Sunday, April 29, 2007
The Dragon and the Elephant
Posted by David Smith at 11:00 AM
Category: David Smith's other articles


This is a piece from The Sunday Times based on my new book, The Dragon and the Elephant, now available on Amazon - see the link on the left.

Two or three years ago I was talking to some business people when the conversation became animated. “What,” somebody said, “about China and India?” There was a nodding of heads, and a view emerged that was pessimistic, even fatalistic. Manufacturing jobs were being lost to China at an alarming pace, and the service sector was on a similar passage to India.

A seismic shift was taking place and things would never be the same again. Where would the jobs of the future be? China and India, with their enormous pools of cheap labour, increasingly educated workforces and access to the latest technology, that was where. What do we do when China and India can do everything?

Whether it was that or the plastic “Made in China” badminton set from Marks & Spencer – made at such low cost it was given away free with a few tubs of prepared salad – a new angle on China and India popped up virtually every day. India was grabbing, not just back-office and call-centre jobs but everything from stockbrokers’ research to medical testing and diagnosis. What hope for the young people of Britain, America or Europe? Should everybody start praying, and learning Mandarin?

The story of China (the Dragon) and India (the Elephant) did not suddenly emerge; China’s economy has been growing at just under 10% a year for nearly three decades and India has been doing its best to catch up for a decade and a half. But they have now achieved critical mass, and together they represent the biggest power shift of our lifetimes.

They are, to start with, the biggest thing ever to hit the world economy. Two huge countries, each with populations of well over a billion (1.3 billion China, 1.1 billion India) have GDPs growing like tigers – 10-11% China, 8-9% India – and that has never happened before. Perhaps the decisive statistic is provided by Richard Freeman, a professor of economics at Harvard: the emergence of China and India and the collapse of the Iron Curtain has effectively doubled the number of people actively engaged in the world economy.

Having said China and India are the biggest thing to hit the world economy, it may seem perverse to argue that we should not be overimpressed. More than a quarter of the world’s 100 biggest cities are in China and India, and many of them are frighteningly large. Chongqing on the Yangtze is becoming the world’s biggest conurbation, with 31m people already and a population that has been doubling every 10-15 years.

But we should put these populations into perspective. The reality of life for most Chinese is not urban living or gleaming new factories owned by multinationals. For the majority, an officially estimated 750m, it is the often grinding poverty of rural life. Even in 2030, according to the Chinese government’s own estimates, 600m people will still live in the country. They are not part of the world-beating competitive labour force the rest of the globe fears.

This is even more the case in India, where more than 70% of the population lives in the countryside, and where the rural population grew by 200m over the period 1981-2001. The world has become obsessed with India’s IT and outsourcing sector, but it employs only 1.3m people directly, barely 0.1% of the population.

Big populations need feeding and warming, however, and China and India will stretch the world’s resources. China now outconsumes America in four of the five basic commodities – grain, meat, steel and coal – oil being the only exception. China consumes nearly 50% more grain and twice as much meat as America. Half the world’s pigs are in China.

China is second only to America in energy use. India is the fifth biggest user of energy. Extrapolate the existing growth figures and within a few decades China would be consuming more oil than the world is capable of producing. It will not happen, of course, which is why I argue that, despite the enormous environmental challenges these countries pose, they won’t destroy the planet.

Their growth will require lots of energy, and it will produce lots of carbon emissions. Roughly, every 1% of economic growth in China and India requires an increase of 1% or more in energy use, compared with half or a third of that even in profligate America.

But that does not mean efforts to cut emissions in the West are futile. The rise of China and India has brought greater urgency to the task of containing global emissions. It is possible, indeed, to combine rising energy demand in China and India with a drop in global emissions. Price Waterhouse Coopers did just this in a set of projections looking forward to 2050 in which global economic growth could average 3.2% a year but carbon emissions decline by 0.4% annually.

How will the two leviathans change the balance of power geopolitically? They will certainly flex their diplomatic and military muscles, making current groupings such as the G8 (which includes neither China nor India) and the UN security council (whose permanent membership does not include India) appear redundant.

But they will not start a new cold war, despite the fact that both are nuclear powers, and each have well-known tensions over Taiwan and Kashmir. Unlike the former Soviet Union, China has no interest in risking the stability of a global economy, given its own interdependence with the rest of the world. India is genuinely not an aggressive power. Any war with China and India will be fought on the economic battleground.

For multinational companies, of course, the prospect of new markets of over a billion people each is highly alluring, and both countries will provide huge opportunities. On a visit to Beijing, I was staying in a hotel attached to a new shopping mall where Prada, Gucci, Armani and Ferragamo, among many others, offered their wares at prices that looked far too high for the hotel’s international guests, let alone the locals, but the shoppers were almost exclusively Chinese. India is also a fast-growing market, with many of the same features as China – a rapidly growing middle class and an expanding elite of the super-rich.

Having said that, we should put the newly prosperous of both countries into perspective – on average they are and will remain relatively poor. On the measure used by the World Bank and other international bodies, China’s GNI (gross national income) per capita is just $1,740 (£870), while India’s is much lower, at a mere $720. Think about that for a second. India’s average income is less than two dollars a day which, given that it has quite a few billionaires and a growing middle-class, means it also has plenty of very poor people. China does better, but still averages less than five dollars a day.

For all the talk of billionaires, millionaires and expanding middle classes, neither country yet makes it into the world’s top 100 in terms of average living standards, however measured. That will change, but not as much as people think. Even if everything goes pretty much right for China and India, their citizens will be a long way from being rich by the middle of the century.

Will everything go right? It can be guaranteed that both countries will hit economic and political turbulence. How they handle it will do much to determine how far they rise. Some argue that China’s political system could not survive a significant economic downturn; others that the Indian miracle is much more fragile.

What the rest of the world should not do is add to their problems by pulling up the drawbridge. The political pressures are growing, in America but also in Europe, for protectionist measures against these low-cost emerging economic superpowers.

That would be a big mistake. Their emergence is a triumph for the world economy. They bring threats but also enormous opportunities. The biggest mistake we could make is to try to put them back in their box.

From The Sunday Times, April 29 2007


When is the book going to be available in the States?

Posted by: Rob Spear at April 29, 2007 08:53 PM

That's a good question. It will soon be published in Canada, under a slightly different title, but no US publisher has yet expressed an interest in it.

Posted by: David Smith at April 29, 2007 08:59 PM

I agree with the economic arguments for globalisation, and the potential for global wealth creation.

What seems to be less well understood is the process of managing the shift from today's structures to a fully globalised structure.

For instance, I work for a large European electronics company who for the last 7 years have been cutting the European and North American workforce whilst hiring literally thousands of engineers in Bangalore and Shanghai.

BTW, all aspects are now being offshored from production through to R&D and Innovation.

Ideally large companies who are implementing these shifts should be managing the process to make maximum use of their Western employees.

Maybe govt should step in ?

Obviously I am taking all these issues into account when advising my children on career choice. So I fully understand the current shortage of students progressing into SET in the UK.

Does your book give insights into what Western high cost labour should be doing in the transition toward globalisation ? Guess I should buy it and see :-)

Posted by: Nick Thorne at April 30, 2007 09:24 AM

1) David, what happens when, and if, there is a global economic downturn? The increased supply of global labour has thus far moderated wage growth. In a downturn, will it not mean that wages actually fall and keep on falling? Will the Eastern Europeans and other migrant labour exacerbate a UK downturn in the economy?

2) The missing point in all of this is how the indigenous working classes will react to the growing levels of inequalities. The elections this week will show if there is a ground swell. I still have my doubts whether the working classes are capable of mobilising themselves to protect their interests

Posted by: Ash at May 1, 2007 07:21 AM

Having travelled both in China and India, albeit on holiday, in the last year, I can fully appreciate the points that come over from the extracts of your book that I have read. As one passes through the villages on the state roads in Rajastan one can't help feeling that this whole slice of Indian civilisation will be left behind in the march toward modernisation. Maybe the caste system can be partly blamed for this both in ignoring the poverty but also on the part of the impoverished for ignoring their plight. India is full of paradoxes!
The striking thing about the Chinese, particularly in Beijing, seemed to be their inability to smile. Also chilling wasw the attendance of an 'extra set of ears ' wherever we went ! China is in danger of destroying valuable natural resources such as water supplies because of progress, a worrying omen for some of their neighbours! Interestingly, whilst swamping Western markets with cheap goods and destroying Western imanufacture base, they can pull the plug on cheap prices and have more than enough in their home market to satisfy production (once a nation wide power supply is established).

Posted by: Paul Wild at June 6, 2007 08:35 AM

Thanks for your observations - I know what you mean about those extra sets of ears.

Posted by: David Smith at June 6, 2007 07:05 PM