The Asian century

Prof. Lakshman Krishnamurthi considers the future of Asia's largest economies, finding challenges for both India and China — and for the United States

By Aubrey Henretty

"Some historians may look at the data and say the last thousand years was a blip."

Krishnamurthi, who travels annually to India, says that nation has changed dramatically in the past 30 years. "I left India in 1975," he recalls. "There was nothing — nothing — happening in India." Today, a booming tech sector, an emerging middle class and an enormous, largely young population have put India back on the map as a potential competitor with neighboring China, whose gross domestic product has been rising steadily since the early 1980s.

In "India and China in the Asian Century," a paper Krishnamurthi recently co-authored with research associate Sugandha Khandelwal, he sets out to "compare India and China and put them in context with the rest of the world." He analyzes data from large-scale studies conducted by the research arms of Morgan Stanley and Deloitte and concludes that both nations will face significant economic challenges in the coming decades.

"China has been growing, on average, about 9 percent per year for the last 17 years," says Krishnamurthi. "That kind of growth is going to put tremendous pressure on factory inputs." In addition, the inevitable rising prices of global goods will strain China's economy, of which 50 percent is tied up in exports.

Despite its economy's heavy reliance on exported goods, China is a net importer with every nation but the United States, Krishnamurthi says. Resource-poor China buys raw materials from most of the world and uses those materials to manufacture finished products, which it then sells primarily to the United States.

Another of China's many economic paradoxes is the philosophy that underlies the system. Though officially communist, China is structured more like a capitalist nation than is India, which for much of its history since independence in 1947 has embraced socialism. "China is very top-down-driven," says the Kellogg professor, a marketing strategist who joined the school in 1980. "If they want to get something done, they get it done. India cannot." Development moves more slowly in India, he adds, because it's a democracy. In addition, bureaucracy still remains prevalent, one vestige of its colonial days during the British Raj. "You can't simply displace workers like they're doing in China." Krishnamurthi is certain that if the Indian government took such liberties, its citizens wouldn't stand for it, and years of tedious litigation would soon follow.

He points to another quirk: "Chinese are very entrepreneurial outside of China," he says. "Inside the country, it's another story. Little guys have a very hard time. In India, that's not true."

According to Krishnamurthi, India's "little guys" have used their greater access to outside funding to build an enormous — but not scalable — retail sector. "It's a country of mom-and-pop stores," he says. "Every store is very small, and there are millions of them. It is completely inefficient, and is a sector that has to modernize.  Major players like Reliance and Bharti are getting into it, but India is far behind China in this sector."

Without major reforms, retail will not be a viable option for India's youth, who will on average be wealthier and better educated than their parents and will face fiercer competition from their peers, who are many times more numerous. Krishnamurthi says that as China's population ages (a result of its one-child policy), India's large, young workforce could put India's economy at a distinct advantage. But it will also pose new challenges:

"The challenge in India is, how do you find work for all those people?" says Krishnamurthi. The answer is not simple, but he believes it must include vast improvements to public infrastructure.

"To employ hundreds of millions of people in the next 20 years, you need massive infrastructure investments which will spur manufacturing," he says, adding that China is way ahead of India in this respect, thanks to Beijing's prudent investment in roads, railways, ports and airports throughout the nation. "India is starting to recognize that their infrastructure investment has been pretty poor. The country knows it has to invest. The question is: How?"

Building new infrastructure will be crucial but difficult for both nations as the prices of essential goods continue to rise, Krishnamurthi says. "These countries need to keep growing to lift themselves out of poverty, so rising oil and food prices are a serious setback." And as each nation grows, neither is interested in hearing the word "pollution" — especially not from veteran polluters in the West. With a better standard of living nearly within reach for so many of their citizens, both nations have responded to concerns about global climate change largely by ignoring them, Krishnamurthi says. "This is misguided of course, because both China and India are destroying themselves in their rush to grow, but the imperative in both countries is to improve the life of their citizens."

In some ways, says Krishnamurthi, China and India are learning from each other. At the moment, India is faring better in some sectors — tech support, for example — because of its high percentage of English speakers. Not to be outdone, the Chinese government has begun to mandate English instruction in primary and secondary schools. "In 20 to 25 years, it's unclear to me that India's [language] edge will be that much."

Asked which nation will be the ultimate economic victor, Krishnamurthi doesn't equivocate.

"I believe China will win," he says. "India will never catch up to China in terms of GDP."

Before China can claim decisive victory, Krishnamurthi says, the nation will have to address short-term problems related to its public image and quality-control standards. "From lead in toys to contaminated seafood to potentially contaminated pharmaceutical products, this is a huge problem right now," he says, adding that the occasional shoddy-export scandal is common in industries that grow faster than the regulatory bodies overseeing them. "Will China address those problems? Of course." If government officials don't act fast, he adds, "their entire investment machine will start to slow."

While China and India vie for global economic supremacy, says Krishnamurthi, business and government leaders in the United States will have to grow accustomed to the idea that both nations will be strong competitors for many years. If the United States wants to stay competitive with China and India as their markets boom, it must recognize and confront weak spots in its own economy. One of the biggest, he observes, is the sorry state of public education, particularly in math and science. A lack of expertise in those two subjects, Krishnamurthi says, is costing the nation jobs in science, engineering and technology — industries in which India happily picks up the slack. "This stuff about, 'We are going to bring the jobs back' — it's nonsense. The jobs are not coming back."

He believes too many Americans — citizens and leaders — remain in "a fog."

"We understand what the problem is, but — strangely, for a country like the United States — we're not implementing well," he says. What is needed, he contends, is a system-wide overhaul — a focus on producing exceptional students of the hard sciences at home and attracting even more from abroad, an agenda that has political repercussions because of the charged immigration issue. "If the best people will not come here, what can we do?"

Krishnamurthi believes the United States will rise to the challenge. "I am optimistic about the U.S., long-term. I think we have a short-term problem."