The Dragon and the Tiger

The emergence of China as an economic superpower has been the story of this century so far. As India becomes the most populous country by 2030, could it become the story of the next decades?

It is now almost twenty years since Goldman Sachs economist Jim O’Neill first dubbed the world’s biggest emerging economies as the ‘BRICs’ – Brazil, Russia, India and China.

Whilst the first three have grown, it has really been the re-emergence of China as an economic and political superpower that has been the story of the twenty first century to date. China has long been the most populous country in the world. Now, after re-emerging over the past 40 years, its economic might matches its economic population.

Having grown its economy at over 10% for several decades, the Government now targets 6% GDP growth: still impressive especially given it is tough to continue to grow quickly in percentage terms as you get bigger. But China has looming problems and may slow down much more than this in the 2020s.

The first is the demographic issue. The One Child Policy, introduced in 1980, means that the population is now ageing rapidly. The fertility rate (births per woman) has dropped from 4.5 in 1973 to around 1 now. As a result, the workforce is now in decline, and the dependency ratio – the number of workers per dependent – is set to decline from around 7 today to less than 3 by 2050. A rapidly ageing population with fewer workers supporting far more retirees is rarely a recipe for economic success. There are methods which could soften this, such as raising the retirement age and measures to increase the birth rate.

Developed nations were tolerant as China’s 700 million workers were unleashed on the world after they joined the World Trade Organisation (WTO) in 2001, but as they move into higher technology areas such as aerospace and telecoms, these nations are getting worried, as seen by the imposition of the US tariffs.

Finally, two trusty means of recent success may be running into difficulties: debt-fuelled infrastructure spending may be running out of projects to build (they already have two-thirds of the world’s high speed trains); and cheap, efficient manufacturing exports become more difficult as you get wealthier. The model will have to transition quickly.

China is now so important to the global economy that it contributes about one-third of global growth. As it slows, who will pick up the slack?

The most obvious place to look is India. Having been the second largest country by population behind China for many centuries, it should get to number one before 2030 given its neighbour’s demographic issues noted above. With half the population under 25, India has no worries about ageing.

Where India has fallen short in recent decades, however, is in economic growth – twenty years ago its economy was half the size of China, but it is now barely a fifth of the size. The reasons for this are multiple and are detailed by economists and in books such as the ‘Elephant and the Dragon’ by Robyn Meredith. Firstly, China started opening up much earlier than India, and so had a head start. China has focused more attention on health (as measured by a higher life expectancy) and education (higher literacy) and so was also better prepared for growth.

“If China can stabilise its total fertility rate at 1.2, its population will decline to 1.07bn by 2050 and 480m by 2100.”

Beijing has highly centralised power which can dictate policy and implement it. India is a democracy, which is to be cherished; however, when large infrastructure projects are needed the government can’t just bulldoze private property in the face of voters, trade unions and companies which all have legal rights. The Indian bureaucracy is also notoriously slow and a drag on growth, including the state run banks which are very cautious in their attitude to lending.

Finally, China chose to grow via manufacturing and trade, having looked at the role of industry in lifting Britain and the US from poverty. New Delhi was highly protective and restricted foreign direct investment. India became the world’s service hub, with a highly successful technology sector centred in Bangalore. This is hugely important to the Indian stock market and is perhaps its most visible face to the global business community: indeed, Satya Nadella and Sundar Pichai, respectively CEOs of Microsoft and Google, are both Indian.

This focus is fine but manufacturing requires far more jobs. Things may be changing, however, under the reform-minded Prime Minister Narendra Modi. Fresh from winning a second 5 year term in 2019, he is using his fresh political capital to introduce a series of measures to boost growth.

He has cut company taxes – they were some of the highest in the world – and cut taxes on investment. They appear to be starting a privatisation programme to free industry of some of the bureaucracy and raise funds for government investment. Finally, the bureaucracy should improve as a result of the digitisation of identification – the roll out of biometric IDs (eye scans, fingerprints) allows Indians to open bank accounts, get access to services such as mobile phones and receive welfare.

Can they succeed? They should grow faster than China over the next decade; however, the gap between the two is so large it will take decades to completely close, if ever. In addition, western makers of industrial and consumer goods should benefit from the re-emergence of India, as will global GDP growth.

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