By Shankar Acharya
Published: July 28 2009 20:37
In recent years, the rise of China and India has become a salient feature of the global economic landscape. Conferences and books have proliferated with titles such as “China and India Rising” and “Dancing with Giants”. Although individual contributions have often delineated carefully the differing paths taken by these two populous Asian nations, there has been a general tendency to lump the two countries together in discussions of global economic issues ranging from international trade to climate change.
At one level, this is quite natural. China and India are the only two countries with more than a billion people. Both are in Asia. Both have opened up to international trade and capital flows in the past three decades. Both have demonstrated sustained and enviable economic growth since 1980. It is true that if current growth rates are maintained, both countries could join the US in the trio of the world’s largest economies by about 2025, measured in purchasing power parity (PPP) prices.
Yet for all its apparent sense, the pervasive bracketing of China and India too often masks critical differences between them and impedes a better understanding of the challenges posed to the world economic order by their economic expansion.
First, China and India today are at different stages of development. The two countries may have had similar average incomes in the late 1970s. But their subsequent growth trajectories have changed the situation materially. India’s 4 per cent average annual growth in per capita gross domestic product since 1980 is commendable and has brought enormous benefits to her population. However, it pales in comparison with China’s spectacular growth in per capita income of more than 8 per cent a year, which has transformed the living standards of her people and made the country a major economic power. By 2007 average incomes in China were about two and a half times higher than in India, at official exchange rates, and about twice as high in internationally comparable PPP prices.
More importantly, the World Bank estimates that the proportion of people in extreme poverty – defined as those living on $1.25 a day – had fallen to 16 per cent in China by 2005, while it still remained above 40 per cent in India. (See charts below.) With a higher poverty line of $2 a day, the Bank reports three-quarters of India’s population to be poor as compared with 36 per cent in China. Other correlates of poverty show similar divergence. For example, more than 40 per cent of India’s children under five remain malnourished, compared with 7 per cent in China. In short, China is no longer a poor country, whereas India still fits that description.
The second major difference between the two nations is the far greater impact of China on the global economy, especially in the present decade. This is due mainly to two reasons: first, China’s much more aggressive strategy of export-and-foreign-investment-led industrialisation; and second, the extraordinary pace of China’s growth. Thus, between 2000 and 2007, China’s merchandise exports almost quintupled in value to account for nearly 9 per cent of world exports, while India’s export share increased sedately from 0.7 to 1 per cent. The increase in the value of China’s exports over the seven years was nearly seven times India’s total exports in 2007.
Despite the rapid growth of India’s information technology-based service exports since 1995, in 2007 China’s total service exports exceeded India’s by 40 per cent. By 2007 China’s $1,500bn of foreign exchange reserves were about six times India’s and her current account surplus of $370bn was of a different order from India’s modest deficits. In most years of this decade foreign direct investment inflows into China have been eight to 12 times higher than to India, though the multiple dropped after 2005.
Similarly, China’s primary energy consumption of commercial fuels has doubled since 2000 to about 1.9bn tonnes of oil equivalent. The increase over the seven years is more than double India’s total primary energy consumption of 410m tonnes of oil equivalent in 2007. Unsurprisingly, China’s carbon dioxide emissions had soared to 5.6bn tonnes by 2006, compared with 1.3bn tonnes from India. In per capita terms China’s emissions were almost four times higher than India’s. With China’s economy three times as large as India’s today and given her disproportionately larger footprint in international trade, capital flows, energy consumption and carbon emissions, China’s potential role in helping solve the major global economic issues of the day is correspondingly greater. For example, in the global recession, China’s massive fiscal stimulus over the past year has already helped revive China’s growth and imparted a significant stimulus to other Asian economies.
Similarly, on the enduring issue of global imbalances, India, with her modest current account deficits and high share of private consumption, can do little to ameliorate this problem. China, in contrast, can play a much bigger part by stimulating greater consumption and undertaking significant currency appreciation to contain and reduce her massive current account surpluses.
Both countries have an important stake in bringing the Doha round to a successful conclusion: China because she is one of the biggest trading nations; and India because her economic interests are better served by a liberal, international trading order than a system of regional blocs. On the contentious issue of greenhouse gases, China’s actions will obviously have much more significant consequences, given that her emissions are four times greater in both absolute and per capita terms.
What of the future? Many believe that on current trends India will achieve China’s present economic scale in about 15 years. Perhaps. But by then, it is not unreasonable to expect that the Chinese economy may also have expanded threefold. The main point is that China’s explosive growth has not only dominated the global economic scene over the past decade; there is a strong likelihood that it will do so for the decade ahead as well. Put differently, there is really only one new economic giant in town. The other potential giant, India, is still a relative stripling. Thus far her growth in trade, capital flows, energy consumption and emissions has been at a steady, moderate pace. Ten or 15 years on, the story may be different.
In an important sense, the sequential rise of China and India has made things easier for the global economic community. The strains of accommodating one giant at a time have been substantial but broadly manageable. Had both these populous Asian countries embarked on growth of 8-10 per cent a year at roughly the same time, it could have been far more challenging for the international economic order – and perhaps more dangerous.
The writer is former chief economic adviser to to the government of India. His most recent book is India and Global Crisis
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Copyright The Financial Times Limited 2009
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