Archive for June 22nd, 2007

Comparing India and China

June 22, 2007

Both get some encouragement from Bob Fogel in his recent paper. His conclusions are similar to the ones in various research reports that India and China are going to be the most powerful economies in future. But as this one is by Fogel, a nobel laureate and a very respected economist, one better take note.  

And he says:

The population forecasts are those of the United Nations. The economic forecasts are mine but were influenced by the forecasts of the C.I.A. and The Economist.

He puts forward some very strong viewpoints. As he has focused his research on health and population, this paper provides another insights as well.  The tables 1 & 2 in particular (page 17 & 18) provide a stark picture of economic outlook. We all knew about India and China but look how other nations are doing? EU clearly is a problem. Its share in World GDP decreases from 21% in 2000 to just 5% in 2040!

Fogel cites reasons:….

rapid aging of many EU15 countries means that their dependency ratios (the ratio of economically inactive to economically active persons) will soar. These demographic factors will, by themselves, significantly curtail the capacity for economic growth. However, political and cultural factors appear to be reinforcing the impediments to economic growth. These include limitations on the length of the workweek and increasingly heavy taxes on businesses to support large social welfare programs (that are nevertheless facing bankruptcy) and are threatening to make EU15 firms uncompetitive in the global market.

He adds that it is nit as if EU would not grow but its growth rates are going to be much lower than India, China and SE Asian nations.

The European market will be about 60 percent larger in 2040 than it was in 2000. But the U.S.’s market will be over 400 percent larger, India’s will be over 1,500 percent larger, and China’s will be 2,500 percent larger. Indeed, the Chinese market in 2040 by itself will probably be larger than the combined markets of the U.S., the EU15, India, and Japan.

He then analyses the forecasts for India and China.He says most think political system is a constraint for China and could hinder growth in China. He doesn’t agree and says leaders recognize the problem and are gradually working towards it. The policies are oriented towards stability and he cites number of references, which show things are improving in China. 

I however, take this analysis with a pinch of salt. They may be making policies for stability, but I guess more is to be done.Infact, unlike most research work he says constraints are more for India than China. The summary is:

  • Economic constraints: India has low education standards (which means services and industry would not be able to grow in future) and agriculture sector is in a mess (low productivity and still 75% of population in agriculture)
  • Political Stability: He says comes from 3 sources- unresolved religious tensions, especially between Hindus and Muslims; unresolved ethnic disputes; and unresolved pressures created by the caste system.

Overall a nice short analysis.  Discusses those areas which most economists/research reports do not mention and leave it to assumptions (provided there are no constraints, India will grow at so and so rate etc) . But more insights were needed and expected from likes of Fogel. 

Assorted Links

June 22, 2007

1. List of Cognitive Biases. Useful to understand behavioural aspects in decision making. They form the basis for Behaviour Economics/Finance.

2. Rajrishi Singhal in ET, offers Contract Farming as a more viable solution.

3. Andy Mukherjee offers a politically unacceptable solution for Mumbai.

4. A nice interview of Dr. Rangarajan in BS. But I don’t really quite agree to this:

Do you believe a trade off exists between inflation and growth?
This is a false dichotomy. In my view, over the medium term there is no conflict between lower inflation and higher economic growth. In fact, higher economic growth can be sustained only in an atmosphere of reasonable price stability. Price stability is required for promotion of savings and investment. Sometimes there could be a conflict in the short run. But, that should not be utilised as an excuse for letting inflation go out of hand.

All he is saying is there is indeed a trade-off. Well, you need to maintain price stability to have sustained growth. The moment inflation hurts, growth also falls.

5. T Thomas says India needs elite universities. I think he is way off the mark. India already has its share of elite universities and needs to improve the levels at other colleges and universities. On comparing India with UK is like comparing apples with oranges. We have a huge population and need places where people can get right education, not elitist education.  And why build more? Improve on the existing ones first.

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