China Won the Last Economic Race, Can India Win This One?

08.11.2016 • Emerging Markets

From Vivek Kaul – Vivek Kaul’s Diary (India) –

In 1962, the Indian per capita income stood at $90. In the same year, the Chinese per capita income was at $70.1 This piece of data might surprise you. The Indian per capita income was around 29 per cent higher than that of the Chinese.

In 1980, the Indian per capita income stood at $280. The Chinese were at $220.2

In 1990, the Indian per capital income was at $390. The Chinese were at $330.3

After this, the Chinese per capita income simply exploded and India was nowhere in the race. A quarter century later, in 2015, the Chinese per capita income stood at $7,820. India was significantly lower at $1,590. The Chinese per capita income is now close to 400 per cent more than that of India.4

The point being that up until 1990, the Chinese per capita income was lower than that of India. After that something changed and China surged way ahead in the race.

The question is what happened? Before we get around to answering this question, it is important to understand how did other countries in Asia, like Japan and South Korea, went from being poor third world countries to becoming developed economies.

The simple answer here is that these countries grew at very rates for a very long period. And where did this growth come from? Exports.

And how did success in exports come about for these countries? As Ryan Avent writes in The Wealth of Humans-Work and its Absence in the Twenty-First Century: “Success in exports markets once required economies to develop an entire suite of capabilities. To export electronics or cars, South Korea and Japan needed to build an entire, high-quality supply chain domestically; they needed lots of firms capable of designing and manufacturing components, and well-organized corporations capable of planning and coordinating the design, production and sale of complex goods.”

Of course, this took time. The process started with the countries building supply chains for producing simple goods like toys and radios. As capacities were built, companies operating in these countries got into more complicated products like computers, cars as well as industrial machinery. This is how countries like Japan and South Korea arrived on the global scene.

China started the process of economic reforms in the early 1980s. In fact, in 1980, China’s export share in the world market for clothing and footwear was 1.3 per cent. India’s share was greater than that of China, at 1.4 per cent. By 2007, the Chinese share had risen to 37.6 per cent. The Indian share had gone up to just 3.2 per cent.5A BCG report published in 2014 points out that in 1993, China’s share of global merchandise exports had stood at 2.4 per cent. This jumped to 11.5 per cent by 2013. India’s share on the other hand increased from 0.5 per cent 1.7 per cent.6

China has beaten India hands down in the global export race. Nevertheless, the export model followed by China was not totally like that of Japan and South Korea. By the time, China arrived on the global export scene, supply-chain trade was taking over. As Avent writes: “Supply-chain trade changed everything. A California technology company could source component supplies from half a dozen Asian economics, have them all meet together in a Chinese port city for assembly, and then ship the finished package to consumers.”

The rise of supply-chain trade essentially meant that China did not have to develop a complete end to end expertise in a given area, to be successful at export. This meant that it could cut short the process of economic growth.

As Avent writes: “A country like China could… immediately get into advanced electronics export game simply by tapping into global supply chains. Cheap labour and relatively small set of competencies were suddenly sufficient to participate in production of advanced goods. Trade swelled as international supply chains developed… And countries that found their way into supply chains enjoyed rapid growth.”

As the World Trade Report for 2013 points out: “A central feature of this… age of globalisation is the rise of multinational corporations and the explosion of foreign direct investment (FDI)…By 2009, it was estimated that there were 82,000 multinationals in operation, controlling more than 810,000 subsidiaries worldwide. Upwards of two-thirds of world trade now takes place within multinational companies or their suppliers – underlining the growing importance of global supply chains.”

While China latched on to this phenomenon and progressed, this is something that India clearly missed out on. The trouble is that the days big-gains from supply-chain trade may be coming to an end.

As Avent argues: “Trade growth has slowed down dramatically. That is partly due to the exhaustion of big gains from supply-chain trade. The growth of snaking production chains across countries supercharged trade growth, since the production that once occurred entirely within one country began to require multiple rounds of exporting and importing. Yet once such chains are in place, trade growth necessarily slows unless chains continue to fracture into additional links or new kinds of products are built into global supply chains.”

The point being China must now look for a new economic growth model. And at the same time, India’s search for an economic growth model, is likely to continue.

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1. World Bank Data
2. Ibid
3. Ibid
4. Ibid
5. V.Joshi, India’s Long Road – The Search for Prosperity, Penguin, 2016
6. Make in India – Turning Vision Into Reality, BCG, 2014

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