Vlerick Leuven Gent Management School
23 June 2005
OLD ASIA IN A NEW
The Stampede of the
Big Tiger and Elephant
CHINA AND INDIA
Willem van Kemenade
E-mail: [email protected]
• There have been three dramatic changes in World Economic
History over the last century and a half:
– Between 1870 and 1914, the US overtook Britain and Germany and became the
leading world economy.
– Between 1950 and 1975, Japan caught up with Europe and the US to become
the world's second largest economy.
– The third catch-up period, from 1975 to 1997, saw the narrowing of the gap
between the “tiger economies” of east Asia and the developed world.
• The next phase is to shift the centre of the world economy from the
Atlantic ocean to the Asian mainland. It will change the composition
of world output and trade and global energy consumption.
• It will create severe tensions between leading economies as they
are challenged for global dominance.
• The east Asian tiger economies moved fast but with stealth. The
“elephant economies” of Asia, by contrast, will create global
commotion as they begin to stampede.
Seismic Shifts in World Economic
Top Ten Total
% of World Total % of World Total
% of World Total % of World Total
Top Ten Total
Source: Angus Maddison, Monitoring the World Economy, OECD, 1995
The World’s 15 Largest Economies
** Billion €
* Billion $
The Economist, Pocket World in Figures 2005
GDP of Newly Emerging Powers 2003
Billions of 800
India, China likely to outshine
US by 2020 : (CIA report)
• India and China are likely to emerge as new major
global players by 2020 and outshine the United States
in some fields, transforming the geopolitical landscape
of the world.
• The 114-page report, titled ''Mapping the Global Future'', said the
likely emergence of India, along with China, as new major global
players – similar to the advent of a united Germany in the 19th
century and a powerful United States in the early 20th century -- will
transform the geopolitical landscape, with impacts potentially as
dramatic as those in the previous two centuries.
• As the 1900s were referred to as the American century, the 21st
century is increasingly seen as the Asian Century.
• A combination of sustained high economic growth, expanding
military capabilities, and large population will be at the root of the
expected rapid rise in economic and political power for both
The United States,
China and India
• The US has a two-track policy towards China: containment ~
engagement, also called congagement.
• The US wants to put a cordon sanitaire of democracies around
China: Japan, Korea, (Taiwan), India.
• In April, Secretary of State Condoleezza Rice visited Delhi and told
the Indian prime minister that America's newest foreign policy goal
was to "help India become a major world power in the 21st century“,
i.e. sell the most advanced F-18 fighter planes.
• Apart from hardliners in Taiwan and some in Japan, nobody is willing
to contain China.
• India resents US support for crypto-terrorist Pakistan and needs
strong energy links with Iran, also clashing with US strategic designs.
• The US needs Indian brainpower and India needs US investment.
• China has developed large scale economic links with India, but the
strategic issues between the two countries are far from settled.
Asia for the Asians ?
• India's entry on the worldstage is gathering momentum
only just now. It is happening partly because the country
has been stirred into action by the “Rise of China” and
is beginning to escape its obsession with Pakistan,
which has often blinded it to wider strategic and
• China wants to engage India, integrate it in the emerging
East Asian Trading System and prevent it from joining
the United States-led containment coalition.
• China also wants to involve Russia in this anticontainment grouping and end the “unipolar world”,
dominated by the US. By 2025 the world will be bipolar,
with China as the other pole, and by 2050 tripolar with
India in the picture.
• What about Europe ?
India joining East Asia ?
• In December 2005, the first East Asian Summit will be
held in Malaysia. Participants are the 10 ASEAN states
plus the three Northeast Asian powers China, Japan and
South-Korea, plus India and New Zealand.
• Perhaps Australia will be added if it agrees to an
“exclusionary clause” about its military links with the U.S.
• Goal is to pave the way towards the establishment of an
“East Asian (Economic) Community”, similar to the EU at
an earlier stage.
• Negotiations on a series of Free Trade Agreements are
• Potentially the largest one will be between China-India.
• Such a community, with China and India as its growth
engines, could pose a serious challenge to Japanese
and U.S. economic and political interests in Asia.
Selected Indicators China-India
Population Growth Rate
$ 1.4 trillion
$ 600 bn
Average annual GDP
Growth Rate 1990-2000
Foreign Investment 2004
$ 60 bn
$ 5 bn
$ 1.1 trillion
$ 114 bn
Population in Poverty
GDP per capita 2003
Foreign Trade 2004
Various Internet Sources
Corruption Perception Index 2004
Some Chinese are envious of
• Despite the sharp limits on free speech in their country,
Chinese intellectuals talk, too, often enviously, of India's
advantages in democratic governance. For all of China's
apparent strengths today, they say, future success may
depend on democratic reform.
• "If China learns its lessons from India, it can succeed in
democratizing in the future," said Pang Zhongying, a
professor of international relations at Nankai University
• "India is a far more diverse country," he said, "a place
with the second largest Muslim population in the world,
and lots of ethnic minorities, and yet it organizes regular
elections without conflict. China is 90 percent Han, so if
India can conduct elections, so can China."
Some Indians praise China’s
• Many Indians believe that a large part of the blame for
their country’s inferior economic performance must be
borne by the political system.
• China, the argument goes, is an authoritarian system
where the government and the businesses it favours can
do what they want—change laws, build infrastructure,
secure licences, fiddle their books— without significant
• In India, however, not only does every step require
dealing with an inept, corrupt and intrusive bureaucracy,
but the democratic system itself also imposes extra costs
and delays. For every important and helpful reform, there
is a powerful lobby that will oppose it.
Amartya Sen’s book
”Development as Freedom”
• Authoritarianism vs. unruly democracy.
• Post-Ideological atheist secularism vs. religious strife.
• “India has much to learn from China's experiences in healthcare and
basic education … and from its intelligent and undogmatic economic
policies,” “But there is little for India to learn on the alleged virtues
of China's authoritarian politics.”
• China contrasts markedly with India's deep-seated, but receding
suspicion of free markets and foreign investment.
• China has a literacy level of over 90 % compared with 65 % in India.
Likewise, life expectancy in China is 70 compared to 64 in India.
• Ultimately, delegates agreed there was more to learn from China
than to ignore. At a press conference, Mr Sen illustrated the point
vividly. “If I just look around me … the ash tray, the paper, the
furniture, the microphones etc. - they are all made in China”.
The best Route to Economic Progress:
The Chinese or the Indian Way ?
• Welcome foreign investment, says China. But a comparison with
India suggests that FDI is not the only path. India's homegrown
entrepreneurs may give it a long-term advantage over a China
hamstrung by bad banks and a malfunctioning stockmarket.
• At the start of “Reform Communism” in 1978, the Chinese diaspora
and later multinationals, were eager to invest. China’s state-banking
system did not lend to private entrepreneurs. As a result, China’s
economy until recently was dominated by state-enterprises and
foreign investors. Private enterprise emerged only slowly.
• Democratic India under soft Fabian socialism could not allow foreign
investors to “exploit” the Indian people and gave priority to native
• India has spawned cutting-edge, knowledge-based industries:
software giants Infosys, Tata and Wipro, pharmaceutical and biotech
powerhouses Ranbaxy and Dr. Reddy's Labs.
High FDI means
• Huang Yasheng, an MIT professor, maintains that high FDI is a
manifestation of Chinese non-competitiveness, not in some, but in
nearly all areas - hence its disproportionate scale, compared with
states having efficient private enterprises and capital markets.
• Huang argues that the undiminished enthusiasm of foreign
companies reflects weaknesses in China's half-state-run, halfprivate economy that outsiders can exploit.
• China's failure to overhaul its money-losing state industries, and its
traditional ideology-based discrimination against local private firms,
who can hardly get bankloans has allowed foreigners to take
charge of much of the high-technology sector.
Associate Professor at Sloan School of Management, MIT
Investment (FDI) in China: Why Surging Levels of FDI
Serious Economic Problems“ (16 January 2003)
India plans Chinese-style
Special Economic Zones
• The Indian government has enacted legislation in May
to allow the country's 29 states to bypass the country's
strict labour laws through the creation of Chinese-style
special economic zones. Eleven have been in operation
and another 35 will be set up soon.
• The creation of SEZs is a central plank of the Indian
government's plans to encourage faster inflows of
foreign direct investment and boost employment.
• Leftwing parties that support the Congress-led coalition
are likely to see the measure as a Trojan Horse to
smuggle in labour reform.
• A weak level of FDI along with low savings levels and
woeful infrastructure is seen as one of India's principal
China’s Strength: Manufacturing
India’s Strength: Global Back-Office
• "China as a manufacturing base and India as the back office to the
world could power global economic growth in future," said Amit Mitra,
secretary general of the Federation of Indian Chambers of
Commerce and Industry.
• China's strength is its rapidly growing domestic market -- China
Mobile's annual incremental increase in subscriptions, is more than
India's total telephone access for both fixed and mobile access.
• On the other hand, India has a clear edge in winning service export
orders, in everything from Hollywood animation to multinational data
processing. India's software exports have the potential to be as
dominant as China's in electronics and toys.
• If deregulation continues as expected, the surge of the two
economies could be phenomenal.
China’s Envy: Software
• India worries about losing its status as Asia's leading producer of
software. Though its software exports this year are expected to top $
10 billion to China's $1.5 billion, China has been sending teams to
learn the secret of India's success.
• Fifteen Indian IT companies now have a presence in China. 40 % of
China's IT exports involved Indian IT companies based in China,
according to a report by Gartner Consultants.
• In contrast, China's overall exports in 2003 were $440 bn compared
with India's $60 bn. "Software is an area where India is five to seven
years ahead," said Mohan Das Pai, CFO of Infosys, which has won
contracts in China's financial sector.
• "China lacks facility with English and experienced project managers.
But China will catch up very fast.“
• It will take 5 to 10 years before
China rises as an equal to
India in IT and outsourcing
services in English.
• Weakness: poor English; weak
protection of IPR; shortage of
managerial talent; fragmented
• There are 200,000 architecture
level IT engineers in India,
against around 1,000 in China.
• There are about 8,000
software-service providers in
China, compared with fewer
than 3,000 in India
New Pattern of
• India has overtaken Brazil to become the largest supplier of iron
ore to China after Australia. Overall, China is now India's secondbiggest trading partner after the United States.
• Huawei Technologies, China's biggest telecommunications
equipment maker, spend $200 million to start making phone
equipment and expand its software development and research
center in India.
• Haier is building a factory in India to manufacture 50,000 TV sets a
month. The company, based in Qingdao, recently began selling
mobile phones in India, Asia's fastest-growing wireless market.
• India has slashed its tariff rate - from 150 % in 1992 to 15 % now.
It's still higher than China's 10 % rate, suggesting that benefits of
free trade may be slightly skewed in favor of supercompetitive
Chinese manufacturers, who already make 75 % of the world's
toys, 58 % of clothes and 29 % of mobile phones, according to
A Chinese-Indian Free Trade Area:
The “Mother of all FTA’s”
• Riding on a 79% growth in bilateral trade in 2004 at $14
billion, China has expressed an interest in formulating a
free-trade agreement (FTA) with India.
• Trade between India and China has increased seven
times in five years. It can increase to $35 billion by 2010,
even if a modest 20% annual growth is maintained.
• Closer trade relations could make it easier to solve
• If the FTA is achieved, it would result in the biggest freetrade region in the world.
• Indian business groups don’t think India is ready to sign
an FTA with the Chinese trading juggernaut. India can’t
face the competition from China yet.
India’s New Government and its
Rigid, Over-protective Labour-laws
• Chinese factory workers are paid less than their Indian counterparts
and are more productive. India has rigid labour laws that make it
almost impossible to fire an employee or hire contract labour. That
is one reason India attracts roughly one tenth of China’s FDI.
• The previous Hindu-nationalist BJP government had indicated
before its electoral defeat in May that it would dilute or scrap two
statutes that make it hard for companies to fire workers and hamper
their ability to take on temporary labour.
• The new more leftist minority Congress-government of Dr. Manmohan Singh will depend on Communist support. The Communists
have always opposed labour-reform.
• The Indian textile industry wants the right to hire contract workers
before the Dec. 31 expiration of the MFA/WTO quota system of
garment imports. As the global textile market opens up, India has
the opportunity to catch up with Chinese manufacturers.
India’s Wages are Lower than China’s ?
Manufacturing labour cost per hour ($)
Source: IMD World Competitiveness Yearbook 2002, Quoted in recent UBS Report
China’s Biggest Weaknesses: Poor Banking- and
Legal System; India: Lack of Liberalization
• In China, foreign investors have been among the biggest
beneficiaries of the constraints placed on local private businesses.
• In a World Bank study published last year, only 52 percent of the
Indian firms surveyed reported problems obtaining capital, versus 80
percent of the Chinese companies polled.
• In a survey of 25 emerging market economies conducted in 2000 by
Credit Lyonnais Securities Asia, India ranked sixth in corporate
governance, China 19th.
• China's misallocation of resources is likely to become a big drag on
the economy in the years ahead.
• India has received only a fraction of the FDI the world has invested in
China, but portfolio managers say India is in a number of ways the
more attractive stock-market investment.
• India is about a dozen years behind China in liberalizing its conomy,
lowering tariffs, and opening up industry to foreign investors.
China & India:
Limited Cooperation in Energy-Sector
China used 5.46 million barrels of
oil a day last year, compared with
Japan's 5.43 million, according to
the International Energy Agency.
China relies on overseas
producers for one third of supplies
and accounts for about 7 per cent
of world oil demand.
In contrast, India imports almost
70 per cent of its oil needs and
last year consumed a little more
than two million barrels a day.
India's government-controlled Oil
and Natural Gas Corporation
recently began producing oil in
Sudan in cooperation with
Chinese state-owned companies.
It is building a pipeline in Sudan
and negotiating to erect a refinery.
Energy Competition between China and India
• In January 2005 India and Iran signed a preliminary $ 40 billion
agreement that commits India to import Iranian LNG by sea tankers
and to develop two Iranian oilfields and a gas field.
• In November 2004, China signed a $ 70bn agreement to buy 250m
tons of liquefied natural gas from Iran over 30 years. As a result,
China is likely to block any US attempt to use the United Nations
Security Council to impose sanctions on Iranian oil and gas.
• China prefers energy supplies from countries that don’t take orders
from the US. The US wants to isolate regimes like Iran and Sudan
and China and India support them with long term energy-deals and
• Anticipating a military conflict with the US, China is considering to
build pipelines to the Indian Ocean through Burma, Thailand or
Bangla Desh, and/or to the Arabian Sea through Pakistan.
• Will Sino-Indian energy needs collide (Angola) and disrupt their
rapprochement? Will their energy interests bring them into conflict
with the US in some areas, such as Iran and Sudan?
China, India and the
Fortune Global 500 List
• As a result of the different paths to development, China
has 5 companies on the 2004 Fortune Global 500 List
against India 4.
• The Chinese companies are state conglomerates - power, oil, steel,
insurance, telecom, chemical, grain - and state-banks.
• China accounted for a third of the world’s growth in oil demand and
it gobbled up half of the world’s cement, a third of its steel, a quarter
of its copper and a fifth of its aluminum.
• PetroChina is 35 % bigger than Norway’s Statoil but it has 53 times
as many employees
• The Indian companies on the list are 3 in the oil-sector and
industry-conglomerate “Reliance Industries”.
• However, last year’s, Forbes 200, an annual ranking of the world's
best small companies, included 13 Indian firms but just four from
China. It will be years before Indian high tech companies are big
enough to make the Global 500.
The Chinese Diaspora:
Big Money / Sports
The Indian Diaspora:
High Tech Brainpower
• China's success in attracting FDI is partly a historical accident. During
the 1990s, more than half of China's FDI came from the overseas
Chinese diaspora. The money appears to have had at least one
• For instance, because foreign investors were acquiring assets from
loss-making state-enterprises, the government was able to drag its
feet on privatization.
• Until recently, the Indian diaspora has accounted for less than 10 % of
foreign money flows to India but this is now increasing rapidly. And
while the Indian diaspora may not be able to match the Chinese
diaspora in “hard” capital, Indians abroad have substantially more
scientific capital, which could prove even more valuable.
• China has won the race to be the world's workshop. With the help of
its diaspora, India could become the world's technology lab.
Geo-strategic and Domestic
Challenges to Progress
• Long term forecasts of China being the world’s largest economy by
the middle of this century and India Number Three could be
derailed by various “external” and/or “internal” imponderables:
• For China: Protracted crisis and/or outright military conflict over
North-Korea, Taiwan, the South-China Sea and internally, financial
and/or political crisis over liberalization.
• For India: Kashmir, Islamic terrorism, communal violence …..
• For both: the effects of climate change, water shortages and/or
other ecological catastrophe.
• There is more corruption in India than in China (Transparency
International: 3.4; 2.8), but India has mature political and legal
systems and a free press, which China has not.
• According to the best available samples of public opinion, Chinese
consider social instability as the main threat to their future.
Projected Income Per Capita for the
“BRICS” (Goldman Sachs Report)
GDP per capita
GS BRICs Model Projections.
Appendix I: BRICs by Country
• Over the next 50 years, Brazil’s GDP growth rate
• The size of Brazil’s economy overtakes Italy by 2025;
France by 2031; UK and Germany by 2036.
• Challenges: lack of openness, lower education levels,
lower savings and investment, higher public and foreign
• Lower convergence rate at first, then catches up with
China and Russia.
• By 2050, Russia’s GDP per capita is by far
the highest of the BRICs.
• Demographic dynamics drive GDP per
• Russia’s economy overtakes Italy in 2018;
France in 2024; UK in 2027 and Germany
• India’s growth rate remains above 5% throughout the
• India’s GDP outstrips that of Japan by 2032.
• India could raise its income per capita in 2050 to 35 times
• Still, India’s income per capita will be significantly lower
than any of the countries we look at.
• Low education levels, lower convergence rates at first
followed by a catch-up.
• China’s GDP growth rate falls to 5% in 2020 from its 8.1%
growth rate projected for 2003.
• By the mid-2040s, growth slows to around 3.5%.
• Even so, China becomes the world’s largest economy by
• High investment rates, tapers off though projection period.
• China’s per capita income could be roughly what the
developed economies are now (about US$30,000 per