Business books:A new book examines the rise of India and China as economic powers, writes Dan McLaughlin
There was a time when the US economy coughed, the world would catch a cold, such was the dominance of the United States. No longer it would seem: growth in the US has slowed to just 2 per cent over the past 12 months, and yet the global economy is still expanding at a 5 per cent pace, which is well above the average of the past 20 years.
The recovery of Germany is a factor, but of more significance is the strength of activity in the developing world. The US now accounts for less than 20 per cent of world output and the advanced economies for around half of global income, with the developing world's share having risen to just under 50 per cent.
Asia's emerging economies have been the key drivers of this rebalancing of global growth, notably China and India, who together accounted for 40 per cent of last year's growth in the world economy.
The emergence of these two economic powers on the global stage is the subject of David Smith's latest book. Smith is the economics editor of the Sunday Times, and here sets out to examine China and India in the new world order, to explain their rise, to assess whether we in the West should applaud, and to debate the prospects for these Asian powerhouses.
Their economic performance is certainly impressive. China, the dragon, is now the fourth or fifth-largest economy in the world, depending on what exchange rate one uses, having grown at an average annual rate of 9.5 per cent since 1978. For much of this period, the West's response was driven by concerns about China's record on human rights and its cavalier attitude to intellectual property rights, but China is now too big to ignore; even if growth slows somewhat in the future, some analysts argue China will be the largest economy on the planet by 2050.
China is now having a significant influence on the global economy, both as a supplier of the manufactured goods and as a purchaser of raw materials. On the latter front, it now accounts for 20 per cent of global demand for a host of commodities and its need for oil is often cited as a factor behind the strength of crude oil prices.
For consumers, China's emergence has proven a boon, helping to push down prices - in Ireland, for example, the price of clothing and footwear has fallen by almost 20 per cent in the past five years. This flood of cheap imports has also hit the manufacturing sector across the western economies, of course, prompting calls for protectionism and attempts by some firms to improve the working conditions of labour employed by their Chinese suppliers.
India, the elephant, has also grown rapidly, averaging 7 per cent growth over the last 10 years, after emerging from a financial and political crisis in the early 1990s. The service sector has been the driver notably in relation to IT - India has become the world's outsourcing capital. On some measures, it has a 65 per cent share of the market in IT-enabled services and half the market in business processing offshore. Moreover, its IT sector has grown from nothing in the mid-1990s to the world leader, with the city of Bangalore now synonymous with the word outsourcing.
Smith outlines these development trends in the two countries, but one wonders about the wisdom of combining them into one book: India and China have very little in common. Yes, they are Asian and yes they have large populations (both in excess of one billion) but beyond that the similarities end. China is much larger in scale, is much more significant in the global economy and has developed by shifting resources from agriculture to manufacturing by encouraging huge capital inflows. It remains a totalitarian regime, of course, and the state's control of the economy is absolute - a whole area of Beijing has been razed, for example, to build the Olympic infrastructure for the 2008 games. India, in contrast, is the world's largest democracy (or "functioning anarchy" according to JK Galbraith), is much smaller in economic scale and attracts far less than China in terms of foreign direct investment. This service sector is also tiny in terms of total employment, with the majority in India still dependent on agriculture. Corruption is rife, according to Smith, as is a stifling bureaucracy.
The book is largely descriptive, but in the final chapter Smith speculates on how China and India will evolve. He argues that in essence they are no different to the other fast-growing economies that in the past have been successfully absorbed into the world's economy, and that issues such as protectionism and the environmental impact of such growth will be resolved. In that he may prove too sanguine, but the book is a readable attempt to give a balanced view of China and India from an economic perspective.
Dan McLoughlin is chief economist with Bank of Ireland global markets.
The Dragon and the Elephant By David Smith. Profile Books £15
