Review on China and India

In: Uncategorized

9 Jul 2007

This week’s Fund Strategy included a review by me of David Smith’s new book on China and India.

A few years ago David Smith, the economics editor of the Sunday Times, was giving a talk on the world economy to a group of businessmen in London. After someone asked a question about China and India it emerged that the audience had a downbeat attitude towards the rise of the Asian giants. It was in response to this pessimism among business types, in the West overall rather than just Britain, that Smith wrote The Dragon and the Elephant.

Smith succeeds admirably in his aim of providing an overall assessment of the rise of China and India. He concedes at the start that he cannot match the local knowledge of those who have spent many years specialising in the two countries. Instead he brings to bear the relatively detached perspective of a seasoned Western journalist with a strong overall grasp of the world economy.

Smith’s approach is essentially chronological. After a brief introduction he starts by examining how China and India fell from their historical position of being leading economic and technological powers. From 1820 to 1914 the European powers were dominant in the world while the rest of the twentieth century belonged to America. In the subsequent chapters he examines how China and India finally set themselves on the path to development. He ends with a chapter comparing China with India and a conclusion on 10 ways the rise of the two countries will change the world.

The Dragon and the Elephant avoids many of the common pitfalls in writing on China or India. For example, he shows both the growing importance of the Chinese economy in absolute terms and its relative poverty. Although China is one of the world’s largest economies it is only 107th in the world in terms of income per head. The explanation is that China’s GDP has to be divided between 1.3 billion people. But many commentators find it hard to reconcile the two facts,

Where there is a well-publicised debate relating to a country’s development the book tends to give both sides of the argument. In relation to India, for instance, many commentators argue that the economic reforms of 1991 were a watershed in the country’s development. But other influential voices point out that India’s growth rate first accelerated in the 1980s rather than the 1990s.

Smith is also good at bringing out the contrasts between the two countries. China’s growth record is much more impressive than India’s. China’s development is primarily industrial while India depends heavily on services. India’s population is, on average, substantially younger than China’s. Nevertheless the two countries are still both, at least in population terms, largely rural.

If there is a problem with Smith’s book it is a corollary of his project of summarising the received wisdom on the two countries. It is usually the case that the mainstream ideas on any subject are flawed. That is true of perceptions of China and India.

An important example is the exaggerated importance attached to demographics. Many commentators claim that, over the long term, India has an advantage over China because of its younger population. But a key lesson of economic development should be that the more productive an economy becomes the less demographics matter.

Comparisons between those of normal working age and those outside working age reveal little about the character of an economy. As an economy becomes more advanced it becomes possible for fewer people to support a larger number at a higher standard of living than previously. Dependents could be people outside the working age or alternatively they could be individuals who are unemployed or in education. As technology becomes more advanced and health improves it also becomes easier for the elderly to work too.

The problem India has with a huge pool of unskilled, agricultural workers is economic rather than demographic. It needs to promote a form of development that can bring these workers into the industrial and service sectors. The challenge is one of underdevelopment rather than of too many people.

Smith also wrongly takes it as given that economic development necessarily brings environmental problems. He says: “The nightmare, for the global environment and demand on the world’s energy resources, would be a rise in Chinese car ownership towards American levels”. That would certainly amount to several hundred million more cars on the road but it is not clear that it should necessarily be a problem. A lesson of economic history should be that economic development allows humanity to harness resources more efficiently. A richer society should have the necessary means to build a transport infrastructure able to handle so many cars. Technological development should also mean they are cleaner and more efficient than the present generation of vehicles.

The Dragon and the Elephant can also be faulted for its adherence to what could be called the “revelation” theory of economic development. Smith implicitly accepts the view that rapid development came to China and India because their leaders finally accepted free market principles. Until then, so the argument goes, they were enmeshed in socialism in China or Fabian dogma in India.

But the development process in the two countries was never as simple as that. In the decades following the second world war there was relatively little foreign investment or trade available for developing countries so correspondingly little incentive to liberalise. In any case the state still plays an enormous role in China’s economy today and an important one in India.

Nevertheless, as an introduction to the rising economies of China and India The Dragon and the Elephant works well. It should provide a good starting point to anyone who wants a lucid primer on the subject. However, working out the real significance of developments in China and India is beyond the scope of the text.

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