THE GROWTH DEBATE - CHINA AND INDIA

A white paper by Dr Daniel Park;

Associate Consultant - International Projects, B2B International Ltd
Introduction
China and India are booin!" #uper$icially it is easy to be ipressed" %e note that
annual !rowth rates in &ross Doestic Product '&DP( ha)e been sustained o)er the
past $ew years at *-+, per cent, soeties e)en hi!her" Analyses o$ China and India
point to the ajor in)estent in education that is turnin! out any thousands o$ top-
class en!ineers and scientists annually" It sees that so any o$ our anu$actured
!oods carry a -.ade in China/ label and that our call centre ser)ices are increasin!ly
located in India" 0he recent rises in ener!y and coodity prices are partly e1plained
by the rapid !rowth in deand $ro China and India" .oreo)er it sees to be
assued that this le)el o$ o)erall econoic !rowth will continue inde$initely and that
unless we in -0he %est/ !et in)ol)ed in it, we will li)e to re!ret it"
0his is, I belie)e, at best an incoplete perspecti)e and at worst a dan!erous one"
0he two purposes o$ this %hite Paper are 'i( to copare and contrast the hi!h !rowth
rates in the two countries and 'ii( to assess the likely outcoes and ipact"
The nature of economic growth
0he $irst aspect o$ this is the si!ni$icant di$$erence in the nature and structure o$
!rowth in the two countries" &rowth easured in ters o$ &DP can be in)estent-
dri)en and2or consuption dri)en" In ature econoies we can point to the balance
between the two" 0he ajority o$ de)eloped econoies see in)estent at around 2,-
234 o$ &DP" In the case o$ India, the in)estent share o$ &DP is sli!htly abo)e
a)era!e $or the industrialised world" In China the position is )ery di$$erent, with
in)estent accountin! $or o)er 5,4 o$ &DP sustained o)er the past +, years or so"
0he ore rele)ant 6uestion in the case o$ China is as $ollows" &i)en the hi!h
in)estent percenta!e within &DP !rowth, why is China not !rowin! ore 6uickly7
0he key 6uestion in the case o$ India is di$$erent" &i)en the ajor social and
deo!raphic chan!es that are bein! e1perienced, will India be able to ana!e the
e1pansion o$ consueris and retain a balanced structure o$ &DP !rowth without
haperin! in)estent in $i1ed capital $oration and a)oidin! a !rowth in national,
corporate and indi)idual debt7
A substantial part o$ the answer to these 6uestions is $ound by studyin! 'a( the
e1tensi)e )ersus the intensi)e pattern o$ econoic de)elopent, to reach an
understandin! o$ what econoists ter -total $actor producti)ity/ and why it atters
and 'b( the tools and techni6ues a)ailable to !o)ernent and industry2coerce to
!ain and sustain pro$itable !rowth at low risk"
+
Eten!i"e# "er!u! inten!i"e# $attern! of growth
0he e1tensi)e pattern o$ econoic !rowth is based on continuously increasin!
resource inputs that are re$lected in !rowin! outputs allied to deand stiulation and
deand ana!eent"
0his works e$$ecti)ely, thou!h not e$$iciently, 'a( as lon! as resources are plenti$ul
and 'b( there is spare capacity throu!hout the producti)e syste" 0his type o$ !rowth
has been described as a -ratchet/ echanis - i$ the top line !oes up by +, per cent,
then e)erythin! contributin! to it !oes up by 'at least( +, per cent"
0he essence o$ the intensi)e pattern o$ econoic !rowth is that resource producti)ity
increases alon! with !rowth in output and consuption and a !reater rate - in other
words there is a better than +8+ relationship between !rowth in outputs copared with
inputs"
0his characterises de)eloped econoies throu!hout the world" It is what dri)es
!reater e$$iciency in )alue-creatin! processes and, in odern ties, !reater
production specialisation across national boundaries coupled with a hi!h !ross
percenta!e o$ $orei!n trade 'iport and e1port( relati)e to &DP, e)en i$ the net trade
balance does not alter uch o)er tie"
It was the -e1tensi)e/ odel o$ econoic de)elopent that e)entually $inished o$$
the #o)iet 9nion despite belated attepts at acro- and icro-econoic re$or"
China still looks with horror on this rapid disinte!ration and has acted early enou!h to
ensure that all but the ost strate!ically sensiti)e industries are now to ost intents
and purposes pri)ate operations" India has succeeded in abandonin! its $orer
addiction to #o)iet-style plannin! early enou!h to a)oid the worst daa!e" But there
reains a assi)e deadwei!ht o$ lar!e-scale indi!enous industry that is o)er-
resourced, uncopetiti)e and sustained by the pressure o$ )ested interests" .erely
chan!in! the le!al $or $ro -state-owned/ to -pri)ate/ is nowhere near a solution"
0here is, howe)er, e)idence that China is o)in! into a ore intensi)e pattern o$
econoic de)elopent, accelerated by a !radual o)e towards world prices $or
coodity inputs and other interediate inputs to!ether with arket-based pricin!
allied to a arket-rational internal cost o$ capital" 0his is to ensure that hi!h rates o$
econoic !rowth can continue, dri)en increasin!ly by consuption relati)e to
in)estent and based on ore e$$icient resource utilisation"
%hat atters abo)e all to a %estern copany is the 6uality o$ decisions ade in
respect o$ dealin! with China and India as partners in increasin!ly !lobal supply
chains"
The %u!ine!! dimen!ion
0hou!h India has ade well-publicised pro!ress in technical and business education
in the past twenty to thirty years, China has not held back" #tartin! ore recently, the
le)el and pace o$ in)estent ha)e been breathtakin!" :owe)er there are si!ni$icant
di$$erences in the approach" %hereas India has de)eloped throu!h its internal
2
resources, China has undertaken rapid trans$er o$ best practice and has adapted this
6uickly to the Chinese culture" Additionally the spread o$ best practice has a$$ected a
)ery wide ran!e o$ sectors o$ the econoy"
0he -Indian phenoenon/ has been concentrated on en!ineerin! technolo!y" :ence
we ha)e seen the eer!ence o$ a )ery e$$ecti)e and internationally copetiti)e
so$tware and I"0" counity abound Ban!alore, and it is o$ten assued that this is
becoin! typical o$ India" It is not" .uch o$ Indian industry is still old-$ashioned
and, worse, it is sti$led by a structure o$ bureaucratic ana!eent coupled with hi!h
le)els o$ )ertical inte!ration that is o)er a century out-o$-date" 0hank !oodness
labour costs reain low, because structures and ana!eent approaches are
intrinsically uncopetiti)e in whole sectors o$ the econoy" Low labour cost is to a
si!ni$icant e1tent a copensator $or systeic ine$$iciency, and the proble will coe
when labour rates be!in to rise, as will naturally happen as the country becoes ore
de)eloped" ;ust as si!ni$icant is the $act that the -Indian iracle/ is ani$est
principally in product that can be deli)ered electronically rather than physical product"
It is in this latter type o$ product that the deadenin! ipact o$ bureaucratic systes is
$ound" Any ad)anta!e o$ low cost $or hi!hly and non-so-hi!hly skilled direct and
indirect labour can 6uickly be outwei!hed by the transaction costs and delays incurred
in operatin! throu!h unresponsi)e, hi!h-cost adinistrati)e systes"
Contrast China" 0heirs has been a uch ore holistic approach - an approach that $its
so well with the philosophical and social traditions o$ the country" %hat has
happened here is that not only is there a ajor initiati)e in up!radin! technical skills
but also a set o$ pro!raes in trans$errin! ana!erial systes and their associated
copetencies" 0he Chinese ha)e accepted that technolo!y is only one diension o$
international copetiti)eness, and that low labour cost is one ore" But these are
e$$ecti)e only i$ the syste as a whole eets best-in-class standards" 0his does not
always ha)e to be -state-o$-the-art/, but it should always be -state-o$-the-arket/"
:ence there has been a lar!e-scale trans$er o$ the best that the de)eloped world has to
o$$er" #tartin! with the education o$ a top class o$ Chinese ana!ers abroad -
principally in the 9nited #tates o$ Aerica and <urope - and continuin! with a siilar
pro!rae o$ trainin! trainers, one now $inds replicas o$ top ana!eent
de)elopent pro!raes in China ran!in! across any sectors o$ the econoy"
Lar!e-scale collaborati)e education and trainin! )entures are $ound in all ajor
Chinese centres" 0his has rapidly resulted in the eer!ence o$ a new type o$ Chinese
technocrat - 'i( hi!hly skilled in conteporary tools and techni6ues o$ lo!istics and
supply chain ana!eent as well as in the basic technolo!ies o$ product desi!n,
aterials ana!eent, systes en!ineerin!, and in addition 'ii( $ully $ailiar with
new concepts and practices in strate!ic ana!eent, international $inance, !lobal
structures, partnerships2joint )entures"
0he last skill entioned abo)e - partnership - is where the Chinese culture is
particularly ad)anta!ed" 0he Chinese ha)e always been natural networkers8 they
networked $or centuries and operated -e1tended/ or -)irtual/ enterprises be$ore we in
the de)eloped world claied these as -ad)ances/ in ana!eent thinkin!=
#uperipose all this on to the odern structures o$ industry and coerce that are
$ound in China>s new cities and special econoic ?ones and the $oundations o$
$oridable copetiti)eness can be built pro)ided that a ore intensi)e approach to
econoic de)elopent can be achie)ed siultaneously"
@
It is isleadin! to think that there is soe kind o$ -copetition/ between India and
China as centres o$ outsourced acti)ity" <ach will de)elop in its own way" %e need a
note o$ caution in akin! assuptions based on well-publicised, but inherently
super$icial and partial, in$oration claiin! that the two !rowth rates are neck-and-
neck and there$ore there is a 6uestion o$ -who wins7/"
India will ha)e to tackle the proble o$ bureaucracy - ask anyone who has operated
there - and it will be a bi! issue as wa!e rates increase and e)entually con)er!e with
world le)els" Aor its part China retains a hu!e and ine$$icient $orerly state-owned
sector o$ industry and coerce that is causin! probles $or the econoy as a whole"
0he best-publicised success stories coe $ro the 'atypical( new cities and special
econoic ?ones, which still constitute a inority o$ the total output econoy but a
ajor contributor o$ o)erall econoic !rowth and added )alue"
Copetiti)eness depends on 'a( a ultiplicity o$ $actors and 'b( the ability to $use
these $actors into an e$$ecti)e whole in copetin! $or custoers with increasin!ly
!lobal perspecti)e, re6uireents and choice" It is not enou!h to ha)e the best
6uali$ied technical people in the business a)ailable at relati)ely low cost i$ the
business cannot achie)e $ast response ties and 6uick decision-akin!" 0he
di$$usion o$ -know-what/ and -know-how/ is so $ast nowadays that any technical
ad)anta!e, whether this be throu!h superior knowled!e or low labour cost, cannot be
sustained $or lon!" %hat atters is the achie)eent o$ a holistically superior
business model. It is y contention that on balance India, despite its probles o$
bureaucracy and structure, is $or the oent a little ahead o$ China in this, despite
China>s bein! culturally ore suited to the odel, as stated earlier"
Com$are and contra!t
&o)ernent policies in China and India ha)e been )ery di$$erent in ters o$ the
approach to !eneratin! !rowth" 0he di$$erence illustrates the iportance o$ the
consuer sector in a odern econoy"
China has directed the assi)e in)estent percenta!e o$ &DP into the creation o$
industrial capacity, aied substantially at e1port arkets" It is there$ore )ulnerable to
downturns in !lobal arkets, particularly in the 9#A" #i!ni$icantly since 2,,5 China
has coenced a slow re-orientation towards stren!thenin! consuption in the hoe
arket relati)e to in)estent" 0he sa)in!s rate in China has been e1ceptionally hi!h,
and the le)el o$ credit in relation to &DP has been )ery low by world standards" 0he
le)el o$ consuption had $allen to @*4 o$ &DP by the end o$ 2,,3, just about the
lowest le)el o$ any ajor world econoy" Coupled with this we note that the e1cess
capacity !enerated by the hi!h le)el o$ in)estent relati)e to consuption has
resulted in o)ercapacity, sta!natin! or reducin! prices, !rowin! le)els o$ unsold
in)entory and pressures on pro$itability" <1cessi)e construction and the reluctance o$
the ajority o$ the population to draw down on sa)in!s ha)e propted $allin! prices
in the property sector" Bne econoist has recently calculated that i$ personal
consuption in China as a percenta!e o$ &DP had reained at its +CC, le)el it would
be @, per cent abo)e current le)els - a ore rational balance in relation to other &DP
5
coponents 'Lardy 2,,D(" 0here is su$$icient spare capacity and in)entory backlo! in
China to enable consuption to rise si!ni$icantly without resultin! in price in$lation"
India has $ollowed a di$$erent path" 0he ajor point o$ di$$erence has coe about as a
result o$ deo!raphic chan!e" 0he si?e o$ India>s iddle class has 6uadrupled to
alost 23, illion people o)er the past +3-2, years" B)erall population !rowth has
slowed considerably, with lar!e !ains in per capita incoe" India>s deo!raphics are
be!innin! to reseble those o$ the de)eloped %est - a o)e away $ro a hi!h birth
rate, o)erpopulation and predoinant po)erty towards saller $ailies and increased
a)era!e incoe" 0here still reains, o$ course, a ajor issue o$ po)erty and poor
education" I$, howe)er, one looks at the econoy as a whole, as the current
!eneration o$ potential baby booers atures and the consuer sector o$ the
econoy continues to prosper, spendin! power and odern consuer beha)iour look
set to -trickle down/ throu!h the econoy $or decades" 0he bi! issue in all this is that
India has relied considerably on a cobination o$ !rowin! doestic arket deand
and in)estent in knowled!e-intensi)e industry and ser)ices, which has eant that
India has been to a !reat e1tent insulated $ro !lobal downturns a$$ectin! physical
trade" Personal consuption accounts $or just o)er D, per cent o$ Indian &DP,
akin! it increasin!ly coparable with a $ully-de)eloped %estern econoy" 0hus it
has been ar!ued '$or e1aple Das 2,,D( that India>s -boo/ is intrinsically ore
durable than China>s, notin! that China>s population is likely to peak around 2,@,,
whereas India>s will continue to !row, on current projections, till about 2,D3"
Im$act on Euro$ean com$anie!
Both areas should $i!ure in the thinkin! o$ %estern copanies" 0hey will be a source
o$ new opportunity and new copetition"
&rowth in the ature econoies o$ Eorth Aerica and <urope will be increasin!ly
di$$icult to $ind $or the ajority o$ %estern copanies" Falue i!ration will continue
to be a phenoenon o$ 2+
st
century econoics" 0his eans that acti)ities enjoyin! a
coparati)e ad)anta!e in an Asian location will i!rate there siply because 'a( it is
lo!ical that they should and 'b( it is becoin! easier and less costly to ana!e such
acti)ities as a result o$ increasin!ly widespread a)ailability o$ low-cost technolo!ies
o$ doin! business"
I$ we think how any products and ser)ices we now buy $ro copanies that did not
e)en e1ist a !eneration a!o and how any o$ these copanies are based substantially
'i$ not head6uartered( in Asia or the Indian subcontinent, the a!nitude o$ this issue
becoes clear" %hether this constitutes an opportunity or threat is soethin! that is
under the control o$ e1istin! ana!eent teas" 0he cobination o$ the %0B
'despite its soeties di$$icult processes and e1periences( and $acilitatin!
technolo!ies 'especially in$oration technolo!y( ensures that opportunity and threat
will increase siultaneously"
India will continue to de)elop as a arket $or increasin!ly sophisticated consuer
!oods and technical ser)ices" It will be a natural location $or production o$ the $orer
$or the doestic arket and the latter $or !lobal arkets that can be ser)ed by web-
based distribution" China will continue to be an attracti)e location $or anu$acture
3
and re-e1port into the Asian re!ion and world arkets" 0his will not be restricted to
basic speci$ication !oods with a hi!h labour content8 there are world-class operations
in China producin! to standards that are coparable with any in the 9#A, ;apan and
<urope"
0he Chinese doestic arket will, howe)er, open !radually as its iddle class !rows
as a proportion o$ the total population" .any lu1ury !oods are now sold in the
Chinese doestic arket" Consuer tastes and pre$erences, especially aon!st
youn!er people, are )isibly con)er!in! with the de)eloped world"
Where net for We!tern com$anie!
0here are two diensions that %estern business has to consider in the Chinese and
Indian eleents o$ internationalisation and !lobalisation - the deals and the learnin!"
#oe %estern copanies ha)e been deonstrably success$ul in de)elopin! a balance
o$ trade and in)estent" Central !o)ernent has tended to stick too lon! to the
-e1port trade/ odel in the hope that this will retain jobs and contribute to added
)alue in the $ace o$ e)idence that the trade-to-in)estent balance has already chan!ed
considerably" Deals are bein! struck increasin!ly throu!h in)estent relati)e to
e1port trade" %here such a strate!y is ipleented, the result is not job loss but the
creation o$ ore skilled jobs back in the hoe arket and net increase in labour
earnin!s at the le)el o$ the doestic econoy whilst participatin! $ully in the
opportunities presented by !lobalisation"
%hat coes ne1t is ore challen!in! and critical $or econoic and business
de)elopent" :ow will %estern copanies build on the second diension - the
learnin! - that has been part o$ this process7
9nless a stron! base o$ -intellectual capital/ is aintained, the %est will coe under
increasin! pressure, especially in anu$acturin!, $ro countries such as China and
India" It is not a 6uestion o$ direct labour cost, since direct labour in ost o$ odern
anu$acturin! accounts $or a relati)ely low percenta!e o$ total cost" It is the in$lation
in !eneral operatin! cost that is the bi!!er proble"
Guite siply, in an increasin!ly !lobal business en)ironent %estern copanies will
achie)e success only by o)in! up the )alue-add chain" In other words, low-skill
transactional-type jobs and acti)ity will i!rate <astwards siply because this is a
rational conse6uence o$ e)er-openin! econoies, and at the sae tie there will be a
copensatin! increase in the deand $or hi!her-skill ser)ices that are used in the
creati)e con$i!uration and rapid re-con$i!uration o$ such ser)ices - predoinantly in
desi!nin! and ana!in! internationally copetiti)e supply chains" #uch supply
chains are not restricted to aterials and products8 they include, inter alia, in$oration
and $inance" It is throu!h copetency in the ana!eent o$ hi!h-skill )alue-addin!
acti)ity that the $uture o$ %estern business is to be de)eloped i$ our copanies, lar!e
and sall, are to copete success$ully in the !lobal econoy"
D
China and India a! $art of g&o%a& economic !hift
&lobalisation presents us with threats and opportunities siultaneously, and the
!rowth o$ China and India is a si!ni$icant $actor in this" Partly throu!h the in$luences
o$ &A002%0B and partly throu!h ad)ances in technolo!y, priarily in$oration
technolo!y, ost or!anisations ha)e easier access to arkets than in the past" 0his
eans ine)itably that our own re!ional arkets are also open to increased
copetition"
:owe)er, the concept o$ !lobalisation !oes $urther than the product2arket
diension" It includes 6uestions relatin! to $luid or!anisations, capital structure and
)alue i!ration" It relates increasin!ly to labour supply and deployent" %hereas
!lobalisation was de$ined custoarily in relation to physical trade, it now relates to
ultiple $actor obility" &lobalisation is there$ore about de)elopin! or sourcin! a set
o$ competencies that enable an or!anisation to contest any arket it chooses and to
deri)e copetiti)e ad)anta!e $ro any cobination o$ )alue-creatin! acti)ities"
#uccess in the $uture $or %estern copanies will depend on continuin! to de)elop the
core copetencies and technolo!ies re6uired to desi!n and ana!e ulti-$actor
supply chains that will !i)e access to the ost attracti)e product and ser)ice arkets"
'ummar( remar)!
A!ainst this back!round B2B International has opened an o$$ice in Beijin!, China" It
has two ain business thrusts8 'i( to undertake arket research $or Chinese copanies
on the China arket and 'ii( to undertake arket research $or non-Chinese copanies
lookin! to enter the arket directly or )ia collaborati)e )enture" 0he concepts o$
arketin! and conse6uently o$ arket research are still in their in$ancy in China, but
the speed with which Chinese copanies and ana!ers are takin! on board the tools
and techni6ues that we take $or !ranted is truly astoundin!" It is also part o$ the
ipact o$ !lobalisation on the arket research business itsel$ - we are $indin! that an
increasin! part o$ our arket research work is concerned with arkets $or in)estent
and opportunities $or sourcin! and operational collaboration as well as with
opportunities $or e1portin! products to China"
0his H%hite Paper> is not written to present India and China as soe kind o$
-either2or/ opportunity or threat" Indeed the opportunities and constraints presented
by each arket ha)e led to a si?eable and !rowin! incidence o$ trade alon! with
!reater scienti$ic and in)estent linka!es between the two countries thesel)es" Eot
least, the e1perience o$ India in its !radual o)e away $ro a #o)iet-style
de)elopent path is o$ considerable interest to policyakers in Beijin! itsel$, and we
should e1pect, and not be surprised by, the increasin! linka!es that are now openin!
up between the two )ery di$$erent countries"
Daniel Park
.arch 2,,I
Co$(right * + D ,ar) -../
I
Reference!
DA#, &urcharan '2,,D( -0he India .odel/ Aorei!n A$$airs, ;uly2Au!ust"
LAJDK, Eicholas '2,,D( -China - 0oward A Consuption-Dri)en &rowth Path/
%ashin!ton DC8 Institute $or International <conoics, Policy Brie$ Eo PB,D"
*