Stephen Roach on China Versus India

by: Stephen Roach

From Morgan Stanley economist Stephen Roach's May 19th essay titled A Tale of Two Asias:

If India is to services as China is to manufacturing, what role does that leave for the high-cost developed world? Down the road, if India also succeeds in pushing into manufacturing while China makes successful forays into services, the same question becomes all the more threatening to the world’s major industrial economies. Protectionism is the biggest risk in all this. IT-enabled globalization is pushing economic development into manufacturing and services at a breakneck pace. Moreover, IT-enabled connectivity has increasingly transformed once non-tradable services into tradables -- and has moved rapidly up the value chain and occupational hierarchy in doing so. The result is a mounting sense of economic insecurity in the developed world that has become a lightning rod for political action that, unfortunately, has unleashed an increasingly worrisome protectionist backlash.

This is not the experience that orthodox economics understands. The win-win theory of globalization -- workers in poor countries get rich through trade but then turn around and buy things made by rich countries -- just isn’t working. That’s because both the speed and scope of an IT-enabled globalization has broken the mold of the classic theory of comparative advantage. In days of yore, it was fine -- albeit painful -- for rich countries to give up market share in tradable manufactured products. That’s because highly-educated knowledge workers could seek refuge and shelter in nontradable services. However, with nontradables becoming tradable and with educational attainment and skillsets rising rapidly in the developing world, the security of the old way has all but vanished. Sadly, that provides both the justification and the opening for protectionists.

China and India represent the future of Asia -- and quite possibly the future for the global economy. Yet both economies now need to fine-tune their development strategies by expanding their economic power bases. If these mid-course corrections are well executed -- and there is good reason to believe that will be the case -- China and India should play an increasingly powerful role in driving the global growth dynamic for years to come. With that role, however, comes equally important consequences. IT-enabled globalization has introduced an unexpected complication into the process -- a time compression of economic development that has caught the rich industrial world by surprise. Out of that surprise comes a heightened sense of economic security that has stoked an increasingly dangerous protectionist backlash. This could well pose yet another major challenge to China and India -- learning how to live with the consequences of their successes.

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