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Wednesday, October 15, 2003

The Coming of China and India

The scale of the future impact of China and India continues to make waves. This time it's the turn of Roger Bootle. Whle in principle I agree with him that the expansion of trade is in everyone's interest, I still think there is a question about how we will pay for all the imports (and remember we are talking abut both China and India, and both manufacturing and services). How this will all pan out, only time will tell. Thos who rush in and feel they no all the answers in advance may be making a big mistake. (Thanks to Reuben for the link).

We are by now accustomed to the idea that our national statistics are highly unreliable, but China's are in a different league. Until recently it has been common to suppose that the official accounts of Chinese growth running at 8 per cent per annum systematically overstated the true rate. So it was striking to hear a story last week to the effect that Chinese official statistics may have been grossly under-stating growth. According to some estimates, the Chinese economy may be growing at some 11 per cent real per annum. China is already a burgeoning presence on the world scene so what does the future hold?

The place to begin, I think, is with the past. It is widely known that China was once streets ahead of the West technologically, but when I recently came across the gross domestic product figures, the sheer scale of the discrepancy took my breath away. According to the great authority, Angus Maddison, in 1500, China and India each accounted for about a quarter of the world's output and the UK for only about 1 per cent. By the early 19th century, although India had already begun its long relative decline and the UK its long relative ascent, India's economy was still some three times the size of Britain's. Once I had grasped it, this fact immediately solved something that had puzzled me for years, namely how could the conquest of India have meant so much for Britain? After all, in the modern world, although it has had a huge population, India has had a smaller economy than the UK. But not in the 19th century. In relative terms the Indian economy was enormous. You can readily see how the control of such a large economy by a small set of islands off the European coast was such a sensation. No wonder India was the jewel in the crown.

China, of course, was never formally part of anyone's empire, but for much of the 19th century she was dominated by the Western powers, including Britain, and again the chart shows why she was such a tasty morsel for them to pick over. In the 20th century her relative decline continued, spurred by decades of bad government, unrest, war, civil war and finally communism. This culminated in a period of economic madness and self-destruction under Mao which has no parallel in history. In 1950 China's GDP was below Britain's. But the recent past is a highly misleading guide to China's latent strength. And now China is on the way back. In the decade to 2002 China's average rate was over 9 per cent and India's 6 per cent, compared with 3.2 per cent for the US, 2.9 per cent for the UK and a miserable 1.3 per cent for Germany. At 9 per cent growth, China's GDP will double in eight years. Indeed, if we assume that China's growth rate exceeds that of the United States by 4 per cent per annum, then China will overtake the US as the world's largest economy in about 20 years.

What will the consequences be? Most business people are extremely fearful. What they fear is much lower Chinese labour costs. Many of them, along with the majority of men and women in the street, fear losing just about all of our industries. Indeed, now that India is increasingly attracting service activities, they fear that much of the service sector of the economy will migrate East as well. In that case, what will be left? In short, what they fear is nothing less than complete economic failure and impoverishment.

But their fears are unfounded. Of course, if China grows much faster than us then we will lose relative position - and we will lose political power and influence as a result. But this is not the same thing as economic well-being. Even as we become relatively worse-off we can become absolutely better off. Indeed, we shall become better off because of China's advance. International trade is not a game of winners and losers. Everybody gains.

We will gain from being able to buy Chinese produced goods at lower prices than we can produce them ourselves and we will also gain from being able to sell goods and services into the rapidly growing Chinese market. The truth is that we gain from other countries' enrichment just as they gain from ours. In my book, Money for Nothing,* this is what I call the wealth spiral.

Plenty of business people, though, doubt that they will be able to sell much to China. In particular, they fear that China will be another Japan, taking our markets but not opening up theirs. I am no fan of Japanese trade policy but we should regard the rise of Japan as an economic blessing from which we have benefited greatly. We have enjoyed the flow of cheap and high quality Japanese goods and the flow of Japanese investment. And although their markets could be a good deal more open than they have been, over the years of its economic advance Japan substantially increased its purchases from the West, including Britain.

And China is not protectionist in the Japanese mould. Although we hear much about the huge Chinese trade surplus, particularly from whingeing American manufacturers, the overall Chinese current account surplus is comparatively modest. The bilateral trade surplus with America is large but that owes much to American over-consumption and to the pattern of trade flows. Bilateral balances are for the birds.
Source: Daily Telegraph

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