[A race bet. China and India is too close to call in 10 years? I will call it now that no way India can catch up China in 10 years]
Harvard and McKinsey Debate China-India Growth: Andy Mukherjee
Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.
Nov. 18 (Bloomberg) -- Management consultancy McKinsey & Co.'s recent newsletter presents three different points of view on what is one of the hottest topics of debate: ``China and India: The Race to Growth.''
The contributors -- a Harvard University professor and two McKinsey consultants -- appear to agree on very little except that the two economies have adopted opposite growth models: China's way since 1978 has been state capitalism; India's path since 1991 has been private enterprise.
All the three commentators have done a good job of highlighting the strengths of the two Asian powerhouses and in offering insights about which of the models may triumph.
Yet, none discussed the possibility that the different paths followed by China and India may actually converge.
For the next 10 years, China will keep trumping India in industries that rely on ``hard'' infrastructure -- roads, ports and power, Harvard University professor Tarun Khanna says in his essay in the McKinsey Quarterly. India will be ahead of China in biotechnology, computer software and other areas where ``soft'' infrastructure like a ready talent pool and private enterprise matter more than physical capital, Khanna says.
As for what happens after 10 years, ``The conventional view that the Chinese model is unambiguously better of the two is wrong in many ways,'' says Khanna, a professor of strategy at the Harvard Business School. ``Each has its advantages. It's far from clear which will deliver the more sustainable growth.''
Different Models
India started opening up its economy in 1991, 13 years after China. Chinese policy makers welcomed foreign-direct investments and decided which domestic company should get money to expand. India, suspicious of foreigners because of its colonial past, depended on its local entrepreneurs, who as a group had much freer access to credit and capital markets than their counterparts in China.
China last year got $54 billion in foreign direct investment, ten times as much as India. China's expansion has outstripped India's 6 percent annual growth by an average 4 percentage points since 1980. The $1.4 billion Chinese economy, Asia's second biggest after Japan, is three times India's size.
``As India opens up further to foreign-direct investment,'' the Harvard professor concludes, ``we might well discover that the country' more laissez-faire approach has nurtured the conditions that will enable free enterprise and economic growth to flourish more easily in the long run.''
China's Advantage
That may not happen, says Jonathan Woetzel, a director in McKinsey's Shanghai office, in his essay.
It's true that the Chinese government decides which companies should grow. It's also true that an efficient market would have allocated capital better and achieved the same amount of economic growth without the $205 billion in bad loans that's now sitting on the books of the four major Chinese state-owned lenders and 11 commercial banks, in addition to the $230 billion transferred to asset managers since 1999.
Yet, ``China is not an efficient market, and the Indian model,'' Woetzel writes, ``essentially one with relatively little investment funding, whether by the government or the private sector, could not have achieved as much growth for the Chinese economy as the approach China's government actually took.''
Diana Farrell, director of the McKinsey Global Institute, provides a third point of view. The automobile industry is one where the Chinese and the Indian growth models are in close competition, she says.
Toss-Up
India's car industry is half China's 2003 size of 1.76 million vehicles. Still, the productivity of foreign joint ventures in China is lower than in Japan or the U.S. In India, local engineers at Mumbai-based Mahindra & Mahindra Ltd. have created Scorpio, a sports utility vehicle that sells for a fraction of an equivalent car in the U.S., says Farrell.
So is the auto industry a good example to conclude that India's laissez-faire system, which encourages local entrepreneurship, works better than China's combination of state capitalism and foreign investments? Not so fast, says McKinsey's Woetzel. Look at Geely Automobile Holdings Co., a Chinese maker of cheap cars for first-time buyers that isn't a state-supported enterprise.
Geely has about 5 percent share of the Chinese car market. By 2010, the company wants to reach the 10 percent mark. ``In five or ten years' time,'' Woetzel predicts, ``at least a third of the Chinese auto industry will be completely private -- nothing to do with the current state players. And this will have started with the state saying, `We want to build a car industry.'''
Convergence
And that provides us with a fourth point of view. Communist China started with statism because it had no entrepreneurs. It's now moving toward a free market in capital and ideas to resemble India. Democratic India had a strong tradition of private enterprise that blossomed around a weak state; the next step for India is to improve the country's physical infrastructure, something that will need a strong political will. Or in other words, what India needs is a strong state.
A more India-like China and a more China-like India -- that's how the two growth models may ultimately fuse together.
On a 10-year timeframe, the rivalry between the world's only billion-people economies is a race too close to call. In 2015, it may look like a race both can win.
To contact the writer of this column:
Andy Mukherjee in Singapore amukherjee@bloomberg.net.
To contact the editor responsible for this column
Bill Ahearn at bahaearn@bloomberg.net.
Last Updated: November 17, 2004 16:30 EST
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