Pick a winner: China, India - even Russia

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The Independent Online
WHICH of the three great 'emerging' economies, China, India or Russia, will be most successful over the next generation? It is a question of enormous importance, for the relative economic performance of these countries will determine the political balance of the world in the first part of the next century. These giants have, for different reasons, saddled themselves with a hopeless economic system, but now they are all seeking to adopt the market economy.

On the evidence of the last three or four years the pecking order would be clear: China first, India second, and Russia last. That is the ranking these countries receive in a new report on the emerging market economies which ranks Russia very much at the bottom of the heap. While this ranking may well prove right, however, it reflects the perspective of the moment. China achieved an extraordinary economic take- off during the Eighties, with parts of the country becoming the fastest-growing regions of the world. It should pass, in the absolute size of its economy, countries such as Britain and France by the end of the century - on some reckonings it already has. If it sustains even half the growth rate of the Eighties, it should overtake the United States around 2015.

India has started to abandon the dirigiste policies that condemned the vast majority of its people to remain in poverty, but faces considerable difficulty in turning itself into a proper market economy.

And Russia? The accepted wisdom now is that Russia has, since it recognised the need for change, made more or less every mistake possible in the way it has organised the transition. The present chaos is the result. But the more one looks at why some countries succeed in generating sustained economic growth and why others fail, the more cautious one becomes about trusting the judgement of the moment: the rational judgement is often wrong.

Consider Japan and India in 1870. Japan had just restored the Meiji emperor and had become more open to foreign ideas. But after more than 200 years of closed borders, it had none of the infrastructure of an industrial state. The first railway, from Tokyo to Yokohama, was not completed until 1872; it had no banks, no mass manufacturing industry, no scientific education and no obvious markets for its products. India, by contrast, had railways and banks; it had universities; it had competent administration; and, above all, it had access to the largest market for imports in the world, Britain. Japan faced a long slog: even in the early 1900s many people there despaired of ever catching up with the West. On the eve of the First World War, Japan's GNP per head was less than one-tenth that of Britain or France. Yet Japan achieved economic take- off and India failed.

One popular explanation is that Japan had command of its own destiny, while India remained a colony for another 80 years. But that does not explain the slow progress of India since independence, or the failure of mainland China until 1980 to start the economic take-off which was achieved by the expatriate Chinese communities in Taiwan, Hong Kong and Singapore a generation earlier. Political answers do not help much either - witness the fact that those overseas Chinese communities have all achieved about the same level of economic development despite their different political systems. If being a colony inhibits growth, why has Hong Kong done so well?

The truth is that we know little about the real reasons why some countries succeed in economic growth and others fail. We know that certain things tend to destroy growth: for example, political interference in the economic process and corruption in public finance. We know that education is enormously helpful in generating wealth. But we do not know why corruption takes hold in some countries and not in others and why some societies value education and others do not.

So before anyone automatically assumes that China will conquer all, and Russia will remain a basket case, a little caution is in order. While China's progress since 1980 has been remarkable, it cannot sustain the same economic growth rates as Taiwan, Hong Kong or Singapore. These countries are tiny and depend overwhelmingly on exporting a narrow range of electronic products to the West. It is simply not credible that China would be allowed to export on this scale, nor proportionately could it because the markets are not large enough. China's exports have soared in the last five years, but already the imbalance of trade is causing friction in the US, and it will in Britain too. The idea that China can 'punish' Britain over its Hong Kong policy by excluding British imports is ludicrous; our imports from China are more than three times our exports to it.

So China is unlikely to generate the same kind of export- led growth than has been achieved by Japan and the small East Asian 'tigers'. It will have to depend more on internal growth, supplemented by regional exports. It will become much more important economically, particularly if it makes a good fist of incorporating Hong Kong, for there it inherits a complete modern financial, manufacturing and trading centre, with the whole market system already in place. But it will have serious transitional problems.

Russia's problems are like those of China without Hong Kong. Added to which, it got things the wrong way round by going for political reform before economic reform. At some stage, though, Russia will come right. Early in the century it was the fastest- growing part of the world. It was once an integrated part of the European economy and, as the new democracies of Eastern Europe achieve economic take-off, they will pull up 'European Russia' with them. 'Siberian Russia' will be dragged up by resource-hungry Japan and the 'tigers'.

At the moment the political climate in Russia is destructive of its economic potential and there are cultural barriers to growth. But there are also strengths. Any country can take a PC to bits and copy it; no other country can produce the Bolshoi or the Kirov companies and, as things become cheaper, services such as ballet will be increasingly valued.

As for India, who knows? It ought to be close to take-off, and in the past it has been a source of great wealth. Its agricultural revolution is widely admired, and it already has a hi-tech industrial sector. Given the regulatory burden under which they struggle, India's entrepreneurs have performed well. Its overseas communities have been just as successful as the overseas Chinese. What nobody knows is if India has been held back by damaging economic policies or something else. Potentially, it is as exciting a prospect as China. So too, in a rather different way is Russia, unlikely though that seems today.

'Emerging Market Economies Report 1993', International Institute for Management Development, Lausanne, Switzerland.