Global: What About Us?
Stephen Roach (New York)
As the global economy tilts increasingly toward Asia, the rest of the world struggles to cope. China and India are leading the way in driving the new global growth dynamic, but their approaches are very different: What China is to manufacturing, India could well be to services. That raises perhaps the most profound question of all: What about the rest of us?
The contrast between the Chinese and Indian economic development experiences is nothing short of astonishing (see the accompanying chart). In China, manufacturing has obviously led the way. This transformation has been especially dramatic in recent years. The industrial sector’s share of Chinese GDP rose from 41.6% in 1990 to 52.3% in 2003. Putting it another way, such industrialization accounted for fully 54% of the cumulative increase in China’s GDP over this 13-year period. India’s development model is cut from a very different cloth. The industry share of Indian GDP has been essentially stagnant in recent years — holding at 27.2% of GDP over the 1990 to 2003 interval. As a result, industrial activity accounted for only 27% of the cumulative increase in India’s GDP over the past 13 years — literally half the contribution evident in China.
For services, it’s been the mirror image. In India, the services portion of GDP increased from 40.6% in 1990 to 50.8% in 2003. Over this 13-year period, services accounted for 62% of the cumulative increase in Indian GDP growth. By contrast, the services share of Chinese GDP rose from just 31.3% in 1990 to 33.1% in 2003. Not only is China’s services sector a much smaller slice of that nation’s economy than is the case in India, but the growth dynamic of Chinese services has been especially weak. Over the most recent 13-year period, the expansion of China’s services economy accounted for just 33% of the cumulative increase in overall GDP — only a little more than half this sector’s growth contribution in India.
China’s approach is a classic textbook example of manufacturing-led development. But the Chinese have taken this model to a new level. Four major factors appear to have differentiated China’s strain of industrialization from others — a 40% domestic saving rate, impressive progress on the infrastructure front, surging foreign direct investment, and a vast reservoir of hard-working, low-cost labor. While this progress has been impressive for over two decades, only in the past few years has China truly come of age as the world’s factory. Nor does there appear to be any let-up in sight. FDI of $53 billion surged into China in both 2002 and 2003, making this nation the largest recipient of such flows anywhere in the world. By contrast, India is at a major disadvantage on all counts: Its national saving rate of 24% is only a little more than half that of China’s; its infrastructure is in terrible shape; and its ability to attract FDI — which ran at only US$4 billion in 2003 — pales in comparison with that of China. In my opinion, China has at least a 10 to 15 year lead over India insofar as manufacturing prowess is concerned.
But that disadvantage hasn’t stopped India from taking a very different approach to the daunting challenges of economic development. By opting for a services-led path, India sidesteps the saving, infrastructure, and FDI constraints that have long hobbled its manufacturing strategy. Instead, India has executed a services-based strategy that is far more compatible with its greatest strengths — a well-educated workforce, IT competency, and English language proficiency. The result has been a veritable renaissance in IT-enabled services — software, business process outsourcing, multimedia, network management, and systems integration — that has enabled India to fill the void left by seemingly chronic deficiencies on the industrialization front. In the annals of economic development, India’s services-based strategy is unique. But in recent years, it has certainly delivered: The services segment of Indian GDP grew at a 7.6% average annual rate over the past five years — well in excess of the 5.7% average growth in total GDP over the same period.
China, for its part, is a serious laggard in services. You don’t have to spend much time there to see it first hand. With the exceptions of telecommunications and air travel, China has serious deficiencies in most other private services — especially retail, distribution, personal services, and a broad array of professional services such as accounting, medical, consulting, and legal. Even financial services are still largely in their infancy. As I look to China over the next 5 to 10 years, I see the current deficiency in services as a huge opportunity. In the developed world, services account for at least 65% of total economic activity — fully double China’s current share. Moreover, with reforms of state-owned enterprises continuing to result in the elimination of 7-9 million jobs per year, the expansion of a labor-intensive services sector could fill an important employment need in China. For those reasons alone, there is nothing but upside to the Chinese services sector.
Alas, globalization and the economic development it fosters is a two-way street. If China continues to deliver in manufacturing and India pulls off a rare services-led development strategy, the wealthy industrial world will face new and important challenges. The theory of trade liberalization and globalization maintains that there is little to worry about. After all, in the long run, the income workers make as producers should show up on the other side of the ledger as purchasing power for consumers. As the developing world’s fledgling consumers then come to life, goes the argument, new opportunities and markets will be given to suppliers in the developed world. All this is potentially a big plus for the world economy. Globalization need not be seen as a “zero-sum” outcome.
The problem is that some of the oldest assumptions of globalization are now being drawn into serious question. In their simplest form, “open” economic models can be decomposed into two sectors — tradables and nontradables. For rich developed economies, the loss of market share in manufacturing activities to low-cost developing nations is “fine” — as long as there is a secure fallback to the nontradable services sector, which is effectively shielded from international competition. The new complication arises out of the IT-enabled transformation of nontradables into tradables. To the extent that the knowledge-based content of the output of white-collar workers can now be exported anywhere around the world with the click of a mouse, the rules of the game have changed. And that’s exactly what’s now happening — not just at the low end of the value chain with respect to call center operators and data processors but increasingly at the upper end of the chain for software programmers, engineers, designers, accountants, actuaries, lawyers, consultants, and medical doctors.
Services-driven development models, such as the one now at work in India, cast globalization in a very different light. Most importantly, they broaden the competitive playing field, thereby bringing new pressures to bear both on job creation and on real wages in the developed world. This is where the debate gets prickly. Protectionists scream, “foul!” — arguing that trade barriers are the appropriate answer. Yet, in my view, there is nothing intrinsically unfair about these developments. Globalization is very much a moving target. The rules of globalization are dynamic — not static. They change as the world changes. Asia’s challenge may not be China or India — it may well be China and India.
So, what about us? As education and skill levels are raised around the world, and as the world itself is brought closer together through IT-enabled connectivity, the wealthy developed world must rise to the occasion. That means doing what we have always done best — staying open and flexible, and pushing the envelope on education, technological advancement, and risk-taking entrepreneurial activity. No one said it was supposed to be easy. But it sure beats the alternatives.
morganstanley.com
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