China and India Reshape the Global Economy
India and China will vie for economic and political dominance on the world stage. Here's an assessment of the two nations' short-term and long-term prospects.
In Asia, an economic, social, and geopolitical revolution is under way. Dirt-poor just a generation ago, China and India are turning their economies around; they are now the dragon and the tiger of global commerce, experiencing growth rates that no other large country can match. The impacts are reverberating around the globe and will continue to be felt for many years to come.
Economically, both China and India have emerged from poverty to become prosperous trading nations. China is the world's third-largest trading nation, the second-largest partner for the European Union, and the second-largest partner of the United States and Canada. India ranks far smaller-it is Europe's ninth-largest trading partner, for example-but is growing rapidly. China already is critical to the well-being of the global economy. India soon will be.
Militarily, China and India are working hard to expand their power within the region and, in the case of China, beyond. Both are modernizing their armies. Both are building blue-water navies. China is developing nuclear-capable missiles with intercontinental range. If these two countries achieve their goals, it will represent the first major shift in the balance of the world's military power since the end of the Cold War. This also will raise the stakes in any future confrontation between India and China or China and Japan.
Diplomatically, both countries are currying influence. Both are beginning to provide aid for poorer lands. India is participating in international military and rescue operations. China is building bilateral ties with many other lands, using its economic power to further its political ends. India covets a permanent seat on the United Nations security Council; China recently blocked a move to grant it.
In these changes, some economists, political scientists, and historians see a shift in the world's center of gravity from the industrialized West to the industrializing East. According to Goldman Sachs, India's economy could be larger than Japan's by 2032, while China's could be larger than that of the United States by 2039.
Capitalism Rises in China
China's brand of capitalism remains highly regulated and often corrupt. Yet, this oddly mixed economic system has proved remarkably successful. Between 1978 and 2000, China's GDP quadrupled. In 2005, per capita GDP reached $6,200. The nation now accounts for more than 4% of the world's economic output.
China remains one of the fastest-growing economies in the world. In 2005, China's GDP expanded by 9.2%, according to official figures. That growth flows from manufacturing, which provides more than half of China's GDP. In 2005, industrial production grew by an amazing 27.7%. The lowest wagesof any major industrial nation have made China the low-cost producer in fields from textiles to telecommunications to auto parts. Distributed through discounters like Wal-Mart, Chinese products are credited with lowering the U.S. consumer price index by as much as 2%.
This is only the beginning. In 2007, entrepreneur Malcolm Bricklin plans to begin importing cars from Chery Auto to the United States. (Some industry experts say it will be 2010 before Chinese cars can meet U.S. emissions and safety standards.) Retail prices are expected to be 30% lower than comparable models from other makers,an advantage that is likely to kill the frail Italian auto industry and decimate competitors around the world.
Economic power always translates into political and diplomatic power, and so it is in Southeast Asia. China wishes to lead its region and become a significant player on the world scene, and its growing wealth is making this increasingly possible. Often, it has chosen to support underdogs in confrontations with the United States.
For example, China has been selling weapons and providing military, economic, and infrastructure aid to Myanmar (Burma)-about $3 billion in all-in return for using ports there to rest and refuel its naval ships. When the United States used trade sanctions to promote ciemocratization in 2003, it cost Myanmar an estimated $200 million; however, deals with China brought in roughly $1 billion that year, and the loss of U.S. trade went almost unnoticed.
Similarly, China's oil and gas deals with Iran have irretrievably undermined the Bush administration's attempt to bring that country to heel through economic sanctions.
Chinese ties with Sudan are, if anything, even stronger. Sudan supplies nearly 5% of China's oil, and China has invested $2 billion to develop Sudan's oil resources. It also supplies weapons to Sudan's armed forces and blocked a U.S. attempt to obtain UN sanctions against the country for its slow genocide in the Darfur region.
China also is building relationships with U.S. neighbors, thanks to its economic muscle and ferocious demand for raw materials, as well as to Washington's neglect. For example, China has concluded an agreement giving it access to Canadian oil sands and uranium. In November 2005, it announced massive new investments in Argentina-$20 billion for offshore oil and gas exploration, railways, construction, and even communications satellites. China also has bought oil assets in Ecuador and signed deals to invest $350 million in Venezuelan oil fields and $60 million in a gas project there.
Sino-Latin trade has grown by an astounding 900% in the last five years. Brazilian exports to China doubled in 2003 alone, to $4.5 billion, and China is now Brazil's second-largest trading partner. It is Chile's largest export market. In all, China's trade with Brazil, Argentina, and Chile amounted to $14.6 billion in 2003, including imports worth $10.7 billion. In 2004, nearly half of all Chinese direct investment overseas went to Latin America. Chile signed a free-trade agreement with China in November 2005, and Brazil has announced plans to negotiate one.
For China, this rapidly growing trade has two benefits: First, and most importantly, it provides another sourceof much needed oil, raw materials, and foreign exchange profits. Second, it may serve to lure the 12 Latin American countries that still support Taiwan toward Beijing's one-China policy.
India Today: Crouching Tiger?
India's late start in building a modern capitalist society has left it far behind the Chinese dragon, but the tiger's economy has made major improvements in a surprisingly short time. A decade ago, more than 35% of Indians lived in poverty. Now, 300 million belong to the middle class, a third of them having risen from poverty. At the current rate of growth, a majority of Indians will be middle-class by 2025-a rate of social progress no one else in the world can match.
While China continues to be largely a manufacturing economy, India leads as an emerging service economy. India's fastest-growing and most-profitable service sector is high technology, and yet little more than 1% of India's citizens own a personal computer; some 50,000 villages lack even a single telephone. India views its skill in information technology not just as the basis for a profitable export industry, but also as a force multiplier to improve its military. By making India an indispensable component of the global high-tech economy, this dominance in IT is a route to greater influence in world affairs. India wants to be a Great Power, and IT is the tool by which it hopes to achieve that goal.
Outsourcing services to India is hot, as its skilled workforce takes on functions such as telephone support and payroll processing for companies in the United States and Europe. Around 400 of the Fortune 500 companies now outsource IT-related services to India, and most of the rest at least intend to experiment with outsourcing. An estimated 3.5 million U.S. jobs will migrate to Indian outsourcing firms by 2015.
Internationally, India has only two worries and one major goal-but they are big ones.
China, its economic rival to the north, might someday become a military rival as well. The two countries are the largest and most powerful in the region; they are natural competitors for regional and world influence, and they have a longstanding dispute over their mutual border. Though there is low probability that China and India will go to war again, the potential impact of such a scenario would be so enormous that military planners cannot ignore it. Much of the restructuring now being carried out by India's armed forces is designed to counter this eventuality. India has turned this into an asset, designing modern high-tech weaponry and joining with Israel and South Africa to build a profitable armsexport industry. The more immediate issue militarily is Pakistan. The armed standoff over Kashmir has flared into numerous skirmishes since the two countries gained independence in 1947.
India's great goal is to win status in the world's eyes as a Great Power. In practical terms, that means being granted permanent membership in the United Nations Security Council. That seat was proposed and denied in 1971, when the People's Republic of China replaced Taiwan, and the wound still festers in the Indian heart. Britain, France, Germany, and the United States all support India's claim to a permanent seat on the Security Council. However, China-uninterested in having another global power in its back yard-recently blocked anattempt to grant India's wish.
The Near-Term Outlook
Clearly, China today is vastly more important to the world's economy than is India. Its insatiable demand for raw materials makes tor an almost inexhaustible market for lands with commodity-based economies. For the developed world, it is a source of inexpensive consumer goods. But which of the two nations will be the dominant player on the world stage in the future?
To many executives and investors, the answer seems easy to see: China is the largest, fastest-growing economy in the world, with the biggest supply of potential consumers. Within the year, its trade with Southeast Asia is expected to reach $100 billion; soon thereafter, it will surpass the $120 billion in trade that the United States does with that region. Given a choice between China and India, China is the obvious place to put your money now.
But based on our analysis at Forecasting International, we are not convinced. China is clearly ahead at the moment, and probably will remain so for the next five years, but India has some long-term strengths that China lacks. We therefore believe that India will be Asia's economic leader by 2015. Dragons may fly, but tigers can move fast when they want to. And India wants to move fast.
In some of his most influential work, Harvard economist Robert Barro identified four key factors that make for economic growth: education, macroeconomic stability, predictable and efficient institutions, and openness. So let's see how China and India compare according to each of these four success factors.
Success Factor 1: Education
One year of additional schooling in a population adds an estimated 0.3% annual GDP growth over a 30-year period, and Beijing clearly has been doing a better job than New Delhi of delivering a basic education to its people. The universities and technical schools that train the Indian elite are irrelevant to the vast majority ofthe country's people. India claims that some 60% of its citizens are literate, but this is based on a lower standard of literacy than the international norm.
In contrast, about 91% of Chinese can read and write well enough to be considered literate under UNESCO's standards. India is working hard to expand its educational system, using the Internet and satellite transmissions to bring classes to outlying villages that often cannot be reached by road. To the extent that India succeeds (and Forecasting International believes that it will), China's advantage in this realm will not last more than another generation.
As a direct result, better education will ease two of India's heaviest burdens. India has always suffered the compound handicap of overpopulation and the wasted resource of large numbers of women who are uneducated and confined to the home. Those problems are likely to ease in the years ahead. According to the 2001 census, 54% of Indian women and girls can read and write, up from only 40% a decade earlier. In several relatively prosperous, urbanized states, the official number is higher than 80%. As a result, women are getting out of the house, getting jobs, and winning more control over their lives. This process invariably reduces fertility in developing countries. We expect India's birthrate to drop by about 35% over the next decade. As Indian families shrink, their prosperity will grow. So will the nation's productive capacity.
Success Factor 2: Macroeconomic Stability
China has at least a temporary advantage over India in key economic factors. Low deficits, minimal inflation, and viable exchange rates all add to macroeconomic stability, and China has the advantage in two out ofthree-debt and inflation. China's public debt amounts to about 29% of GDP, while India's is roughly 80%. And China's inflation rate in 2005 was only 1.9%, compared with India's tolerable 4.4%.
Where China is at a disadvantage to India right now is in the area of exchange rates. It will be at least 2008 or 2009 before the yuan is fully convertible to other currencies. Problems may arise as China discovers that opening itself to foreign-exchange markets is extremely painful. Allowing the yuan to float to its natural level is likely to slow both exports and economic growth.
China will have to face one more problem as well. A critical asset for any would-be capitalist country is a strong, transparent banking system. China's banking system is, simply put, a mess. By Western standards, none ofChina's major banks is solvent. Over the years, a combination of cronyism and corruption has saddled Chinese banks with nonperforming loans estimated at $500 billion. Central government officials, determined to salvage the situation, have recapitalized about two-thirds of the banking system and are working to recover as much as possible of these lost funds. However, at the local level this process is reported to be foundering on the same kind of pocket-lining and sweetheart deals that caused the problem in the first place. Thus far, it seems that China's banks will be as bad off five years from now as they were five years ago. This can only undermine the country's efforts to modernize its economy. It was exactly this problem that mired Japan in recession for most of a decade.
Success Factor 3: Institutional Efficiency
India and China both suffer from bureaucracies that are horrendously entrenched, rigid, and corrupt, but India is doing a better job of fixing the problem. China occasionally cracks down on corrupt officials, but for every one whose misdeeds are too flagrant to be ignored, thousands more quietly carry on business as usual. The common practice among local officials of confiscating peasant lands for their own benefit was a major factor igniting China's estimated 87,000 riots in 2005. In January 2006, the Communist Party's Central Discipline Inspection Committee announced that grassroots officials would be required to undergo more anticorruption training, while procedures for their selection would be tightened. In announcing the new measures, President Hu Jintao warned that "the fight against corruption is a long-term, complicated, and arduous task."
It is a task that India has well in hand. Nearly a decade ago, New Delhi established dozens of "vigilance commissions" to root out corruption at all levels of government and industry. The Central Vigilance Commission headed by N. Vittal has managed to clean up the banking industry. This is no more than a start, but it's a good one. Ten years from now, India's economy will work much better than it does today; unless things change unpredictably, China's will not.
Success Factor 4: Openness
India's commitment to information technology gives it another advantage over China: openness. In hitching its economic future to information technology, India has exposed itself to the kind of intellectual cross-pollination that makes for a vibrant, creative, and economically productive culture. China, on the other hand, has not yet taken best advantage of IT's opportunities.
Raw statistics make it seem that India is at a marked disadvantage when it comes to Internet use. According to the most recent figures available, India has about 50.6 million Internet users, while China has 111 million, plus about 4.9 million in Hong Kong. Yet, India has managed to put at least one public Internet connection in every village in the country. Through those connections, even the most-remote villages are quickly being opened to the flow of ideas throughout the world.
In contrast, Beijing heavily censors the Internet. With the aid of Western technology companies such as Google, Yahoo, and Microsoft, it filters out ideas that the government considers destabilizing. In fact, China has good reason to fear the Internet. Beijing's leaders worry that any force promoting a quick transition to democracy could set off the kind of chaos that allowed the formation of a "kleptocracy" (government by thieves) in Russia. They may well be right, but in trying to avoid political chaos, Beijing's Internet censors have also cut the country off from much-needed intellectual stimulation. In the years ahead, this may slow China's development of industries that require creativity and offer high added value, with profits to match.
One other force for openness is the World Trade Organization. As China integrates itself into the WTO over the next few years and further opens to foreign investment and trade, it will be necessary to loosen many internal controls as well. These could include its restrictions on the Internet. Until those changes are well along, India will find it easier than China to develop new ideas and new business.
Other Forces of Change in China and India
* Wealth gap. One factor that Forecasting International weighs heavily in evaluating the stability of any country is the income gap between its rich and its poor. The wider the gap between the most prosperous and the least well-off tenths of the population, the more likely it is that political chaos, and even violent revolution, lie ahead. This was one of several factors that, long ago, allowed us to predict the fall of the Shah of Iran two years before the revolution that brought the Ayatollah Khomeini to power.
Both India and China are well within the stable range, according to the latest data available. India's richest tenth has an average income only about 9.6 times as large as that of the poorest tenth. In China, the ratio is about 12.7. Unfortunately, the most recent data available are ancient; they date from 1997 for India and 1998 for China. This is before India's high-tech wealth began to filter through the economy and before massive development began to drive Chinese peasants from their land, leaving an estimated 125 million former farm workers to wander aimlessly from one city to the next in search of work. Since those data were current, India's poor have begun to escape from poverty, while many of China's poor have lost what little security they had.
India clearly recognizes the dangers of the income gap. Shortly after coming to power, Prime Minister Manmohan Singh, the economist who set India on the path to economic reform in 1991, offered a guarantee that all households will get at least 100 days of work each year. Beyond that, the government has stated that it will not allow economic growth to fall below 7%-8% annually. With the exception of the employment guarantee, any social program that threatens to bring growth below that level will be tossed overboard. But when growth exceeds 7%, Singh promises to increase the budget for aid to the poor. These guarantees alone are a big advance for India's poorest.
Beijing, too, understands the danger of disparity and recently announced that its next five-year plan will contain extensive measures to improve the lot of its poor. Details are not yet available, but it is clear that China is starting later than India and has a longer way to go.
Over time, India's economic growth will have a greater impact on the lives of the country's people than seems possible for China. At an average of 6% growth per year, which India achieved throughout the 1990s and which it expects to see for at least the next 15 years, a majority of people in India's south, west, and northwest should have entered the middle class by 2025. Those in the poorer eastern states should catch up a generation later. And by 2068-admittedly a long time from now-India's people can expect per capita incomes equaling those of the United States at that time. It is difficult to see China matching that performance. Its growth is expected to slow to levels typical of the developed world by 2025.
* Democracy. India is a democracy; China is not, and it has no intention of becoming one in the near future. There is no need to go into much detail on this point. On average, democracies are simply more efficient than any other form of government, because elections provide a feedback mechanism that encourages the speedy correction of mistakes. Democracy does not guarantee that voters will punish their leaders' blunders quickly, but it improves the odds.
Democracy also gives people a stake in the management and future of their country. An old joke from the Soviet Union said of its labor system, "They pretend to pay us, and we pretend to work." Such an attitude is much less likely to spread when national policy is set by freely elected leaders who can be held accountable for their actions.
Over a period of years, the incremental efficiencies of India's democratic government are likely to overcome the greater short-term efficiencies of China's command system.
Democracy also improves India's chances of achieving the global influence it so earnestly desires. Marketing itself as a democratic, worldoriented neutral can give India a route to its coveted seat on the UN Security Council. It may help also that India is working closely with the United States on terrorism security. At the moment, this is a sure route to U.S. support for India's goals.
* Use of English language. Widespread use of the English language is India's most-important advantage over China. India now produces more English-speaking scientists, engineers, physicians, and technicians each year than the rest of the world combined. And in the modern world of technology and business, there is no more useful tool. India's most recent "native" tongue has been its greatest asset in building a global IT and business services industry.
Of late, China is working hard to overcome that Indian advantage. Many Chinese are learning English in preparation for the 2008 Olympics in Beijing. The Chinese government also has committed itself to training 100,000 new workers for the tourism industry by 2010, all of whom will be required to learn English. Additionally, a recent edict from Beijing, issued to improve the country's competitiveness in global markets, requires that all students learn English in primary and secondary school. If this new emphasis on English continues, India's future economic supremacy could be short-lived; in 20 years, China could easily regain the lead. Yet, preliminary reports indicate that progress in teaching English to Chinese students and workers is proving harder to achieve than the government had expected. At present, it seems that India is likely to retain its edge over China in this critical respect.
Summing Up: The Long-Term Outlook
The key issues considered in this overview are just a few of the many factors shaping the future for China and India. Other important issue areas that should be examined carefully include energy, R&D, and tourism.
China is currently struggling to achieve energy independence, and its success or failure in that effort will help to determine its future economic growth. India has undeveloped energy resources that could give it an economic boost. Meanwhile, both countries are becoming low-cost providers for research and development, not just rote labor. The world's pharmaceutical companies are migrating rapidly to China, where technological sophistication is high, bioethics are largely unknown, and human test subjects are easy to find. Lastly, tens of millions ofChinese and Indian tourists are beginning to flood out across the globe, where they will be exposed to ideas that Beijing would prefer to avoid.
Taken together, all these trends lead to this conclusion: China and India will successfully meet all the challenges of economic development, social change, and national security that will face them in the years ahead. It will happen only with difficulty, but it will happen. Beijing and New Delhi will spend the next 20 years struggling to balance capitalist profit against rural need, environmental damage against development, military spending against domestic priorities, and the need for economic cooperation with their neighbors against the realities of trade and geopolitical competition.
This will be a difficult balancing act for both the dragon and the tiger. But in 20 years, both these countries will be stronger, wealthier, freer, and more stable than they are today.
For India, English and relative transparency are big advantages. For China, their absence is a big disadvantage, which it will take decades to overcome. Both these countries will do well in the years ahead. Both will achieve better lives for their people and probably the Great Power status that both desire. Yet, India soon will be the wealthier and more stable. And having captured the lead, India will retain it for many years to come.
FEEDBACK: Send your comments about this article to letters@wfs.org.
AuthorAffiliation
About the Authors
Marvin J. Cetron is president of Forecasting International Ltd. in Virginia. His e-mail address is glomar@tili.com. He will address this topic at the World Future Society's 2006 conference, WorldFuture 2006: Creating Global Strategies for Humanity's Future.
Owen Davies is a former senior editor at Omni magazine and is a freelance writer specializing in science, technology, and the future.
Their most recent book, co-written with Fred DeMicco, is Hospitality 2010 (Pearson Prentice Hall, 2005), which is available from the Futurist Bookshelf, www.wfs.org/bkshelf .htm.
Enhance Understanding with Primary Sources and Study Enrichment
