In analyzing the potential future path of China and India, based on the path taken by other economies in the region, I will very quickly gloss over the similarities between China and its Southeast Asian neighbors. The idea is that I will focus on the key differences between Southeast Asian economies on one hand, and China and India on the other. While it is important to try and tease out lessons from the experiences of the successful Southeast Asian economies that emerged before China and India, their experiences have altered the landscape in which China and India operate. Most of the challenges currently being faced by China and India were not necessarily the same issues faced by the fast growing economies of Southeast Asia, at the same stage in their development.

To that end, I will lay out the country specific issues facing China's and India's economic growth. I will then highlight the effect of unpredictable 'bumps in the road'. By their very nature, we are unable to begin to understand what they could be and how they could affect future economic development.

I will conclude that the path facing China and India up until this point has been similar to that faced by the successful economies of Southeast Asian economies. However, I will also argue that the more important challenges facing China's and India's economic growth are unique and so insights from the Southeast Asian economies may not be appropriate ....[x].


China and its Southeast Asian neighbors - the story so far

China has grown more rapidly, and for a longer period of time, than most of the successful Southeast Asian neighbors. With an average annual GDP growth rate of 9.8% from 1978 to 2008, China' s pace of growth is faster than that of any other Southeast Asian economy during their fast growing periods.

There are numerous similarities between China and its Southeast Asian neighbors. For example, China's economic growth has been the result of a number of strategies including, pursuing an export-led strategy aided by a low currency as well as competitive labor costs. China's growth also depends on a domestic-led fixed investment strategy with the state sector playing a dominant role. However, in contrast, the key to success in some of those Southeast Asian economies such as Taiwan and South Korea was to lay the foundations private enterprise and capitalist activity. China on the other hand, is pursuing a somewhat different approach by crowding out private industry and replacing it. In other words, the key difference between China's economy and its successful Southeast Asian neighbors is the extent of the role of the state.

Looking ahead: China-specific issues

Declining population growth rates and ageing

Declining population growth rates and ageing have generally been a problem for industrialized economies. China's population has grown at an average annual rate of 2.01% between 1950 to 1978, but has since slowed to about 1.16% per annum by 2004. By 2005, the population growth rate has declined to about 0.65% or about half the world average. In addition to this decline in population growth rates, the elderly population has been growing faster than the average of the world and Asia, since 1980. The combined effect is that over time there will be fewer young people replacing the elderly who exit the labor force, and this will become a credible threat to the sustainability of China's rapid economic growth.

The reason behind this trend lies in increased life expectancy and the one-child policy. The increase in life expectancy is partly due to the effect of economic development. The dependency ratio is expected to rise to 70% by 2050. This implies that every 10 working people will have to support up to seven dependents in 2050, compared to about fewer four today. Interestingly, this rise in dependency ratio is expected to occur at lower levels of per capita income, than in other countries. The dependency ratios in most other countries, eg. Japan and South Korea, are expected to peak at a time when their per capita incomes are relatively high (more than $30,000). China on the other hand, is expected to face this rise in dependency ratios while its per capita income is around $10-15,000.

Non-performing bank loans (NPL)

China's banks have historically made loans to unprofitable state-owned industries, not on the basis of repayment or risk, but instead, under the direction of the government. The result is a substantial portfolio of potentially NPL's estimated at up to 100% of Chinese GDP, larger than that of Japan. The Chinese authorities have been able to maintain liquidity in the banking system in spite of these NPL's, however, at some point a continued escalation of NPL's will restrict further growth in bank credit, and this could have a subsequent effect on the growth of businesses.

Inefficient state-owned enterprises.

China's state owned enterprises are poorly managed and protected from competition. They utilizes a substantial portion of China's capital through their historical ties to the state banks but produce little or no return on their capital. The private firms which are more efficient and which need capital often face difficulty raising capital. Though the Chinese government have shut down a number of SOE's or merged them with stronger enterprises, fears of worsening an already serious unemployment situation is preventing further improvements action to improve performance at (or shut down) SOE's. Since efficient and productive firm are a crucial part in any economic growth story, this slow progress in this area may hamper economic growth.

Tensions with Taiwan

China's biggest flash point remains Taiwan. The country has toned-down its rhetoric, but still maintains that it will invade Taiwan should they declare independence. Any such armed conflict would potentially drag in the U.S. and possibly Japan. Given that the US and Japan are China's two biggest trade partners, any such conflict would most likely adversely affect shipping routes in and out of China and also result in long-term tensions that would spill into trade.


India overview

In contrast to the predominantly export-led growth strategies employed by the Southeast Asian economies, India's growth is primarily driven by domestic consumption, like many developed economies. The country has a large and educated workforce which has been responsible for its ongoing services sector boom. The economic liberalisation that started in 1991, after the IMF's support package, led to deregulation, privatization, and inflation-controlling measures, which ultimately propelled India's growth.

Looking ahead: India-specific issues

Agriculture and the economy

Unlike most other Asian developing economies, India's economy is still primarily linked to agriculture. Agriculture accounts for more than 60% of employment and more than 20% of India's GDP. Despite the importance of this sector to the India economy, it is widely agreed that growth and productivity in the sector has underperformed.


The poor state of India's infrastructure also hampers efforts to alleviate poverty and achieve India's growth potential. Conditions at Indian ports imply that, on average, it takes 24 days for goods to travel from India to the United States, compared to 15 days from China. Less than half the population has access to electricity, blackouts are common, and lack of access to water hinders business and the general public alike.

Over-regulation, corruption, and rigid labor markets

It takes on average almost three months to start a business in India compared to under a month in South Korea. Over 30% of senior managers highlight corruption as the major constraint to doing business in the country. Workers in the formal sector are amongst the most difficult to fire in the world. Investors generally consider the scale of bureaucracy in the country to be the single most important risk to investing in India.

Relations with Pakistan

India has had three conflicts with Pakistan since their independence in 1947. This is in addition to the many border skirmishes over the disputed Kashmir region. Now that both nations possess nuclear weapon, the effects of a war between the them could be catastrophic. Though tensions between both countries have recently eased, the election of a radical Hindu nationalist government in India or the a radical Islamic regime in Pakistan, could potentially reignite tensions.

Unexpected future events

Just as the East Asian financial crises of 1997 was a complete shock to the system and may have altered the path facing the East Asian economies, the effects of today's financial crisis is equally likely to bring about new challenges to China and India's economic growth; challenges which were not experienced by the Asian tiger economies at the same stage in their growth.

China has reacted a lot more forcefully with it economic stimulus package than, say, India.

Subsequently, fears are beginning to rise that Beijing's policies have fueled a property price bubble. Average real estate prices in Chinese cities have spiked in recent times at the fastest rate in about a year. Since late last year, Chinese policymakers have introduced steps to cool-down the housing market and restrict access to credit.

On the other hand, the effect of this financial crisis on India has been a lot milder. India maintained robust growth through the financial crisis as a result of its reduced exposure to the global economy. In addition, India's banks have remained quite conservative through the downturn, especially compared with Chinese lenders.

Source: Essay UK -

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