MerElep 08-03-29 The Elephant and the Dragon The Rise of India and China and What It Means for All of Us Robyn Meredith W. W. Norton & Company, 2007, 252 pp., ISBN 978-0-393-06236-6

This is the story of how the rise of India and China are changing their destinies and reshaping our world.

Tectonic Economics

In 2003 India and China were both still poor nations but 87% of Chinese were above the dollar-a-day poverty line compared to 69% of Indians. "India's economy was lumbering along, while China's was flying into the future." (10)

In many ways they are totally opposite. "India is democratic, and China is authoritarian. Capitalist India is often antibusiness, and communist China is usually probusiness. Chaotic India is a riot of bright colors, a cacophonous nation with thirty different languages." (11)

"When China closed its colleges during the Cultural Revolution, India nurtured its universities, educating a generation of doctors, scholars, scientists, and engineers. While China persecuted capitalists, Indian managers gained experience by battling it out in local markets, and its businesses are better run than China's today. India's invisible human infrastructure is the nations' mighty resource now that it has reconnected to the global economy." (11)

The transformations of these two countries and the way they will transform the globe are stunning. (11) "Perhaps the most overwhelming changes are being felt in the newly global job market." (12) "Globalization has proved good for the poor even as it puts the American and European middle class under pressure." (12)

But it is about much more than jobs. "It is about a major shift in post-Cold war geopolitics, about quenching a growing thirst for oil, and about massive environmental change. This is tectonic economics: the rise of India and China has caused the entire earth's economic and political landscape to shift before our eyes." (13)

Where Mao Meets the Middle Class

"Guangdong, which boasts five thousand other toy factories…has become the center of the $85 billion global toy industry…." (15)

"China's government established a Singapore-style quid pro quo with the Chinese people: the Communist Party would allow economic freedom, but not political freedom." "Nearly twenty years after the Tiananmen massacre and thirty years after Mao's death, Chinese are still allowed to carry only money, not voter's identity cards, in their new wallets." (27)

Miles of expressways in China: (28)

1989 - 168 miles. 2004 - 21,500. 2010 - 40,000. 2010 - 55,000 (same as U.S.) "Yet the highways--or rather, those traveling on them--mark severe geographical disparities in economic development." (29)

"…less than half the economy is truly part of the free market, because the Chinese government still owns so many companies." The peasants have received a disproportionately small share of the benefits of recent growth. "Water is filthy, and worsening air pollution levels already trigger an estimated 400,000 premature deaths per year. Horrific, preventable accidents abound and often are blamed on officials taking bribes to ignore safety violations." (31)

"China tries to preserve stability by tamping down political dissent, censoring the Internet, newspapers, magazines, and television." (32)

"Peasants went from earning an average of $16 a year to earning $317 a year in twenty-five years, while the national average rose to $1,023." "Both urban and rural Chinese have prospered, but because there is such a gap between them, the Chinese government is now facing its biggest fear: instability." (33)

"Young college graduates in Beijing know that a $15,000-a-year salary in China goes further there than a $45,000 salary in the United States…." (36)

From the Spinning Wheel to the Fiber-Optic Wire

India recognizes that infrastructure is the greatest problem. (53) "Indian reforms, hampered especially by local politics, tend to lurch ahead, then jolt to a stop, only to hurl forward again." (54)

"…China was able to reform faster because it is authoritarian." "China was able to take many shortcuts…by government fiat." "That couldn't be done in India." "In India, the government must gain consensus from various constituencies--multiple political parties, outspoken interest groups, local businesses, and residents. It can take years to coax wary voters to change." (55)

"Connecting by cell phone service in India remains far more reliable than by land line." (56) "China is winning the sprint, and we are going to win the marathon." (57 quoting the Indian commerce minister)

As India starts to supply the refined brains for the new global economy, China continues to provide the raw brawn. Chinese factory workers, whether making light bulbs, talking toys, or tennis shoes, earn each day about what Americans pay for a latte at Starbucks." (59)

"…much of the world's commerce has connected with China because the Chinese government has spared no incentive in wooing foreign companies to build factories there." (60)

"Even today, many foreign partners simply accept that they won't be allowed to lay off unneeded Chinese workers. To keep from losing money, they merely expand their factories, making twice as much cement or twice as many trucks as they did before with the same numbers of workers." (65)

"Instead of doing the inventing as the West watches on with envy, China excels at building Western inventions cheaper than Westerners can build them at home. China has shifted from a hub of invention to one of rote production." (66) "…if China exports a show that sells for $100 in the United States, just $15 of the price stays in China in the form of workers' wages, transportation costs, or other value." (67)

"While tens of millions of Chinese workers have benefited because of the new jobs created there, a larger share of the gains from the business migration to China has gone not to Chinese companies but to American European, and Japanese companies and to consumers in those countries." (67)

"The United States alone imported a record $233 billion more from China than it exported to China in 2006, the largest trade deficit the United States has ever run with any country." "…China's economy is growing so fast that it is poised to overtake Germany as the world's third-largest economy as soon as 2008…." (67)

"Only four of China's top twenty-five exporters are Chinese companies." "In practice, 'Made in China' often really means 'Made by America in China' or 'Made by Europe in China.'" (67)

"China must transform itself further if it is to reap the full rewards of its own economic rise." "Ernst & Young 'conservatively' estimated that the Chinese banking system had $911 billion in bad loans in 2006, six times the magnitude of the American S&L crisis." (68) [Of course, American has a worse loan crisis now! dlm] "In addition to trying to stamp out corruption, Beijing has been trying to transform the banking system by writing off past bad loans and changing banking practices." (69)

"…many Chinese consider bribery to be business as usual. Foreign companies paying bribes hire consultants to help facilitate projects and don't ask too many questions about where the exorbitant 'consultant fees' are going."(70)

"Because the Chinese population is so large, even a small percentage rising to the middle class creates a market as big as many European countries boast." (70) "Chinese officials predict that China's annual per capita GDOP level will rise to $3,000--but not until 2010." "…the majority of China's people remain poor; they are just less poor than they were before." (71)

"The bulk of China's job gains have come from factory work, and most Americans no longer work in factories but in the service industries. Yet they, too, have reason to worry: increasingly, American companies and other multinationals are hiring Chinese workers to do white-collar work." (74)

The Internet's Spice Route

"As China has famously become the factory to the world, India is becoming the world's back office." "Of the world's 500 largest companies, 400 send middle-class work to India…." (77)

"The very concept of exporting services is revolutionary." "Now, with the Internet and inexpensive telephone service connecting the world, developing counties with educated workforces can export their intellectual work too…." (79)

India's "IT and call-center market has mushroomed, accounting for 4.8 percent of the country's GDP and employing 1.3 million Indians." (83)

"Working involving 'personal services' like plastic surgery or lawn mowing will stay in the United States, while 'impersonal services,' like jobs for movie animators and call-center operators, may move." (83)

"India has about 2.7 million college graduates each year…. Every year, more engineers graduate from college in a single Indian state, Andhra Pradesh, than in the entire United States." "The United States will lose 3.3 million jobs to offshoring by 2015, about 2 percent of the entire U.S. workforce." (84) Some of this movement will create higher-wage jobs in the U.S. (85)

"India already has seventy-five pharmaceutical plants approved by the U.S. Food and Drug Administration…." (88)

"Car sales have skyrocketed from fewer than 200,000 a year in 1991 to 1.1 million in 2006…." (89 "India's red tape, historic antibusiness bias, and truly abysmal infrastructure has held back the rest of the nation's economy, allowing only a small sliver to flourish." (89)

"The lack of an expressway in Mumbai…makes for a three-hour crosstown drive over potholed, backed-up local roads…. India doesn’t have enough power plants and electricity supplies are so unreliable that lights--and computer screens--regularly flicker in downtown business districts." "Indian airports are so shabby they have become a national embarrassment." "Companies must navigate antiquated customs processing, variations in taxes and byzantine rules for transporting goods between Indian states in addition to the crumbling highways, decrepit airports, and what-me-hurry ports." (90)

"As a result, while India increasingly supplies the brains foreign companies need, it doesn't yet provide much of the brawn." "Fully 39 percent of Indians are illiterate." Many could work in factories but there aren't enough such jobs. (90) "Most Indian factories haven't been allowed to grow large enough over the decades to adapt to modern methods for mass production." (91)

"The corporate bellwether General Eclectic says that in the next decade 60 percent of its revenue growth will come from developing countries, primarily India and China." (96)

The Disassembly Line

"The new system--call it a disassembly line--is the result of companies rushing to break up their products into specialized subassemblies to drive down costs, ratchet up quality, and reduce the time it takes to get the product to market." "The term 'assembly line' has been replaced by the phrase 'supply chain.'" (99) Companies move work to wherever they find cheap labor and decent shipping. Each piece of a finished good is built where it is cheapest. (101) Lots companies no longer make what they sell or sell what they make. They only make or sell pieces of it. Jobs move around the world in search of lower wages and greater productivity. (104)

"For developing countries, the changes have been a big boost, lifting hundreds of millions of the world's poorest people out of poverty through jobs at new factories. The combined growth of India and China during the past two decades has cut the portion of the world living in extreme poverty from 40 percent to 20 percent…." "Twenty years ago, developing countries provided just 14 percent of rich countries' manufacturing imports, but by 2006 that figure had increased to 40 percent…." (107)

India's Cultural Revolution

"India has been reincarnated as a land of prosperity and boundless opportunity." (118) The brain drain is reversing as India's economy booms and everything becomes less of a struggle. (121) But "for India's rural and urban poor, change has been interminably delayed." Most still earn less that $2 a day. (124-25)

"Whatever you can say about India, the opposite is also true." India has some of the world's most horrific slums. Many residents build roads for 25 cents a day. 25,000 families live illegally alongside Bombay's streets in tumbledown shanties. These are better off than the pavement dwellers. (126-27) In 2005, 36% lived on less than one dollar a day and 85% on less than 2 dollars a day. The nation's primary schools are in shambles. Only 15% reach high school and only 7% graduate. (128)

"Caste-related discrimination persists in India. Lower-caste Indians as well as tribal populations face persistent discrimination, particularly outside India's cities." (129)

"Today 142 million Muslims remain in India, more than the 140 million who live in Pakistan." (129) Diplomatic strains linger between India and Pakistan, two nuclear-armed neighbors. (130)

"In 2030, demographers predict, India will become the most populous nation on Earth, overtaking China around the point when both reach 1.45 billion people. Also in 2030, economists predict, India will surpass Japan to become the world's third-largest economy after the United States and China." (132) "India will need far more jobs than currently exist to keep living standards from declining." "Creating vast numbers of jobs for India's poor is crucial, literally a matter of life and death." (133)

"So far, India's record (on moving forward) is frustratingly mixed, and the challenge is primarily political." (134)

Revolution by Dinner Party

China's social safety net has frayed. Only 1 of 4 people in China has health insurance and only 14$ have pensions. The Chinese are socking away savings, 30% on average. Not just the government, but ordinary Chinese fear political instability. Even so, they spend freely, buying cars, stereos, home theaters, laptops, etc. Incomes are stratifying quickly but incomes are rising across the board. China is emerging as a giant consumer market. Chinese TV viewers have not developed Europeans skepticism. The younger generation quickly picks up Western desires. (140-43)

"In a single generation, China has gone from being economically backward to being the world's fourth-largest economy." (145)

"China's authoritarian regime has retained in practice much of the mind-set and many of the abusive practices of the past, most of them designed to preserve political stability." "China's most pressing social problem is the fast-widening gap between rich and poor in a nation where a mere generation ago almost all comrades were equally poor. China's rural population, plus nearly everyone over thirty, are fast being left behind…." The shockingly widespread corruption of government officials is sapping the incomes of ordinary Chinese and spawning dissent nationwide." (150)

China's banks are fragile. China's environment is being destroyed. China remains in the midst of a Civil War with its own people. Religious activity is curtailed. Their press isn't free. There's no free speech. Mouthing off on a blog can get you arrested. Prisoners are mistreated and sometimes tortured. Even with all this, the political atmosphere has improved. (150-52)

"Within the next decade, there will be 40 million more men than women in China. In addition, the one-child policy has created a demographic time bomb. Chinese call it the 1:2:4 problem: China's soon-to-be retirees tend to have one working-age person supporting two parents and four grandparents." (153) 'Meanwhile, China's population is beginning to age even as India's explodes with youth." (154)

"China's political system is far more likely than India's to face great turbulence, even the possibility of collapse." (154) "China will not become a democracy anytime soon." "There is no push for democracy from either the Chinese citizenry or the government." (155)

Geopolitics Mixed with Oil and Water

Three big issues are surfacing for China and India. Their growing need for natural resources is leading to higher world prices and shifts in political alliances. Both are modernizing their militaries, causing massive shifts in geopolitics. And worsening pollution is endangering the world's environment. (160)

"Global demand for steel has soared in recent years, propelled by China's drive to build infrastructure and skyscrapers and both India's and China's newfound love of cars." (161)

The U.S. is the worlds biggest oil consumer at 20.6 million barrels per day. China uses 6.9 million. Per capita, Americans use 13 times more than Chinese and 26 times more than Indians. (163)

The 21^st century is one of the most unstable times in decades. Oil rich nations are reasserting political and military power. Religious fundamentalists are flexing their power. (164) "…both India and China have been making deals with pariah states--from Sudan to Iran to Myanmar--to secure supplies of oil and other resources they desperately need to ensure growth. As a result, the foreign policies of India and China are increasingly dictated by their energy needs." "China already buys much of its oil from Iran." (165)

"China's thirst for oil could ultimately prove partly responsible for Iran's becoming a nuclear state. China is already responsible for facilitating the genocide in Darfur, Sudan. Sixty percent of Sudan's oil is exported to China with the proceeds helping pay for Sudanese terror." "China has built arms factories in Sudan and sold the war torn nation guns, rocket-propelled grenades, tanks, helicopters, and ammunition." (166)

"Since the late 1990s, China has spent billions building up its military during peacetime." "Military experts around the world see China laying the groundwork for a shift in military power." (170) "A quiet arms race between the United States and China has already begun during this permafrost peacetime era." "With the ability to shoot moving satellites and ships, China could rather inexpensively constrain American dominance of both space and sea." (173)

"The two nations should reach economic parity around 2015…and then the United States will need China economically as much as China needs the United States. At that point, China will have much more economic and military clout than it has today. That will mark a decisive shift in the global balance of power." (174)

"The United States would like to make India its global swing vote in military power, part of its ongoing effort to contain China." (176)

Half of India's energy and two-thirds of China's comes from large coal deposits. The expansion of factories, office buildings, and apartments produces choking air pollution. (179)

"As if the air weren't dirty enough, China also has problems with water: there isn't' enough of it, and most of it is undrinkable." (180) Deserts are expanding, farmland is drying up, and cancer rates are soaring near industrially polluted lakes and rivers. It may be easier for China to get oil than water. Water may shape China's future. (181)

A Catalyst for Competitiveness

The U.S. must urgently prepare for increased competition from the East. (190) "The effects of today's tectonic economic shifts are dramatic, but very complicated." Lower prices are offsetting what would be a decreasing U.S. standard of living. Consumers are the big winners. (191) Consider Wal-Mart. "The paradox is that Wal-Mart's success, and its eager shoppers, has led to job losses in the United States, even as it has eased the pain of adjustment for American factory workers who lose their jobs." (192)

"Trade with China powerfully holds down U.S. interest rates and inflation, benefiting consumers…. Because Americans buy more from China than China buys from the United States, the Chinese government has the world's largest dollar reserves. It buys those dollars, largely in the form of U.S. Treasury bonds, to keep its exchange rate steady against the dollar." (194)

American households are unprepared for turmoil. "During the 1990s, the American savings rate began its plunge from over 8 percent to negative 1 percent in 2006." "Middle-class expenses are way up, largely because of increased health care and college costs." (197)

"In this decade, a clear pattern emerged: China became the factory to the world, the United States became buyer to the world, and Indian began to become back office to the world." (198)

"If the U.S. housing bubble bursts…home prices in the country could plunge. …a broad economic slowdown would follow, and many Americans would be forced to tighten their belts drastically…." (198)

"The U.S….is far too overdependent on China not just for goods but also for finance…." "For the United States, it is the economic equivalent of having your coastline encircled by a powerful navy. It is ironic that China's communists have such a huge influence over the U.S. economy--one that is now working in America's favor but that could be used to attack the United States economically. "Japan wields nearly the same economic power over the United States, because Japan, too, has enormous holdings of U.S. dollars." (198-99)

The best way forward for the U.S. and developed nations is to uncover new sources of job creation, to innovate. (203) "'We've got to have a public education system that's first-rate. We've got to get our basic research back. We've got to get our fiscal house back in order' by reining in the budget deficit." (204, quoting Robert Rubin of the Hamilton Project, a mini-think tank in the Brookings Institution).

The U.S. has enormous advantages and resources and a 'can do' spirit. "The American system is renowned for its ability to foster the kind of creativity and flexibility that has helped it rise above past challenges." "Today's challenge is to ready the nation for the coming wave of stiff competition from India and China." "It must strengthen its educational and economic foundations and foster innovation…." "America must return to basics." (205)

"Americans like to compete…. It is a fundamental strength and national characteristic." "The United States is the world's largest, strongest, most resilient economy by a good measure." Let the rise of India and China be a catalyst to reestablish America's competitiveness." (212-13)
(204)

* * * * *

Your comments and book recommendations are welcome.

To discontinue receiving book notes, hit Reply and put Discontinue in the text.