Chindia: Crouching tiger, hidden dragon

The 22 August double issue of Business Week featured China & India. You can read the complete issue in print or online (Web links below).

The latter part of the past century saw economic miracles emerge in Japan and South Korea. However, their populations were not big enough to change the global game. China and India together account for more than a third of the world’s population. Never before, have so many people risen so quickly, on such a broad scale, in so many industries at once. The sheer speed of change, made possible by 21st-century communications and technology, is transforming the global economy.

The closest parallel is the saga of 19th-century America, a continental economy with a young, driven workforce that grabbed the lead in the high technologies of the era, like steam engines, the telegraph, and electric lights. Now this type of world-changing scenario is emerging from both China and India, but the timeframe is vastly shorter. Even America’s rise falls short in comparison.

For the past two decades, China has been growing at 9.5% a year, and India by 6%. Given their young populations, high savings rates, and the sheer amount of catching up they have to do, most economists think they will continue to grow at 7-8% per year for decades. There are, of course, major social problems, but those will only slow the growth engines. The growth seems inexorable.

Within 20-30 years, India will overtake Germany as the world’s third largest economy. By mid-century, China will jump ahead of the U.S. as No. 1. Within a couple of decades, “Chindia” will account for half of global output. The big 3: China, the U.S., and India, will dwarf every other economy. They are the only industrialized nations with significant population growth; birthrates in Europe and Japan are declining.

It is interesting India and China complement each other’s strengths. China will stay dominant in mass manufacturing; it is one of very few countries building multi-billion-dollar electronics and heavy industrial plants. India is a rising power in software, design, services, and precision industry.

If the two nations truly collaborate, they would take over the world tech industry. In a practical sense, the yin and yang of these immense workforces are already converging. Many multinationals are already having their tech products built in China with software and circuitry designed in India.

Both India and China are already developing a startling array of technology, some of which is truly revolutionary. India is already building a $2,000 car; cell phone service costs 2 cents a minute; most airline flights cost less than $50; and major surgery costs a fraction of the same in Europe and the U.S.

As interactive design technology makes it easier to collaborate, the distance between India’s low-cost design facilities and China’s low-cost factories will shrink. The global impact will be nothing less than explosive.

Politically, the “crouching tiger and hidden dragon” will be counterweights to America’s power, at the expense of Japan and Europe.

• Business Week - A New World Economy:
http://yahoo.businessweek.com/magazine/content/05_34/b3948401.htm

• China – a big, dirty growth engine:
http://www.businessweek.com/magazine/content/05_34/b3948520.htm?c=bwinsideraug12&n=link1&t=email

• India’s Untold Story:
http://www.businessweek.com/magazine/content/05_34/b3948528.htm?c=bwinsideraug12&n=link2&t=email

Jim Pinto is an industry analyst and founder of San Diego-based Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his new book, Pinto’s Point: www.jimpinto.com/writings/points.html.

http://hbswk.hbs.edu/item.jhtml?id=3604&t=globalization

Can India overtake China? That's the title of an influential new article in Foreign Policy magazine. A Q&A with authors Yasheng Huang of MIT and Tarun Khanna of HBS.

by Martha Lagace, Senior Editor, HBS Working Knowledge

Comparing India and China is to embark on an old puzzle that has fascinated smart people for centuries. The newer question of economic leadership, however—"Which country will overtake the other in the foreseeable future?" —is an urgent and important one, according to a provocative article in the July-August issue of Foreign Policy magazine.

It is urgent and important because China and India are the world's next major powers, according to the writers, Yasheng Huang, formerly of Harvard Business School and now a professor at M.I.T. Sloan School of Management, and Tarun Khanna, a professor of strategy at HBS. It is also important because the two countries have embraced very different models of development.

The reasons they have done so are complex but, in general, China has discouraged or actively undermined local entrepreneurship in favor of an foreign direct investment-dependent approach, they say. India, on the other hand, is building an infrastructure—however slowly—that allows entrepreneurship and free enterprise to thrive. By making fuller use of its resources, India's long-term outlook may be far stronger, they suggest. Macroeconomic statistics cited by Huang and Khanna show China clearly in the lead. "But," the authors wonder in Foreign Policy, "the real issue isn't where China and India are today, but where they will be tomorrow."

How these two models play out has great significance not just for Asia but also for other parts of the world that want to benefit from their lessons and avoid their mistakes.

Huang and Khanna recently collaborated on an e-mail interview with HBS Working Knowledge to discuss their Foreign Policy article, "Can India Overtake China?"

Lagace: "China and India are the world's next major powers," you both write. "They also offer competing models of development." What are the most important differences you see in the ways China and India are evolving?

Yasheng Huang and Tarun Khanna: In terms of similarities, both are conscious of their role in the world economy. Both seek to play a bigger political role on the world stage. China is already doing that as a permanent member of the U.N. Security Council. The differences include the fact that China is taking tangible but slow steps towards embracing private entrepreneurship, a big departure from the past. India is continuing to struggle with making things easier for multinationals. So the differences are arguably narrowing; but our view is that the first-order effect of all this is still "a big difference."

The biggest source of worry is the state of China's banking sector, which is technically insolvent.

—Yasheng Huang and Tarun Khanna

Q: As you think about the future of both countries, what are your main concerns or worries, given these two different models?

A: Our concerns for China are these: how will China give political voice to the public, if at all, along with increasing economic autonomy? We are also concerned about instability caused by migration to cities and the large (though decreasing) role of bankrupt, state-owned enterprises that continue to play a Social Security-like role in China. But the biggest source of worry is the state of China's banking sector, which is technically insolvent. The banking problem is one of the biggest costs of the delay associated with developing a vibrant, domestic private sector.

Here are our concerns for India. How will India rein in its fiscal deficit? How will India discipline its political class? One challenge India faces is deregulation. India is also quite over-regulated compared to other countries at its level of per capita income.

Q: How does foreign direct investment affect the economic outlook for both countries?

A: In general, FDI has been positive to both economies. It has, after all, provided goods and services that did not otherwise exist. It has also introduced competition into moribund sectors. We do not buy the old, inward-looking economic ideology of the 1960s and 1970s that advocated protecting domestic markets. For China, however, the government liberalized its external sector way ahead of its internal sector. The government should speed up its reforms in the internal sector rather than scale back external sector reforms.

Q: On the influence of émigrés, you write, "With the help of its diaspora, China has won the race to be the world's factory. With the help of its diaspora, India could become the world's technology lab." Tell us briefly how and why you believe Chinese and Indian émigrés have come to perpetuate such different roles. Do you see these roles changing?

A: The different composition of the Chinese and Indian diasporas has to do with the different time periods during which each diaspora settled overseas and the different circumstances under which it did so. The Indian diaspora consists more of professionals; the Chinese consists more of entrepreneurs outside China. The implications of the differential structure of the diasporas is only now being appreciated, at least in the commercial arena. India has been particularly unreceptive—except until very recently—to embracing the diaspora.

Q: How is your message about the pace of India and China being received by economists, policy specialists, or business people?

A: We think they see it as a new and intriguing way to look at a centuries-old comparison. The best endorsement for our article is the way in which it has been disseminated. In India, it has spread by word of mouth and been reprinted in numerous newspapers and magazines. In China, one is hard pressed to find public discussion of the article; though the message is being discussed, we've been told, in other, less transparent forums. This is, in some sense, part of the very point of the article!

Q: How will you continue to delve into this area of research? What's next for you?

A: We are writing a book on China and India, eventually. We hope to use this to jump-start further research.

Yasheng Huang is an associate professor at the Sloan School of Management at the Massachusetts Institute of Technology. He is the author most recently of Selling China: Foreign Direct Investment during the Reform Era (Cambridge University Press, 2002).

Tarun Khanna is a professor at Harvard Business School.

The reasons China pursues the FDI model are manifold. First and Foremost

It gives them control.

Because it is requiring all those FDI projects to be paired....50-50 with a local 'partner'. That partner is not, of course, an 'entrepreneur'. But is often a ranking Party honcho or a princeling thereto. COSTIND has spun off a huge number of its reliable PLA officers also to head up 'companies' that then report right back to the Army...particularly if a Western company has some militarily useful tech they can expropriate. Which they invariably do secretly. The U.S. and Western "partners" are never the wiser.

Second, by stomping out entrepreneurs, they keep the people oppressed and under their control. Indeed, the people are still repressed in virtually all the ways that count. They can't move without the Party/State say-so. They can't own anything without the Party/State say-so. And what they 'own' can be extinguished at a moments notice. They can't criticize their government. They can't form any opposing parties. They can't organize any churches. They have to hide their bibles. They have to sing hymns in whispers to evade being overheard.

Hence there is little likelihood that their system will gradually morph into a Western model of freedom.

And the FDI portion of the economy could witness the entire foreign capital investment nationalised at the drop of a hat. Their continuing requirement of the 50-50 partnering, at this stage of their development, suggests that always was the plan.

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