30 January 2023

PS Commentators Respond: Could the “Chinese Century” Belong to India?


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As India considers how to make the most of its demographic dividend, China has reported its first annual population decline since 1961. At the same time, the West is courting India for trade and security partnerships, and attempting to shift its supply chains away from China, in part to limit Chinese technological development. And while analysts predict that India will become the world’s third-largest economy by 2027, many are now questioning China’s ability to overtake the United States as the world’s largest within the next few decades.

In this Big Question, we ask Pranab Bardhan, Brahma Chellaney, Pinelopi Koujianou Goldberg, and Yi Fuxian whether the economic fortunes of India and China will continue to diverge, and what that could mean for the global economy.

PRANAB BARDHAN

I think the century will probably not belong to China or India – or any country, for that matter. Chinese achievements in the last few decades have been phenomenal, but it is now experiencing a palpable – and expected – slowdown. And while international financial media have been hyping the arrival of “India’s moment,” a cold look at the facts suggests that such assessments are premature at best.

A key reason for this is demographic. Yes, India has most likely already surpassed China as the world’s largest country by population, and its youth bulge is substantial. But far from delivering a “demographic dividend,” India’s relatively young population may turn out to be a liability, as the country struggles to generate sufficient productive employment.

India has found the most success in skill-intensive sectors – such as software, digital technology, and pharmaceuticals – which do not have much need for the low-skill workers who comprise a huge share of India’s working-age population. In fact, the share of unskilled labor-intensive industries in India’s merchandise exports declined by almost half over the last two decades. Massive numbers of Indians are now un- or under-employed, and many discouraged workers have dropped out of the labor force.

It does not help that Indians lag even on elementary health indicators: household survey data show that the proportion of children who are stunted or otherwise malnourished remains extremely high. Simply put, while India has a large quantity of people, the quality is lacking, with productivity levels insufficient to enable the country to compete internationally in many sectors.

One reason Vietnam has outperformed India in terms of attracting international business seeking alternatives to China is that Vietnam’s labor force is in general healthier, better educated, and more highly skilled. The other reason is that India’s government has upheld a relatively restrictive trade policy. Rather than, say, joining regional trade agreements, it promotes crony capitalists, who have largely failed to translate their domestic economic dominance into international competitiveness.

Despite China’s current struggles, I expect the country to remain a major manufacturing and trading power for many decades. While India will perform reasonably well, chances are low that India will surpass China any time soon.
BRAHMA CHELLANEY

Chinese President Xi Jinping seems to be in a hurry to achieve what he calls the “Chinese dream” – that is, China’s global preeminence. With a demographic crisis looming, economic growth stalled, and the global environment becoming increasingly unfavorable, Xi seems to have concluded that China has a narrow window of strategic opportunity to shape the international order in its favor. So, his appetite for risk has grown.

But, while China remains a middle-income country, long-term structural constraints – including a shrinking and rapidly aging population, slowing productivity growth, and massive debts – are already beginning to bite. This could severely hamper Xi’s ability to advance his ambitions and even threaten China’s status as the world’s factory.

India, by contrast, has demographics on its side. With a median age of 28.4, India is one of the world’s youngest countries. This large youthful population is propelling rapid economic growth, contributing to a consumption boom, and driving innovation, reflected in the emergence of a world-class information economy. About one-fifth of the world’s working-age population is likely to live in India by 2025.

India has about 600 million more people than all of Europe’s 44 countries combined. Moreover, India is the first developing economy that, from the beginning, has strived to modernize and prosper through a democratic system, despite the challenges posed by its cultural and ethnic diversity. And, unlike China, India is not seen as hungry for the land and resources of others, and its rise has not been accompanied by greater assertiveness.

But for the century to belong to India, the country must make the most of its relatively low labor costs and Western companies’ growing interest in shifting production away from China to become a manufacturing powerhouse. This would not only be good for the global economy; India’s accelerated rise could also help counter Chinese expansionism.
PINELOPI KOUJIANOU GOLDBERG

The century could belong to India, but this doesn’t mean that it will. In fact, the export-driven development strategy that propelled China’s rise would almost certainly fail in India.

In the last 30 years, China became an economic superpower. And with a per capita GDP of around $12,500 (in current US dollars) in 2021, and a population of 1.4 billion people, it has enormous scope for productivity growth.

But China also faces strong headwinds. Domestic drags on growth include an aging population, high inequality, and a problem-ridden property sector. Meanwhile, the United States is working actively to hamstring China’s technological development; while this is unlikely to block China’s growth in the long term, it will act as a short-term constraint.

Like China, India is a populous country with enormous room for productivity growth. Unlike China, however, it has a young and growing population, and is well positioned to capitalize on current geopolitical tensions. Moreover, India is more familiar with Western norms than China is, and a larger share of its population speak English.

But India is facing its own domestic challenges – most important, high and persistent poverty, low female labor-force participation, high levels of pollution, and simmering ethnic and religious tensions. Furthermore, India cannot expect to engineer an export-driven growth “miracle” like that previously seen in East Asian economies.

The global environment is much more competitive today than it used to be, with several low- and middle-income countries jockeying for access to lucrative export markets. At the same time, automation is eroding the value of developing economies’ low-wage advantage in labor-intensive manufacturing, and advanced economies have become more interested in protecting their labor markets from the consequences of import competition from low-wage countries.

Finally, as I explain in my recent Say More interview, India is less integrated in the global trading system than other countries are, and it is not well positioned to participate in global supply chains. So, while openness to trade and investment can contribute to growth, it cannot serve as India’s main growth engine.

If India is to lead in the twenty-first century, it will have to “leapfrog” from an agriculture-based to a services-driven economy. Some of the conditions for such a transformation – including increasing digitalization, proven success in business services, and a large domestic market – are in place. But if India is to succeed – effectively becoming a poster child for a new model of development – it will also have to overcome major domestic challenges, and it is far from clear that India’s government has the will to implement the many policy changes this would require.
YI FUXIAN

China’s government recently announced that the population began to decline last year – a decade earlier than the United Nations predicted. But I believe that China’s population actually began to decline in 2018, and that it is even smaller today than the government claims – 1.28 billion, instead of 1.41 billion. In any case, it is clear that China’s recent social, economic, defense, and foreign policies, as well as US policy toward China, have been based on faulty demographic data.

Even if China manages to stabilize its fertility rate at the official level of 1.1, its population will drop to 1.08 billion in 2050. At that point, the median age in China will be 57 (up from 42 today), compared to 44 in the US (up from 39 today), and 39 in India (up from just 29 today). In 2100, China’s population will be only 440 million, compared to 1.53 billion in India.

China’s leaders must accept that the country is not poised for “national rejuvenation.” It simply does not have the demographic base for that, and its current policy approach – authoritarian at home and aggressive abroad – is hardly sustainable. Instead, China’s best course will be to pursue a strategic contraction, improve relations with the West, and loosen domestic censorship, in order to boost socioeconomic dynamism, which is crucial to avoiding demographic collapse.

The US, for its part, should stop acting as if it is dealing with a rising China that is capable of undermining the US-led global order. Instead, it should recognize that China is declining, and adjust accordingly. This means both maintaining an assertive stance and allowing for cooperation. With the US and its allies also facing population aging and economic slowdown, preserving the existing global order will require China’s cooperation. It is worth noting here that America’s failure to manage relations with a declining Russia paved the way for the war that is now raging in Ukraine.

As for India, its economy will overtake not only China’s, but also America’s, though that will take decades.

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