Business Standard – August 5, 2008
NEW DELHI: The 20th century belonged to the advanced economies, but the 21st, economists believe, will be driven by the emerging ones. China and India (or Chindia) will take lead as two of the world’s biggest economies. Many western scholars have shown concern over the duo’s rise and impact on the world. In his book, Chindia Rising, renowned scholar on global business, the Charles H Kellstadt Professor of Marketing at Emory University’s Goizueta Business School, Jagdish N Sheth, dispels some of the concerns. Sheth spoke to Amit Ranjan Rai on why Chindia’s rise is inevitable and its outcomes. Edited excerpts:
Some authors have an alarmist view on China and India’s rise. How would their rise benefit the world?
Apprehensions relating to China’s rise are primarily because it has been a communist system. These two economies are almost necessities for advanced economies. The main reason is that advanced economies no longer have growth within their economies. They are affluent, and as it happens with affluent countries, their population is ageing with negative growth.
Thus, they need to look outside for growth. One way obviously could be massive immigration into these countries, but that is difficult because of political reasons. Even in the US, which is founded on immigrant population, allowing immigrants has been a big issue. So it is emerging economies like China and India where advanced economies will have to look for growth.
Do you have any concerns?
Both the economies have large populations and their growth will be driven by consumer markets. In consumer markets, like in the US, the need for resources — agricultural, industrial or energy — is high. In the long run, these resources are unlikely to meet the demands. Demand will outpace supply, and there would be transit or shock value. What we are seeing in energy today could happen in agriculture and with industrial raw materials.
The consequence would be that we will innovate much more — massive innovations will be the way out. Innovation is going to be primarily in how we replicate and discover more resources.
We will learn how to conserve, replicate and revitalise nature. In the process, cloning will come up in a big way. We have seen animals and agricultural products being cloned, but it won’t stop there — we will see industrial raw materials also being cloned. Nature takes thousands of years to create an industrial raw material, but by understanding the cycle of this process and compressing it, we will be able create it much quickly. The idea is how do we clone in ways that nature is not abused much, but at the same time replicated.
Why is Chindia’s rise inevitable?
As I said, because of one main reason, that is, advanced economies have no growth left in them. Their population growth is negative. Look at Japan, every month it has fewer men than the previous. It does not have an immigration policy to constantly revitalise the nation. Spain and Italy have the lowest birth rates. For Spain, it is 1.1 children a woman — 2.1 children a woman is the rate to balance the negative population growth.
The second reason is, both the Indian and Chinese economies have undergone reforms. China being a communist country has several advantages. In fact, the best capitalists today are the ex-communist countries. I say this based on the resource-based advantage theory, that is, the more resources you have in your hand, the more you are likely to benefit. China is extremely rich in human capital and natural resources, and being a communist state, it invested quite significantly in these over the years. One of its biggest resource is its educated population. The only thing it didn’t had was access to capital, on which it is equalising, because the world wants to invest in its economy.
How does India’s rise compare with that of China?
China has a 20-year lead time. Reforms in China started in 1976-78, whereas in India, they started in 1991 — what I call India’s Second Independence. Now, in China, the government runs like a corporation — you can call it a corporate state. India is a democracy — its policies are based on democratic viewpoints. The speed at which India makes its decisions is slower — it comes only after several rounds of debates. China doesn’t allow that, and thus things happen at a faster pace. For instance, infrastructure development in China has been much faster than in India.
But my analysis is that the Chinese economy will start plateauing by 2035, probably sooner. The main reason is that by then China will become very affluent, and its population will be ageing. Its growth will start slowing down, just as it happened in the case of Japan, Western Europe or even the US. Checking the population growth rate — the one-child policy that it put in place — is going to come in the way.
Our forecast is, that if you extrapolate, presuming things will work out, between now and 2035, India will be able to build infrastructure — which can help add 1.5 to 2 per cent additional GDP, with no inflation. Infrastructure investment has always been non-inflationary. By 2035, India will have good infrastructure, though it may not be world-class. And by infrastructure I mean physical, financial and human capital infrastructure, which includes education and health of its people.
China will plateau, but by then it will become the number one economy in the world. The US will be number two and India will be number three or four, depending upon how the EU will function as an economy. India would be number three, but it does have the potential to become number one or two in the long term.
If you take the economies of India and China as 100 per cent, China is 90 per cent and India is 10. But by 2035, India’s share will increase to about 40 per cent or even more. It could happen even in 2030. And this share is forecasted to increase further — to more than 50 per cent. It’s not because India would do better, but primarily because China will lose its edge in terms of population growth. Another reason is that China will not remain self-sufficient in agriculture — it just does not have enough land mass that is irrigable. So China will always be a net importer of food and fuel. India is likely to remain self-sufficient in food because of its fertile land.
Which market will be more important — domestic or foreign?
The rise of Chinese and Indian corporations will have different trajectories. Chinese corporations will rise by primarily serving its domestic markets first. These corporation will grow really big — similar to what happened in Japan. Then they will go global — by either investing or acquisitions. Indian corporations will go global upfront by acquisitions. We have seen what Lakshmi Mittal has done, or what the Tatas are doing. Aditya Birla group’s Hindalco bought one of the largest aluminium companies in the world.
Wipro has made several acquisitions. I think Indian corporations are going to make bigger and bigger acquisitions worldwide. Acquisitions actually is the best strategy — because they can be done quickly. Assets currently are relatively well priced, or value-priced, in other words. I also see Indian companies acquiring more in America now, because the prices have dropped enough and American companies will be more and more willing to sell.