Is there a simpler explanation to the rise of Chindia

Another report claiming that "dominance of China and India [would] return to the historic norm prior to the Industrial Revolution of the late 18th and 19th centuries" came through today. Its become so boring to read that India and China will re-emerge as dominant economies unless they goof up on their fiscal policies, urban development, educational growth, demographics .. the list is long!

I find most news reports and analyses engaged either in extrapolating the economic trends of the past decade or speculating by generalizing trends from certain sectors like manufacturing (China) and software services (India). The point is - has anyone been able to spot the root cause behind the rise of China and India? And is there any theory which can justify why China and India will rise to become economic super powers - without putting riders to the claim.

The reasons for rise of India and China have been different sectors, but the source of both their strengths is the same - cheap and plenty 'manpower'. The only difference is that China powers its factories with cheap labour, while India has a large pool of English educated workforce for doing the world's backoffice work. But in effect, neither India nor China are engaged in fundamentally altering the way business is done or improving the productivity and efficiency of business processes which they have 'insourced' from the West.

This brings me to my initial point - what is the guarantee that once practically the whole world's backoffice processes have been moved to India and all possible manufacturing  processes have been transferred to Chinese industries - these nations will continue growing? Since they are not doing anything to improve productivity, how will they feed the aspirations of their ever growing urban population for improved lifestyle? Where will the money come to improve urban development, educational improvement and fiscal management?

What most analyses miss is the fact that both India and China have grown in the past 2 decades due to wage/cost arbitrage and existence of a "remittance economy". Money has been moving from the US/Europe to Chinese/Indian metros - from where it remits to smaller cities, towns and villages. With recession in US/Europe - another wave of cost cutting has emerged in these developed markets, creating another siphon of remittance - but how long will this siphon continue?

India and China need to work on 3 immediate things:

1. Control population growth so that living standard per capita can be improved
2. Improve productivity of their existing businesses and reduce the amount of manpower needed to create each Yuan/Rupee
3. Innovate! Encourage entrepreneurship! Increase domestic consumption!

Point 1 above will probably get addressed in China by as early as 2015, but it will be a huge problem for India all the way till it either crosses the 'developing to developed' divide or ends up failing to cross it. 

Point 2 is dependent on point 1 - unless you control population, it will be difficult to push reforms or improvements which reduce the dependence on manual labour. If you have a large population - the cost of hiring two people ends up lower than the finance cost of buying a machine to do the same job. Hence the larger your population, the lower the inherent push to improve productivity per individual. 

Its important to note that achievement of point 1 is a necessary but not a sufficient condition for point 2. Point 2 needs a lot more - preparedness of businesses to improve, low resistance from worker unions to automate, high acceptance in the society, higher energy production capacities etc. 

Point 3 above is easy to achieve in India due to its democratic set up and very hard in China, unless there is a change of heart among the polity of the country.

The 18th and 19th centuries had agriculture dominated economies where manpower, skills and productivity - all 3 played important roles. 20th century was the age of industries where what mattered was how large industries you could build - how well you could deploy technology.

The 21st century is the knowledge economy where innovation in technology and people both matter - what needs to be seen is whether the West can continue to maintain a high education and research impetus to maintain its dominance in the economic markets, or whether as predicted the Asias rise to dominance once again!

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