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The Goose and The Peacock: China and India’s Competing Visions for Economic Leadership

August 14, 2017

Schwarzman Scholars worked together to create an academic journal, reflecting their ability to think critically about the Middle Kingdom and the implications of its rise. These collections of thoughts come together to form “Xinmin Pinglun,” our Journal dedicated to the publication of the informative and analytical essays of our scholars. As the application deadline for the class of 2019 is approaching and the arrival of the incoming class is on its way, we are sharing pieces from Ximin Pinglun to give insight into the critical thinking and scholarship taking place at Schwarzman College. Here, Noah Elbot, (Class of 2017) discusses the competition between China and India for economic leadership.

Economic globalization is a driving force of the modern geopolitical landscape. It has become a primary vehicle for policy makers in regional minor and major powers to disburse soft power towards security and political ends. As seen through diverse historical initiatives such as the EU Single Market, the Marshall Plan and the myriad regional multilateral development banks (e.g. African Development Bank, Inter-American Development Bank), institutions aimed at regional economic integration also contain implicit and explicit security and geopolitical objectives. The US implemented this idea in Asia the 1990s, when President Clinton predicated his Asia-Pacific foreign policy on greater economic interchange. This “engagement and enlargement” strategy came with the precondition that countries shared American political values and were willing to join or support US-led global institutions such as the WTO. For state-actors, geopolitical and security goals are often combined with international trade aims because bilateral growth in one area correlates to gains in the other.

For the growing Asian regional powers looking to the multi-polar international order, improving economic relations with the neighboring states has become a priority for policymakers and multi-lateral institutions. According to the ADB’s annual Asian Economic Integration Report, the region still lags behind other parts of the world in financial and trade integration, although recent decades have brought rapid acceleration towards this potential. Although there have numerous attempts to bring rising Asian economies closer, such as the proliferation of the regional free trade agreements, these have been hampered by protectionist sympathies, poor legal frameworks and lingering security concerns. In response, the current Chinese administration decided to create a cohesive long-term vision for China-led regional integration in the form of One Belt One Road (yi dai yi lu, 一带一路), an investment framework for building infrastructure towards a 21st century Silk Road. OBOR consists of two major geographical components: one, an overland network passing from China through Eurasia and the Middle East and into Europe, roughly following the ancient Silk Road trading route; the other, a maritime component of the program, building port infrastructure and ensuring waterways connecting China to Southeast and South Asia, across to East Africa and into the Mediterranean. Since its inception the program has expanded to cover over 60 countries, although Central and Southeast Asia were the original target regions for development. The program provides a showcase for China’s relatively new status as a global economic powerhouse and regional development leader. It is also Xi Jinping’s key evolutionary contribution to China’s “Going Out” Policy (zou chu qu zhan lue, 走出去战略).

In contrast, India, the other giant growth economy of Asia, does not currently have as cohesive a vision for an Indian-led integration effort, although they are attempting a few experimental initiatives. This is a potential vulnerability as less economic integration in the region is correlated with a higher risk for conflict or bilateral security alliances. There have been calls for India to create its own competing physical infrastructure development program in order to compete with China for the favor of smaller Asian economies.

As both countries rapidly increase in both economic size and geopolitical power, whether policymakers can successfully create and implement regional economic integration efforts that leverage their countries strategic advantages is central to the two nations’ futures and position in the global order.

Integration with Chinese characteristics

Since Xi Jinping’s announcement of China’s One Belt One Road (OBOR) in 2013, the program has generated both speculative scrutiny and acclaim. In the form of $4 trillion in private, public and multilateral investment, OBOR is unprecedented in size and scope, as well as the outward facing role China will play on the international stage. The initiative contributes much needed investment towards the large Asian infrastructure gap, estimated by the Asian Development Bank to stand around $8 trillion. OBOR takes the Chinese economic growth model and provides a semi-institutional framework for regional integration (although the details of how exactly this structure will work are still emerging). There are numerous risks involved casting doubt on the likelihood for successful implementation, including the leading investment role of Chinese State-Owned Enterprises (SOEs), profitability of many of the projects, and, not least, the relative political instability and risk from many of the smaller member countries in Africa and Southeast and Central Asia. At its best, however, the initiative seeks to have Shanghai/Hong Kong-led finance, Beijing oriented economic and legal policy, and Chinese state owned enterprise-built infrastructure permeate OBOR member countries into the long-term.

India has been largely absent from economic integration efforts with the rest of Asia despite its strategic positioning on the Indian Ocean trade routes and large labor base. Trade volumes and FDI with its Asian neighbors, specifically the ASEAN nations, have lagged behind that of China, even when adjusted for the relative size of economies. As OBOR generates FDI and new trade channels, the gaps will likely increase. Although India has experimented with integrating initiatives such as the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and South Asian Association for Regional Cooperation (SAARC), these efforts are limited in scope and political consequence.

Although there is much still to emerge on the risks and future pitfalls of the initiative, OBOR can become a powerful tool for China, increasing regional integration from both economic and security perspectives by building bilateral dependencies between China and neighboring countries. India, due to its historical development model and modern economic composition, is unlikely to be able to replicate an OBOR-like initiative. Nor should India attempt to compete with China on this basis given the two countries’ economic composition and orientation. This is supported by reviewing and contrasting the historic development paths of India and China, showing how the former developed service sector export- orientation towards highly developed Western economies while the
latter aimed for resource and industrial sector economic development through regional supply chain integration with other Asian economies.

The Western view of globalization as a foreign policy tool often falls within a “carrot-and-stick” model of power — if a geographically strategic country meets a set of political preconditions, it is rewarded with economic integration into the US-led global economic system. For countries that are politically hostile to the West, economic sanctions are an early tool used for punishment. It is worth noting how China’s geopolitical goals are explicitly stated through OBOR. Xi Jinping has repeatedly said that program does not have liberal objectives in terms of reforming member countries political systems. China, at least in rhetoric, emphasizes neutrality towards the domestic politics of target countries. The geopolitical objectives of the economic integration is instead based on mutual security. In his words at the Opening Ceremony to the 2012 World Peace Conference, “We must seek security on the basis of development. Economic development and prosperity provides a strong guarantee for security.”

Xi Jinping emphasized this paradigm in 2014 by highlighting and updating the Five Principles of Peaceful Coexistence, jointly developed and signed by India, Myanmar and China in 1954. The first updated principal is “Upholding Sovereign Equality,” which is the principal of not demanding political reforms from partners, followed by “Upholding Common Security” and “Advancing Common Development.” Despite not having political preconditions, Chinese outward investment in neighboring countries still constitutes a soft power foreign policy. OBOR represents a semi-institutional, centrally coordinated effort to integrate economic interests in the region under Chinese leadership.

“India has been largely absent from economic integration efforts with the rest of Asia.”

The goose and peacock development models

The two awakened Asian giants of China and India serve as important political and economic foils. China took the path of rapid industrialization under authoritarian rule, while India has pursued decentralized growth within a socialist democracy. India’s growth story is still in the initial chapters, starting with Rajiv Ghandi’s economic reforms in 1991 and accelerating to today. China’s run has been more varied, beginning with Deng’s reforms in 1978, evolving with subsequent reforms in 1994 under Jiang Zemin, membership into the WTO in 2001, and further liberalizing reforms announced by the Xi-Li administration in 2013. Though many of the economic growth factors were already in place from the pre-reform period, the respective post-reform political systems in India and China can be observed in the nations’ current growth trajectories. China focused on high-volume industrialization, utilizing its factor advantages to create a powerful export-oriented manufacturing economy. This conformed to the strengths and limitations of its authoritarian political system: the ability to mobilize large supplies of cheap labor and infrastructure investment, while preventing entrepreneurs from realizing high profit and therefore power.

India’s democracy displayed a different array of limitations due to the incentives within a populist democracy. Most apparent were the stifling regulations on the industrial sector reflected in rigid labor policies and illiberal agricultural development, which cynically became known as the “License Raj.” In reaction, the educated Indian entrepreneurial class showed a higher propensity towards the high-profit services sector, which allowed them to utilize the strong technological education system. Both nations used global export markets to sustain rapid growth through investment, albeit in very different sectors. China mobilized an industrial work force and utilized a high domestic savings rate to invest in infrastructure, albeit at low efficiency and high human costs. Human capital growth also increased rapidly following the Reform and Opening Period (gaige kaifeng, 改革开放) due to a swift rise in higher education attendance and socialized health care leading to higher life expectancy than most developing states (including India). Politically, China emerged into the reform period with a centralized governance structure and a high-capacity bureaucracy.

The Jiang-Zhu administration in the 1990s sought to employ the Export-Oriented Industrialization (EOI) strategy previously employed by Japan, South Korea, and Taiwan through state-guided investments in export industries in which Chinese manufacturers could gain competitive advantage. China was the next in formation in the East Asian “Flying Geese” model of development, so called because the economic pull created by Japan led to economic investment in the Asian Tigers and subsequent capital industry development in China, as with geese flying in formation benefiting from the aerodynamic draft of the flock leaders.

In this way, China began climbing the EOI value ladder, first exporting primary resources, and followed by labor-intensive low-capital manufacturing (e.g, textiles), and then progressively heavier industry. As each economy passes onto a new rung of development, a lower developed geographic neighbor has the opportunity to fill the vacuum due to comparative labor advantage. For the period following independence in 1947 until the economic reforms of 1991, India basically followed Prime Minister Nehru’s original socialist model of import substitution industrialization (ISI) and trade pessimism with human capital investment primarily at the higher education level. Economic growth during this period was highly limited by the immense bureaucracy of the “License Raj.”

In Hindu mythology, a peacock, India’s national bird, is said to derive its beauty from its ability to eat poisonous plants, which then provide the vibrant colors and patterns of its feathered tail. In much the same way, India’s exceptional entrepreneurs managed to take the toxicity of the license Raj and produce vibrant growth. They achieved what is impossible by classical economic paradigms—the building of competitive trade advantage from tertiary services before developing an industrial base—not despite, but due to the uniquely limiting economic factors. Entering into the reform period in 1991, India had a lower domestic savings rate (21.9% of GDP in 1992 as opposed to China’s 36% in 1982), low GDP growth (1.5% annually), low literacy rates (52% of total population in 1991 as opposed to China’s 67% of total population in 1980), and an embedded bureaucratic structure riddled with rent-seeking and red tape. Because the Indian reforms involved the dismantling of regulatory institutions—as opposed to China’s starker introduction of new markets into a fully planned economy in 1978—the Indian liberalizing process consisted of a more gradual deregulation of existing markets in a process that is still continuing.

Because much of the protectionist regulation is a legacy from before 1991, sectors that developed afterwards have been relatively more liberal and open for entrepreneurship than more traditional industries, such as agriculture and manufacturing. Faced with a manufacturing sector constrained by regulation and poor infrastructure, the entrepreneurs found a way to apply the East Asian growth model of export orientation into the novel context of the services sector. By 2013, Indian business process outsourcing (BPO) services were a $120 billion a year sector, more than 5% of overall GDP and around 20% of the global market. In comparison, China was approximately $50 billion, or 8%. India’s outsourcing boom has had beneficial knock-on effects throughout its services, high tech and IT sectors. As China continues to climb the capital value-chain, it vacates a further rung in the Flying Geese development model, which ASEAN members have already begun to fill. Vietnam received over $3.3 billion inflows of FDI from China in 2015, with the figure consistently growing over the past decade. Of Vietnam’s total FDI inflows in 2016, 68% went to manufacturing.

Looking at trade volume with the ASEAN nations further evidences the contrast between economic foreign policies. India’s trade with ASEAN in 2016 ($58.5 billion) was less than 16.9% that of China’s total bilateral trade with member states ($345.7 billion. Normalized by the relative sizes of their economies, India remains nearly 3% lower than it should in relative trade volumes with its neighbor. India has been taking steps towards strategic integration. The ASEAN- India Free Trade Agreement (AIFTA) and the South Asia Subregional Economic Cooperation (SASEC) both represent recent steps by India towards integration. Although FTAs are on a lesser order of magnitude than the $4 trillion OBOR, they nonetheless show that India is beginning to turn outwards and see the emerging geopolinomic landscape in the region.

India’s comparative advantage

For India, a similar program in physical infrastructure development is unlikely to bear fruit. ASEAN and Central Asia share many more compositional characteristics with China at the beginning of its growth – high savings rates, infrastructure connected trade markets, and low labor costs. It is difficult to imagine an investment of physical infrastructure that India could make to improve these nations’ ability to develop a service sector or export business operations, beyond telecommunications hardware. While manufacturing can create a virtuous regional cycle of development through integrated supply chains, services tend to be vertically integrated and thus lead to a competitive race to the bottom among neighbors vying for limited demand from highly developed economies.

By focusing on the commonalities of growth stories between themselves and neighboring states, however, India could strategically form its own soft power economic integration program based around its comparative advantages. Similar to India, many Central and Southeast Asian countries have low capacity bureaucracies that are burdened with regulatory inefficiencies and a public sector unwilling to collaborate. India could leverage its greatest strength for solving its own challenges – the entrepreneurs.

By encouraging its entrepreneurial technology startups to look abroad early, it could export similar growth to neighbors. If the government also supported entrepreneurial hubs in these countries, especially through the development of neighboring countries’ higher education institutions, it could facilitate the penetration of Indian style development and economic frameworks for growth. Having young entrepreneurs in Myanmar or Kazakhstan learning from Indian professors either in their own country or on scholarships to India is a powerful soft power tool. Although it is unlikely that Indian BPO firms could become an intermediary by climbing a service-sector value chain, as Indian entrepreneurs turn more towards manufacturing and high tech in the past decade, having a complimentary, inexpensive services sector outside of the borders might lower costs and create new markets for products.

While China’s major strengths came from leveraging its low-cost labor force and high savings rates towards infrastructure development, the Indian model of higher education fueled technology and services development might be an interesting fit for neighboring countries. If India seeks to create regional integration on its own terms towards common security and geopolitical advantage, it should leverage its relative strengths and put together a cohesive vision for exporting them. This must involve sending out its entrepreneurs, who fashioned the Indian growth miracle at home.

If India seeks to become a regional power, it should utilize its own comparative advantages to create a cohesive vision for India-led globalization as a geopolitical tool. Compared to the Chinese Goose, the Indian Peacock does not fly in formation.

Noah Elbot (Class of 2017) is from the United States of America, and graduated from Brown.