With globalization receding and China’s economy slowing down, there’s speculation the Asia boom is over. It isn’t. The ascension of China and India continues to be the most important economic story in the world.
Both India and China have been growing much faster than the US. This is normal for poor countries, which have lots of room to catch up. But the sheer population size of both super-giant countries -- each with about four times as many people as the US -- means that these percentages add up to a whole lot of dollars.
During the past decade, China has added about three times as many dollars to the world economy than the US has. India, whose growth rate overtook China’s in 2015, is still much poorer, so it only adds about a fifth of the dollars China does each year.
So the two economies are important to developed countries for different reasons. India, being so poor and so populous, has much more theoretical room to grow in the long term. The key number for India is its high percentage growth rate, since this offers a rough guide to the return on investment that foreign investors in the country might expect. For China, the key number is the absolute dollar growth, which represents the size of the new markets added each year.
So the question of global growth still hinges on China and India. There’s a very good reason for this, actually. Many emerging markets have economies based on natural-resource exports, rather than manufacturing and services. When the prices of commodities go up, these economies do well, but when the world finds new resource deposits or invents new technologies to make more efficient use of resources, these countries suffer.
India and China are different. They have a lot of people but not a lot of resources per person -- China, for example, despite its abundant coal deposits, is now a big coal importer. In effect, these countries are so populous that they have to make money by the sweat of their own brows. Labor, not land, is the primary resource possessed by China and India.
That’s good news for their long-term growth. China and India don’t suffer from the infamous resource curse -- the combination of bad policy incentives and unfavorable exchange rates that dooms most resource-based economies to middle-income status.
The historical examples for China and India are all positive. Europe, Japan and South Korea were once farm-based economies with lots of humans but not a lot of natural wealth. Those regions all got rich in essentially the same way -- moving people from agriculture to industry and from rural areas to cities, then later adding lots of service industries. India and China both look like they’re following in the footsteps of those early successes, rather than the missteps of many emerging economies.
The question, of course, is how long this can continue. The risks here are well-known. In China, the chief threat is a possible real estate bubble that could bring down companies, local governments and the financial system. The long-term drag of a shrinking working-age population and the need to clean up the environment, also are headwinds. In India’s case, the main question is whether the government can overcome inertia and corruption enough to dramatically improve the country’s infrastructure and education systems.
For developed countries, the course of action is clear. First, they should do as much as possible to facilitate investment in China and India, as well as exports to both. The health of many American, European and East Asian businesses will still depend on how well they take advantage of the opportunities presented by the super-giants.
Second, policy should be used to help these countries sustain growth, especially India. Facilitating trade and investment between India and rich countries is a start. Helping India build high-quality infrastructure is another. A third policy is for developed nations to take lots of Indian and Chinese immigrants, especially skilled ones. These immigrants and their children tend to invest in businesses in their ancestral homes, giving those economies a boost while cementing connections between nations. In a rapidly changing world, the economic gains of the super-giant countries have remained one of the happy constants, and it’s vitally important to make sure those countries can keep growing.
By Noah Smith
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University and he blogs at Noahpinion. –Ed.
