China and India follow different paths to economic power, says Dallas Fed

For immediate release: August 28, 2008

DALLAS—China and India have charted different courses to economic growth, and India’s may be more sustainable in the long run, according to the August issue of the Federal Reserve Bank of Dallas’ Economic Letter. 

In “China and India: Two Paths to Economic Power,” senior vice president and chief economist W. Michael Cox and senior economics writer Richard Alm find China’s economy depends more heavily on goods and India’s is tilted toward services. India’s services sales make up 38 percent of all its exports, compared with China’s 8 percent.

So far, China’s focus on goods has led to faster growth rates, but India’s emphasis on services may eventually prove more successful, the authors say. Economies with a high per capita income tend to focus more on services than goods production, the authors say.

“Exporting will help India raise its per capita income as it develops world-class service providers, fosters a skilled workforce and provides incentives for education,” Cox and Alm write. “India may fare better in a world of high transport costs because moving information on the Internet will remain cheap.”

Both countries would reap big economic rewards by pressing forward on economic freedom and globalization, the authors state. While China and India have improved in some areas of economic freedom, businesses in both countries still face heavy regulation and poor enforcement of property rights.

“Competing in cutting-edge industries will require China and India to further improve business climates that in many ways aren’t up to the standards of the U.S. and other nations,” the authors write.

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