Friday, September 16, 2011

The return of India & China as economic power house - Jaspal Singh Sabharwal, Economic Times

Have you ever wondered why ancient India was called Sone ki chidiya (The golden bird)? The answer lies in Angus Maddison's historical tracking of world's GDP. India was world's largest economy in 1 AD with China as number two. According to the calculations by Angus Maddison, from at least the beginning of the common era until the early 19th century, China and India accounted for around half of the global GDP. For much of this period, China and India were independent countries and technological leaders.

Until around 1450, China and India were technologically more innovative and advanced than Europe. Both the countries were very well knit with the rest of the globe but both economies went down hill between the early 18th century and the late 20th century. The decline can be attributed to a multitude of factors and events: the industrial revolution in Europe; the formation and expansion of the United States of America; China's decline during the Ming and Qing dynasties; the impact of British rule on India in the 20th century.

In the 20th century, China had to jostle with social unrest and various other social issues under Mao Zedong but China woke up in 1979 and rolled out the process of economic reforms. India experimented with Nehruvian model of socialism for more than 40 years and we finally woke up in 1991 after the financial crisis.

How do some nations attain long-term economic growth and an even higher standard of living while others don't? What determines whether people live in big mansions, slums or footpaths? In the 18th century, Adam Smith pointed to the transformative effects of the division of labour. In the 19th, David Ricardo highlighted the importance of international trade. In the 20th, Michael Porter made the case for industry zones, geographic diversity, physical capital, TRAIning and business strategy. The complex dynamics of wealthy and the under-privileged world cannot be explained by any of these theories.

We may find an answer in John Naisbitt's theory of evolution. In his book Mega Trend, he has concluded that there are seven waves of evolution, starting from the time human beings left the African Savannah as animal hunters until they stepped into the first virtual reality machine. This process started in 40,000 BC with the language breakthrough (40,000 BC). Wave 2 propelled the agricultural revolution (5000 BC-1500 AD).

Wave 3 incubated the industrial revolution (1500-1850). Wave 4 was all about the transport and telecommunication revolution (1850-1940). Wave 5 was the computational and electro-chemical revolution (1940-1975). Wave 6 set the platform for the Network Era (1975-2002). We are currently living in the seventh wave, which started in 2002, and it is all about knowledge and collaboration.

Very clearly, India and China led the world until the wave 3 but tide began to turn thereafter. The sixth wave accelerated the process of globalisation leading to convergence of income (profits driven by scale) and technology (knowledge). The emergence of China and India is more accurately described as a return to the position that they had held throughout most of recorded history. Of course, that does not mean that our return will be a smooth and a comfortable ride. Sustainability is in most cases far more a difficult task than the arrival.

No comments:

Chronological order