China and India Exposed

BERKELEY – Chinese Premier Wen Jiabao’s forthcoming trip to India, following hard on the heels of President Barack Obama’s recent visit, will provide another opportunity for the media to gush about the growing global economic clout of China and India. We can be sure that the soft underbellies of both economies will be kept hidden from view.

After a couple of centuries of relative stagnation, these two countries, containing nearly two-fifths of the world’s population, have experienced remarkably rapid income growth in the last three decades. In manufacturing and services (particularly software, business processing, etc.), respectively, China and India have made huge strides internationally, and their acquisition of global companies has attracted considerable attention.

But some dubious assertions have, through constant repetition in recent, often breathless, accounts about the two economies, become part of conventional wisdom. Much of what really goes on inside these two large countries is often left out.

For example, in terms of value added (the value of output after deducting the cost of materials and components), China, contrary to popular impression, is not yet the manufacturing center of the world. The Chinese produce about 15% of value added in world manufacturing, while the United States contributes about 24% and the European Union about 20%.