China, India Center of Global Economy

Asia — primarily India and China — is now the center of the economic universe, according to Luis Miranda, ’89, president and CEO of IDFC Private Equity. “China and India’s 2.4 billion people are soon to become the world’s number-one and number-three economies, controlling 20 percent of the world’s growth rate,” Miranda during a panel at the 56th Annual Management Conference at Gleacher Center on May 16.

A fascinating glimpse of how each country has handled various growth issues can be found in an Asian Development Bank study in which Indian economists were invited to examine China, and Chinese economists to examine India, he said. “It was interesting to see which sectors each economist looked at because it tells us the stories of what India sees as the strengths of China and what China sees as the strengths of India,” Miranda said.

The Chinese economists focused on India’s education; software and Internet technology; finance reforms; entrepreneurship; and economic growth and development. The Indian economists examined China’s infrastructure, labor market, manufacturing, state-owned enterprise reforms, and the growth of price stability, Miranda said.

China and India both house large domestic economies and disparate regions within their countriesmust ultimately become integrated — both with each other and with their booming export economies — but that is largely where the similarities end, said Brian Barry, clinical associate professor of economics.

While China has increasingly opened its economy since 1978 and attracted foreign direct investment, India has done so more slowly. Also unlike China, India has long been a complex, vibrant democracy, he said. Despite similar demographics, China’s aging population more closely resembles that of South Korea or Japan, while India boasts a very large young population, Barry said. China’s economy is rooted in manufacturing and India’s in services, but India’s young population poses huge potential in manufacturing, he said.

India needs to reform its labor markets and build better infrastructure, Barry said. “India’s labor rules make it especially hard to fire people,” he said. “It’s hard to close down a business and it’s often very scary to start a business, so India has a very large informal sector.”

In China, the legacy of state-owned enterprises causes the most worry about its banking system and financial sector, Barry said. “The question is, what happens with the unprofitable businesses previously owned by the state? If you look at the big picture, this is basically a question of credit being channeled to less efficient enterprises that have some sort of central or local government tie, whereas domestic private enterprise tends to be much more starved for capital.”

The previous economic cushion China’s growth afforded the U.S. poor will likely reverse in the wake of the subprime lending crisis, said Atif Mian, associate professor of finance. “The net effect of the underlying growth trends in the United States — increasing inequality in income growth between the top 20 and bottom 20 percent — will likely become a much bigger force in the next few years than in the last 10 or 15 years,” Mian said.

China previously muted the effects of this growing inequality by giving the American poor more ability to borrow and relatively cheaper prices, he said. “Just as home prices appreciated a little more for poor households before the market collapsed, now they are going to drop relatively more for poor households,” Mian said. “Because the United States must export more to get rid of its current account deficit, Chinese currency will appreciate more and prices will increase more for the poor because they tend to buy more of those lower-end goods China has been exporting to the U.S.”

--Phil Rockrohr