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Home / Opinion / Columns /  The fading hype about China, India

Three decades ago, former US treasury secretary Larry Summers, then chief economist of the World Bank, characterized the opening up of the Chinese and Indian economies as the most significant events in global history, along with the end of the Cold War. Grandiose predictions were made when China joined the World Trade Organization (WTO) in 2001, including on how it would make it a more politically liberal country. Decades on, so much of the hype that gathered velocity and volume in a narrative loop from Wall Street to Washington and Davos and back appears hopelessly misplaced. ‘Chindia’, the Chinese Century, the possibility that India might create the world’s largest middle class and predictions that the Chinese renminbi would jostle with the US dollar to be the world’s reserve currency now seem like comic science-fiction.

Last week was emblematic. The People’s Republic launched its first home-designed aircraft carrier. Not so subtly named Fujian, after the Chinese province that faces Taiwan, this is just another sign that Beijing will flex its muscle militarily in the 21st century. If it were to try and take over Taiwan by force, the shock waves for the world economy, even those transmitted just via our dependence on the two countries for semiconductors, would make us nostalgic for the disruptions brought about by Russia’s horrific and pointless invasion of Ukraine. India, meanwhile, threatened to play spoiler at the WTO meeting, before better sense prevailed. Whether New Delhi is run by a Congress-led government or the Bharatiya Janata Party, our trade negotiation tactics keep observers everywhere amused and alarmed, not least because we do damage both to multilateral trade and our own economy.

Some of the ‘Chindia’ silliness was based on an extrapolation of growth rates in the early 2000s that didn’t make sense because even large emerging economies see their economic growth slow, though few as dramatically as India’s slowdown, which saw our quarterly gross domestic product (GDP) growth rate fall to under 4% before the pandemic. About a decade ago, Summers and fellow Harvard economist Lant Pritchett pooh-poohed what they called “Asiaphoria". They predicted that it was more likely that Chinese and Indian GDP growth rates would over the years revert to close to the global mean. Other predictions cheerfully overlooked the weak institutions, centralization of power and interventions in the economy that are characteristic of both Beijing and New Delhi.

China at least can claim to straddle global manufacturing like the giant it was expected to be. Harnessing the genius of Hong Kong and Taiwanese businessmen, who brought management skills and quality controls to Chinese factories after China opened up four decades ago, it now accounts for over a fifth of global manufacturing exports. Its role in global financial markets is tiny, though. While former Chinese premier Zhu Rongji did a brilliant job of using US investment banks and global capital markets to raise billions of dollars in listing and modernizing unwieldy and inefficient Chinese state-owned enterprises from the late 1990s onwards, China’s integration into global financial markets has been a half-baked affair. Former Goldman Sachs head Henry Paulson Jr, like Henry Kissinger, has long been a cheerleader for Beijing. In his 2015 memoir, he modestly likened Western bankers’ role in China to the Greek mythological figure who gave the world fire.

This week, the analyst and author Ruchir Sharma took apart such absurd hype about China’s role in global financial markets. The renminbi, he noted, is a “tiny three percent of global central bank reserves." So much for it becoming a reserve currency as the dollar declined. “Since 2015, the renminbi’s share of payments through the SWIFT network for international bank transactions has fallen by a fifth, from an already negligible level under three per cent," Sharma wrote in The Financial Times. “A widely followed index that ranks 165 nations by capital account openness puts China at 106th."

India has been a similar disappointment in opening up enough to let a huge labour force become a factory to the world and an alternative to China. While we have crafted an epic in software exports, which help pay our huge oil import bills, our share of global merchandise exports, at less than 2%, mirrors China’s lack of progress on its currency. For a bit player in global goods trade, we do at least punch above our weight at the WTO. This month, New Delhi held forth on how “traditional fishers’ life in India has intertwined with the oceans and seas since times immemorial." Ancient wisdom notwithstanding, many trade gurus struggled to understand our position. India’s threat of ending a 24-year moratorium on digital trade tariffs was even more baffling, as it would undermine our comparative advantage in software.

The costs of not engaging adequately with the global trading system and matching the low tariffs of our Asian neighbours while instead grandstanding at the WTO is apparent in our lopsided labour market, which does not create enough factory jobs for women (and men), as Vietnam and Bangladesh have managed to do. Since 2017-18, the absolute number of farm workers in India has risen by more than 40 million, though economic emergence should have meant a decline. Instead of the world’s largest middle class, we have the world’s largest number of subsistence labourers with few other options. Encashing our demographic dividend came with a deadline, it turns out, one that we may have sadly missed.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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