February 2011
Asian Research Report 2010

China and India: Issues for Sustaining High Growth— Common Problems Include Legal System Inadequacies: Regional
Cooperation Offers One Solution—Shujiro UrataSenior Economist, Japan Center for Economic Research
Professor, Waseda University• China and India need to go further toward reform and opening• China’s main problem is wide disparities, while India’s is insufficient infrastructure• Hopes are pinned on the contribution both countries can make to rebuilding theworld economic order

China and India have continued to grow rapidly even as the economies of mostother countries decelerated under the impact of the global financial crisis. During 2010
it became clear that China’s gross domestic product (GDP) had exceeded the scale ofJapan’s.
This high growth in China and India is expected to continue for some time. A
Goldman Sachs study projects that China’s GDP will be 1.3 times larger than that of theUnited States in 2050, while India’s will be 0.8 times as large. Relative to Japan, the twocountries in 2050 will have GDPs that are 6.7 times and 4.2 times larger, respectively.
With this outlook in mind, the Japan Center for Economic Research prepared a reportfocused on India’s economic situation and comparing it with China’s, clarifying thetasks both countries need to tackle. (The author was the chief researcher in this project.)*****
China’s rapid growth began with the adoption of the reform and opening policyin December 1978, while India’s began with the introduction of an economic reform
program in 1991. Both countries had previously enforced regulations that led to theunproductive use of labor, capital, and the other factors of production; the reforms
enabled these resources to be used more efficiently, and economic development picked
up speed. A particularly important contribution was made by policies to relax thecontrols on foreign capital and accord foreign companies preferential treatment. This
triggered an inflow of foreign capital, which boosted growth.

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Asia Research Report 2010

In recent years China and India have modified their posture toward foreigncapital. China is moving toward a policy of nondiscriminatory treatment, handlingforeign companies in the same way as domestic companies, while focusing preferential
policies just on selected industries. India, meanwhile, is establishing special economic
zones and placing increased emphasis on preferential measures for foreign businesses.
It should not be forgotten that one factor underlying the high growth in bothcountries is an advantageous demographic structure for economic development. A large
share of their populations consists of people in their productive years (ages 15 to 64),
and the dependent segment, which is the total of the children (ages 0 to 14) and theelderly (ages 65 and over), is fairly small. A low dependency ratio presents a potential
for high growth, or “demographic bonus,” since each worker has few dependents inneed of support.
At present, however, China’s population is aging as a result of its one-childpolicy, and the proportion of elderly is on the rise. Given this situation, the country will
no longer be able to enjoy the merits of a demographic bonus in the future. India
currently has a large population of children, and as they grow up, the working-age
population will swell. But India will find that its demographic bonus does not translate
into an advantage for economic development unless it creates jobs for the growing ranksof workers.
Working-Age Population in China and India

Source: United Nations.

*****Both countries have many issues they must resolve. Among the common tasks
they need to tackle are going further toward reform and opening, upgrading the legalsystem, securing energy supplies, protecting the environment, and fostering humanresources. In both countries reform and opening paved the way to high growth, but

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Asia Research Report 2010

import tariffs, restrictions on foreign capital, and other protective policies continue to beapplied in some industries, such as the automotive industry. To some extent thesepolicies are a legitimate means of fostering infant industries, but a gradual shift toward
liberalization is nonetheless needed to prevent them from imposing a growing burden
on consumers and other industries and becoming a drag on economic growth.
Barriers to the entry of foreign companies also exist in both countries. Some areembedded in the systems regulating foreign companies, while others result fromquestionable application of labor laws and other parts of the domestic legal system. As
China and India act to enhance transparency, they need to make the application of legal
provisions stable and highly reliable, and they also should work out arrangements
enabling information to be promptly disclosed. Another indispensable requirement issecuring capable staff of regulators for efficient and fair enforcement of the legalsystem.
Both countries have abundant reserves of coal, which occupies a prominent
position among their energy sources, but because of the rapid diffusion of cars and othersuch trends, demand for oil and natural gas is expanding. As these trends are expected tocontinue, one of the issues China and India must deal with is securing supplies of oil
and natural gas in a situation where their dependence on imports for these resources ison the rise. Both countries are making active use of “resource diplomacy” to acquire
stable energy supplies from overseas, but keeping the environmental impact in mind,
they also need to strive toward using energy resources more efficiently.
In the area of fostering human resources, the urgent needs in India include
improving elementary education in order to secure workers for the production of goods
and fostering highly talented workers who have received secondary and highereducation. In China, meanwhile, shortages of unskilled labor are becoming conspicuous,
as is reflected in the rising wages of the workers who make manufactured products forexport. China also needs to educate highly skilled workers and researchers so thatcompanies can move forward on not just manning assembly lines but also developing
new products and performing other sophisticated jobs.
In addition to these common issues, China and India confront various separate
issues that require resolution. The most critical issue facing India is an insufficiency ofinfrastructure. Apart from the telecommunications sector, where mobile phones havespread spectacularly, the nation has run into problems in the logistics sector, whereroads and railroads need improvement, the electric power sector, and many otherinfrastructure fields. Inadequate infrastructure impedes smooth business activities andblocks the introduction of foreign capital. The area of infrastructure is under the control
of government agencies, and populism in politics has hindered application of the rulethat users should bear the costs. Another problem is the low productivity of workers
who are vigorously defended by labor unions.

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Among the most serious issues facing China is extreme widening of regional
disparities and income differentials. Subsequent to the start of reform and opening,
differences in the degree of development greatly widened between coastal regions,which achieved rapid growth by taking advantage of the opportunities provided byglobalization, and interior regions, which were unable to do the same. In a similar
fashion, huge income gaps opened up between people depending on whether they hador lacked the ability to benefit from the merits of globalization. Because the widening ofsuch disparities has not only produced social unrest but also suppressed consumption,
China has been unable to accomplish one of its tasks, which is to shift from growth led
by external demand to growth led by domestic demand. In order to narrow thedifferentials, the government needs to engage in investment and income redistribution.
A competitive relationship in such areas as industrial development has led tosome trade and investment friction between China and India, but diplomatic efforts have
prevented this friction from becoming serious and also promoted cooperation to utilize
the two countries’ complementary relationship in resolving issues that both areconfronting. This cooperation has just gotten off the ground in a number of areas where
good results are anticipated, such as improving infrastructure, dealing withenvironmental problems, and developing energy resources. For cooperation to makeprogress, many barriers will have to be cleared away, including mutual mistrust andrelations of rivalry.
*****
While bilateral cooperation will surely be useful, regional cooperation drawing
in Japan and other Asian countries offers an important and effective means for dealing
with some of the issues facing both countries. It should be especially beneficial to makeuse of an arrangement Japan is ardently backing: the Comprehensive Economic
Partnership in East Asia (CEPEA). This is a group encompassing the members ofASEAN (Association of Southeast Asian Nations) and Japan, China, and South Korea,
plus India, Australia, and New Zealand. Consideration is being given to preparing a free
trade agreement for CEPEA and embarking on cooperation in infrastructure and otherareas.
The outbreak of the global financial crisis in 2008 was a signal that the world
economic order brought into being after World War II under the leadership of theindustrial nations has become dysfunctional. The backdrop to this situation is theremarkable development of the emerging countries represented by China and India,
which have radically redrawn the global economic map. No time should be lost in
getting to work on rebuilding the world economic order which has fallen into adysfunctional state.

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The Group of Twenty, whose members are the world’s leading countries
including China and India, plus the European Union, held a summit meeting inNovember 2008 to discuss the response required for the global financial crisis, andagreed to continue implementing stimulus policies aimed at recovery. The joint
implementation of these policies successfully averted a plunge into a major financial
panic and depression, but the world economic order is still not functioning as it should.
Summits of the G-20 countries, including their heads of state or government,
were regularized at the 2008 meeting and are now being held annually. The items on theagenda include many of the important issues facing the world economy, such as reformof international financial institutions and financial regulations as well as development,
the environment, and trade. It is hoped that China and India, which have achieved highgrowth by making skillful use of the opportunities provided them by globalization, willcontribute to the rebuilding of the world economic order through such forums as theG-20.
The rapid economic growth of China and India is expected to continue far intothe future. It will be useful for Japan, which is becoming a nation with many seniorcitizens, few children, and a shrinking domestic market, to strengthen economic ties
with China and India through trade and investment so as to sustain and increase thepresent level of prosperity. No doubt a key strategy for Japanese companies will be to
locally develop, manufacture, and sell products that meet the needs of the enormousChinese and Indian markets. The Japanese government, for its part, should actively
promote the establishment of CEPEA, which can serve as a regional framework
enabling Japanese businesses to operate freely in China, India, and the rest of the East
Asian region.

Shujiro Urata: Born in 1950. Graduated from Keio University and received his doctorate ineconomics from Stanford University. Specializes in international economics.

(The original Japanese article appeared in the January 24, 2011 issue of The Nihon Keizai Shimbun)
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