The Boom Beyond Our Borders
Can China and India maintain their sizzling growth rates?
BY MATTHEW REES
Wednesday, July 18, 2007 12:01 a.m. EDT
Anyone interested in the marvel of modern-day China and India routinely encounters a host of "gee whiz" factoids that illustrate each country's high-octane growth. Shanghai, for example, had 15 skyscrapers in 1978; by last year it had about 3,800, more than Los Angeles and Chicago combined. India, meanwhile, is home to three of the world's 10 biggest information-technology firms, and IBM employs 53,000 people there--an increase since 1992 of . . .53,000.
Yet it's just as easy to uncover bad news. Sixteen of the world's 20 most polluted cities are in China. And even if the country survives an environmental catastrophe, say the pessimists, it will be hit by an economic one: 70% of its publicly traded companies are worthless, according to a high-ranking Chinese government official (speaking earlier this year). It has also been estimated that the banking system is carrying close to $1 trillion in bad loans. China's premier, Wen Jiabo, has even admitted that the economy is "unstable, unbalanced, uncoordinated, and unstable."
Cassandras don't lack for alarming material about India, either: Close to 40% of the population is illiterate and 60% remains dependent on agriculture--much of it at the subsistence level--while an antiquated infrastructure stifles the country's ability to grow. "Whatever you can rightly say about India," the Nobel Prize-winning economist Amartya Sen has written, "the opposite is also true." Ditto for China.
In "The Elephant and the Dragon," Robyn Meredith, a Hong Kong-based correspondent for Forbes magazine, neatly navigates between the boom and the gloom. Her account of India and China today is accessible to the general reader but also brimming with enough data and first-person reporting to get the attention of even those jaded by the recent breathless coverage of Bangalore and Beijing.
As Ms. Meredith shows, comprehensive, market-oriented reforms--China's began in 1978, India's in 1991--have sparked a new dynamism and remarkable economic growth. In the 1990s alone, more than 200 million people escaped poverty in the two countries, lifting the per-capita standard of living beyond the wildest dreams of previous generations. "We got more done for the poor by pursuing the competition agenda for a few years," says one of India's former finance ministers, "than we got done by pursuing a poverty agenda for decades."
In "The Elephant and the Dragon," we see the average citizen enjoying unprecedented opportunities but also the effort of businesses to capitalize on them. "I look at apartments at night," says a general manager from Philips, a Dutch company that manufactures light bulbs (among much else). He measures China's economic progress by its growing illumination. He observes, for instance, that China's rural homes have an average of three light bulbs now but had none before the economy opened up. Helping a nation of 1.3 billion people to "see the light" is, for Philips, big business.
Elsewhere, Ms. Meredith shows us the different steps taken by a Hong Kong company to produce linen sweaters--buying flax from France, having it shipped to Tianjin, on China's eastern seaboard, then trucked to a city 255 miles away where it is cleaned, straightened and ironed, and then trucked again, more than 1,100 miles, for dyeing and knitting. The finished product then travels two hours, by truck, to Hong Kong, where it is transferred to a plane, for distribution in the U.S. Thus the metamorphosis in modern China's business rhetoric: Assembly lines are out; supply chains are in.
Ms. Meredith reminds us of just how far both countries have traveled in the past half-century or so. In China, 30 million to 40 million people starved to death from 1959 to 1962 because of Mao's collectivizing farm policies, and nearly all of the country's universities were shuttered for more than a decade during the Cultural Revolution. In India, the post-independence experience with socialism and central planning subjected the economy to what became known, derisively, as "the Hindu rate of growth." Cumbersome, inefficient, patronage-laden enterprises sustained poverty rather than alleviating it. Over time, the irresistible logic of capitalism coincided with a juggernaut of globalizing technology to overturn the old paradigm and usher in reform.
Ms. Meredith acknowledges that, as a result of such changes, the U.S. has lost jobs to China- and India-based outsourcing and "offshoring," but she notes that American consumers have gained all the more, with a range of products and services at lower prices. She also claims that the much-lamented U.S. trade deficit with China is overstated: Much of it is derived from the practice of Western companies assembling goods in China and then exporting them to the U.S. The money we pay for such products, although counted in the trade deficit, is actually headed to non-Chinese firms and stockholders.
Can China and India maintain their sizzling growth rates? Ms. Meredith does not dwell on the question as much as one might hope. But it's clear that both countries need to liberalize their rules governing banks and financial markets. Burdensome regulations interfere with lending--India's banks, for example, must channel about one-third of their loans to agriculture and household businesses. The effect is to send capital into unprofitable enterprises.
Both countries also need a more basic deregulation of everyday commerce. According to the World Bank's Doing Business report--which measures the effect of government regulations--entrepreneurs in India and China suffer from high taxes and intrusive bureaucrats. They also have trouble enforcing contracts and getting licenses to operate. For all the progress, in short, the elephant and the dragon still have a long way to go.
Mr. Rees is a senior director at The White House Writers Group, a Washington-based consulting firm. You can buy "The Elephant and the Dragon" from the OpinionJournal bookstore.
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