Daniel Park :
China and India are booming. Superficially it is easy to be impressed. We note that annual growth rates in Gross Domestic Product (GDP) have been sustained over the past few years at 8-10 per cent, sometimes even higher. Analyses of China and India point to the major investment in education that is turning out many thousands of top-class engineers and scientists annually. It seems that so many of our manufactured goods carry a “Made in China” label and that our call centre services are increasingly located in India. The recent rises in energy and commodity prices are partly explained by the rapid growth in demand from China and India. Moreover it seems to be assumed that this level of overall economic growth will continue indefinitely and that unless we in “The West” get involved in it, we will live to regret it.
This is, I believe, at best an incomplete perspective and at worst a dangerous one.
The two purposes of this Paper are (i) to compare and contrast the high growth rates in the two countries and (ii) to assess the likely outcomes and impact.
The first aspect of this is the significant difference in the nature and structure of growth in the two countries. Growth measured in terms of GDP can be investment-driven and/or consumption driven. In mature economies we can point to the balance between the two. The majority of developed economies see investment at around 20-25% of GDP. In the case of India, the investment share of GDP is slightly above average for the industrialised world. In China the position is very different, with investment accounting for over 40% of GDP sustained over the past 10 years or so.
The more relevant question in the case of China is as follows. Given the high investment percentage within GDP growth, why is China not growing more quickly? The key question in the case of India is different. Given the major social and demographic changes that are being experienced, will India be able to manage the expansion of consumerism and retain a balanced structure of GDP growth without hampering investment in fixed capital formation and avoiding a growth in national, corporate and individual debt?
A substantial part of the answer to these questions is found by studying (a) the extensive versus the intensive pattern of economic development, to reach an understanding of what economists term “total factor productivity” and why it matters and (b) the tools and techniques available to government and industry/commerce to gain and sustain profitable growth at low risk.
The extensive pattern of economic growth is based on continuously increasing resource inputs that are reflected in growing outputs allied to demand stimulation and demand management. This works effectively, though not efficiently, (a) as long as resources are plentiful and (b) there is spare capacity throughout the productive system. This type of growth has been described as a “ratchet” mechanism – if the top line goes up by 10 per cent, then everything contributing to it goes up by (at least) 10 per cent. The essence of the intensive pattern of economic growth is that resource productivity increases along with growth in output and consumption and a greater rate – in other words there is a better than 1:1 relationship between growth in outputs compared with inputs.
This characterises developed economies throughout the world. It is what drives greater efficiency in value-creating processes and, in modern times, greater production specialisation across national boundaries coupled with a high gross percentage of foreign trade (import and export) relative to GDP, even if the net trade balance does not alter much over time.
It was the “extensive” model of economic development that eventually finished off the Soviet Union despite belated attempts at macro- and micro-economic reform. China still looks with horror on this rapid disintegration and has acted early enough to ensure that all but the most strategically sensitive industries are now to most intents and purposes private operations. India has succeeded in abandoning its former addiction to Soviet-style planning early enough to avoid the worst damage. But there remains a massive deadweight of large-scale indigenous industry that is over-resourced, uncompetitive and sustained by the pressure of vested interests. Merely changing the legal form from “state-owned” to “private” is nowhere near a solution.
There is, however, evidence that China is moving into a more intensive pattern of economic development, accelerated by a gradual move towards world prices for commodity inputs and other intermediate inputs together with market-based pricing allied to a market-rational internal cost of capital. This is to ensure that high rates of economic growth can continue, driven increasingly by consumption relative to investment and based on more efficient resource utilisation.
What matters above all to a Western company is the quality of decisions made in respect of dealing with China and India as partners in increasingly global supply chains.
Though India has made well-publicised progress in technical and business education in the past twenty to thirty years, China has not held back. Starting more recently, the level and pace of investment have been breathtaking. However there are significant differences in the approach. Whereas India has developed through its internal resources, China has undertaken rapid transfer of best practice and has adapted this quickly to the Chinese culture. Additionally the spread of best practice has affected a very wide range of sectors of the economy.
The “Indian phenomenon” has been concentrated on engineering technology. Hence we have seen the emergence of a very effective and internationally competitive software and I.T. community abound Bangalore, and it is often assumed that this is becoming typical of India. It is not. Much of Indian industry is still old-fashioned and, worse, it is stifled by a structure of bureaucratic management coupled with high levels of vertical integration that is over a century out-of-date. Thank goodness labour costs remain low, because structures and management approaches are intrinsically uncompetitive in whole sectors of the economy. Low labour cost is to a significant extent a compensator for systemic inefficiency, and the problem will come when labour rates begin to rise, as will naturally happen as the country becomes more developed. Just as significant is the fact that the “Indian miracle” is manifest principally in product that can be delivered electronically rather than physical product. It is in this latter type of product that the deadening impact of bureaucratic systems is found. Any advantage of low cost for highly and not-so-highly skilled direct and indirect labour can quickly be outweighed by the transaction costs and delays incurred in operating through unresponsive, high-cost administrative systems.
Contrast China. Theirs has been a much more holistic approach – an approach that fits so well with the philosophical and social traditions of the country. What has happened here is that not only is there a major initiative in upgrading technical skills but also a set of programmes in transferring managerial systems and their associated competencies. The Chinese have accepted that technology is only one dimension of international competitiveness, and that low labour cost is one more. But these are effective only if the system as a whole meets best-in-class standards. This does not always have to be “state-of-the-art”, but it should always be “state-of-the-market”.
Hence there has been a large-scale transfer of the best that the developed world has to offer. Starting with the education of a top class of Chinese managers abroad – principally in the United States of America and Europe – and continuing with a similar programme of training trainers, one now finds replicas of top management development programmes in China ranging across many sectors of the economy. Large-scale collaborative education and training ventures are found in all major Chinese centres. This has rapidly resulted in the emergence of a new type of Chinese technocrat – (i) highly skilled in contemporary tools and techniques of logistics and supply chain management as well as in the basic technologies of product design, materials management, systems engineering, and in addition (ii) fully familiar with new concepts and practices in strategic management, international finance, global structures, partnerships/joint ventures.
The last skill mentioned above – partnership – is where the Chinese culture is particularly advantaged. The Chinese have always been natural networkers: they networked for centuries and operated “extended” or “virtual” enterprises before we in the developed world claimed these as “advances” in management thinking! Superimpose all this on to the modern structures of industry and commerce that are found in China’s new cities and special economic zones and the foundations of formidable competitiveness can be built provided that a more intensive approach to economic development can be achieved simultaneously.
It is misleading to think that there is some kind of “competition” between India and China as centres of outsourced activity. Each will develop in its own way. We need a note of caution in making assumptions based on well-publicised, but inherently superficial and partial, information claiming that the two growth rates are neck-and-neck and therefore there is a question of “who wins?”.
India will have to tackle the problem of bureaucracy – ask anyone who has operated there – and it will be a big issue as wage rates increase and eventually converge with world levels. For its part China retains a huge and inefficient formerly state-owned sector of industry and commerce that is causing problems for the economy as a whole. The best-publicised success stories come from the (atypical) new cities and special economic zones, which still constitute a minority of the total output economy but a major contributor of overall economic growth and added value.
Competitiveness depends on (a) a multiplicity of factors and (b) the ability to fuse these factors into an effective whole in competing for customers with increasingly global perspective, requirements and choice. It is not enough to have the best qualified technical people in the business available at relatively low cost if the business cannot achieve fast response times and quick decision-making. The diffusion of “know-what” and “know-how” is so fast nowadays that any technical advantage, whether this be through superior knowledge or low labour cost, cannot be sustained for long. What matters is the achievement of a holistically superior business model. It is my contention that on balance India, despite its problems of bureaucracy and structure, is for the moment a little ahead of China in this, despite China’s being culturally more suited to the model, as stated earlier.
Government policies in China and India have been very different in terms of the approach to generating growth. The difference illustrates the importance of the consumer sector in a modern economy.
China has directed the massive investment percentage of GDP into the creation of industrial capacity, aimed substantially at export markets. It is therefore vulnerable to downturns in global markets, particularly in the USA. Significantly since 2004 China has commenced a slow re-orientation towards strengthening consumption in the home market relative to investment. The savings rate in China has been exceptionally high, and the level of credit in relation to GDP has been very low by world standards. The level of consumption had fallen to 38% of GDP by the end of 2005, just about the lowest level of any major world economy. Coupled with this we note that the excess capacity generated by the high level of investment relative to consumption has resulted in overcapacity, stagnating or reducing prices, growing levels of unsold inventory and pressures on profitability. Excessive construction and the reluctance of the majority of the population to draw down on savings have prompted falling prices in the property sector. One economist has recently calculated that if personal consumption in China as a percentage of GDP had remained at its 1990 level it would be 30 per cent above current levels – a more rational balance in relation to other GDP components (Lardy 2006). There is sufficient spare capacity and inventory backlog in China to enable consumption to rise significantly without resulting in price inflation.
(To be continued)
