TC033-10_Dragon vs Elephant

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THE DRAGON VERSUS THE ELEPHANT

Strategic differences and common success stories

By Suzanne Rosselet, Deputy Director of IMD’s World Competitiveness Center -April 2010

IMD

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Tel: +41 21 618 01 11Fax: +41 21 618 07 [email protected] http://www.imd.ch



THE DRAGON VERSUS THE ELEPHANT I Strategic differences and commonsuccess stories

IMD - www.imd.ch THE DRAGON VERSUS THE ELEPHANT /7

On May 1, World Expo 2010 will open its doors in Shanghai, China. The theme of the exposition

is "Better City – Better Life" and signifies Shanghai's new status in the 21st century as a major

economic and cultural center. More than 190 countries and more than 50 international

organizations have registered to participate, and China expects to receive almost 100 foreign

leaders and some 70 million people – the largest number of visitors in the history of the

world's fairs in terms of gross numbers.

What could be a more fitting venue for this World Expo than China – the country expectedshortly to overtake Japan’s prized position as the second largest market in the world and

described by economist Jeffrey Sachs as the most successful development story in world

history. The size of the economy has doubled every eight years for three decades - the fastest

rate for a major economy in recorded history. A recent report by PricewaterhouseCoopers

forecasts that China could overtake the US economy as early as 2020.

But China is not alone. India is also among the world’s fastest growing economies and

together with China, has contributed nearly 30% to global economic growth as the balance of

economic power continues to shift from West to East. Contrary to popular belief, both China

and India are not emerging economies, they are actually “re-emerging.” China and India have

particular strengths and competitive advantages that have allowed each of them to weather

the global financial crisis better than most countries and to gain ground in the “catching-up

game” with the developed world.

Beware the sleeping giant

India, often referred to as the “sleeping giant”, has emerged as the fourth largest market in

the world when its GDP is measured on the scale of purchasing power parity. Both economies





are increasing their share of world GDP, attracting high levels of foreign investment, and are

recovering faster from the global crisis than developed countries. Each country has achievedthis with distinctly different approaches – India with a “grow first, build later” approach versus

a “top-down, supply driven” strategy in China.

Although China’s income per head is still low at about $3,566, less than one-tenth of what

Americans have, it is more than three times higher that of Indians (just over $1,000). China is

currently the fifth fastest-growing consumer economy in the world, and is on course to

become the third-largest by 2020, with India close behind and expected to move into the fifth

position by 2025. Chinese consumers are indeed putting into practice Deng Xiaoping’s famous

quote, “It is glorious to get rich.” The country recently surpassed the United States to become

the world’s largest automobile market and huge potential remains in terms of future

purchasing power.

China is also the first country in the world to have met the poverty reduction target set in the

U.N. Millennium Development Goals, and enjoys the remarkable success of having lifted more

than 400 million people out of poverty. This contrasts sharply with India, where 456 million

people (42% of the population) still live below the poverty line, defined by the World Bank at

$1.25 a day.

Different means, same end

The two countries’ economic performance has been very differently orchestrated. China’s

growth has been mainly investment and export-driven, focusing on low-cost manufacturing,

with domestic consumption as low as 36% percent of GDP. On the other hand, India’s growth

has mostly been derived from a strong services sector and buoyant domestic consumption.





India is also much less dependent on trade than China, relying on external trade for about 20%

of its GDP versus 56% for China.

There are equally large differences in how deeply China and India are integrated into the world

economy. China has recently surpassed Germany as the world’s biggest exporter, with exports

about eight times larger than those of India.

China remains far more open to the world than India, the latter often “hiding” behind trade

barriers or other protectionist measures. But India is fast becoming a country to be reckoned

with and the nation is definitely on investors’ radar screens as the third most popular

destination for foreign direct investment, after China and the U.S., with FDI increasingly

flowing from the rest of Asia.

“Cross the river by feelings the stones”

Both the above success stories have come about as a result of dramatic reform undertaken in

China and India. Both have adopted a “gradual approach” to development, in contrast to the

“Big Bang” or “shock approach” undertaken by Russia after the break-up of the Soviet Union

in 1991. In contrast to India, China’s development has been driven by a strong state and

implementing reforms in stages. Almost all reforms have been the result of experimentation -

as Deng Xiaoping famously said: “Cross the river by feeling the stones”.

The long-term goal remains the transformation of China’s economy to reduce over-

dependence on exports and investment. The well-being of society also requires greater focus

on healthcare reforms, education, labor legislation and environmental protection, as well as

job creation for the growing labor force.





Public infrastructure in both China and India calls for enhancement of its quality and

efficiency, and to halt environmental degradation. Whereas China has made extraordinary

investment in its basic infrastructure (roads, railroads, airports, ports, telecommunications,

etc.), in the last two years, India has doubled infrastructure investment in its budget to four

percent, but this remains paltry when one considers that China spends around three times as

much.

Both countries are heavily dependent on foreign energy and are strongly pursuing outward

investment to secure additional energy sources. A more ambitious goal would be to target

government funding to provide incentives to make clean and renewable energy projects a

long-term priority. Both countries appear to be moving in this direction.

The challenges that India faces mirror those of China. Both need to progress from low-cost,low-value manufacturing and service provision to higher-value activities, but while China is

striving to move up the value chain in manufacturing first and services next, India is doing the

opposite.

Recent growth recovery in China has mainly been driven by a huge policy stimulus of $586

billion and financed by aggressive bank lending, helping to offset the negative impact of falling

exports last year. Despite excess capacity in specific industries like steel and cement, China

still has great potential for growth, with many new opportunities on the horizon.

The current crisis offers a unique opportunity to encourage more labor-intensive service

industries, reduce over-capacity in many low-cost manufacturing industries, boost job

creation and pursue the path of long-term sustainable growth. During this “recovery period”, it





will be interesting to see how China and India invest in the economic, business and social

structures which characterize more mature and advanced economies. Will India’s “slow-moving elephant” ever catch up with China’s “roaring dragon”? It may just be a question of

time.

In the meantime, visitors from around the world can get a preview of just how far China has

already come during the Shanghai Expo.

Suzanne Rosselet is the Deputy Director of IMD’s World Competitiveness Center. The annual

World Competitiveness Yearbook results will be released on May 19, 2010.





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