China Research

About ten years ago, I wrote an article in a British journal (Economic & Financial Review, 2005) about the topic whether China or India would be the economic winner in the longer term. I come to the conclusion that India would catch up, but not really take the lead – at least not before positive demographic trends should favor India more structurally and, thus, add visibly to potential GDP growth. This will take time.

As India’s main competitive disadvantages compared to China I identified then infrastructure, lower average education levels, slower public decision-making, weaker entrepreneurial incentives and ambitions to reform the economy as a whole. India showed instead more advantages in the higher quality segments of research and education, banking/financial markets, transparency, certain other institutional conditions and – which the Indians still strongly emphasize – democracy and the rule of law.

I also pointed a decade ago at forthcoming structural changes in production patterns that obviously were to come: an increasing share of services at the expense of manufacturing in China and the contrary development in India.

In the meanwhile, China has clearly increased the role of services in its economy, whereas India’s efforts to achieve substantially more production in competitive manufacturing – also in value-added terms – turned out to be more modest.

Consequently, experts on the Indian economy start to raise the question whether it may be too late for India to become a manufacturing superpower. This may be true to a certain extent. However, it also could be beneficial for India that it now – when applying experience from China – has a chance to avoid the establishment of a gigantic industrial overcapacity as China did in a number of sectors.

This latter phenomenon may also be one of the reasons why China currently seems to note slower economic growth than India. On the other hand, China has at least on the paper more economic reforms in the pipeline than India does. However, we still have no idea of the future results of Chinese reform policy. We have to wait for improvements of transparency also in this specific respect.

Consequently, it is still too early to make a prediction on the long-run winner in the global competition between China and India.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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