Will India steal China's thunder?

• Position: Economic development

For most of the last decade, global strategists have fixated on China's potential to become a global economic powerhouse. What are the chances that while China continues to grow, India turns out to be the major new powerhouse in the global economy? After all, India enjoys

* an educated class far larger than that of China;

* a huge English-speaking middle class population;

* a relatively predictable legal system;

* the likely potential for fewer demographic problems than China; and

* a globally strategic location allowing it to become potentially an important strategic partner with Europe and the United States in defusing pressure in the Middle East.

Towards the end of the 19th century, the talk in official London circles was that at least one of two emerging economies would likely become a dominant industrialized power. The two were the United States and Argentina. Indeed, a large body of opinion was betting on Argentina. Today, no one denies that China in the 21st century will assume a notable role in the world economy. But has India been given short shrift? Will it turn out that India steals China's thunder? Or will all the problems that have hindered India in the past, including slow infrastructure spending, continue?

BARTON M. BIGGS

Managing Partner, Traxis Partners

India will steal China's thunder. In addition to all the reasons cited in the introduction, there are two other immense advantages that India possesses. The first is its democratic political system, and the second is the mature and transparent state of its financial markets. Without these two crucial ingredients of a great nation, China's social stability will always be questionable and its capital allocation process will be flawed. Neither will be smoothly or quickly implanted by China's Communist leadership.

India has been a democracy for decades, and a big, sloppy, inefficient one at that, plagued by weak, often transient coalition governments. Its fabulous growth trajectory has been achieved in spite of, not because of, government. In the early stages of an emerging country's development, a "benevolent" dictator and a strong central government has always been the formula we as investors look for. A young, rapidly growing economy needs to make tough choices expeditiously. It's difficult for a government that serves at the whim of the people to impose pain and demand sacrifices.

India has had for years functioning and transparent securities markets and an uncensored business press. Capital markets are a crucial part of the resource allocation system as is the dissemination of real news and true information. China has neither although it is now trying to remedy this problem. It will not be easy to nurture this fragile flower in the midst of a command political system and a command economy.

China now risks the backlash from fifteen years of singularly successful economic reforms. Although growth has been spectacular, it has created acute income inequality. Now increased household financial burdens for education, health, and housing have produced a fierce debate on the benefits of pro-market reforms. In terms of domestic tranquility and a stable society, the contrast between India and China is striking. China will eventually make the transition to a fair, capitalist, democratic society and the odds are that it will be painful and costly for the Chinese people, for its growth rate, and for foreign investors.

3. FRED BERGSTEN

Director, Institute for International Economics, and coauthor of China: The Balance Sheet--What the World Needs to Know Now About the Emerging Superpower (Public Affairs Press, 2006)

India will not "steal China's thunder" in terms of its impact on the world economy because, even if its population comes to exceed China's and it matches China's growth rate over the next couple of decades, the closed nature of its economy will severely limit its global importance.

A country must meet three criteria to become a driver of the world economy: size, dynamism, and openness. India meets the first two. However, there is a vast gulf between China and India in terms of openness to the world economy:

* China's imports equal about 30 percent of its GDP, up from 5 percent when it launched its reforms in 1978. This is more than double the level of the United States and about triple that of Japan. The comparable number for India is less than 15 percent.

* China still maintains important trade barriers but its ratio of customs receipts to the total value of imports, the best measure of effective protection, is only about 2 percent. The comparable number for India is about 18 percent.

* Even China's applied level of tariffs averages only about 10 percent, compared with about 30 percent in India.

The results of these differences are stunning. The annual increase in China's trade is more than 50 percent greater than the total level of India's trade. China receives almost twice as much inward foreign direct investment each year as India has received in its entire history since independence in 1947. China has accounted for more than 12 percent of the entire increase in world trade over the past five years, almost twice as much as the United States or any other country and seven times as much as India. It is thus virtually inconceivable that India will "steal China's thunder" in terms of impact on the world economy at any point in the foreseeable future.

JAMES SCHLESINGER

Former Secretary, U.S. Defense and Energy Departments, and former Director, Central Intelligence Agency

History is not predetermined. In a world of uncertainty and unpredictable change, almost anything can happen. Chinese growth could be stalled by internal unrest, or stopped by war or even loss of unfettered access to the American market. Such things are possible, but unlikely.

India has the advantages cited. Yet it had a later start than China, particularly in manufacturing. Its demographic burden is excessive population growth. As a democracy, it is obliged to yield in turn to various interest groups. Tensions with Pakistan--or even with its internal Muslim population--could readily grow. No more than with China can one be assured of smooth sailing.

India likely will do quite well. Yes, bedazzled by China, the commentators have to some extent given India short shrift. Nonetheless, it is most unlikely that India will steal China's thunder. However, it will emulate China and share some of its thunder.

India will steal the spotlight

MAYA BHANDARI

International Economist, Lombard Street Research

The Indian economy is poised to take off just as the Chinese "hard landing" is getting underway. As China's government-led and export and investment driven developmental model reaches its limits, India will almost certainly steal the spotlight, for these two reasons: First, the Indian growth model is far more robust than its Chinese counterpart and should take the economy on a much higher growth trajectory; and second, China faces more perilous challenges that will be harder to overcome.

Where India has successfully pursued human capitalled growth, China has relied on foreign direct investment to fuel growth. Although China's strategy has certainly borne fruit, in the medium to long term, technology or knowledge-driven growth is a much more powerful growth engine. India's effective banking sector and stock market--crucial financial infrastructure to support any high-growth economy--are almost absent in China. China's financial system is primitive, with most banks in the hands of the state. Indeed, this is the primary cause of the over-investment and overheating that is likely to undermine Chinese growth (and a key reason for its shortage of innovative firms). India certainly faces its own challenges, including poor infrastructure, stifling labor regulations, and the need for agricultural reform. But against this, China must contend with a rapidly slowing economy, an essential but difficult transition to democratic governance, and even more difficult banking and capital market reform.

GLENN HUBBARD

Dean of Columbia Business School and Russell L. Carson Professor of Finance and Economics, Columbia University, and former Chairman of the Council of Economic Advisers under President George W. Bush.

History and economic research tell us that the story of long-term economic growth is a story of successful economic institutions that promote entrepreneurship by protecting property rights and investors and advancing transparency and openness. The presence of entrepreneurship-promoting institutions explains the dominance of the United States in exploiting recent technological innovation; the absence of those institutions explains the failure of resource-rich Argentina and Russia to live up to their potential throughout the twentieth century or in recent years.

In Mao's China, real GDP per capita grew at an average annual rate of 1.8 percent. From the beginning of Deng Xiaoping's reforms in 1978, China's per capita GDP growth accelerated toward nearly 10 percent in recent years. This performance reflects greater openness and entrepreneurship. But China will not maintain this growth without more efficient capital markets (requiring greater investor protection) and a stronger banking system (requiring less official direction of credit). Such a warning is not abstract, as Japan's recent lost decade of growth prior to financial reform shows.

The improved performance of India's economy over the past quarter-century offers, as with China, an opportunity for both celebration and reflection. The doubling of India's GDP over the past decade has elevated living standards. But institutional reform is needed, with the development of industries hindered by labor market regulations pertaining to firms in the "organized sector" and slumbering state-owned enterprises. Such reforms, combined with India's well-developed private sector, would raise investment in growth.

The U.S. government rightly...