Being Street Smart July 30/05

by Sy Harding
July 30/05

INDIA WILL OUTSHINE CHINA!

It's quiz time. Which two foreign economies, outside of the U.S., will be the largest in the world in 20 years? Most people would quickly put China at the top of the list. For second place it would probably be a toss-up between Japan and Germany.

Over the years I've written a number of times about the stunning growth of China's economy. That it could take place within a communist political system has been one of the surprising economic events of our times.

However, way back in 1978, Chinese leadership began slowly moving China's economy from an inept Soviet-style, centrally planned and controlled economy to a more free-market oriented system, while still retaining strict Communist control. It began permitting a variety of private enterprises in services and manufacturing, and gradually opened its economy to increased foreign trade and investment. The result has been that China's GDP has quadrupled since 1978, and really surged in the last few years (creating a lot of excitement, but also concern). For much of China's population, living standards have improved dramatically, and personal freedoms have increased, even as political controls remain tight.

In recent years, as China's participation in world trade has surged, that trend has been extended in a straight line into the future, and it has been widely forecast that China will eventually surpass the U.S. economically, and probably militarily.

However, trends only continue until conditions change, and perhaps the world needs to look in a slightly different direction. India probably has a much better shot than China at eventual world economic dominance.

Here are some of the reasons I believe that to be so.

In 1980, China's leaders introduced the 'one-child' law, designed to limit population growth by levying heavy taxes on couples that bring more than one child into the world. An unforeseen consequence has been that China's population is now aging faster than any country ever has in history. An aging population is usually a drag on any economy. In twenty years China will not have enough young workers to support its aging population, already being recognized as also being a future problem in the U.S.

However, 80% of India's population (also over one billion people) is under the age of 45.

India also has several other important advantages going for it.

China's hybrid economy has sometimes produced the worst aspects of both socialism (bureaucracy and lethargy), and of free-markets (wide disparity of wealth between rich and poor, and greed).

India is not a communist country, not a hybrid political/economic system. It is a democracy, its government a constitutional federal republic, similar to that of the U.S.

India's many decades as a colony of Great Britain (before winning its independence in 1947), also left its influences. India's legal system is based on English common law, and of even more importance, unlike China, the English language is an important and widely used language in India.

India was ten years behind China in introducing free-market reforms. So, right now China has a head start, in its absorption and development of technology, its rising prominence in world trade, and the alleviation of poverty. But India is coming on strong. Its economy is now growing approximately 7% per year (compared to less than 4% for the U.S.).

Last but not least, last week an agreement was reached between President Bush and India's Prime Minister Manmohan Singh that may go a long way toward catching India up as a world power.

India, like China, faces restraints on its growth in the form of an energy shortage, exacerbated by the rising cost of oil-generated energy. In last week's agreement, President Bush pledged to ask Congress, and the leaders of other countries, to not only remove U.S. sanctions aimed at holding back India's development of nuclear power, but to "enable full civil nuclear energy cooperation and trade with India". India already has 14 nuclear power plants, has nine more under construction, but needs many more.

As Howard Gold put it in a Barron's Online article, "The U.S. now wants India to become a world power. Recently U.S. - China tensions have been rising across the board. China is also currently the biggest buyer of U.S. Treasury bonds, holding roughly $450 billion in U.S. dollar reserves. The U.S. has suddenly become significantly dependent on China, the world's biggest Communist nation, and that makes Americans very uncomfortable."

Meanwhile, India is a country which, like China, has a developing large population which is ambitious and eager for education and a better life, a growing technology-based economy, and entrepreneurial spirit, but also has language, free-market, and now political, advantages.

India has been doing quite well on its own, its 7% annual economic growth proof of that, but a strategic alliance with the U.S., still the largest and most advanced economy in the world, is likely to jump its growth several steps up the ladder.

I expect India will blossom and soon replace China as the big story in international economies and trade.

Sy Harding

Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.