UBS economist Jonathan Anderson

China vs. India: Who's ahead?

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HONG KONG--A favorite topic among economists in Asia, including Jonathan Anderson, Hong Kong-based managing director and head of Asia/Pacific Economics of the global investment firm UBS, is comparing the development of the region’s largest developing markets.

Although China and India each have populations greater than one billion and both economies are skyrocketing, their respective paths towards economic success and social stability have had to accommodate distinct cultural, historical and political differences.

Before joining UBS in 2003, Mr. Anderson worked at Goldman Sachs. He also spent eight years at the International Monetary Fund, including three years as resident representative in China. Fluent in Mandarin, he is the author of “The Five Great Myths About China and the World.”

On Nov. 6, he spoke at the Foreign Correspondents’ Club in Hong Kong about the nature of Asian growth, China's current role in the region and India's future as an Asian “tiger.” Below is an edited version of his presentation, “India, the next China? Or China, the next India?”


Let me start by speaking not about China nor India but about Japan and the Asian “tigers"and turning the clock back a bit. We woke up in the 1980s and discovered this big, growing, massively dynamic region called Asia. Japan seemed to be taking over the world, the Asian tigers seemed to be on its tail. It looked for all the world like something very unique and unprecedented was happening. There were two lines of argument about why Asia was growing so quickly.

Argument number one was simply the Asian business model. Somehow Asia had reinvented the wheel. They were doing things very differently from the rest of us, they had put together a new social compact, and had put together a new corporate model. Business schools all around the world were suddenly teaching Asian business strategies, as if they were very different from other business strategies and the West, of course, had a lot to learn from what Japan and the Asian tigers were doing.

The counter argument was the polar opposite: No, no, Asia is doing what it’s doing, because they’re cheating. Their currencies are too cheap, they’ve closed off their economies, we can’t compete with them. They’re just throwing out cheap exports into our markets, artificially so, they’re basically riding on the coattails of the U.S. and Europe, with no inherent growth and no inherent productivity.

It wasn’t until the 1990s when economists actually started making sense of the Asian growth record. Looking at macroeconomics with a very simple model, there are basically three ways you can grow in any economy. You can throw more labor at production, you can throw more capital at production, and you combine more labor and more capital in more interesting ways to grow faster to high productivity.

The “Japan and Asia taking over the world” story basically involved unprecedented productivity growth, eight or nine percent, companies doing something no one else has done. The “cheating” story basically involved negative productivity growth, destroying value but getting lucky because of cheap labor and cheap currencies.

But productivity growth in Asia was no better or no worse than it was in Europe or the U.S. Clearly, Asia was not reinventing the wheel, it was doing the same thing everyone else was doing, and growing three or four times faster than the rest of the world because they were taking enormous amounts of capital and putting it on the ground. Investment rates and capital contributions were enormously higher in Asia than elsewhere. In the words of Paul Krugman, “perspiration, not inspiration.” Asia saved a lot, and was able to grow.

Mainland China has taken over from Taiwan and the Asian tigers. China grew about 9.7% on average in real terms over the last 25 years, the highest that any economy in recorded history has grown. Suddenly we find ourselves today with the same questions. Either China is cheating, the currency is too cheap, wages are too low, they’re not allowing foreign companies to compete on their shores, an argument that I find ludicrous given all the foreign direct investment in China. Or, China has reinvented the wheel and we all ought to be studying Chinese state companies to see what they’re doing right, something I also find to be ludicrous.

Chinese productivity growth is a bit on the high side, but it’s the same story. It’s growing one or two percentage points faster, because China is the world record holder for sustained savings in the economy. People do not consume, they just sock money in the bank, so they can invest more and ergo, [China] grows faster than its neighbors. It’s also a great export story that gives jobs to menial laborers, but really China grows because it saves more and invests a lot at home. Savings drives growth.

What drives savings, and why did Asia save twice as much as the rest of the world? Alas, we have no clue. There is no shortage of explanations. There are too damn many of them--unified cultural [and] political frameworks, Confucian ethics, demographics...this remains one of the great immaculate conception mysteries of economies.

Looking at savings rates and exports [and] what made Asian tigers into Asian tigers, for the past two decades, India has looked more like Latin America than Asia. But in the last few years, things look a lot different. Indian savings rates have risen from about 20% of GDP to 30%. Today, its gross domestic savings rate is very similar to what we saw in Korea, Taiwan and Hong Kong when they were cruising along at 8% growth. On the export front, we could talk all day about how uncompetitive Indian exports are, the role of labor laws, the problems India faces but the statistics speak for themselves.

In the past 15 years, Indian exports have more than doubled as a share of GDP. It now looks very similar to China back in the late 1980s and early 1990s, which makes us very interested in India. We see a lot of savings, India’s export story is starting to take off and its domestic economy is growing three percentage points faster than it used to. India starts to look like a tiger.

Now, from a bottom-up perspective, of course, this sounds like a ludicrous statement. When I talk about India picking up its pace, Indian academics laugh at me. Things look awfully bad in India, the red tape, the struggles, the frustrations, the friction.

But look back at China in 1989. If we were asked to weigh its prospects, and look at the impediments and bureaucratic constraints, China had no private ownership, no legal framework for investment, no direct foreign investment, it was awash with loss-making state enterprises and the economy was in recession, which led to the problems that year. China looked arguably worse than India does today. Things looked bad and the transition didn’t come from sudden changes in the Communist party. The framework was put in place from the bottom up, starting with Hong Kong investment in Guangdong.

Looking at India today, if it is going to succeed, it’s not going to be because its congress puts through wide-ranging central reforms. I suspect it will happen when one or two Indian states get the export story right, get the infrastructure in place, bend the rules on the labor laws, give some tax breaks and get investment going. Then suddenly they’ll start to grow at 14 or 15%, and everyone around them will start to jump on the bandwagon.

What about demographics? A lot of people make noise about the differences between China and India. China is running out of young workers and will eventually run out of workers because of the one-child policy. India has the benefit of a great demographic dividend, it still has a rising population and a very young workforce and some think this is going to be a supercharged fuel that’s going to drive Indian growth, while China is going to peter out.

That’s true about aggregate growth. The more workers you have, the more your economy is going to grow. It doesn’t help you in per capita growth gain. What we care about in India is not how fast the economy grows per se, it’s how fast per capita incomes grow. If you’re growing at 5% and your population is growing at 5%, you could call that a demographic dividend, but I call that stagnation.

In fact, a growing population in India really increases the pressure on the authorities to get things right. I don’t necessarily see that as a good thing, I see that as a source of some coming tension. It’s going to make it all the more imperative to push exports harder, to get a manufacturing sector going harder and get India up and working.

China is just the opposite. For ten years, it’s been riding a bicycle on a tight rope, needing to generate new jobs every year as young workers flood out of the countryside into cities looking for jobs. That’s coming to an end. If you talk to manufacturers in China today, the big pressures today are wage pressures and labor shortages. It’s not that China is running out of workers, but it’s running out of young workers at a pretty fast clip.

That’s going to benefit India. China is becoming a more expensive place and losing pricing power in low-end industries. That’s why shoe manufacturers and toy makers already are sneaking off to Vietnam and Bangladesh and eventually to the Indian subcontinent.

But this is not a bad thing for China either. It’s exiting the tightrope. For the next ten years, China doesn’t need to generate ten million jobs annually anymore, maybe just one million jobs per year to keep a stable employment outlook because it’s reaching the end of its big demographic boom and the workforce will start to fall. I don’t see China worried about that, I envision the Chinese authorities mopping their brows and saying, “Thank God, thank God, the migrant story is reaching the end.”

About politics, India is a democracy. China is not. What does that mean? From the East Asian perspective, it means India may have a problem. If you look at Japan and the Asian tigers, none of the high-performing economies were democracies at any point in time along their high-growth phase. Everyone who’s done it to date has done it with fairly oppressive or at least unified regimes that did not have a multiparty framework.

India is very different. It has a very active democracy, and you can’t force growth through in the same way you did in those other economies. The next five years will show us what India’s made of. We’ve got the growth rate, the savings rate, exports are growing. If India continues to grow at 8% over the next decade, I think it could be the one to prove the East Asia experience wrong and show you don’t need to have a repressive political regime to generate this sort of growth, you can do it out in the open. But this is up in the air.

China, over the next 10, 15 or 20 years, is going to be increasingly engaged on a democratic experience. We saw this in the rest of Asia, Korea, Taiwan and Japan, people reaching a middle class status, higher income status, and suddenly developing a taste for more vibrant democratic dialogue. Suddenly you had the introduction of multiparty systems. This is happening in China in the very beginning. You’re starting to see village and township democratic experiments. I don’t think it will be too long before you see city elections that are openly contested within an intra-party framework.

China is, in a sense, becoming the next India as well as India the next China. I suspect within two decades we’re going to see China with a much more vibrant political and democratic framework, even if it’s nominally under the guidance of the current party, and much better governance and transparency, things that India is justifiably renowned for.
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