Economic View: China and India are heading for the top of the world but along the way the climb will become treacherous

Their runaway growth stories will take some unwanted twists, but the moral for the rest of us remains how we can learn to raise our own game
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The Independent Online

Thanks to the Olympics, this is the year of China, but the week arguably belonged to India, with the launch of the Tata "one lakh car". Yet this – and the environmental issue raised by India moving to mass motoring pushes it to the forefront – does make one wonder about the sustainability of the great run of growth in both China and India. We know there will be bumps ahead for both countries – events that for a while derail their expansions – but what we cannot know is their timing or their scale.

Thinking about this, it seemed this would be a good time to revisit the the modelling work done by Goldman Sachs on the likely growth of Brazil, Russia, India and China – the "Brics". We have become so mesmerised by the growth of China and India that we find it quite hard to accept things might go wrong. Intellectually we can accept it but in immediate practical terms we can't see how it might happen. (In Russia and Brazil the story is a little different and the potential bumps are easier to envisage.)

The view that double-digit or near double-digit growth is normal has been reinforced by events. Since the original Bric report, both China and India have actually grown faster than initially projected, leading to modifications in the data. In the later versions, China passes the US to become the world's largest economy in the 2030s rather than the 2040s. You can see the projections for 2050 in the chart: China way ahead of the US and India snapping at its heels.

If that were indeed to happen, the world would feel utterly different from today – as different as the present world feels from the colonial era of a century ago. You might say 2050 is a long way off but even the 2025 projections show China's economy close to that of the US in size, and 17 years in the future is the same distance forward as John Major's premiership is in the past.

These are projections; they are not forecasts. But they are very useful in that they give us a yardstick against which we can calibrate our own judgements. We are forced to give specific reasons why this sort of general outcome might not happen.

The most obvious one is the environment. Put simply, are there enough energy resources and raw materials in the world to support a Chinese economy that is bigger than the US, allowing too for further US growth, and an Indian economy that is not far behind? There are other subsidiary questions. For example, is China following a more dangerous path than India? That India should be developing a genuine economy car, bridging the gap between the present mini-car and the motorcycle, could be taken to suggest it will follow a more sustainable route than China, where large and medium-sized cars dominate.

The starting point for any analysis is that the price mechanism is a powerful force for change. Take the use of oil. If the price stays close to or above $100 a barrel, that will force the whole world, not just China and India, to find ways of economising on its use. Where there are substitutes, these will be employed instead. Where there are not, for example in aviation, the world will adapt to the higher prices by travelling less. The legitimate criticism of China seems to be that it has gone for an old industrial model, with very heavy investment in infrastructure, rather than seeking to build a more lightweight economy. It has done that partly because of a lack of imagination but also because it has priced energy too low. India has chosen a different path and under-invested in infrastructure – an error it now has to correct. But ultimately its economic system may prove more durable.

The next point seems to me to concern education. On paper China has done better than India in that it has higher literacy rates and literacy is the key to economic development. However, Chinese education has flaws, particularly in the way it teaches people to pass exams rather than be creative. To oversimplify grossly, India has a grave problem now at primary and early secondary level, whereas China may increasingly have a problem at tertiary level. But I think that in both countries there is a growing awareness of education as a key competitive issue in the years ahead.

Social conflict? Anyone who spends some time in China or India (or indeed Russia and Brazil) will have observed the huge disparities in income, and we know this causes tensions. The question is whether, over the next 30 years, these will be so great as to demolish their economic growth. It would be tragic if the present performance of China and India, which is lifting tens of millions of people out of poverty every year, were derailed by social dissent. Maybe the growth path is sufficiently embedded as to ensure the momentum is maintained, but I don't think we can be completely confident of that. At least the authorities in both countries are aware and concerned but whether the centre holds is not certain. My instinct, for what it is worth, is that the social tensions can be contained for a while yet and that economic success will eventually defuse the ticking bombs. Let's hope I am right.

A further point here is that success in the Brics has a knock-on effect. The laggards find themselves asking: "If China can grow like this, why can't we? What are we doing wrong?"

As this message seeps out around the world, expect more and more countries with uneven performance records to take a hard look at themselves. Expect countries as diverse as Nigeria, Indonesia and Vietnam to raise their game. The Goldman Sachs team dubbed the new Brics the "Next 11". They are a pretty disparate group, linked only by the fact that they have reasonably large populations and seem likely to improve their economic performance over the next generation. But there are signs that several of them are increasingly aware of their potential and what is needed to unlock it.

And we will learn too. If there is one message from the Tata car, it is that we in the West will also need to lift our game. That, I suggest, is no bad thing.