THE DRAGON VERSUS THE ELEPHANT

Strategic differences and common success stories

By Suzanne Rosselet, Deputy Director of IMD’s World Competitiveness Center -

April 2010

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On May 1, World Expo 2010 will open its doors in Shanghai, China. The theme of the exposition
is "Better City – Better Life" and signifies Shanghai's new status in the 21st century as a major
economic and cultural center. More than 190 countries and more than 50 international
organizations have registered to participate, and China expects to receive almost 100 foreign
leaders and some 70 million people – the largest number of visitors in the history of the
world's fairs in terms of gross numbers.

What could be a more fitting venue for this World Expo than China – the country expected
shortly to overtake Japan’s prized position as the second largest market in the world and
described by economist Jeffrey Sachs as the most successful development story in world
history. The size of the economy has doubled every eight years for three decades - the fastest
rate for a major economy in recorded history. A recent report by PricewaterhouseCoopers
forecasts that China could overtake the US economy as early as 2020.

But China is not alone. India is also among the world’s fastest growing economies and
together with China, has contributed nearly 30% to global economic growth as the balance of
economic power continues to shift from West to East. Contrary to popular belief, both China
and India are not emerging economies, they are actually “re-emerging.” China and India have
particular strengths and competitive advantages that have allowed each of them to weather
the global financial crisis better than most countries and to gain ground in the “catching-up
game” with the developed world.

Beware the sleeping giant

India, often referred to as the “sleeping giant”, has emerged as the fourth largest market in
the world when its GDP is measured on the scale of purchasing power parity. Both economies

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 THE DRAGON VERSUS THE ELEPHANT I Strategic differences and common
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are increasing their share of world GDP, attracting high levels of foreign investment, and are
recovering faster from the global crisis than developed countries. Each country has achieved
this with distinctly different approaches – India with a “grow first, build later” approach versus
a “top-down, supply driven” strategy in China.

Although China’s income per head is still low at about $3,566, less than one-tenth of what
Americans have, it is more than three times higher that of Indians (just over $1,000). China is
currently the fifth fastest-growing consumer economy in the world, and is on course to
become the third-largest by 2020, with India close behind and expected to move into the fifth
position by 2025. Chinese consumers are indeed putting into practice Deng Xiaoping’s famous
quote, “It is glorious to get rich.” The country recently surpassed the United States to become
the world’s largest automobile market and huge potential remains in terms of future
purchasing power.

China is also the first country in the world to have met the poverty reduction target set in the
U.N. Millennium Development Goals, and enjoys the remarkable success of having lifted more
than 400 million people out of poverty. This contrasts sharply with India, where 456 million
people (42% of the population) still live below the poverty line, defined by the World Bank at
$1.25 a day.

Different means, same end

The two countries’ economic performance has been very differently orchestrated. China’s
growth has been mainly investment and export-driven, focusing on low-cost manufacturing,
with domestic consumption as low as 36% percent of GDP. On the other hand, India’s growth
has mostly been derived from a strong services sector and buoyant domestic consumption.

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 THE DRAGON VERSUS THE ELEPHANT I Strategic differences and common
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India is also much less dependent on trade than China, relying on external trade for about 20%
of its GDP versus 56% for China.

There are equally large differences in how deeply China and India are integrated into the world
economy. China has recently surpassed Germany as the world’s biggest exporter, with exports
about eight times larger than those of India.

China remains far more open to the world than India, the latter often “hiding” behind trade
barriers or other protectionist measures. But India is fast becoming a country to be reckoned
with and the nation is definitely on investors’ radar screens as the third most popular
destination for foreign direct investment, after China and the U.S., with FDI increasingly
flowing from the rest of Asia.

“Cross the river by feelings the stones”

Both the above success stories have come about as a result of dramatic reform undertaken in
China and India. Both have adopted a “gradual approach” to development, in contrast to the
“Big Bang” or “shock approach” undertaken by Russia after the break-up of the Soviet Union
in 1991. In contrast to India, China’s development has been driven by a strong state and
implementing reforms in stages. Almost all reforms have been the result of experimentation -
as Deng Xiaoping famously said: “Cross the river by feeling the stones”.

The long-term goal remains the transformation of China’s economy to reduce over-
dependence on exports and investment. The well-being of society also requires greater focus
on healthcare reforms, education, labor legislation and environmental protection, as well as
job creation for the growing labor force.

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 THE DRAGON VERSUS THE ELEPHANT I Strategic differences and common
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Public infrastructure in both China and India calls for enhancement of its quality and
efficiency, and to halt environmental degradation. Whereas China has made extraordinary
investment in its basic infrastructure (roads, railroads, airports, ports, telecommunications,
etc.), in the last two years, India has doubled infrastructure investment in its budget to four
percent, but this remains paltry when one considers that China spends around three times as
much.

Both countries are heavily dependent on foreign energy and are strongly pursuing outward
investment to secure additional energy sources. A more ambitious goal would be to target
government funding to provide incentives to make clean and renewable energy projects a
long-term priority. Both countries appear to be moving in this direction.

The challenges that India faces mirror those of China. Both need to progress from low-cost,
low-value manufacturing and service provision to higher-value activities, but while China is
striving to move up the value chain in manufacturing first and services next, India is doing the
opposite.

Recent growth recovery in China has mainly been driven by a huge policy stimulus of $586
billion and financed by aggressive bank lending, helping to offset the negative impact of falling
exports last year. Despite excess capacity in specific industries like steel and cement, China
still has great potential for growth, with many new opportunities on the horizon.

The current crisis offers a unique opportunity to encourage more labor-intensive service
industries, reduce over-capacity in many low-cost manufacturing industries, boost job
creation and pursue the path of long-term sustainable growth. During this “recovery period”, it

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 THE DRAGON VERSUS THE ELEPHANT I Strategic differences and common
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will be interesting to see how China and India invest in the economic, business and social
structures which characterize more mature and advanced economies. Will India’s “slow-
moving elephant” ever catch up with China’s “roaring dragon”? It may just be a question of
time.

In the meantime, visitors from around the world can get a preview of just how far China has
already come during the Shanghai Expo.

Suzanne Rosselet is the Deputy Director of IMD’s World Competitiveness Center. The annual
World Competitiveness Yearbook results will be released on May 19, 2010.

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 THE DRAGON VERSUS THE ELEPHANT I Strategic differences and common
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