Under the leadership of prime minister Narasimha Rao, India is undergoing a second industrial revolution which already is enriching the nation's 300 million strong middle-class, and could eventually reach the other 600 million. China, despite all the political uncertainties as the Deng Xiaoping era draws to a close, and despite the current raw relations with the United States, continues to produce astonishing rates of growth.
India's growth rate has been climbing steadily in the 1990s, notwithstanding the near collapse of the economy of its previously most important trading partner, the former Soviet Union. The International Monetary Fund expects growth to reach 5.8 per cent in India this year, building on the 4.9 per cent expansion seen in 1994.
The economic upswing in China will moderate this year, following the spectacular double-digit expansion seen in the early 1990s, but at 8.9 per cent it still will be the world's fastest growing economy. Of course, there will be interruptions in these stirring rates of growth caused by inflation worries; financial shocks (India is particularly vulnerable); and political upheavals.
Nonetheless, on current estimates China and India respectively will be the second and fourth largest economies in the world by the year 2010, with China's economy expanding to US$7 trillion and India's to US$2.5 trillion (assuming average annual growth rates of 6.5 per cent for China and 6 per cent for India). This still will leave per capita income levels way behind those of the current western industrial economies, although in China per capita income should double to $5,000 by 2010.
The economic progress in both China and India in the early years of the 21st century looks set to be every bit as dramatic as that seen in Japan in the last 30 years. But managing economic change on the scale predicted, poses enormous problems. It requires critical political and strategic shifts for the countries concerned and their trading partners. It means adjustment to the needs of a globalised economic system of free capital markets, with virtually unlimited amounts of inward investment by multinational corporations and financial institutions. And it will require the modernisation of commercial structures which are rife with the bureaucratic inertia and corruption which could, if left intact, lead to a major loss of confidence by development institutions, banks and foreign investors.
In many respects the political and trade relationships could be most fraught. This is particularly true of the People's Republic, where political freedoms to match the new economic freedoms have yet to emerge. Moreover, the keynote relationship with the US, born out of strategic necessity during the Cold War, has turned increasingly sour because of Chinese resentment of the close relations between the US and Taiwan; American frustration at human rights abuses in Beijing; and a series of trade disputes. The Clinton administration has sought to enmesh China more closely into the Pacific community through the Asia-Pacific Economic Cooperation (APEC) forum, but this does not appear to be working.
There are concerns over China's military power, too. US assistant secretary of defence for international security affairs Joseph Nye argues that even if China does not increase its military budget as a percentage of gross national product, 'the sheer magnitude of the rise in China's GNP means that impressive military capacities will accompany economic growth'. Adjusting to Chinese power could be the world's biggest challenge in the 21st century.
As a democracy India is far less threatening politically, although its unstable relationship with Pakistan remains a serious problem. India already is showing some statesmanship in handling its new economic power, using it as leverage to obtain improved deals between the developing countries and the West. The country already has a relatively sophisticated market economy, with 23 separate stock markets and quotations for more than 7,000 companies. However, it is plagued by corruption and, as Singapore Airlines recently discovered, foreign investment can generate political opposition.
On the surface, the challenges to investors in China and India look broadly the same. In the latest McKinsey Quarterly, the management consultants identify similarities in the countries' economic needs and opportunities. These include reengineering the supply structure so that capital flows towards more productive uses rather than being trapped in inefficient activities; responding to the consumer revolution; developing agriculture to drive economic growth; improving infrastructure to meet demand for transport, telecommunications, housing, water and energy; containing social issues; and holding inflation.
However, these similarities at the macro level mask vast differences locally. Since the start of the decade, China has been successful in mobilising human and financial resources to create growth, through the establishment of special economic zones such as Guangdong in southern China, which has come to rival Hong Kong in its prosperity. Having opened itself to foreign investment and technology faster than India, China is enjoying better growth rates.
However, China's tightly controlled political system means that market-driven behaviour is still relatively undeveloped, making it a much more enigmatic place to do business than India. China currently enjoys the edge in terms of growth and size of consumer potential. But India could be the pick of the Asian giants if it succeeds in taking on corruption, making its markets more transparent and efficient, and improving the regulatory environment.
Source: Airline Business
