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April 8, 2010: Dr. Wendy Dobson and Dr. Ellen Frost

(Click to enlarge) From left to right: Dr. Wendy Dobson and Dr. Ellen Frost discuss economic growth in India and China.

Gravity Shift: China and India's National Priorities Meet Global Expectations

 

(Washington D.C.) April 8– Though the economies of China and India have developed significantly, structural changes will be required in both countries in order to sustain current growth rates. In an East-West Center in Washington Asia Pacific Political Economy seminar, Dr. Wendy Dobson, professor and co-director of the Institute for International Business at the Rotman School of Management in the University of Toronto, and discussant Dr. Ellen Frost, visiting fellow at the Peterson Institute for International Economics and adjunct research fellow at the National Defense University’s Institute of National Strategic Studies, examined the economic development of China and India, detailing the opportunities and challenges inherent in their respective rise as economic powerhouses in Asia.

 

Many economists have predicted that the center of global economic gravity is shifting to Asia, led by the quickly developing economies of China and India. Growth in both countries has been driven by large labor forces, investment, and innovation. Many economists predict that by the year 2030, the economies of India and China will exceed that of the United States, and that this shift spells profound changes for the future of world economic institutions and the balance of power. However, Dr. Dobson argued that while the development of both economies has been remarkable, growth in the future will be hampered by factors that will require concerted systemic changes on the part of both governments.

 

China’s growing economic power has not only improved the lives of countless of its citizens but also impacted the international economic system. Dr. Dobson explained, however, that China’s growth will soon be hampered by difficult challenges. She pointed out that due to China’s one-child policy, the country’s labor force will contract by at least 30% by the year 2030 and that much recent growth has been supported by unsustainable investment activity. To overcome these obstacles, the government will have to find ways to encourage increased productivity among a diminished workforce, encourage greater consumption by its population, and prompt entrepreneurial innovation. To achieve these goals, Dr. Dobson explained that the government will have to make changes to a plethora of systems, such as improving social security nets so that the population will feel less need to save and more desire to consume, or by encouraging state-owned banks to invest in non-state owned enterprises and accept the risks inherent in entrepreneurial activities. These systemic changes, she argued, will take time to implement and, in the meantime, Chinese growth rates will consequentially drop.

 

India, too, could see enormous economic gains by 2030 through the use of its large labor force and technological innovation. However, Dr. Dobson pointed out that the government has not made the investments in its labor force required to transform the country into a manufacturing society, such as providing comprehensive education and opportunities for training. Further, she explained that government regulations, many supported by a strong socialist movement, limit the ability of entrepreneurs to develop large, labor-oriented industries that can capitalize on economies of scale. As a result, most entrepreneurs focus on knowledge intensive, rather than labor intensive, industries, leaving India’s labor force underutilized. Additionally, vast public sector debts in India make it difficult for entrepreneurs to get the loans they need to develop their businesses. Without significant changes to address these problems, Dr. Dobson argued that India’s growth will necessarily slow over time.

 

Because of the unbalanced growth in both China and India and the changes that will be required for the economies to rebalance, Dr. Dobson explained that she currently sees smaller growth potentials for the two countries by 2030 than many other economists. However, she noted many positive factors that have resulted from China and India’s economic rise. Both countries, she explained, are now active in international financial systems, and they are beginning to create important trade ties bilaterally. She believes that while some economic competition between the two powers will occur, efforts by regional neighbors to encourage regional economic integration should prompt China and India to be cooperative rather than competitive. Dr. Frost agreed, explaining that China in particular is interested in maintaining regional stability, as this is best for its own economic development goals. Further, Dr. Frost pointed out that policymakers in both countries are aware of the structural problems that their economies face, and that internal debate about the best course for economic development is strong. She also noted that as members of the G20, the two countries are becoming more active and responsible in international economic matters, an activity that will provide valuable experience for the two governments as they develop their respective economic futures.

 

Wendy Dobson is professor and co-director of the Institute for International Business at the Rotman School of Management at the University of Toronto. Formerly, she was associate deputy minister of finance in Ottawa; president of the C.D. Howe Institute, Canada’s leading independent economic think tank; and vice-chair of the Canadian Public Accountability Board. She is a non-executive director of several public companies engaged in international business and participates in several international research and policy networks. Dr. Dobson has published numerous monographs and articles on international economics and business, winning the Ohira Prize in 1998 for Multinationals and East Asian Integration (1997). Her latest book is Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the Twenty-First Century, published in North America in 2009 and forthcoming in India in 2010.

 

Ellen L. Frost is a visiting fellow at the Peterson Institute for International Economics and an adjunct research fellow at the National Defense University's Institute of National Strategic Studies. Her most recent book is Asia's New Regionalism(Lynne Rienner Publishers, 2008). She previously served in the U.S. government as counselor to the U.S. Trade Representative (1993-95), deputy assistant secretary of defense for international economic and technology affairs (1977-81), various positions in the Treasury Department (1974-77) and the State Department (1963), and as a legislative assistant in the U.S. Senate (1972-74). During the 1980s she worked for two multinational corporations. She is a member of the Council on Foreign Relations, the International Institute of Strategic Studies, and the U.S. Committee of CSCAP (Council on Security Cooperation in Asia Pacific).

 

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