American guide to China and India

Today’s Fund Strategy includes a review by me of a book on India and China.

The rise of China and India has, apart from anything else, produced a booming economy of books designed to introduce the countries to western readers. Robyn Meredith’s The Elephant and the Dragon is one of the best of the genre.

Meredith’s perspective is that of an American journalist who has covered recent developments in India and China at first hand. From her base in Hong Kong, where she is a correspondent for Forbes magazine, she has written widely on both countries. Her mission in the book is to help her predominantly American readership better understand the two emerging Asian powers.

Her approach is in contrast to that of David Smith, the economics editor of the Sunday Times, who recently wrote a book on the same subject called The Dragon and the Elephant (see 9 July post). His work, while worth reading, is more historical and based largely on secondary sources. But Meredith has spent much time watching Chinese workers produce goods for western markets, navigating India’s awful roads and talking to people in the region. Both books are well written, but Meredith’s is more vivid.

She, like Smith, tends to alternate chapters on the two countries. So after a general introduction on “tectonic economics” she has a chapter on China’s rise since the 1970s, followed by one on India’s ascent. She then moves on to China’s manufacturing and India’s surge in IT services.

Perhaps most interesting is her chapter on what she calls “the disassembly line”. This describes how the world economy has moved from one where production is focused on assembly lines to one where supply chains are key. Under the old system, of which Ford was the emblematic example, each company was responsible for a series of processes that ended up with a final product.

Under the new system, different parts of a product can be made by an enormous array of producers all over the world. Chinese firms play a key role in such supply chains as important links in this new set of processes. Often the final goods end up in the West, under western brand names, even though a good part of their value is created in China.

Although Meredith is generally sympathetic to the rise of India and China, she does discuss problems associated with their emergence as economic powers. First, she says that the rise of the two nations puts strains on the availability of natural resources. Second, she warns that the modernisation of their military forces could create tensions with America. Finally, she discusses the environmental problems posed by the rise of the two Asian giants.

In her conclusion, Meredith looks at what the rise of China and India means for America. She argues that the solution to the challenge they pose is neither an unadulterated free market nor protectionism. Instead, America needs to create more jobs and educate its population better.

Unfortunately, The Elephant and the Dragon takes the mainstream view of the two countries too much at face value. Perhaps this is inevitable in what is essentially a primer. But, like Smith, she accepts what I call the “revelation theory” of economic development.

This essentially argues that China and India lived in the intellectual dark ages until their leaders realised that capitalism was best. If only they had latched on to this perspective sooner they could, so the argument goes, have enjoyed spectacular growth rates much earlier.

What this argument misses is that there was little incentive for third-world countries to open their economies in the decades following the second world war. During the post-war boom the West was generally uninterested in investing in or trading with the developing world. Therefore there was not much incentive for third-world leaders to encourage western investment or trade. This was particularly true of demographic giants such as China and India as their strategy of relying on their large domestic markets seemed reasonable at the time.

This is not to be in favour of autarky in principle. On the contrary, it has many disadvantages. But even if China and India had opened themselves up earlier, it is doubtful whether the West would have been particularly interested in doing business with them. It was only with the end of the post-war boom in the West that an externally orientated development strategy became feasible.

The Elephant and the Dragon is also too much influenced by western, and particularly American, preconceptions. Rather than ask what the rise of China and India means for the world, the “all of us” in the subtitle seems to refer only to Americans. Meredith’s primary concern is how American policy-makers should react, rather than what is best for humanity.

Such one-sidedness is particularly apparent in her discussion of the environment. She describes, correctly, how China and India are heavily polluted. But she fails to recognise that focusing on economic development, rather than the environment, can be the correct approach for developing countries. Since human welfare is closely linked to poverty, a focus on development can benefit a country’s citizens even if it increases pollution.

Meredith also fails to draw out the fact that economic development provides the resources to tackle pollution. American cities are cleaner than those of Asia precisely because America is so rich. It has the economic resources and technology to clean up its environment. As time goes on it is likely that India and China will make a clean environment a greater priority.

Despite these weaknesses, The Elephant and the Dragon is well worth reading for anyone who wants to get a quick overview of the Asian giants. Given their importance to the world economy, they are countries of which people can no longer afford to be ignorant. The rise of India and China is one of the key trends in the contemporary world.