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Which Pacific Century?

Which Asian country will prove most influential in the 21st century?

March 23, 2005

Which Asian country will prove most influential in the 21st century?

In the 1980s, the world first thought that Japan would lead the Pacific Century. After all, Japan had taken less than two decades after the post-World War II devastation to revive its economy.

And by the late 1960s, it had amassed unquestioned economic power in Asia. By dominating the manufacturing space, it became the highest value creating Asian economy.

Yet, with the rapid rise of the four Asian Tigers — Singapore, Hong Kong, Taiwan and South Korea — the "flying geese" East Asia Economic Model became "the" economic model.

At that time, China's economic potential was merely seen as "similar" to the larger Southeast Asian nations — that is, as yet more geese flying behind the Asian Tigers.

Meanwhile, India was not expected to play any meaningful part in a Japan-centric "Pacific Century."

This was going to be a "happy for all" Pacific Century. The logic was impeccable: Since Japan has the highest per capita income and occupies the highest value chains in Asia, those "trailing geese" merely needed to trade with Japan — and the West, of course — and embrace manufacturing outsourcing to climb the value chains and raise their standards of living.

As long as Japan continued to climb the value chains, a prosperous outcome was predicted for everyone.

The twin events of a rapid decline in Japan's economic might since the beginning of the 1990s and the rapid ascent of China since 1994 — coupled with the bursting of asset bubbles in Asian Tigers and the collapse of the Southeast Asian economies in 1997 — quickly led to a re-definition of the "Pacific Century."

From 1994 to 2003, China became a magnet for global investment, rapidly amassing manufacturing capabilities and export power.

Its share of global merchandise exports grew from 2.8% in 1994 to 6% in 2003. But the combined share of Hong Kong and Taiwan declined from 5.8% to 5% — and that of Southeast Asia from 6.2% to 5.7%.

China is now the consensus favorite to dominate and lead Asia into the Pacific Century.

Contrasting sharply to the "happy for all" Japan-centric Pacific Century, a China-centric Pacific Century would entail a great deal of pain for the rest of Asia.

Nations will see their growth and income stagnate while China's low wage and rising market shares crowd out wage growth and export opportunities for the rest of Asia.

India's embrace of economic reform since the mid-1990s largely went unnoticed until recent years. India's economic potential is widely understood to lie in its English-speaking, educated workforce and its acumen for IT services works.

In recent years, given the new wave of global IT and service outsourcing, India's foray into the global economy has finally attracted attention. However, this foray is largely perceived to be of a "limited" impact relative to the manufacturing "big bang" created by the China factory.

Global merchandise trade is vastly bigger than global trade in services. Thus, India's service-oriented economic development model is seen to pale in comparison to China's manufacturing-oriented economic development.

Global merchandise trade is worth some $14.9 trillion, more than four times the estimated $3.6 trillion in global services.

The ratio has stayed roughly the same over the past 15 years, which means that a services trade explosion disproportionately benefiting India does not seem likely. Most importantly, China has the clear edge in manufacturing.

China at the end of 2003 had 5.6% of global merchandise trade — and 6% of global merchandise exports. India had only 0.8% in both counts. Hence, the world remains fixated on a China-centric Pacific Century.

While there are increasing numbers of analysts willing to seriously reconsider the economic potential of India, the precise roles of China and India — and their respective leadership roles — remain fuzzy.

However, India could spring a few significant upside surprises that may not have entered the calculation of global investors.

First, there is no reason to believe that India cannot, or will not, aggressively pursue export-oriented manufacturing. Its abundant and competitive labor pool fulfils the most critical basic requirement for a manufacturing-export growth strategy.

The lack of economic infrastructure and a conducive economic environment — for example, the lack of economic incentives for multinational manufacturing firms, bureaucratic red tape and a "less responsive" labor movement and labor regulatory environment — are often cited as obstacles.

In my view, these impediments, while appearing to be quite deep-rooted, cannot permanently stall a reform-minded regime from economic development.

China's experience is the best example, as it faces perhaps more structural impediments than India at its initial stage of reform and development.

China's present edge on manufacturing — low wages, an inexhaustible supply of quality cheap labor and an already large and rapidly growing manufacturing capacity — presents no significant obstacles to India's quest for manufacturing growth.

In fact, China's low-wage, low-value-add, low-returns model is quite vulnerable — as India's ability to better protect intellectual property rights may allow India to offer similar low wages, but be quicker at climbing the value chains, thus representing a better bargain for the West and global investors.

The West could favor India over China in the longer term, thus making capital and technology transfers more readily available for India. In my view, there are three reasons why the West might favor India.

First, India has a well-established, Western-style democracy and its Western-leaning social-economic-political complex and institutions can align themselves better and closer to Western interests.

Second, India appears to be much better at offering protection of intellectual property rights. This is going to be a decisive factor in luring the West's capital and technology to India — and enabling the country to more rapidly climb the value-add chains in both manufacturing and services.

And third, the West views China as a geopolitical competitor. The rapid ascent of China will intensify such competition. The future economic development of China may not be as smooth as the past quarter century's — as geopolitical rivalry could limit China's growth.

For these reasons, while the West may not have formed a "final" strategic view on India, India appears to be better positioned as a "natural" strategic partner than China.