Opinion: The Asian powerhouses: All they’re cracked up to be?

Wendy Dobson, Gravity Shift: How Asia’s New Economic Powerhouses Will Shape The 21st Century, University of Toronto Press, 2009.

One of the major economic stories of the last decade has been the rise of China and India as global economic powers. In the last 10 years, China has become the world’s third-largest economy, while India is now among the top 12 and gaining ground rapidly. 

Their rapid rise has been accompanied by hundreds of books and articles, many of them breathlessly predicting a fundamental shift in the world’s economic and political order.  

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In this well-researched, insightful and data-rich book, Wendy Dobson provides a more nuanced view of the growth prospects of these two economies. Looking ahead to the world of 2030 – where some have predicted that China will overtake the U.S. and the Chinese and Indian economies combined will be twice the size of that of the U.S. – she highlights obstacles that both will have to overcome to sustain their current growth rates. 

Widely recognized as one of Canada’s leading economists with a career spanning government, industry and academia, Ms. Dobson is currently affiliated with the Rotman Institute for International Business at the University of Toronto.

In Gravity Shift, she examines each country’s future growth prospects though the prism of its institutions. A country’s institutions, she argues, play a critical role in shaping incentives, framing interactions and essentially setting out the rules of the game. Deeply embedded and slow to change, they can effectively limit or accelerate a country’s growth process.

In Ms. Dobson’s view, both India and China face significant institutional challenges to maintaining their current levels of growth.

While India claims to be the world’s largest democracy, she notes that its highly dysfunctional and corrupt political system and stultifying bureaucracy will make it extremely difficult for it to effectively deal with some of the significant infrastructure, policy and regulatory challenges required to maintain its current growth rate.

To date, India’s high-tech economy has only touched a small percentage of the country’s population. Future growth, Ms. Dobson argues, will require bringing the 90 per cent of the population that is still casually employed and largely rural into the modern economy. The obstacles to doing this include poor infrastructure, outdated labour market institutions and restrictive labour laws, poor-quality and insufficient education, cultural attitudes towards women and entrenched barriers to social mobility. 

In particular, she takes issue with India’s much-hyped “demographic dividend” i.e. the fact that by 2020 India will have the world’s largest population of people of working age.  In her view, unless some of the abovementioned obstacles can be overcome and a large percentage of these people drawn out of agriculture, this could actually become the country’s Achilles heel and a potential source of instability.

In China’s case, she see continued growth to be contingent on continuing market reforms in the areas of property rights, contract law,  legal recourse and accountability – all of which, she notes, run contrary to China’s bureaucratic mindset and the concept of party supremacy.

Moreover, Ms. Dobson also predicts that, given China’s aging and declining populations over the next couple of decades, it’s likely the country’s cost advantage in manufacturing will erode, forcing it to focus on productivity gains and the creation of new industries and knowledge. 

She sees China’s Achilles heel as its financial system, which is characterized by government-directed lending, a heavily managed exchange rate and an administered interest rate resulting in capital that is priced too cheaply, which encourages its wasteful use.

The financial systems of both India and China are described by Ms. Dobson as works in progress. Both countries continue to impose political objectives on their financial systems. Both have underdeveloped equity and bond markets and neither country is making much progress in channelling investment into startups and entrepreneurial ventures.  In her view, without major reforms in this area, it will likely be difficult for either India or China to maintain their current growth trajectories.

The book ends with a good discussion of the important role of India-China and U.S.-China relations in maintaining a stable international environment for growth.

Overall, Gravity Shift is an important contribution to the literature on the global shift of economic power and influence and a good read for anyone interested in doing business in these two countries.

Micheal Kelly is dean of the Telfer School of Management at the University of Ottawa.

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