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China and India: Same Globalization Road, Different Destinies

Some analysts suggest that China and India are on a path to perpetual cooperation. Both are populous Asian nations experiencing high rates of economic growth with more exposure to international market forces. However, diverging political and economic ambitions could drive the two powerhouses into increasing rivalry over markets, natural resources or strategic partners, suggests Scott MacDonald, a senior partner at Aladdin Capital Management. The current industrial division of labor has China dominating manufacturing and India monopolizing the service sector, but both countries plan to compete in industries pioneered by the other. Both states have contrasting political strategies: China tries to marry economic openness with silencing political dissent, while India has the release valve of lively democratic politics, along with corruption and ethnic violence. Transfer of power in India offers more certainty than that in China. Surface similarities of two emerging economies, both juggling globalization, conceal potential conflict. – YaleGlobal

China and India: Same Globalization Road, Different Destinies

Ambitions of Asia's two giant emerging economies could lead to rivalry
Scott B. MacDonald
YaleGlobal, 24 October 2007
Future partners? Authoritarian China (top) and democratic India share many
similarities, but display contrasting styles and methods in economics and the workplace

STAMFORD: In late September 2007, a leading financial analyst opined that Chindia "stands for China plus India, rather than China versus India." That may be so for now, but over time the "plus" will evolve to "versus" on many levels. For all of the talk around the idea of Chindia - the merging of China and India into one great complex of dynamic economic development - the path of Asia's two giants is more likely to diverge.

Simply stated, China and India are different countries that happen to be on the same road of globalization. The contrasts will only sharpen as Asia's two most populous countries pursue national interests that are likely to collide over issues such as access to markets, natural resources and strategic partners.

The core differences between China and India are political. China's political leadership confronts substantial challenges in the management of popular aspirations: It must maintain rapid economic growth based on investment and exports, at the expense of wages and consumption, while controlling most aspects of political expression. The downside is that demonstrations and riots have become the domain for discontent. In 1989, pro-democracy demonstrations at Tiananmen Square rocked the government until they were crushed by the military, an event that left its mark on the Chinese Communist Party.

In contrast, India's approach allows for more open debate over societal aspirations and goals. When Indians are discontent with government policies, they have the option to change leaders peacefully. The downside is often unwieldy coalition governments that make implementing policies difficult. All the same, India has avoided the regime-threatening upheaval of a Tiananmen Square and Indians retain confidence in using the ballot box.

Determining which approach has been more successful in improving people's lives and managing the process of globalization depends on the set of factors examined: economic growth, poverty reduction, political stability, business expansion, and conflict or compromise.

In China, the high rates of economic growth have led to substantial decreases in poverty rates while, in India, poverty reduction has been more modest. According to the World Bank and International Monetary Fund, between 1981 and 2004, there was an estimated decline in the absolute number of extreme poor in China of more than 500 million people, while in India, the number of extreme poor remained roughly constant.

Indian democracy's embrace of globalization and more market-oriented policies have not reduced extreme poverty, while China's authoritarianism has delivered the economic goods. But India's open-door economic experiment has been in motion for a shorter period of time.

In addition, there have not been the extreme ranges of socioeconomic experimentation in India as in China. That experimentation included the infamous Great Leap Forward, the ill-fated Backyard Furnace Campaign and forced communalization, which resulted in famine and the death of an estimated 30 million people. Also, India's relative lack of achievement in many social areas is largely unrelated to globalization. Rather, the delivery of social services is complicated by domestic political problems, bloated bureaucracies and corruption, all of which predate globalization. If anything, globalization has made Indians aware of what can be achieved, especially when their nation is compared to China.

Although India's political life is complicated by corruption and religious/ethnic differences, the country's political system has managed to uphold an electoral system that provides the foundation for much of the give-and-take of parliamentary politics. The system allows an escape valve for public frustrations. Unlike its neighbors, India has not been subject to military coups or civil wars. Even when Indira Gandhi declared the Indian Emergency in 1975 and the country flirted with authoritarianism, India steered back to elective politics in 1977.

The two nations loom large in the geopolitics of Asia. China has a close relationship with Pakistan, assisting in the development of that country's nuclear program, and building influence in Burma. This is not to argue that India and China sit on the edge of a new conflict; if anything, relations are probably the warmest they have been in a long time.

Sino-Indian relations started to thaw in 2000, gaining greater momentum with the visits of top officials from both countries, including Prime Minister Atal Bihari Vajpaypee's 2003 travel to Beijing. In 2004, trade between the two countries topped $10 billion for the first time, and in 2006, Nathula, an ancient trade route that was part of the historic Silk Road, reopened for the first time since the 1962 Sino-Indian War.

The Chindia theme was underscored in 2006, when China's Premier Wen Jiabao declared that China and India will be a source of economic power in the 21st century: "Cooperation is just like two pagodas - one hardware and one software."

Chinese and Indian businesses are likely to become rivals. Currently China easily dominates in manufacturing, while India dominates the service sector. However, China seeks to move further into services and India into manufacturing. Indeed, India has been consistently criticized for not further developing its industrial sector to make a more balanced economy. That process is beginning to gain momentum as reflected by the globalization of such firms as Tata Motors (automotives), Vedanta Resources (metals and mining), Hindalco (metals) and Dr. Reddy Laboratories (pharmaceuticals). From oil exploration to revitalizing Africa's mining industry, Indian and Chinese companies increasingly bump into each other on faraway points of the map, such as Zambia, West Africa and Latin America.

While the two-pagoda theme, where China runs the industrial pagoda and India the service one, serves as a cordial veneer to Sino-Indian relations, there remains considerable cause for rivalry. China started the processes of globalization and economic development earlier and has a more broadly diversified export base. India is catching up, driven by its service sector, and is also making headway on the industrial side. Furthermore, Indian takeovers of Western assets occur with much less opposition than China's as the South Asian country is a more comfortable fit - politically, as a fellow democracy; linguistically, with English; and socially, as a member state of the Commonwealth. China has little desire to strictly remain the hardware pagoda, and India has little intention to remain the software pagoda. Both countries have competent companies moving into both sectors.

In a sense, China seems to desire that India remain a regional power that can be contained. For its part, India has greater aspirations, especially as its companies enjoy a period of global expansion. The aspirations of the two nations portend a future of growing rivalry, in which both countries will seek to advance their national interests generally by offering market and capital, and through the projection of soft power, but with military power in the background.

Considering the old pull of border issues and the competition over natural resources as well as a still-fluid international system, the looming issue for Asia and the rest of the world is how New Delhi and Beijing will manage the ups and downs of tectonic economic shifts and the potential for their competing world views.

We do know that India's democracy will result in a change of government in a relatively orderly fashion; changes of government in China are much more of a Byzantine affair, and discontent with market-Leninism opens the door to decisions being made in the street rather than in the voting booth, the ramifications of which will impact everyone in Asia and put to rest any notion of Chindia condominium.

Scott B. MacDonald is a senior partner and head of research at Aladdin Capital Management, LLC, in Stamford, Connecticut, and currently writing a book on Asia and globalization.

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