Today sees the publishing of the first part of a new white paper from Dan Park, economist and associate consultant of B2B International. The paper takes an in depth look at the prolific growth of the Indian and Chinese markets. Check back over the next few days to catch parts 2, 3 and 4.
Introduction
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 White 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 nature of economic growth
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.
“Extensive� versus “intensive� patterns of growth
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 “ratchetâ€? 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.
This entry was posted
on Wednesday, March 7th, 2007 at 8:21 am and is filed under International Market Research, Market Assesment, Market Research, Market Research China, White Papers.
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