Why China will remain a giant for 10 years

Last week I was in Beijing for yet another conference on the rise of Asia (especially China and India) and its implications for the global economy. Before turning to substance, let me share a few casual impressions about China's capital city, which I was revisiting after fifteen years.

Beijing was cold, spacious, orderly and confidently prosperous: smooth wide roads and pavements, plenty of new cars and buses (but very few bicycles and no motorised two-wheelers), throngs of warmly (often fashionably) clad and well-shod pedestrians in the streets and shopping malls, lots of new commercial centres and residential blocks laid out in a planned urban development format and impressive highways (with giant cloverleaf crossings) ringing the city.

It reminded me much more of well-planned, industrial country cities like Hamburg and Nagoya (which have been almost wholly rebuilt after the destruction of WWII) than of any infrastructure-starved, (often) chaotic, slum-scarred Indian metropolis.

On return, the contrast with Delhi's dingy little "international" airport, with its anarchic parking lot and blanket-huddled taxi drivers, was quite stark. Official data say that average income in China is approximately double India's. Visual appearances suggest that Beijing is at least thrice as rich as Delhi and much better organised.

At the conference I had been asked to talk about India's growth and its implications for the world economy. Here is the gist what I said, with the focus on the implications.

India's growth at an average rate of almost 6 per cent a year over the past quarter of a century (with per capita growth of nearly 4 per cent a year) is both remarkable and commendable.

Certainly, back in 1980, there was almost no respectable scholar or institution predicting such sustained development of this poverty-ridden, populous country. At the same time, the prevailing fashion of bracketing India's rise with China's exceptionally dynamic development under rubrics like "China and India Rising" or "Dancing with Giants" may mask more than it reveals.

If India's development in the last 25 years has been good, China's has been extraordinary. Furthermore, while India has been a gradual "globalizer", China's surging development has been far more intensively based on global trade and capital flows.

As a consequence, the global economic impact of China's rise has been much more dramatic in terms of the usual metrics of international economic relations: trade, capital flows and energy. What's more, China's integration with the world economy has accelerated sharply in recent years, especially after her entry into the WTO in 2001.

A glance at the table illustrates this. The comparison of columns 5 and 6 is particularly instructive. It highlights both the dramatic increase in China's engagement with the world economy over the five years 2000 to 2005, as well as the much milder rise in India's international economic integration.

CHINA AND INDIA: GLOBAL IMPACT
	China		India		Increment (2000-05)
	2000	2005	2000	2005	China	India
	(1)	(2)	(3)	(4)	(5)	(6)
Merchandise Exports ($ billion) a,b	249.1	762.4	45.5*	104.7*	513.3	59.2
Share of World Exports (%)e	3.9	7.3	0.7	0.9	3.4	0.2
Service Exports ($ billion) a,b	30.4	74.4	16.2*	60.6*	44	44.4
Current Account Balance ($ billion)a,b	20.5	160.8	-2.7*	-10.6*	140.3	-7.6
Foreign Exchange Reserves ($ billion)a	165.6	818.9	37.2	131	653.3	93.8
FDI inflow ($ billion)c	30.1#	72.4	1.7#	6.6	42.3	4.9
FDI stock (Inward, $ billion)c	193.3	317.9	17.5	45.3	124.6	27.8
Oil Consumption (million tones)d	223.6	327.3	106.1	115.7	103.7	9.6
Primary Energy Consumption (million tonnes oil equivalent)d	966.7	1554	320.4	387.3	587.3	66.9
Note: * Data for India refer to fiscal year 2000-01 and 2005-06 ; #1990-2000 (Annual Average) Sources: a International Financial Statistics, December 2006 (http://ifs.apdi.net/imf/); b RBI, Handbook of  Statistics on the Indian Economy, 2005/06 (www.rbi.org.in); c UNCTAD, World Investment Report , 2006 (www.unctad.org);  d Statistical Review of World Energy, 2006  (http://www.bp.com/statisticalreview); e International Trade Statistics, 2001 and 2005 (http://www.wto.org/english/res_e/statis_e/statis_e.htm)

For example, China's goods exports increased by an amount which was five times India's total goods exports in 2005. During these scant five years China's share of world exports jumped from 3.9 to 7.3 per cent, while India's share rose sedately from 0.7 to 0.9 per cent.

The increment in inward FDI flows into China was seven times total FDI inflow into India in 2005. Similarly, the increase in oil consumption in China was almost equal to India's total oil consumption in 2005.

Aside from the dominant factor of China's full-blooded embrace of global opportunities (compared to the much more hesitant policy stances adopted by India) there are several other reasons which explain these strikingly different outcomes.

First, over the last 25 years, China's per capita growth rate has been about double India's, around 8 per cent as compared to 4 per cent. So, depending on how you measure it, today China's economy is perhaps two and a half times as large as India's.

Second, India's growth has been propelled more by domestic consumption than external demand as compared to China. Third, China's growth has been powered much more by the rapid growth of industry, especially labour-intensive manufactured exports, while in India the growth of services (mostly non-tradeables) has been more dominant. (It is a
striking fact that the share of manufacturing in GDP in 2004 was only 16 per cent in India as compared to nearly 40 per cent in China.)

Even in services, China's total services exports exceeded India's in 2005 and the increment over 2000 was comparable in absolute terms, though the rate of growth was lower. The one area where India has displayed China-type growth rates is software exports, which quadrupled from about $6 billion in 2000-01 to $24 billion in 2005-06.

But even in 2005-06 (and despite all the media coverage and hype) the IT/ITES sub-sector accounted for less than 3 per cent of India's GDP and employed (according to Nasscom) about 1.3 million workers directly (and perhaps double that number indirectly). By itself this sector cannot be expected to transform India's economy and employment profile.

Although the potential for software export growth remains high, the pace of expansion has moderated as skill shortages have increased, competitors have risen and anti-"outsourcing" sentiments have hardened in importing nations.

The thrust of these remarks is that India's economic rise poses few adjustment problems for the rest of the world. That has certainly been the experience so far (with the limited exception of software exports).

It is only fair to acknowledge an alternative view, which perceives India's development as simply lagging China's by 10 to 15 years, suggesting that by then India's economic engagement with the global economy will rival China's today. On balance, I don't think so.

The medium-term future is more likely to resemble the past decade's experience. Barring unforeseen political or economic turmoil, in the next ten years the global economy will have to contend with only one new burgeoning "giant", as it already has in the decade past.

India's economic rise in global commerce, capital and energy transactions is likely to remain gradual and (hopefully) sustained. In 20 years, it may be a different story.

The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. The views expressed are personal.