Over the past 18 months, many trees have given their lives so that articles titled something like, “Is India the next China?” could appear. But, an equally interesting question a business professor from Washington University in St. Louis posed is, “Is China the next India?” These two questions offer a lens through which we might glimpse, however darkly, the economic futures of India and China. And by posing these questions side by side, Professor Jim Little said we can see an interesting pattern emerge: as China moves up the technology ladder, the drivers of its growth are becoming more like India’s. At the same time, India increasingly resembles China’s current economy as it develops as a manufacturing base.
Historical perspective
In their pre-growth periods, China and India were both highly state-directed, internally focused economies, although China was certainly the more tightly closed and controlled of the two. China’s state control was direct and all pervasive; India’s state control was indirect, operating as it did through a complex system of regulations and subsidies. Moreover, India was (and is) democratic and had a large and vital private sector. So it is something of a surprise that China’s rapid growth was both earlier and larger than India’s, said Little, the Donald Danforth, Jr. Distinguished Professor of Business.
The surprise is tempered when one takes into account the commitment to reform on the part of the Chinese leadership. The goal of the reforms was to bring Chinese standards of living up to those of the world’s rich countries by 2050. To achieve this end, the government implemented a policy to turn the Chinese economy into a modern market economy in which economic decisions were driven by individual consumers and producers, and not the central planners. A key part of these policies was to open up the Chinese economies to multinational companies and to aggressively seek out foreign investment.
The government also invested in the infrastructure necessary for China to support advanced manufacturing and exporting. State-owned enterprises were downsized or restructured. Cities were either created or transformed to provide environments that would be attractive to foreign investors. The idea was not to turn China over to foreigners, but rather that foreigners would teach the Chinese, Little said. Once locally controlled enterprises developed the necessary management skills and adopted up-to-date technologies, Chinese companies would become competitive on a global scale.
India’s economic reforms came later, were less aggressive, came in the form of reduced restrictions on foreign investment, and significantly reduced internal regulation of the economy. These reforms did jump-start growth but, unlike China, Indian growth was led by domestic firms and entrepreneurs, not by foreign companies. It could also be argued that India’s growth was driven by innovation where much of China’s growth was driven by emulation.
Signs of change — India
Looking into the future, the question that naturally comes up is whether growth can, and will, continue if the two countries proceed down their respective paths, or will the pattern of development change?
Much of India’s growth has come from mobilizing its skilled human capital. Although Indian higher education continues to produce first-rate people, increasing the overall supply of the highly skilled takes a long time. This means that India, if it hasn’t already, will soon bump against constraints on supply and the cost for hiring skilled people will begin to rise, according to Little
On the other hand, India has the potential to become a manufacturing powerhouse, but is hampered by severe deficiencies in infrastructure and the complicated and restrictive regulations imposed by the national government and state-level governments, Little said. On the infrastructure front, things are starting to change. Across India, enterprise zones are springing up that have good internal transport, reliable sources of power and relatively unrestricted development rights. Foreign companies — Toyota, Rohm and Haas, and ABB — have begun to make significant manufacturing investments in India. They are producing high value-added products and products whose production cannot be easily shifted to the next low-cost mecca because the manufacturing requires a high level of technical expertise.
Despite these promising signs, India still faces significant challenges. The pace of regulatory reform has slowed. State governments, in many instances, do not seem to share the national government’s enthusiasm for reform. Indian farmers seem less inclined to leave the land for manufacturing jobs than do their Chinese counterparts. The development of infrastructure will be a massive undertaking and the Indian government does not have the financial resources enjoyed by the Chinese.
Signs of change — China
As for China’s future growth, there are indications that, despite the seemingly inexhaustible supply, the easily accessible labor is starting to get fully employed. In and around Shanghai, one now hears fairly regular complaints about rising labor costs — $1.60 an hour, which is double what costs were three or four years ago. Little said, the pay increase also indicates that hiring firms are bumping against supply constraints.
The engine of Chinese growth has been the cities along the coast. However, the capacity of these coastal cities to absorb larger populations is becoming more and more limited. In order to address this issue the factories are going to have to move to the workers instead of the worker’s moving to the factories. But there are problems in this. The farther a factory moves into China’s interior, the more problematic the logistics become. And, the talented young managers that are essential to the success of such ventures don’t want to live in the cities of central China; they want to live in the vital coastal cities.
Which brings us to another challenge that China faces going forward: a shortage of experienced, trained and talented local managers. If you visit a foreign company in China you will be struck by how young the local managers are. In part, this reflects the absence of language skills among the older generation, but it also reflects the fact that managers who “grew up” in state-owned companies simply don’t have the management skills needed in the current environment. Here, China’s past and even to some extent its present will constrain its growth going forward.
Following in India’s footsteps
According to Little there are two even more important forces at work. The first is that the government appears to be doing establishing policies that are tilting the playing field in favor of local companies over foreign enterprises. The other force is a tilt away from the “growth at any cost” approach. Significant societal divisions are beginning to appear in China. Over the past 25 years, Chinese income distribution has gone from being relatively egalitarian to being more unequal than that of the U.S. There are a few private business owners who have become immensely and conspicuously wealthy. More problematic are the widening differences between urban and rural residents; the coastal cities and the rest of the country; and between managers and workers and farmers. The urban professionals, a much larger group in numbers than the super-rich, have become very well off. Rural dwellers have been left the farthest behind. There are thousands of instances where farmers have been removed from their land so that it can be converted to factory sites or roadways, or in the case of the Three Gorges Dam, to power the cities. The upshot of this pattern is a significant majority of Chinese people are beginning to think that they are not the beneficiaries of China’s economic success and the managers and foreign companies have won.
The response from Beijing is that the leadership is placing less emphasis on growth per se and more on growth that raises the living standards of those who have fallen behind. The official line is that China’s big task now is to build a harmonious society. Where Western investment is most welcomed is in activities that are higher up the value chain — research and development, high technology and so on. The government has apparently recognized that manufacturing employs a lot of people, but doesn’t add a lot of value, so they are nudging growth towards higher value-added sectors. The Chinese leadership is hoping that Westerners show them the way but that local, Chinese enterprises dominate the economy, said Little.
In a sense, what China is trying to do is become the next India by focusing its growth more towards high-tech and high value-added activities and leading it with local enterprises. On the other hand, China is also becoming more like India through increased regulation for foreign companies with a design to give advantages to local companies. China lacks the large pool of highly skilled and trained technical workers upon which India’s growth has been based. It also lacks the financial structures that support entrepreneurs. It is not clear that China will succeed in this. But the economic “designers” have been very adaptable so they may be able to engineer the structural changes that would promote more innovation and more knowledge-led development as well as a greater role for local entrepreneurs.
Both China and India face significant challenges going forward, Little said. China must develop more of a knowledge-based economy if it is to continue moving forward. India must find a way to mobilize its huge population that remains in agriculture. In meeting these challenges, the two countries have much to learn from each other. But whether they will learn and whether they apply these lessons is the great unknown.
Editor’s note: Professor Little is available for interviews. Television and radio reporters can conduct live or taped interviews via the University Communication’s studio which is equipped with VYVX and ISDN line.