India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.

Long Term Growth Prospects

As oil prices continue to fall, stock markets collapse and the world economic recovery falters, it is worth thinking occasionally about what is in store over the next thirty years rather than the next thirty months.

Some economists suggest that continuous, rapid world economic growth is a thing of the past since we will never again experience the waves of technological change which boosted growth over the last 150 years. In the late 19th and early 20th centuries life changed out of all recognition. The basic tasks of living, for example collecting water and washing clothes took much effort; speed and travel were totally different – journeys considered normal today, such as travelling from London to Birmingham or from London to New York were major expeditions. Communication  relied largely on the delivery of mail. It is difficult for us to understand how the gradual spread throughout the population of things today considered commonplace, such as the telephone, railways,  washing machines and the motor car transformed everyday living in developed countries.

Recently there has been concern that the world is not going to get the same positive external shocks from technology to boost economic growth that it has previously experienced. Some believe that information technology will provide the stimulus while others suggest that such things as driverless cars will provide less of a stimulus than the original invention of the car itself. To quote Peter Thiel, a major venture capitalist “We wanted flying cars but instead we got 140 characters”.

Possibly we should not be worrying about the long and focus on ensuring that the world does not head into another major recession. As Keynes said “In the long run, we are all dead.”

China and the UK

There has been much attention given over to China in recent weeks, following the visit of President XI and the signing of many deals between China and the UK, not least in the energy sector where China (and France) will be financing and largely building a generation of nuclear power plants in the UK. The Times commented that it will not be long before a Midlands UK businessman or woman could breakfast on Chinese cereal (Weetabix), travel to London on a partly Chinese-financed railway (HS2) for a meeting in a Chinese office development (China has invested heavily in UK property), then make a call home on a Chinese mobile phone and arrange to take the family out to a Chinese owned pizza chain (PizzaExpress) to discuss the possible purchase of a Sunseeker Yacht, a company acquired by China in June 2013. It is also worth noting that Chinese tourists to the UK have doubled between 2009 and 2014 to 185,000 and there were 10,468 Chinese pupils and 87,895 students at UK  independent schools and  universities respectively in 2014. By 2030 the World Bank estimates that 30% of global investment will come from China, the year it is estimated that it will become the world’s largest economy.

Currently China provides 9% of our imports of goods but we are only their 7th biggest source of their imports and our 22nd largest export market for goods so there is considerable potential for growth there. Given the UK Government’s intention to move to a budget surplus and not to borrow even to invest, China provides a valuable source of finance for infrastructure investment.

However all is not well at home with recent Chinese growth figures falling to 6.9% in the third quarter, slightly below the target rate of 7%. There has been some doubt expressed about the validity of this figure and some economists suggest that a true figure would be significantly lower, not least because nominal growth was only 6.2% implying a 0.7% deflation in China over the period which some commentators suggest is inaccurate. An alternative measure looks at statistics for electricity, bank lending and rail cargo which suggests growth of between 3% – 4%. Such discrepancies put the UK’s recent fall in GDP growth to 0.5% into perspective.

A Greek tragedy

Greece’s schools are ranked as lowly as any in the EU, yet employ four times more teachers per pupil than the highest ranked, Finland. Its state-owned railway has annual revenues of €100 million against annual wages of €400 million and €300 million in running costs. The average employee of Greece’s railway is still earning €65,000 a year.