By Nathu Ram Verma
Today is a landmark time in China’s economic history. China has recently overtaken Japan as the world’s second largest economy, raising speculation that it will pass the United States as the world’s largest economy earlier than thought; according to some, this might even occur as early as 2027. I believe that such speculation is highly romantic, and that the reality may be somewhat different.
It is true China’s economy has overtaken Japan’s. But it is a distant second to the U.S. economy, which is four times bigger. It is true that the U.S. is in a funk, facing serious problems relating to both private and public debt. The housing sector is sputtering, while the deficit and current account balances are ballooning. The unemployment rate is very high and still rising, while consumer confidence is down. And, there is talk that the U.S. might go into a double-dip recession or even deflation. Regarding the U.S. economy, the jury is out and more data are required.
But the outlook for the Chinese economy is not so rosy either. Growth is decelerating, while inflation is picking up. Balancing the world economy will require that China increases consumption, while the U.S. increases savings. There will be much pressure on China to change its ways.
China has many peculiarities. Its products are largely Made in China, but not Made by China. This makes a difference. Foreign multinationals are driving growth, not indigenous entrepreneurs, and economic growth cannot be taken to much farther lengths without this so-far missing element. In this, China compares poorly in relation to Indian entrepreneurs, for example. To compete, China will have to develop this element rapidly, which is difficult to do.
Little is heard about China’s capacity to innovate frugally and cheaply, and this is where the future lies. The rich in the Western world and the poor in emerging markets are increasingly demanding value for their money. Traditional innovation is out, and frugal innovation is in. While traditional innovation calls for heavy investment and many years for development, frugal innovation is done on a shoestring budget and in a much shorter time.
There is an increasing need in the world for companies like India’s Bharti Intel, which provides users with phone calls that cost 1 cent per minute, while China’s tariff is 2 cents. There is a need for cheap medical providers for cardiac treatment like Narayana Hridalaya, an Indian hospital. Likewise, an Indian eye treatment center offering cataract operations for $30 recently made waves, while an Indian computer which now costs $30, and which is projected to cost $15 in the near future, is making news. The $2,000 NANO car, also manufactured in India by the Tata group, is the world’s cheapest car. The economic formula for the future will be affordability paired with sustainability. China has to be able to show the capacity to meet this formula if it is to meet the high expectations being set for it.
And China faces another problem: an explosion of expectations. While it has permitted its citizenry to make money, it has taken away political, social, religious and spiritual freedom. Suppressed people are not creative.
Equally important, China will have to make arrangements for deferred costs like social security, medical care, environment degradation, etc., and all of these will impact growth prospects.
China’s own leaders have admitted that the country’s economy may not grow more than 7 percent in this decade, and about 5-6 percent in the decade of 2020s and subsequently. Meanwhile, China’s demographic dividend of a large working-age population will not last longer than this decade. After that, the population pyramid will become top heavy, that is, with a shrinking working population resulting in fewer savings and less investment.
There is a study by a reputed banking institution indicating that India will be the fastest developing economy by 2014-15 provided several essential reforms are undertaken. Unlike China, India will benefit from a demographic dividend in coming years. Growth in 2010-2011 is expected to range between 8.8 percent and 9 percent.
Finally, let us be clear: the real engine for growth is invention and innovation. Up until the early 19th century, India and China were the two largest economies in the world. But in both countries, invention and innovation had largely ceased some time before. On the other hand, beginning around the same time, the Western countries witnessed an explosive industrial revolution fed by cutting-edge invention and innovation, and economic growth zoomed to stratospheric levels.
The U.S. is great not because it has Microsoft, General Motors or IBM. It is great because it has Harvard, Stanford, Princeton, Yale, MIT, Caltech and many other excellent universities and research centers.
China has compressed its industrial revolution into the shortest possible time, but now the real test begins. Do not write off the United States just like that, nor just yet. Democracies are much more swift and nimble than autocratic states. And remember, India is closing quickly on their heels.
China has done well, but please, let’s not get carried away.
Nathu Ram Verma is a career Indian diplomat who has served as ambassador to Uganda, Bahrain and Argentina, and has served in various diplomatic posts in the Soviet Union, the United States, Laos and Canada. He was educated at Rajasthan University in India and Harvard University in the United States. He is married to a Costa Rican and spends part of his time in Costa Rica.
