Chinese economic ascendancy? Maybe India is a better bet.

Economic growth and investment has shifted considerably towards India and China over the past few decades – that’s no secret. But to what extent is all the hype (ex. the RMB will be the major international reserve currency by 2020) accurate? It’s hard to predict what the future will look like between all the prophecies of western decline coupled with predictions of future Chinese economic dominance.

But then you see anecdotes like this – entire cities sitting completely empty and hugely inefficient infrastructure investments – they do make you question how sustainable Chinese growth is, not to mention their political system. China has the savings to continue these projects and keep their labor force employed, but will the inefficiencies in the system catch up with it somehow?

Sure, China is nominally a market economy, but the allocation of investment is still largely state-supported and in many circumstances, state-directed, in contrast to western economies which are much more capitalist and free market. Our economic and political systems make it harder for us to respond resolutely to economic circumstances (such as the recent financial crisis) but investments are much more efficient.

China has the cash reserves to take the hit in case these inefficient investments go south, but to what extent would that impact global confidence in the foundations of their economy?

I think investments in India are a better bet for several reasons, most notably the following: First, Chinese labor costs will inevitably rise as a result of the one-child policy. Over the next generation, every Chinese worker will have to support two parents and four grandparents, putting tremendous financial pressure on social programs for the elderly. India has no such policy, meaning that labor costs will stay low and rise very predictably.

Figure: Chinese median age is already higher than India’s. It will rise even further over the next generation. The pool of working-age labor will rise in India while it will plateau in China.

Second, despite rampant corruption in India and a massively inefficient judicial system, India has twelve times the number of English speakers China does, making it much better-suited for international commerce.

I’m no colonial apologist, but I do agree with Niall Ferguson when he says colonial powers have left behind institutions that could give former colonies advantages in their economic development. 

India certainly has its problems – there are more poor people in India than in all of Africa combined. But lastly, India is a democracy, and generally (barring aberrations such as Singapore), democracies produce greater economic growth over time.

Would love to hear what you think on this!

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