cadres and opening China up to foreign investors and to the private sector. Two years later, Gordon Wu, a Hong Kong tycoon, opened a superhighway connecting Pearl River Delta farmland to Hong Kong’s container ports. The farmland soon became factory towns, foreign investment poured in, and China truly began to join the global economy. Through the 1990s, Zhu Rongji, the prime minister, drove massive economic reform programs that prepared China for joining the World Trade Organization, after which investment flows ratcheted up even higher, and China’s growth accelerated.
In the two decades since Deng’s tour, several factors have combined to create China’s economic miracle—the greatest rise in economic productivity that the world has ever seen—a productivity boom that is still under way and that underpins the dramatic rise of the consuming classes. The following are some of these factors:
Welcoming market forces into the economy: letting markets set prices, allowing entrepreneurs to set up shop, and forcing state-owned enterprises to compete with each other. China also dismantled its “iron rice bowl” model of state enterprise (a system in which workers were given job security)—a painful but necessary reform that displaced more than seventy million people.
Making infrastructure investments that expanded the economy’s productive capacity, tapping into high domestic savings, leveraging the system of five-year plans, and intelligently using the state’s ultimate ownership of all land. These investments, coupled with agricultural reforms, also unleashed a migration to the cities, bringing people into urban environments, where much more remunerative employment opportunities existed.
Embracing trade and foreign investment, using membership in the World Trade Organization as a catalyst for driving domestic reforms, and creating an investment environment highly attractive to foreign investors. The ability to leverage Hong Kong’s trading prowess and Taiwan’s technology has been a huge advantage here.
Educating a highly capable workforce of women as well as men, and mobilizing this workforce into the high-growth sectors of the economy (indeed, a physical mobilization of more than 150 million migrant workers within the country), while sending the best and brightest abroad for even more study.
Developing private-property rights, which has led to large-scale home ownership.
India’s economic miracle began with different starting conditions and followed its own pathway, but is no less impressive. Prior to the 1990s, India’s version of state capitalism, the “License Raj,” was arguably even more effective at stifling productivity than China’s Communist system. The Licence Raj system consisted of India’s elaborate requirements for starting businesses, including multiple permits for opening, operating, or expanding an enterprise. At their height, License Raj regulations, red tape, and bureaucracy constrained Indian growth and productivity—and effectively created oligopolies with very high prices in many sectors. Entrepreneurialism was crushed by the resulting government-erected barriers to entry and by corruption. The first wave of changes happened in the 1980s—including changes in the monopoly laws and some sporadic sectoral reforms. In 1991, soon after Rajiv Gandhi was assassinated, the newly elected prime minister, Narasimha Rao, and his finance minister, Manmohan Singh (the prime minister as of this writing), found the old economic system in total crisis, with its foreign exchange reserves having dropped to $1.2 billion. With foreign debt obligations looming, the country was literally only weeks from bankruptcy. The duo launched a wide-ranging set of reforms that would liberalize the Indian economy. The reforms embodied several key elements:
Dismantling the License Raj—promoting competition in more than seven hundred industries previously protected and reserved for small and medium-sized enterprises. This helped many manufacturing companies achieve efficiencies and become competitive, because they were no longer subscale.
Supporting international trade by reducing the costs of import licenses.
Removing protectionist measures that stifled foreign direct investment and actively courting foreign multinational companies to invest in India. This has resulted in the opening up of most sectors for foreign direct investment.
Launching a program of privatization, with full or partial sales of the government’s stake in state-owned enterprises.
The economic miracles of China and India, spurred by fundamental reforms begun two decades ago, have now driven a boom of productivity gains that will remain strong and even strengthen in the future. By 2029, if not sooner, China will have surpassed the United States as the world’s largest economy (figure 1-3). By 2028, India will likely have surged past Germany and Japan, establishing itself as the world’s third-largest economy.
China’s productivity growth rate is forecast to be particularly strong in the current decade as its workforce gains experience, and growth tapers only moderately after 2020. India’s productivity growth has been more sluggish and starts from a lower base, but it is predicted to grow strongly in the next three decades, as education and infrastructure improve, urbanization accelerates, and an abundance of young and energetic citizens enters the workforce.
Productivity is important because it strongly correlates with the growth of personal incomes—which, in turn, will fuel the consumer revolution. The increased consumption that results is proportional—we have coined it the $10 trillion prize.
We calculate that between 2010 and 2020, the people of China and India will consume goods and services worth a total of $64 trillion. Chinese consumers will spend $41.5 trillion over this period, with annual expenditures rising from $2.0 trillion to $6.2 trillion, an increase of 203 percent. Indians will spend $22.5 trillion, with their annual expenditures rising from $991 billion to $3.6 trillion, an astonishing 261 percent increase (figure 1-4).
In other words, Chinese and Indian consumers will be spending nearly $10 trillion a year by 2020—more than three times the amount they are spending today. Their combined share of the global market will grow from 8.2 percent to 15.7 percent.1 In appendix A, we describe the mosaic of cultures in these two vast and heterogeneous countries and explain how a local market understanding is required for success.
Of course, there is uncertainty in any forecast of the future—forecasts presume stability, and in the real world, they can be knocked off course by economic downturns, natural disaster, political instability, and corruption. In appendix B, we issue a word of warning, highlight what we call the hit-the-wall scenario, and explain why the road to the $10 trillion prize could potentially be a rocky one.
FIGURE 1-3
GDP levels for the five largest economies, 1960–2030
Nevertheless, for Chinese children born in 2009, continued economic progress will probably mean that over the course of their lives, they can expect to consume thirty-eight times more material goods than their grandparents (figure 1-5). Life expectancy has grown from forty-seven years for a Chinese baby born in 1960 to seventy-three years for one born in 2009. An Indian baby born in 2009 can expect to live to the age of sixty-four—twenty-two years longer than its grandparents—and consume thirteen times more material goods than its grandparents, too (figure 1-6). In comparison, a child born in the United States in 2009, although likely to enjoy the world’s highest standard of living, might consume only twice as much as his or her grandparents and live only nine years longer.
FIGURE 1-4
Consumer
