Friday, March 03, 2006

Make Way for India — the Next China

The following is copied from Arab News website.

Hamish McRae, The Independent

“Bush in India” may never become an opera like Nixon in China — though maybe Bollywood will some day have a crack at it. But the president’s visit to India, which began yesterday, does signal a warming in the US toward the world’s greatest democracy. While it may not quite match President Nixon’s historic visit to China in 1972, which started the rebuilding of relations with the People’s Republic, presidential visits to India are pretty rare events. Only four serving US presidents have visited the country since independence: Eisenhower, Nixon, Carter and Clinton. So this visit matters.

It matters because it highlights the shifting perception of India’s economic prospects. Even a couple of years ago India was still regarded as an also-ran in the race with China to move from developing to developed status.

India’s success in a narrow field of export industries, such as software, was widely acknowledged. But the economy as a whole would be held back, it was argued, by a combination of adverse factors, including poor infrastructure, low educational standards, corruption and an unwelcome attitude to foreign investment. China, by contrast, was soaring.

Well, China continues to soar, with the economy still growing at around 9 percent a year. However, people are becoming more aware of the environmental and social costs of such growth, and also of the demographic shift that will soon start to affect the country. This is that the one-child policy will start to reduce the size of China’s working population within the next 10 years.

India, by contrast, will have an increasing working population for another generation at least. Naturally it, too, will suffer from environmental and social pressures — it already is — but arguably its less authoritarian society will be more sensitive to these than China has been.

This leads to one of the great questions facing the world economy: Which of the two giants, China or India, is more likely to dominate the world economy in another generation, or both? Well, it must surely be both, unless there is some unspeakable catastrophe. But whereas two or more years ago most people would have predicted that China would continue to outpace India, now they are evidently more evenly matched.

This has an important political dimension. India is a democracy; China is not. As China raced ahead, this led to the somewhat uncomfortable conclusion — uncomfortable, that is, for those of us in the West — that while economic freedom was clearly an essential condition for rapid growth, political freedom was not. Worse, an excess of political freedom might even inhibit growth.

If, however, Indian growth were to prove more durable than Chinese, or at least produce fewer unpleasant bumps, then it would, to put it mildly, be very comforting to Western democracies, including, of course, the US.

Of course, there are other issues about Indian practice. Nevertheless, on the four main governance indicators used by the World Bank — quality of regulation, rule of law, control of corruption, and voice and accountability — India scores higher than China. On the final one it is much higher.

Perhaps the most encouraging aspect of the Indian take-off is that it continued under the governance of both major parties. There was a bout of reform in the early 1980s under the Congress party. But that stalled, and it was only the near-bankruptcy of the country in 1991-2 and the reforms of Manmohan Singh (then finance minister, now prime minister) that set the country on its current growth path. However the BJP coalitions of the late 1990s and early 2000s carried on the process. Congress, back again, carries it on.

There are a large number of roadblocks facing the Indian economy. As anyone who visits will be all too aware, progress in the country is very uneven. Inequalities have multiplied. Cities are under enormous pressure as people move in from the country. Investment in infrastructure has lagged, and, in some ways worse, maintenance of existing infrastructure can be appalling.

Bureaucratic blockages over privatization are holding up investment in the main airports. An enormous road-building program is under way, linking the main cities with high-quality highways. But while that will ease some transport blockages, it will have environmental costs. The middle-class lifestyle that is so attractive requires a lot more energy, and India is energy poor.

Indeed, all economic growth requires energy. There is a myth that Chinese growth is principally driven by manufacturing while Indian is driven by services — the former requiring more energy. That is indeed useful shorthand, for the impact on the West of both nations does appear that way. We import goods from China, and we import software and other services from India.

But if you look at both economies in the whole, India is a rapidly industrializing nation too. It actually has a trade surplus with China. New industries such as motor components are flourishing. Meanwhile the hi-tech sector, about which we hear so much, is actually quite small in the context of the whole economy. So, just like China, shortage of energy will constrain growth.

The most interesting question of all, surely, is whether a messy, multilayered democracy is more likely to cope peacefully with the pressures of growth than an autocratic but energetic bureaucracy. In other words, when things go wrong — as they inevitably will — will India be better able to cope than China? The instinct of many of us in the West would be that the Indian political system is more flexible and ultimately more robust.

In 2001 the investment bank Goldman Sachs produced a research paper on the BRICs. That stands for Brazil, Russia, India, China. A follow-up study a little over two years ago argued that China would become the world’s biggest economy by 2050, passing the US, while India would become the third biggest, passing Japan.

Yesterday a book from the Goldman team who prepared that study landed on my desk, The World and the BRICs Dream. Since that initial study both China and India have grown even faster than projected. The new book poses the question: Is India poised to be the next China? Its answer, in a nutshell, is yes. If it carries on with its path of reform, it will become the “sleeper success story” of these fast-growing economies.

If President Bush wants a useful briefing on what he needs to know about the Indian economic success story he should get one of his staff to highlight the important bits of this study for him. Every previous president was visiting a Third World economy. Things are different this time.

Links to this post:

Create a Link

<< Home