A new world economy

Simultaneous takeoffs
China and India. Rarely has the economic ascent of two still relatively poor nations been watched with such a mixture of awe, opportunism, and trepidation. The postwar era witnessed economic miracles in Japan and South Korea. But neither was populous enough to power worldwide growth or change the game in a complete spectrum of industries. China and India, by contrast, possess the weight and dynamism to transform the 21st-century global economy. The closest parallel to their emergence is the saga of 19th-century America, a huge continental economy with a young, driven workforce that grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights.

But in a way, even America's rise falls short in comparison to what's happening now. Never has the world seen the simultaneous, sustained takeoffs of two nations that together account for one-third of the planet's population. For the past two decades, China has been growing at an astounding 9.5% a year, and India by 6%. Given their young populations, high savings, and the sheer amount of catching up they still have to do, most economists figure China and India possess the fundamentals to keep growing in the 7%-to-8% range for decades.

Barring cataclysm, within three decades India should have vaulted over Germany as the world's third-biggest economy. By mid-century, China should have overtaken the U.S. as No. 1. By then, China and India could account for half of global output. Indeed, the troika of China, India, and the U.S. -- the only industrialized nation with significant population growth -- by most projections will dwarf every other economy.

What makes the two giants especially powerful is that they complement each other's strengths. An accelerating trend is that technical and managerial skills in both China and India are becoming more important than cheap assembly labor. China will stay dominant in mass manufacturing, and is one of the few nations building multibillion-dollar electronics and heavy industrial plants. India is a rising power in software, design, services, and precision industry. This raises a provocative question: What if the two nations merge into one giant "Chindia?" Rival political and economic ambitions make that unlikely. But if their industries truly collaborate, "they would take over the world tech industry," predicts Forrester Research Inc (FORR). analyst Navi Radjou.

In a practical sense, the yin and yang of these immense workforces already are converging. True, annual trade between the two economies is just $14 billion. But thanks to the Internet and plunging telecom costs, multinationals are having their goods built in China with software and circuitry designed in India. As interactive design technology makes it easier to perfect virtual 3-D prototypes of everything from telecom routers to turbine generators on PCs, the distance between India's low-cost laboratories and China's low-cost factories shrinks by the month. Managers in the vanguard of globalization's new wave say the impact will be nothing less than explosive. "In a few years you'll see most companies unleashing this massive productivity surge," predicts Infosys Technologies (INFY) CEO Nandan M. Nilekani.

To globalization's skeptics, however, what's good for Corporate America translates into layoffs and lower pay for workers. Little wonder the West is suffering from future shock. Each new Chinese corporate takeover bid or revelation of a major Indian outsourcing deal elicits howls of protest by U.S. politicians. Washington think tanks are publishing thick white papers charting China's rapid progress in microelectronics, nanotech, and aerospace -- and painting dark scenarios about what it means for America's global leadership.

Such alarmism is understandable. But the U.S. and other established powers will have to learn to make room for China and India. For in almost every dimension -- as consumer markets, investors, producers, and users of energy and commodities -- they will be 21st-century heavyweights. The growing economic might will carry into geopolitics as well. China and India are more assertively pressing their interests in the Middle East and Africa, and China's military will likely challenge U.S. dominance in the Pacific.

One implication is that the balance of power in many technologies will likely move from West to East. An obvious reason is that China and India graduate a combined half a million engineers and scientists a year, vs. 60,000 in the U.S. In life sciences, projects the McKinsey Global Institute, the total number of young researchers in both nations will rise by 35%, to 1.6 million by 2008. The U.S. supply will drop by 11%, to 760,000. As most Western scientists will tell you, China and India already are making important contributions in medicine and materials that will help everyone. Because these nations can throw more brains at technical problems at a fraction of the cost, their contributions to innovation will grow.

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