Tuesday, May 23, 2006

China and India

The New Economist points to a 3-part series on India, in the Financial Times, here and here.

Well worth reading, but why the comparisons with China? It makes sense to study China's performance in lifting its people out of poverty, and to seek lessons that apply to India, but the mercantilist assumption that China's successes are India's defeats needs to be put to rest. There is NO competition with China.

We do not compete with China for FDI:
The article (subscribers only) in the Economist that included the above graph points out:

"Uniquely, China combines a vast supply of cheap labour with an economy that is (for its size) unusually open to the rest of the world, in terms of trade and foreign direct investment."

I believe this openness is a good thing, both for the people of China, and for the rest of the world. However, I am not convinced that we need to follow the same path, and compete with China for FDI, in order to grow.

We need investment- that means either FDI or domestic savings. Probably even more important, however, is to apply the best technology that is available, and to create markets that provide incentives for our businessmen to use that technology well. Technology is non-rivalrous. Both China and India can benefit from the same technology.

We do not compete with China for customers:
Yes, some Indian companies do compete with some Chinese companies for customers, but countries do not compete with one another.

In the long-run, the people of a country consume what they produce.

We may import goods, and so consume what we do not produce, but that requires us to sell goods of equal value that we have produced. Our imports may exceed our exports, so that we run a trade deficit, but the difference becomes assets (debt/equity) that belong to foreigners. Eventually, they will want to sell those assets for goods that they can use- and we will run a trade surplus. (Admittedly, there are some lucky countries that manage to run trade deficits for long periods).

In 2004, the Chinese exported goods worth more than 1/3 of their GDP, but they imported goods worth almost as much. They are creating both supply and demand.

As China grows, their external sector will shrink relative to the rest of their economy. I suspect its economy will be far too large to be as tightly integrated with the rest of the world as Germany's is.

I think we need to stop worrying about being "left behind" by China. Our people need to escape poverty, and that requires economic growth. But the point is to grow as fast as we can- its not to "compete with China"

6 comments:

Jay said...

I agree with your point of not comparing with China.
Just two things when China was mentioned.

All the manufacturers are there , all the consumer companies are there.. but if you see the sectors at least the ones that i have worked in , the real growth is from the Chinese companies themseleves and they are shadily owned by the government in most cases or by party functionaries who will be able to work the machinery, I am sure it happens elsewhere but in china at least rt now there is no fear of being bought to the public notice.

the other thing was just reading about the three gorges dam construction in China , it seems large number of villages were just destroyed in the process of the dam being constructed and there wasnt an established method of relocation of the dispossed people.
I think thats the only area where we shld compare with China and thump our chests. At least the news will come out here ,doesnt matter if the political scavengers will use it either ways to appeal to the votebank that matters.

tanul said...

Totally agree, the aim is not to compete with china or any other country but to ensure that you reduce or elimate the concept of poverty line, to provide people with the basic infrastruture and do it pronto 59 years is a long time

John said...

I am not sure I entirely agree with "not competing" with China. I agree with not worrying about "being left behind". Maybe I missed your point, but in the case of IT for instance, the fact that the chinese may soon become a large/cheap enough force to take away some of the contracts should be worrisome.

Jay said...

just wanted to check something . does a company like yours compete among geographies for the same account meaning will the Indian team compete with the Chinese team for the same account.

Rajeev Ramachandran said...

Re John's comment- if the Chinese export more, they end up importing more as well..
Yup, we may find ourselves being creamed in software services & BPO, but that would mean a shift in the kind of work we do- as the Chinese economy moves resources out of other sectors into software.
Again, most production in India and China will be for domestic consumption, not export..National Economies are nothing like companies. Once again, over to PK: http://www.pkarchive.org/trade/company.html
As for Jay's question, nope.. Does not happen. Why?

John said...

interesting article.. you have more articles on this? so in this context if the businessmen are setting the rules through the WTO ( or are they?) what's the impact? what happens in a situation where all federal banks dont play fair.. like if the chinese keep their currency artificially low against the dollar..? what's the tie to inflation?