Japan Economic Foundation

Chairman's Article
(excerpts from JEF's Magazine "Japan Spotlight")

60 . Welcome Competition Between China & India

Welcome Competition Between China & India
May/June 2007
Noboru Hatakeyama
Chairman and CEO,
Japan Economic Foundation

The Japan Economic Foundation conducted a joint study with two American
think tanks, including the Chicago Council on Global Affairs, regarding the
rise of China and India and its impact upon Japan and the United States.
The fundamental findings of this study can be summarized as follows. "The
high economic growth rate of China or India is not a threat to Japan or the
United States. Rather, the slowdown of their economic growth will be a
threat to us." In the 1990s, the US economy prospered, taking advantage of
inexpensive Chinese goods and Indian services. Had it not been for those
imports or outsourcings, the United States could not have enjoyed such a
high growth rate for a long time without inflation. Japan also enjoyed
inexpensive Chinese goods through imports and direct investments in China
although Japan has not been able to make full use of outsourcings to India.
Inexpensive Chinese goods greatly helped to reduce the cost of living and
production in Japan.
Of course, there were some closures of local factories in Japan due to the
surge of imported Chinese goods and some layoffs of white-collar workers in
the United States due to increased outsourcings to India. However, it was
a plus-sum game overall.
Therefore, what matters for Japan and the United States is the sustained
high growth of the Chinese and Indian economies. There are many risks or
problems down the road both for China and India.
Since there are so many risks for the Chinese economy, I assigned them
letters alphabetically because otherwise I cannot remember them. "A" is
appreciation risk of the renminbi, the Chinese currency. "B" is bad loans
possessed by Chinese banks. "C" is corruption. "D" is democratization.
"E" is energy and environment. "F" is farmers' riots. "G" is the gap
between rich and poor and between coastal areas and rural areas. For the
sake of space let me stop here regarding China's risks.
India has at least three problems. The first problem is the excessive
protection of workers. Companies there cannot lay off workers without
obtaining approval from the Indian government, even when they are operating
with big losses.
The second problem is electricity shortage. More than 30% of electricity
supply is stolen nowadays in India. In addition, tariffs on electricity
are grossly distorted by populist politicians. For example, tariffs for
farmers are one-tenth those for manufacturing. Therefore there are no
incentives for new participants to enter the electricity business or for
existing companies to make investments to increase their supply capacity.
The third problem is lack of industrial infrastructure such as roads and
ports due to huge fiscal deficits of central and local governments.
These three problems have been preventing India from becoming a big
manufacturing country. Instead, India has focused on the service industry,
especially computer software. In 2004, the weight of the manufacturing
industry to the total GDP of China was 53% and that of India was only 24%
while the equivalent weight of the service industry of India was 53%.
Probably it is desirable for the Indian people that India becomes a big
manufacturing country as well. But will it also be good for other people,
including us ? I think it will be better for us too. China and India will
be economic giants within the next 20 years. If we can see competition
between China and India both in terms of the manufacturing and service
industries, it will be in the interest of the rest of the world.
At the same time, however, what we should take into consideration is the
impact of a fierce competition between China and India upon the market
mechanism and the global environment. They may compete trying to acquire
as many resources as possible. As long as such competition is conducted
based on the market mechanism, it should not be blamed. However, if the
government of either country or both support or participate in the
competition, it will distort the markets for natural resources, including
oil and ores. In addition, we must at least watch very carefully the
possible contamination of the globe as a result of this competition. If
per capita possession of passenger cars in China and India and their
utilization were to be equal to those in Japan as of now, the two countries
would consume as many as 1,130 million kiloliters of gasoline per year,
according to my most simple calculations, although this is not a realistic
hypothesis at all. In other words, this much gasoline consumption will
lead to annual CO2 emissions almost equal to the current level of CO2
emissions caused by worldwide gasoline consumption.
In this regard, it is important for us to come up with an ambitious idea to
address this environmental issue as well in the context of post-Kyoto
Protocol response and inclusion of China and India therein.