China and India: No Guarantees



MOST chemical companies now believe it is inevitable that China and India will reach developed economy status. Many even believe that their strong growth will mean “the end of economic cycles”.

But as we discuss in Chapter 6 of ‘Boom, Gloom and the New Normal’, the new ICIS/ International eChem/ICIS eBook, there are three major risks to this rosy scenario, which are:

China’s demographic timebomb. Its one-child policy was introduced in 1978 to counter fears of over-population and famine. By China’s own accounting, about 400m births were prevented between 1979 and 2010.This has reduced today’s 25-to-35-year-old age group by 75%. As demographer Kenneth Gronbach notes, “the 30-somethings will have to do the majority of China’s production, consumption and taxpaying, and when you have a 75% reduction in the group that is chiefly responsible for those activities, you’ve got a real problem“.

Lower incomes. China and India’s “middle class” have incomes that are only a tenth of those in developed markets, as we discussed in Chapter 4. This has major implications for the nature of consumption in China and India – and for the type of products that companies will need to make to prosper.

The transition is not guaranteed. It takes 50 consecutive years of 7% annual growth for a country to boost per capita income from $500 to $20,000, says Nobel Prize-winning economist Michael Spence. China’s per capita GDP was only $4382 at end-2010, and India’s $1371, according to the International Monetary Fund. So both countries still have a long way to go.

Recent growth in China and India has also come at a price: Poor air quality, chronic water shortages and deforestation. Equally, China needs to rebalance its economy away from its over-reliance on exports.

India must improve its atrocious infrastructure, and reform the harmful government subsidies that are holding back the agricultural sector. It is also often forgotten that India is home to a third of the world’s poor people, with 37% of its population (410 million) classified as poor by the World Bank. Its overall literacy rate is only 61% – and just 47.8% for women.

The new chapter therefore argues that China and India will require quite different products and services from those sold in the West. It also warns that their growth should not be taken for granted. Companies need to develop robust scenarios to manage the uncertainty this will create.

 

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