Why slower growth is good for China but bad for India

After years of double-digit GDP growth, China grew at less than 8% in the first quarter. And after 8% growth in the 2000s, India is growing at just a pitiful 5% today ? way too slow for an emerging economy at its wealth level. Have these Asian tigers been tamed? Have they been ensnared by the middle-income trap??Well, despite some superficial similarities, their slowdowns are different breeds of cat.

The downshift may actually good news for China. For years, economists have speculated when Beijing would shift from an unsustainable export- and investment-led growth model to one where domestic consumption was primary. Economist Martin Feldstein sees?President Xi Jinping?s?economic appointments, particularly that of Lou Jiwei as finance minister, as demonstrating ?the new Chinese leadership?s emphasis on pro-market reforms and a shift from heavy industry to greater reliance on consumption and services.?

Now that shift will mean slower GDP growth, which is one reason Beijing has resisted for so long. Superfast economic growth was thought necessary to create the millions of jobs needed ever year to raise incomes and reduce poverty. But economist Stephen Roach argues a consumption model will do just fine in that area, despite the slowdown.

A rebalanced China can grow more slowly for one simple reason: By drawing increased support from services-led consumer demand, China?s new model will embrace a more labor-intensive growth recipe. The numbers seem to bear that out. China?s services sector requires about 35% more jobs per unit of GDP than do manufacturing and construction ? the primary drivers of the old model.

That number has potentially huge implications, because it means that China could grow at an annual rate in the 7-8% range and still achieve its objectives with respect to employment and poverty reduction.

As China moves up the value chain, companies such as Foxconn increasingly replace workers with machines. That?s great for productivity, less so for near-term employment. Not only are services more labor intensive, Roach adds, but they leave ?smaller resource and carbon footprints.?

It?s a different story with India. The nation?s ?existing economic institutions could not cope with strong growth, its political checks and balances started kicking in to prevent further damage, and growth slowed,? explains economist?Raghuram Rajan, the chief economic adviser in India?s finance ministry. Shorter: India?s usual problems of too much regulation and bureaucracy. Well, that and too little investment. So the recipe for the India is opposite that of China. Rajan:

To revive growth in the short run, India must improve supply, which means shifting from consumption to investment. ? ?Over the medium term, it must take an axe to the thicket of unwieldy regulations that make businesses so dependent on an agile and cooperative bureaucracy.?One example of a new institution is the Cabinet Committee on Investment, which has been created to facilitate the completion of large projects. ?? Enormous new projects are in the works to sustain this growth. For example, the planned Delhi-Mumbai Industrial Corridor, a project with Japanese collaboration entailing more than $90 billion in investment, will link Delhi to Mumbai?s ports, covering an overall length of 1,483 kilometers (921 miles) and passing through six states. The project includes nine large industrial zones, high-speed freight lines, three ports, six airports, a six-lane expressway, and a 4,000-megawatt power plant. ??If all goes well, India?s economy should recover and return to its recent 8% average in the next couple of years.

Source: http://feedproxy.google.com/~r/aei-ideas/posts/~3/LLT89u58DPQ/

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