China and India are the rising stars of this generation.  Before them it was Japan, and before Japan it was America.  But this time two stars rise together, with about 1/3 of the world’s population in tow.  Barring economic disaster, some analysts believe that by 2050 China will overtake America as the world’s largest economy, with India in third place.  Their continued growth (China has been growing at 9% for decades, India at 6-7% recently) relies on a young and growing population, high savings, and massive amounts of untapped potential.

But I find it interesting how these two nations are rising in very different fashions.  First, I’ll discuss China’s and India’s strengths, with each nation’s strengths being something the other nation generally lacks.  Then I’ll conclude by talking about the two nation’s future relationship.

China is a “single-minded” one party government: single-minded because the government is completely focused on development and stability.  This attitude has two effects: it fosters an attractive location for investment and it makes it easy to develop infrastructure.  Because the government’s main focus is uninterrupted economic growth, bad economic policy will often change quickly at the behest of investors.  For example, company law is under constant revision to meet the demands of corporations and the stock market and investment sectors are constantly changing to meet the demands of investors.  As a result, foreign companies perceive China as a stable and increasingly responsive place to invest.

Infrastructure is easier to build when the government has the authority to tell entire cities to move out of the way for it—the Three Gorges Dam is an example.  There is little argument on how to spend money, so the money for infrastructure growth is easily acquired.  As a result, airports, subways, and freeways are sprouting up all over China, giving the nation a solid foundation for furthered growth.

On the other hand, India’s bureaucratic democracy does not make decisions nearly as quickly.  However, India’s democracy has fostered a freethinking and innovative society along with a high social value for “soft capital.”  Something that China lacks is a productive, innovative technology sector.  India houses research and development bases for Cisco, Motorola, and Hewlett-Packard—and R&D outsourcing to India is expected to quadruple by 2010 to $56 billion.  Besides that, India’s soft capital, or non-measurable capital, like respect for intellectual property, rule of law, commercial code, anti-corruption, and clear and even-handed policies, are also strengths that India has over China.  Finally, India has turned one of its weaknesses—a comparative lack of foreign investment—into a strength.  Since they do not have the massive amount of capital to invest into manufacturing that China has, India has invested more frugally in the service sector.  And it shows: “The average Indian company posted a 16.7% return on capital in 2004, vs. 12.8% in China” (Business Week.)

So China, with its massive cheap labor force and loads of foreign investment, has become the manufacturer of the world.  India, with less investment and more soft capital, has become the world’s new innovator.  These two different economies seem to compliment each other.  For example, an Indian company could manufacture in China and do R&D at home or vice versa.  In fact, Motorola has already taken advantage of this complimentary situation by building factories in China and R&D facilities in India.

Will this complimentary relationship continue?  It is hard to say.  Both China and India are racing to shore up their respective weak spots—which are often the other nation’s strengths.  Does that mean conflict is inevitable between the two rising stars?  I don’t think so.  I believe and hope that competition will be the word, not conflict.  Still, competition is not easy.  Over a decade ago, Japan and America were competing, now it seems the two nations have settled into stable relationship.  Now China and India will compete with each other—and the rest of the world.  Let us hope, after a few bumps, that the world economy will accept the two new world giants into a stable relationship.

Source: Business Week: China and India