"The Elephant and the Dragon" provides excellent information that allows readers to understand the impact of India and China's recent economic transformations. The bad news, however, is that its recommendations are the same old silly nostrums that have little, if any value. However, given the importance of simply helping Americans become more informed on the topic, the fact that the book exploded at least two popular myths, and the difficulty of correcting the problems India and China pose for the U.S., I still rate the book with 5 stars.
China's economic reforms began in 1978 when 18 rural families met in secret and decided to break up their collective farm (contradicting the communist system) and almost quadrupled their output. (Production had originally fallen 40% when the farms were collectivized.) The government then released most food price controls, and 80% of farmers then repaired and/or improved their homes. Deng (Mao's successor) then toured Singapore, was greatly impressed, and sent hundreds of others. "Special economic zones" suspended anti-business laws, taxes were lowered, and rules streamlined for factories making goods for export. In addition, local officials' promotions were pegged to the number of jobs created - thus, they were quick to build required roads and utilities. In addition, government officials insisted foreign companies use, and teach local workers their latest techniques.
A key dimension of our trade deficit with Asia (especially China) is the ESCALATING rate at which it is increasing. For example, in 2000, 30% of the world's toys came from China; only 5 years later it was 75%. It exported $1.3 billion in auto parts in 2001, and nearly $9 billion 4 years later. In 1996, $20 billion of computers and other technical products were exported from China, vs. $180 billion in 2004 - leading all other nations. China now exports more/day (over one 40 ft. container/second) than it sold abroad during all of 1978 - the year it began opening up its economy.
There's more. A McKinsey '05 survey of U.S. companies in China found they bought just 30% of what they could buy in China, and planned to increase that to 50% by '08. Finally, in '05, only 14% of Chinese companies designed their export products in China; by '08 half expect to do so. (Only about 10-20% of a product's U.S. retail value stays in China - the bulk goes to the designer - eg. Intels and Microsofts, and brand-name retailers; when these areas become subject to Chinese competition the sales of U.S. McMansions, BMWs, etc. will plummet.)
Perhaps U.S. efforts will convince China to revalue its currency by about 40%, making U.S. products more attractive. Not likely - the author reports that Chinese leaders estimate an 8% annual GDP growth rate is required to absorb the frustrations of its increasingly discontented interior population (earn only one-fourth that of their coastal brethren) - as well as the slightly more than 50% still employed in state- or collective-owned enterprises. In addition, only 25% of Chinese have health insurance, 14% have pensions, parents must pay an increasing proportion (now 25%) of education costs, enormous pollution and safety costs must be funded, roads and utilities require massive expansion, and Chinese banks are estimated to have $911 billion in bad loans (6X the American S&L crisis). Chinese officials are also well aware that cheaper labor is available in other areas of S.E. Asia, India, Africa, and South America - they cannot afford to push their luck too far. Finally, the U.S. should be careful what it wishes for - revaluing China's currency would put ENORMOUS pressure on those holding large amounts of U.S. dollars, risking a run of inflation for us.
India began allowing foreign investment 13 years after China, and in a begrudging and erratic manner after a new government was confronted with the reality of near bankruptcy. It devalued the currency 20%, lifted restrictions on imports, raised interest rates to 11% to encourage deposits, and eliminated export subsidies. State-owned banking, airline, and oil entities were opened to private investors, and important antimonopoly limits were eliminated for most companies while red tape and corruption and taxes were reduced. In '96, a corruption scandal brought a return of the left-leaning leaders. Sending government leaders to China helped break the resulting impasse.
Offshoring computer programming to India began as a result of Y2K needs. Today, newspaper ads bring 250 applicants/call-center job. Manufacturing, however, suffers from India's lack of good roads, stable electricity sources, and infrequent sailings.
The two popular myths exploded by the book? 1)Democracy is key to success - China's progress (9.6% GDP growth/year) has greatly outpaced that of India's (5.7%/year, over a shorter period), and at least one Indian leader attributes that to China's ability to move more quickly through its authoritarian leadership. 2)China's small steps to economic improvement (eg. try improvements out on a limited basis before going nationwide) worked far better than the "total immersion" recommended by U.S. advisors and attempted by Russia.
Finally, "The Elephant and the Dragon" attempts to offer suggestions for Americans - improve our education system, and invest more in basic research. These suggestions, however, are superficial (at best) because the real problem is that Asians are smart (IQ tests generally show about a ten-point lead vs. Caucasions), more are college-educated than in the U.S., and WILLING TO WORK FOR ONE-TENTH THAT OF AMERICANS! Improving our education (been tried for over three decades, with little or nothing to show for it except vastly increased spending) will do nothing to address this fundamental overall problem. (There still remains another problem regarding the need for improved technical leadership - addressed in the final paragraph.) Focusing on services delivered on site (incapable of outsourcing) is another recommendation offered by some - however, this forgets that this opportunity has already been largely taken over by illegal Mexican immigrants.
I don't have a solid solution either. However, Meredith's material allows some preditions. Since at best only half the savings of Chinese manufacturing now goes to American consumers, and American firms plan to considerably expand their outsourcing of manufacturing and service jobs, it seems likely that the economic spread between American "winners" and "losers" will first increase and then hold steady; at the same time the stock market will continue to rise (18,000?). Eventually, however, fewer Americans will be able to afford current prices for Chinese goods while the Chinese move into design and branding (eg. Korea's Samsung, LG Group, Kia, and Hyundai) - then prices, profits, stock levels, and executive pay will all slide.
"American content" laws enacted under President Reagan to save the American auto industry offer a ray of hope for American workers. They haven't "saved" G.M., Ford, and Chrysler, but they have led to considerable foreign investment in the U.S. and thousands of high-paying jobs from Toyota, Honda, Nissan, Mercedes, BMW, etc.
Two final points. 1)China and India's thirst for raw materials and energy make both more willing to deal with countries verboten to the U.S. - Iran, Venezuela, Sudan, etc. Thus, the U.S. is going to find itself with less and less international influence in the coming years. 2)Top caliber Indians and Chinese are already finding the U.S. less attractive as opportunities quickly grow in their own nations. Many of their expatriates are choosing to return. Thus, the U.S. is going to increasingly need to rely on its own talent, and we sorely need to improve our education for this segment.
