Chindia needs efficiency, not money or manpower

NEW DELHI: It's not the abundant labour or capital but increased productivity that India and China, Asia's fastest growing economies, would need to sustain their rapid growth, economists believe. "Both India and China have experienced rapid growth in recent decades.

Sustaining this rate of economic expansion will require less reliance on abundant labour and capital and more support from improved productivity," Citigroup's Chief Asia Economist Yiping Huang and Emerging Markets Chief Economist Donald Hanna wrote in a report.

While India would need more investment in infrastructure and education, China needs to achieve more balanced economic expansion with less reliance on rapid export growth, they said.

Citing the example of a strong but unsustainable economic growth, the report said that the former Soviet Union achieved remarkable growth in the 1930s and 1950s, but then collapsed in the 1980s, as it was hugely dependent on labour and capital while contribution from other factors dropped to nearly zero. In mid-1990s, the noted economist Paul Krugman argued in a research paper - The Myths of Asia's Miracle - that strong growth in some East Asian economies in the 1980s and early 1990s could not be sustained because of their reliance mainly on labour and capital mobilisation and not on productivity improvements.

Additionally, findings of a recent growth accounting exercise by economists Barry Bosworth and Susan Collins confirm that productivity improvement is crucial for sustainable growth, Citigroup said. Bosworth and Collins found that two factors driving the rapid growth from 80s to 90s in India and China were more rapid accumulation of physical capital and faster increase in total productivity.

From 1993-2004, capital accumulation, which is a result of investment, accounted for 44 per cent of the GDP growth in China and 28 per cent in India. In comparison, total productivity improvement accounted for 41.7 per cent and 35.9 per cent of GDP growth in China and India respectively.

Economic growth in Asia averaged 5.3 per cent in the second half of 20th century, with China and India recording an even faster growth in recent decades.

Citigroup report said that the analysis provides preliminary evidence for the recent rapid growth may be sustainable in the two countries, as productivity is not bound by limits which the continued use of additional labour and capital face.

Some analysts have even argued that the annual growth potential of China and India has probably already shifted to around 10 per cent in the last few years.

Overall, Citigroup is confident that China and India can sustain rapid economic growth in the coming decade, despite downside risks to near-term outlook, with strong increase in productivity.

A sustainable economic growth also augurs well for the currencies of the two countries, the analysts believe. Growth has often led to sharp currency appreciation, as has been the case in Japan, Korea and Taiwan, and China and India are not likely to be an exception, the report said.