Even a year ago, few would have dreamed that China, Russia and India would emerge as global economic locomotives. They are still big, bulky states, still shaking off the torpor of fading socialist dreams, and a bit behind the times in a triumphantly capitalist era. But look at the numbers now: the production of goods and services is expanding by 7.5 percent in China, 5.5 percent in Russia and 4.5 percent in India this year. By contrast, the United States, Europe and Japan, the engines of the capitalist world, are wallowing in or near recession. Were it not for China, India and Russia, which account for two fifths of world population and one fifth of its output, global output would likely be shrinking instead of rising by maybe 1 percent this year. “It’s a topsy-turvy world, isn’t it?” says William Cline, research director of the Institute of International Finance in Washington. “But there it is. They are the leaders now.”
The story of how the gift of growth has passed, temporarily at least, to three emerging giants reveals the complexity and quirkiness of global business. The common assumption that the post-communist world was merging seamlessly into a standard economic model doesn’t hold up to scrutiny. Right now there are half a dozen stages of development. China, India and Russia occupy a middle ground. They are already far more connected to the global economy than the poorest economies, like those in sub-Saharan Africa, which export only a few raw materials or farm goods, and import little more than used clothing, the odd truck and surplus food. Their growth depends on factors like the weather and the snail like pace of change in subsistence cultures. For the foreseeable future, most of them will keep falling behind, as their economies just barely keep pace with the growth of their populations.
Russia, China and India are in control of their destinies. Their average incomes are five to 10 times higher than incomes in the poor countries. They participate vigorously in world trade, although Russia less than the others. They, in fact and theory (theory for the most part, in India’s and Russia’s cases), are open to foreign investment. Their cultures cherish education, hard work and at least the goal of honesty in business and government–qualities essential for rapid economic growth. One final parallel: China, India and Russia are just getting started on the capitalist road, and it is always easiest to sprint when coming off the start line.
The economies in Japan and Hong Kong got going right after World War II. The other Asian tigers, such as Taiwan, South Korea and Malaysia, joined the race in the 1960s. China climbed onto the course only after 1979, and very cautiously at first. India gave up on socialism, and Russia on communism, only in 1991. Now the three big latecomers are enjoying a period in which intelligent imitation of their predecessors can yield decades of very rapid growth.
Yet no two have chosen the same path. China has turned itself into the low-cost manufacturing center of the world, taking advantage of a cultured work force and wage levels a fraction of those in Taiwan, Korea or Malaysia. As a consequence, some of China’s growth, and its whopping trade surplus of $30 billion this year, is coming at the expense of Korea, Taiwan, Singapore and Japan, which are all suffering from slow growth or recession. China’s pell-mell growth–10 percent in the 1980s, 9 percent in the 1990s–is slowing. But if it can manage its financial problems (the bankrupt state banks, for instance), it could sustain 6 or 7 percent growth rates. And it is still reforming rapidly. This week China becomes a member of the World Trade Organization, crossing an ideological Rubicon to join the global economy under international law.
From its independence in 1948 until 1991, India was almost as committed to Marxist economics as China. Then, in part out of envy of China’s boom, India embraced free-market reform. Growth rates jumped from 1 or 2 percent in the late 1980s to more than 7 percent in the mid-1990s, before the impetus seemed to fade. The 4.5 percent expansion expected this year is actually a serious comedown. The government is now debating a new round of liberalization, from legalizing layoffs to lifting controls on foreign direct investment.
Russia has made the most surprising recent strides. After 1991, Russia privatized in the worst way, allowing politically favored tycoons to take over state industries. In a climate of commercial lawlessness, chaos and corruption prevailed. Investment ceased. Profits flowed out of the country into secret bank accounts. Output by the late 1990s was 10 or 15 percent below the level when communism fell. It all crashed down in August 1998, when the government defaulted on its bonds and the ruble dropped from six per U.S. dollar to 16.
No one could see it at the time, but things could not get worse in a nation with Russia’s basic strengths, and so they have gotten better. The legislature has begun passing laws to help legitimate businesses compete. Vladimir Putin, elected president in the fall of 1999, launched a campaign against government corruption, began to collect taxes and stabilized the currency. From less than zero in 1998, output grew by 5.4 percent in 1999 and 8.3 percent last year. Despite sagging oil prices, it still expanded by more than 5 percent this year. Nor is this all. Virtually all the 11 former Soviet republics, from Belarus to Uzbekistan, are in the midst of two- to three-year-old expansions. “They are finally getting things right,” notes Kevin Crane of PlanEcon in Washington. “But when the star performers of the world are the former Soviet economies, you know the world is in bad shape.”
Point taken. Russia, China and India still have massive problems, starting with banks that are broke by conventional accounting standards. China and India both have major budget shortfalls. Russia and India still have limited exports, and in the postwar era no nation has achieved prosperity without becoming an export powerhouse. But for the next several years, China, India and Russia still have large, untapped domestic markets in which to grow, no matter how slow the recovery in the West. These big, backward states, once part of the problem, are now part of the solution to growth in the global economy.
