With economic growth in China and India outstripping global averages and foreign companies increasingly choosing between the two nations when planning future investment, many observers are casting bets on which will snare the lion's share of Asian wealth.
There is general consensus that these countries will continue to be the engines of global economic growth in the 21st century, but many predict that the balance between the two will shift. China's imminent decline and India's rise has become the global media topic of the year.
William Fung, managing director of global trading group Li & Fung, caused a stir in March when he said China's manufacturing competitiveness had suffered over the last year due to a "double-digit" rise in labor costs, the revaluation of the renminbi, and higher oil and energy costs.
On the slide
"It is no longer the most cost-effective country in the region," he said, touting India as one of a number of likely South and Southeast Asian beneficiaries.
Talk of India replacing China as the low-cost outsourcing destination of choice is partly driven by their similarities – they are the two largest countries in the world in terms of population, the two fastest-growing economies, and home to the world's largest pools of skilled labor.
But as a result of vastly divergent development models over the last half century, the differences are even starker. While China became a hub for global manufacturing, India attempted to secure a niche at the top of the global value chain in white-collar services. However, India has been left behind by the pace and scale of China's development. China's US$6,270 per capita GDP in 2005 was almost double India's US$3,420, despite both starting from a similar base in 1980.
India's figure is dragged down by huge numbers of extremely poor people, and New Delhi recognizes that economic diversification is the solution to this problem. It also knows it cannot expect uneducated rural poor to be productive in the white-collar services sector, so it is turning its attention to manufacturing and exports.
Following years under attention, these sectors received a jump start in 1991 with the introduction of a new liberalization agenda. Though still a relative minnow, trade flows are now growing at a rate close to China's, with total trade in goods and services hitting US$240 billion last year. Imports and exports were up 34% and 27% respectively on 2004.
Mark Thirlwell, program director for international economy at the Lowy Institute for International Policy in Australia, argues that the idea of India becoming the "new China" is simplistic. Rather than India taking manufacturing jobs from China, the countries will increasingly look to combine their comparative advantages to create a superpower in the heart of Asia.
Bilateral trade is growing rapidly, rising 38% year-on-year to US$18.7 billion in 2005, up from US$3.6 billion in 2001 and only US$339 million in 1992. India is enjoying the better of the exchange with a surplus of about US$700 million last year.
Chinese Prime Minister Wen Jiabao's visit to India in April 2005 was another big step towards closer integration. Significantly, the two leaders also talked about information technology. The plan is to combine Indian software expertise with Chinese hardware know-how to achieve world leadership. "If they can get that complementarity working then bilateral trade can really take off," Thirwell said.
Shifting the balance
It is this cooperation that could change globalization according to Clyde Prestowitz, president of the Economic Strategy Institute in Washington and author of Three Billion New Capitalists: The Great Shift of Wealth and Power to the East.
"The development of India and China, regardless of how well they cooperate is profound for the rest of the world," he said. "If they do develop a cooperative and complementary relationship, I think the comment that [Indian Prime Minister] Manmohan Singh made at the [April 2005] press conference with Wen is very accurate. He said, 'Together, India and China could reshape the world order,' and that's for sure."
The rise of Japan generated the first wave of Western concern over a shift in the world order, but with Japan's economic integration into the West, the fears were never realized. The emergence of the Asian tigers further pointed to the ease with which a rise in global living standards could be absorbed into the status quo.
But Japan is small and the tiger economies are even smaller, Prestowitz argues. India and China are a different proposition and the world economy will face a huge demand and supply shock as two billion plus people move up the income scale.
"The history of the last 600 years has been the story of the rise of the West, culminating in today's American hegemony," he said. "The story is going to turn around and the story of the next 100 years is going to be the story of the comeback of the East. China, India and the rest of Asia are going to resume something more like the historical position that they once had."
Thirlwell sees the world's response to these challenges as the unknown factor. "The developed world used to tell itself this nice comforting story about how globalization works," he said. "Manufacturing goes offshore to third-world producers and we just move our population into the services sector where the conditions are nicer anyway and we get higher wages.
"Suddenly you have a competitor out there that is still an emerging market but is saying, 'It's not just manufacturing where we compete nowadays, we compete in service sectors, we compete in IT, we compete in software.'"
While still grappling with the thorny issue of what to do about the economic threat posed by China, factoring India into the equation is currently a bridge too far for the world's incumbent powerhouses.
Prestowitz contends that developed countries will find it increasingly difficult to justify having such a high standard of living in a world where China and India can do everything they can for 30 cents on the dollar. "I think at the moment in Europe and the US there is a lot of denial and we have to get over that," he said.
But the changing tide may be inevitable. Despite concern from domestic industries in the West, a protectionist backlash is not a reality in the modern world of increasingly integrated global supply chains. Business pragmatism is likely to remain the order of the day, with the head office chasing the opportunities and the money, irrespective of political cries to take action against rampant emerging markets.
The press conference which saw Li & Fung's managing director suggest China might be losing its advantage, also bore witness to company President Bruce Rockowitz's more pragmatic reason for the increasing attractiveness of other countries. It was not that China was suddenly unaffordable, but rather that when textile safeguards placed on the country last year, the group's "geographically diversified and flexible sourcing network proved invaluable to our customers," he said.
In an increasingly politicized global environment, diversification is an advantage. It is inevitable that India will be a significant beneficiary, but this doesn't mean China will lose out. After all, it has firmly and publicly set its sights on a move up the value chain. If anything, the threat will increase the speed at which China diversifies, forcing Beijing to form even closer ties with New Delhi.
Imagining the future in terms of "China or India" provides a degree of comfort to the developed West; a shift in regional dominance would merely turn Asia upside down. But the prospect of the two countries working together to mutual advantage could have a seismic impact on the world order as a whole.
Three's a crowd: Pakistan's predicament
Pakistan could well be a big loser from closer Sino-Indian ties. As commercial imperatives take hold in an increasingly outward looking China, Pakistan lacks the market, economic dynamism and geostrategic potential India offers.
Islamabad and Beijing have been strategic allies since 1951. In the post-Cold War era, especially following the Soviet withdrawal from Afghanistan, China emerged as Pakistan's most important strategic guarantor against its much larger and long-standing subcontinental rival.
Pakistani President Pervez Musharraf highlighted the importance of the relationship during a visit to China in February. "Pakistan would welcome investments from China more than anywhere else because Chinese are our brothers and time-tested friends," he told business leaders.
China is now a major trading partner with Pakistan, accounting for nearly 11% of Islamabad's imports in 2004. The value of trade between the two countries increased 40% to US$4.25 billion in 2005.
There has also been cooperation on a variety of large-scale infrastructure projects in Pakistan, including highways, gold and copper mines, major electricity complexes and numerous nuclear power projects.
One of the most significant ongoing construction projects is a major port complex at the naval base of Gwadar on the Arabian Sea. In return for providing most of the labor and capital for the project, China will gain a naval outpost on the Indian Ocean with strategic access to the Persian Gulf, thus enabling it to protect sea-bound oil imports from the Middle East. The complex will also feature railroad and possibly pipeline linkages extending into China's western provinces, giving Beijing an alternative means of transporting Persian oil.
However, there are serious concerns that Pakistan will be pushed to the outside as a result of the strengthening China-India relatinship. "Pakistan is a complication in [China's] relationship [with India] because of the long-standing ties between China and Pakistan," said Mark Thirlwell, international economy program director at the Lowy Institute for International Policy in Australia. "China's ties with Pakistan are one of the reasons that India will maintain reservations about what Beijing's long-term game is."
This effectively leaves China with a decision to make. Its role as Pakistan's strategic nuclear guarantor is a liability in terms of bilateral relations with India but, at the same time, Islamabad is not completely superfluous to China's needs. The country could play a role in Beijing's bid to build greater regional power, distracting New Delhi as China makes diplomatic inroads on Bangladesh, Sri Lanka, Burma, Nepal and Iran.
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