G7 touts China as favourite in Asian superpower stakes, but India may be better bet
February 20, 2005
Everyone has an opinion on who will lead Asia in the years ahead, including the Group of Seven (G7). This month, it clearly seemed to put its money on China.
The biggest industrialised nations haven't exactly said India will play second fiddle to China; they invited Asia's fourth-largest and second-largest economies to their February 4 meeting.
Yet the G7's almost linear focus on China and its currency policy leaves little doubt about which one it's betting on. Ditto for the policy making elite attending this year's World Economic Forum in Davos, Switzerland.
Yet G7 ministers should think twice before downplaying India's potential. Investors, too.
If anything seems clear, it's that Japan is less Asia's future than its past.
China is the heir apparent, according to conventional wisdom. Its 9 percent growth is largely behind Asia's rapid growth. It's attracting the vast majority of the world's foreign direct investment, a dynamic that many observers think will continue.
Yet Daniel Lian, a Singapore-based economist at Morgan Stanley, can think of at least two reasons not to count India out.
One, the world has a dismal record of predicting the next economic megatrend. Two, India could spring a few significant surprises that haven't entered the calculations of global investors.
Remember how everyone assumed Japan would lead the so-called Pacific Century. Now, investors and businessmen are eyeing a China-centric one.
The decline of Japan's economic might, China's rise since 1994 and the collapse of the Asian Tiger economies in 1997 altered the dynamics for this century. China morphed from a poor economy into the world's top investment destination, and many observers expect that to continue.
It's not all good, perhaps.
A big question mark is China's banks, which have been undermined by an institutionalised misallocation of capital with little regard for international norms of risk management and the extension of credit. Rating agencies think it will cost several hundreds of billions of dollars to resolve their bad loans.
Enter India, which has a measure of economic and political stability that will take China years to develop.
Hovering constantly above China's economy is whether it can manage the transition from socialism to capitalism, and whether the Communist Party can hang on to power.
India, for all its warts, isn't preoccupied by such risks. Its troubles include massive national debt, high poverty, an inefficient and bureaucratic government and dodgy infrastructure.
Yet India's progress in creating a living, breathing economy is more impressive than China's. It has an entrepreneurial spirit that produced Wipro, Infosys Technologies and Dr Reddy's Laboratories.
India's markets are also far more developed. China, for example, doesn't have much of a bond market, while India does. Indian companies have big head start and a significant advantage when it comes to raising capital in the debt markets. What China must build from scratch, India already has up and running.
India's big push into export-orientated manufacturing is under way. While China is clearly ahead on that count, India's efforts could pay important dividends in poverty reduction.
It is a means of creating jobs for those without the skills to enter India's software and call centre industries.
Also, Lian says, the West ultimately could favour India over China. His reasons include India's well-established western-style democracy, the belief it is better equipped to protect intellectual property rights and the view of China as a geopolitical competitor.
Yes, China has vast potential, but so does India. You'd think the G7 would be hedging its bets on which economy will rule Asia 15 years from now. It may not be the one they think. - Bloomberg
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