Emerging Giants

Is China’s growth sustainable? India’s ?

The following post is based on the book The Elephant and The Dragon by Robin Meredith. It talks about the emergence of China and India, the way it has affected globalization, and what needs to be done in the future.

Globalization has changed the world. It has created a dislocation of wealth in the last quarter century that has changed the lives of millions of people. While it has compressed time and space and affected various countries, it has created two emerging giants, China and India. The flow of capital and labor to China and India has cut from 40% to 20% the amount of people worldwide living in extreme poverty, or living with less than one dollar a day. It has also created a new global “disassembly line” where products are assembled in different parts of the world and run through several supply chains before reaching its final destination (Meredith, 2008). China has become the manufacturing center of the world while India has become the back-office of the world. The question at hand is whether this current process is sustainable for both developing and developed countries. Additionally, we must address the risks of the current globalization process and what both developing and developed countries will need to do in order to adjust to the dislocations occurring in the world.

From 1949 to 1976, China closed its doors to the world under the communist rule of Mao Zedong. It was only in 1978 under the command of Deng Xiaoping that China embarked on its high-investment, export-driven economic growth that averaged 11% per year from 2003 to 2007 (Economist Intelligence Unit, 2009). In order to reignite the economy, the communist Chinese government started to embrace capitalism. It encouraged the formation of rural enterprises and private business, liberalized foreign trade, relaxed state controls over some prices, and invested heavily in the country’s infrastructure and education of its workforce (Meredith, 2008). The Chinese government also attracted multinational companies by offering tax breaks, laying down phones lines and IT Infrastructure, and building highways, railroads, and ports.

India has been slower to catch up. Reforms started in 1991 and have oscillated back and forth between India’s goals of self-sufficiency, which was pioneered by Mahatma Gandhi, and the embracement of capitalism by growing through the export of services to the developed world (Meredith, 2008). India does not have the physical infrastructure that China has developed, but the advancement of technology, their partially English-speaking population, and low wages has given them a competitive edge in white-collar service jobs. However, India’s democracy, unlike China’s communist state, has made the government accountable for their actions and unable to seek economic development ruthlessly; therefore, India has lagged behind China and recently grown 8.9% per year from 2003 to 2007 (Economist Intelligence Unit, 2009).

Overall, China and India’s embodiment of capitalism has brought prosperity and lifted millions of people out of poverty. As former Indian finance secretary Vijay Kelkar pointed out in regard to India, but which also applies to China, “we got more done for the poor by pursuing the competition agenda for a few years than we got done by pursuing a poverty agenda for decades” (Meredith, 2008). However, this export-driven growth is unlikely to accomplish what China and India ultimately need because of their combined population of around 2.48 billion people, or about 37% of the world’s population (Economist Intelligence Unit, 2009).

China and India are trying to lift billions of people out of poverty and create economic growth with the same strategy that small countries such as Japan, South Korea, and Singapore pioneered. Overall, the two countries have seen major improvements in GDP and personal income; however, as of 2005, 36% and 81% of India’s population still lived on less than one dollar a day and less than two dollars a day, respectively (Meredith, 2008), while 8% of China’s population lived on less than one dollar a day and 15% lived on less than two dollars a day (Chen & Ravallion, 2008). It is unlikely that developed countries have enough jobs to send overseas and the ability to manage ever-growing trade deficits to sustain the growth and job requirements of India and China. This means that if China and India do not expand their domestic markets, as articulated by Martin Wolf (2008), their growth is likely to be unsustainable. China and India are emerging giants, but they are being propelled by the developed countries, especially the United States. As Robin Meredith (2008) notes, goods are not really “Made in China” but rather “Made by America in China”, with only four of China’s top twenty-five exporters being Chinese companies.

The second element that may turn both India and China’s export-driven growth to become unsustainable is political outrage in developed countries. As the 2008 financial crisis exposed, protectionist sentiment among developed countries is growing. As more and more jobs have been sent overseas, especially white-collar jobs sent to India, politicians in countries such as the United States are trying to defy globalization. Several bills have already been proposed to limit the outsourcing of work done for the federal government, enact import barriers, and limit overall offshoring of jobs (Otterman, 2004). The benefits of such actions are questionable; however, they would nevertheless have large negative effects on the growth of China and India.

There are also other specific risks that may halt China’s rapid growth. First, political instability or collapse could change China’s faith. In 2005, there were 87,000 protests in China, or 200 a day nationwide (Meredith, 2008). As inequality between city workers and rural farmers grow and corruption continues to be rampant, social unrest is likely to grow. China’s lack of accountability to the public and expeditious growth at all costs has generated tremendous growth in the aggregate, but the individual families that have been displaced of their homes for the building of economic zones and have had their farming water supply polluted may become a major negative force for the country. China has been able to crush major protests in the past such as the infamous 1989 protest in Tiananmen Square; however, nothing in the future is certain. Political turmoil in China would likely slow China’s growth while having tremendous negative effects on multinationals operating in the country. The political risk may seem negligible in the near-future, but it is likely to grow as the Chinese people are exposed to the outside world and the concepts of democracy.

The second factor that could greatly hinder China is pollution and food shortage. It seems as if short-term profits have once again triumphed over long-term sustainable growth and great levels of pollution will potentially impose threats to China’s growth. According to the World Bank, pollution and related health problems costs China $54 billion annually and air pollution triggers more than 750,000 premature deaths a year. Additionally, according to the Chinese government, one-third of China’s rivers are polluted to the extent that they are not even suitable for agricultural or industrial use (Meredith, 2008).  Given that China’s growth is propelled by industrial manufacturing, this level of pollution is likely to make China’s current rapid growth unsustainable unless something is changed. China’s water shortage is also affecting the nation’s food supply, with its grain output decreasing by 8% in 2004 because of farmland being lost to erosion and desertification (Meredith, 2008). Therefore, pollution will not only affect China by reducing individual productivity due to health-related problems, but it will also make industrial expansion harder and potentially create a bigger risk of political turmoil due to food shortage. In sum, China and India’s growth bubble could easily be burst because of political forces, or in China’s case, excessive pollution.

China and India’s current transformation is tightly linked to the developed world, especially the United States. The emerging giants have benefited developed countries and at the same time imposed a few handicaps. For burdens, as each job is sent overseas, it potentially means that another worker in a developed country becomes unemployed. Some economists argue that the 3.3 million jobs that have been sent overseas from the United States is only “a drop in the bucket” out of the country’s total workforce and that job creation has outpaced the losses (Meredith, 2008). The new jobs created are also usually said to be better than the ones replaced; however, according to the Bureau of Labor Statistics, only 36% of displaced workers due to trade (mostly in the manufacturing industry) in 1997-1999 found jobs that either matched or increased their wages (Otterman, 2004). This means that continuous job losses in developed countries is a real concern and something that must be addressed. Additionally, in the aggregate, the developed economies may benefit from jobs being sent overseas, but those families that lose their jobs are likely to put pressure on politicians to take action, the same way Chinese farmers being displaced of their property are putting pressure on the Chinese government. Consequently, this could slow or even reverse the pace of globalization. As mentioned above, this would negatively affect China and India’s growth but it would also affect the growth of developed countries; thus slowing the current worldwide economic growth.

Another risk that developed countries face in offshoring jobs and creating supply chains that extend through multiple countries is the threat of international conflict or war. Assets may be seized, and most importantly, production of goods and services may be interrupted and generate large losses. Recently, the world has generally been at peace; however, the possibility of conflict is always at hand and must be acknowledged at all times. Once again, if any major international conflict was to arise, global growth in its current form would likely prove to be unsustainable.

Nevertheless, the benefits of the emerging giants for the developed countries and Americans have been great. First, to the dismay of the developing countries and to the benefit of developed countries, “the country moving jobs keeps 78% of the value created globally by the more efficient operation of companies, in the form of lower prices for customers or higher corporate profits” (Meredith, 2008). This means that while jobs are sent overseas, the majority of the value-added created by those jobs are mostly staying in the developed countries. Additionally, consumers are seeing lower prices in store shelves. Therefore, wages may be stagnating in the United States due to offshoring but consumer’s purchasing power seems to be increasing. An example of this phenomenon is the ability for Americans to easily acquire advanced personal computers. Wages may have stagnated, but the ability for the average American to buy an advanced personal computer in the United States is more and more accessible at a price point of $700 (Frucci, 2008). This would have never happened if these computers were manufactured and assembled in the United States. Therefore, it seems like developed countries are the ones reaping the most benefits out of globalization.

China and India has also benefited the developed world by opening new markets to its multinational companies. As China and India’s domestic market grows, the revenues of Western companies in these countries are likely to be great given their population size. Larger revenues means more profits which in turn translates to higher levels of wealth for people in developed countries. Therefore, instead of depending only on higher domestic incomes to increase domestic output, companies will be able export its services to more people across the globe.

While developing countries must expand their domestic markets to sustain their growth and adjust for the future, developed countries, especially the Unites States, must look to sustain high-skilled job creation and be continuously innovating. It must invest in infrastructure, basic research, and overall education to stay in front of the curve. As the world continues to be more global and developing countries become better educated, it will be unlikely that workers in developed countries will be competitive, much less earn wages ten times higher, than foreign counterparts that can accomplish the same task (Meredith, 2008).

In sum, the current form of globalization can be sustained if appropriate measures are taken. First, we must ensure that domestic and international tensions are contained in order to avoid the rise of protectionist policies and avoid the disruption of global supply chains that would be harmful for both the developed and developing world. The emerging giants must also expand their domestic markets if they are to sustain their level of growth in the long run. On the other hand, developed countries must innovate and generate high-skill jobs at a pace equal to or greater than the pace at which it is losing manufacturing and white-collar jobs. If these steps are taken, political turmoil is likely to be avoided and global growth is likely to continue on its current trend. As discussed, there are risks linked to globalization and the emergence of India and China, but the benefits for everyone seems to outstrip the potential harms by a great extent.

References

Economist Intelligence Unit. (2009). Country Briefings. Retrieved April 23, 2009 from http://www.economist.com/countries/CHINA/profile.cfm?folder=Profile-FactSheet   &   http://www.economist.com/countries/INDIA/profile.cfm?folder=Profile-FactSheet.

Frucci, Adam (2008). Study: Average Mac Computer Price More than Twice Than of Average PC. Retrieved April 25, 2009 from http://gizmodo.com/5033865/study-average-mac-computer-price-more-that-twice-that-of-average-pc.

Meredith, Robin (2008). The Elephant and the Dragon: The Rise of India and China and What it Means for All of Us. New York: W. W. Norton & Company, Incorporated.

Otterman, Sharon (2004). Trade: Outsourcing Jobs.  Retrieved April 08, 2009 from http://library.osu.edu/sites/guides/apagd.php.

Wolf, Martin (2008). Fixing Global Finance. Maryland: The John Hopkins University Press.

Technorati Tags: China, China growth, Emerging Markets, Globalization, India

Tagged as: China, China growth, Emerging Markets, Globalization, India