Halfway across the world from this meeting, an economic and social revolution is under way. Dirt-poor just a generation ago, China and India are turning their economies around; they are now the dragon and the tiger of global commerce, experiencing growth rates that no other large country can match. The results are being felt around the globe. They will continue to be felt for many years to come.

This abrupt transformation in Asia means many things to many observers. Humanitarians see in it better lives for one-third of the world’s people. Investors recognize a welcome chance to get in on the ground floor of many highly profitable ventures. Some economists, political scientists, and historians see in it a shift in the world’s center of gravity from the industrialized West to the industrializing East. Military planners note the remote but unignorable risk of war between two nuclear powers. In all, it is worth taking some time to compare the Chinese dragon and the Indian tiger, to measure their progress and try to figure out where their futures lead.

Background
In the race to capitalist prosperity, China clearly got off on the wrong foot. As the United States grew rich in the postwar boom of the 1950s, Mao Zedong’s Communist China starved; an estimated 30 million people died of hunger between 1959 and 1962 alone, following an ill-conceived attempt to industrialize the countryside that produced only shoddy, unsalable goods and disrupted the nation’s agriculture. In the late ‘60s and early ‘70s, while Europe and Japan managed increasingly wealthy capitalist economies, the "Great Proletarian Cultural Revolution" purged intellectual and political leaders, destroyed the school system, and attempted to reshape China into an land of agrarian peasant communes; it achieved little but chaos that would take decades to repair.

India was not doing much better. In the 1950s, Jawaharlal Nehru’s profound distrust of capitalism shaped an economy that was equal parts socialism and bureaucracy. The so-called "License Raj" provided graft-rich government jobs for the educated sons of upper castes, nationalized major industries, erected barriers of licensing and regulation that made it almost impossible to start or operate a business, and blocked what little foreign investment might otherwise have been attracted to India. Economy growth was understandably slow. It seemed that India would remain the world’s perpetual beggar state.

In China under Mao, most economic activities were owned and operated by the government. Iron, steel, coal, machine building, light industrial products, armaments, and textiles all were the province of huge, inefficient state-run enterprises. Agriculture was centered in large communal farms. China is still struggling to escape this legacy.

The first hints of economic change arrived soon after Mao’s death in 1976. In the 1980s, Mao’s successor, Xiang Zemin, abolished the farm communes and turned most agriculture over to households. In rural areas, villages were encouraged to establish small factories.

Even the state-owned industries received greater autonomy; ultimately, this meant that they were cut loose to live or die by market forces they had previously ignored. Since then, local leaders and plant managers have been given increasing control over state-owned enterprises, while private businessmen have graduated into ever more ambitious service and manufacturing operations.

Increasingly, China has sought foreign capital to promote economic development. At first, this was limited to the export trade and in partnership with Chinese companies. Since 1990, Beijing has allowed the development of wholly foreign-owned companies selling in the domestic market. However, investment has been largely channeled to labor-intensive manufacturing; until recently, services and finance remained off-limits to foreigners. As a result, though investment in China remains a hot story in the business news, China actually receives less foreign direct investment than other major developing countries, only $30 per capita; for comparison, Brazil which receives $195 per capita.

Strict population controls have helped to make China’s economic policies effective. A system of incentives, combined with unofficial coercion, encourages Chinese couples to limit themselves to a single child. (There are exceptions for very small ethnic groups.) The result is a population growth rate now reported at 0.6 percent per year, among the smallest in the world. Economically, it helps to have fewer mouths to feed.

India came to free markets even later than China. Throughout the 1980s, most major industries and the media either were owned by the government or were so heavily regulated by it that any nominal distinction was of little practical significance. The "License Raj" that had made it difficult to operate a business in the 1950s metastasized over the decades, so that private enterprise could hardly function. By 1991, a foreign exchange crisis threatened to bring down the whole cumbersome economic structure.

Enter an Oxford-educated economist named Manmohan Singh, recently described in a New York Times headline as "the Sikh who saved India." Singh devalued the rupee, reduced taxes and tariffs, liberalized the rules governing foreign investment, reformed monetary and fiscal policies, and eventually announced plans to privatize many government-owned enterprises. When Congress Party government of then Prime Minister P.V. Narasimha Rao fell after a series of corruption scandals in 1999 and was replaced by the Baratiya Janata Party (BJP) under Atal Bihari Vajpayee, those policies remained intact.

Unlike China, India has had little success in keeping its population under control. India was one of the first countries to concern itself with birthrates; the Nehru government formulated a "National Family Planning Programme" as early as 1951. Yet even a program of forced sterilization under Indira Gandhi in the 1970s had little effect on the birthrate, estimated at 2.14 percent in 2003, according to the United Nations Population Information Network.

India has one other problem that China does not: an excess of diversity. China is one of the world’s more homogeneous societies. Nearly 92 percent of its citizens are Han Chinese, with the remainder divided among ten principle groups. Most speak Mandarin, though there are many local dialects. Religion is a relatively small issue, as the country has been officially atheist since the Communist revolution. In contrast, India is divided among three basic ethnic groups, something over half a dozen major religions (81 percent of Indians are Hindu, 12 percent Muslim, just under 2 percent Sikh), 18 official languages and perhaps 2,500 dialects, and more than 4,000 castes—the hereditary occupational divisions that form the basis of Hindu culture—plus a large population of Dalits, or "untouchables," whom tradition regards as being too low in status even to warrant a place in the caste system. There is no more complex or fractious society in the world.

In the United States, most of us find it relatively easy to accept that diversity is a source of strength. Many Indians remain unconvinced. Religious conflict between Hindus and Muslims, Hindus and Sikhs, and recently Hindus and Christians has been a frequent part of Indian life. Some 200,000 Sikhs were murdered over the 20 years ending in 2000. Religious riots resulting in hundreds or thousands of deaths were a regular occurrence in the 1990s. And, of course, the perennial border warfare in Kashmir continues animosities between the Hindus and Muslims that has continued since before the two countries gained their independence in 1947. The BJP originated as a radical Hindu supremacist movement. Though it ruled India even-handedly from September 1999 to May 2004, there is room to doubt that it has truly strayed far from its roots.

Present Status - China
China’s brand of capitalism remains highly regulated and often corrupt. Many large enterprises are still owned by the state, frequently operating at a loss, and many that have been nominally privatized are owned by high-ranking military officers and political officials. Excluding military personnel, the country’s single largest employer is the People’s Liberation Army; it operates dozens of factories, many in heavy industry and most with great inefficiency. In many regions, local officials retain enormous power over small private businesses. The occasional execution of officials charged with corruption has done little to change this situation.

Yet this oddly mixed economic system has proved remarkably successful. During the 1980s, industrial and agricultural output grew by an average 10 percent per year. Between 1978 and 2000, China’s GDP quadrupled. Between 1982 and 1990, per capita income tripled; by 2002, it had grown by roughly another 40 percent. In 2003, per capita GDP stood at just $5000, compared with $37,600 in the United States. (This figure is stated in terms of purchasing power parity, as are GDP and income figures below.) China now accounts for about 4 percent of the world’s economic output.

It remains one of the fastest growing economies in the world. In 2003, its GDP expanded by 9.1 percent, according to official figures. (Many economists suspect them of being inflated by 1 or 2 percent.) In the first quarter of 2004, it grew at an annual rate of 9.8 percent. Exports rose by no less than 35 percent in 2003; they are forecast to grow by 15 percent in 2004. Imports were up by 40 percent in 2003, with another 20 percent expected in 2004. In 2003, the Chinese economy was the sixth largest in the world, at $5.989 trillion. By 2006, it is likely to be the fourth largest.

The power behind that growth is manufacturing, which provides more than half of China’s GDP and is expanding by more than 12 percent per year, on average; in 2003, industrial production rose no less than 16 percent. Wages that average only $0.60 per hour have made China the low-cost producer in fields from textiles to telecommunications auto parts. (For comparison, wages in Mexico average $1 per hour and are rising quickly.) Heavy industries such as steel and chemicals are a mainstay of the Chinese economy, but China also produces half the world’s cameras, 20 to 25 percent of its major kitchen appliances, and 37 percent of its computer hard drives. Distributed through discounters like Wal-Mart, Chinese products are credited with taking 1 or 2 percent off the American consumer price index.

This has attracted large-scale investment from foreign companies eager to cash in on cheap labor. In 2002, foreign direct investment in China reached an estimated $52.7 billion, the most in history. (Another $13.7 billion went to Hong Kong, which is counted separately.) Most of this is flowing to Guangdong, Shandong, and other provinces on the Pacific coast, where manufacturing is well established and transportation is close at hand.

China’s rapid growth has given it an economic importance that mere size might not have done. No less than 21 percent of America’s export growth in 2003 was due to expanding trade with China—and that was a relatively small fraction compared with other industrialized lands. In Germany, 28 percent of export growth that year was due to China. In Japan, it was 32 percent, in South Korea 35 percent, and in Taiwan no less than 68 percent of total export growth occurred in the mainland market. In return, trade contributes an estimated 40 percent to China’s GDP. The engine of Chinese trade is credited with pulling the global economy out of the slump it had endured in 2001 and 2002.

Economic growth also has allowed China to overcome some of its social problems in recent years. An estimated 130 million Chinese live below the local poverty line. Yet this is only one in ten. Another 247 million people qualify as middle-class, about 19 percent of the population. Children are required to attend school for seven years, so that 86 percent of Chinese can read and write. These are impressive improvements over the situation after the Cultural Revolution of the late 1960s and early ‘70s.

However, growth in China has left some old problems untouched, and created a number of new ones. One is unemployment. An estimated 300 million to 400 million people live in the industrialized regions of China, where growing prosperity has given them comfortable lives. Another 800 million or more do not. In the rural areas, an estimated 300 million surplus laborers are unemployed or underemployed and have little hope of escaping poverty. As many as 125 million roam from city to city, looking for work. Tens of millions have been laid off from bankrupt state enterprises, with many more to come as the Chinese economy is opened to competition from modern, well-run businesses.

China’s environment is suffering as well. Seven of the world’s ten most polluted cities are in China. Acid rain alone costs the country an estimated $13 billion per year, while air pollution cuts as much as 3 percent off China’s GDP. Coal provides nearly two/thirds of the country’s energy; carbon emissions have doubled since 1980, and by 2020 China is expected to become the world’s largest emitter of greenhouse gasses. So much water is being pumped from the Yellow and Huai Rivers that they run dry for at least four months of the year; Shandong province, which produces one-fifth of China’s corn and one-seventh of its wheat, relies on the Yellow River for half the water used to irrigate its crops. There are about 50,000 miles of major rivers in China. According to the U.N. Food and Agriculture Organization, 80 percent already are so polluted that fish can no longer survive in them.

China faces some problems in its international relations as well:

To its South is India, a nuclear power with which it fought a brief, successful, and unforgotten war in 1962; India still claims some Chinese-occupied territory in Kashmir.

On its West, there are Kazakhstan, Kyrgyzstan, Tajikistan, and Pakistan, Muslim states with substantial extremist movements that could pose a terrorist threat in adjoining Muslim-occupied areas of China.

Then, of course, there is Taiwan, which China views as a renegade province. As Taiwanese president Chen Shui-bian was sworn in after being re-elected in May, Chinese officials warned that their country would force Taiwan to remain part of China, even if it meant international isolation and severe economic pain. Prime Minister Wen Jiabao even suggested that China might pass a law requiring reunification by a given date, by force if necessary—this despite at least one clear declaration by the United States that it would use its military might to defend Taiwan’s undeclared but effective independence. Reports from American diplomats with contacts in China said at the time that mainland officials were severely depressed about the Taiwan issue, convinced that they would eventually be forced to recover the errant province by force.

Present Status - India
In many ways—and especially in ways important to investors—the Indian tiger’s late start in building a modern capitalist society has left it far behind the Chinese dragon. India’s GDP in 2002 was only about $2.664 trillion (again as purchasing power parity; the raw number is about $508 billion), with a growth rate variously stated at anything from 4.3 percent to about 8 percent. Its per capita GDP was $2,600, about half that of China. About 25 percent of Indians live below the local poverty line, compared with 10 percent of Chinese; an estimated 300 million subsist on incomes of $1 per day or less.

Yet these numbers represent major improvements, in a surprisingly short time. A decade ago, over the 35 percent of Indians lived in poverty. An estimated 300 million Indians now belong to the middle class; one-third of them have emerged from poverty in the last ten years. At the current rate of growth, a majority of Indians will be middle-class by 2025. Literacy rates have risen from 52 percent to 65 percent in the same period, though India is more generous than other countries in its standards of literacy. This is a rate of progress no one else in the world can match.

Though manufacturing is expanding rapidly in India, services are a much larger and faster growing segment of the economy. Agriculture provides roughly one-fourth of India’s GDP, manufacturing and construction one-fourth, and services fully half. By comparison, half of China’s GDP is derived from manufacturing and construction, roughly one-third from services, and only 15 percent from agriculture.

India’s fastest growing and most profitable service sector is high technology—this in a land where little more than 1 percent of people own a personal computer and 50,000 villages lack even a single telephone. India views its skill in IT, not just as the basis for a profitable export industry, but as a force multiplier to improve its military and—by making India an indispensable component of the global high-tech economy—a route to greater influence in world affairs. India wants to be a Great Power, and IT is the tool by which it hopes to achieve that goal. Indian planners believe they have a good chance—and in this they are correct—because the tiger has two assets that the dragon to the North cannot match: Thanks to long British rule, English is a native language spoken by virtually every educated Indian; by 2010, India will have the largest population of English speakers in the world, overtaking the United States. And during the 1990s, India built one of the world’s largest infrastructures for technical education. Indian universities graduate about 70,000 computer scientists and engineers each year, plus a host of physicians, geneticists, and other high-tech specialists. As a result, India is now home to the second-largest population of English-speaking scientists, engineers, and technicians in the world; it turns out more of them each year than the rest of the world combined. According to some of their American peers, India’s geneticists are capable of world-class research, while its best computer scientists are on a par with those of Silicon Valley.

Even its average "techies" are more than good enough. There are an estimated 5,000 information-technology software and service companies in India. About 40 percent are multinational firms with operations in India; the rest are domestic players. The Indian software industry alone aims to export more than $50 billion worth of product by 2008. In all, IT adds more than 3 percent to India’s GDP.

The well-respected analysts at IDC India predict that the total Indian IT market, both domestic and export, will grow at a rate of nearly 28 percent annually between 2002 and 2006.

The hottest segment of the industry now is outsourcing, taking on functions such as telephone support and payroll processing for companies in the United States and Europe. Somewhere between half and two-thirds of Fortune 500 companies now outsource IT-related services to India, and most of the rest at least intend to experiment with outsourcing. At that, Indian IT planners are probably disappointed. In 1999, they set a goal of outsourcing software programming for at least 400 of the Fortune 500 no later than 2004. They probably will not have long to wait. An estimated 3.5 million American jobs will migrate to Indian outsourcing firms by 2015.

If there is a major failure in India’s economic performance, it is privatization. The Vajpayee government was eager to spin off most publicly-owned companies, not only to streamline the economy and encourage the stock market but to provide much-needed capital to help pay off its sizable national debt. Though a few companies, or parts of them, have been sold off over the years, by and large it has not happened. Labor unions and bureaucrats alike have strenuously resisted privatization, and the Communist Party of India-Marxist, a key backer of the ruling coalition, has called for abolition of the privatization ministry. There is little prospect that India will soon turn the companies its government runs badly over to private owners who might do a better job.

There are other failures as well. "Indians despair over the simplest public goods—good behavior from the cop on the beat, honest justice from the lower judiciary, or for a government schoolteacher to actually show up in a village school in Bihar," writes Gucharan Das, former CEO of Procter & Gamble India. Electric power fails frequently, even in the largest cities; most major companies keep backup generators and use them regularly. And 30 percent of the country’s villages have no roads to link them with the outside world. New Delhi just is not very good at the basics of governance. The upset defeat of former Prime Minister Atal Bihari Vajpayee in May resulted from the anger of the rural poor with a government that promoted prosperity but delivered few of its benefits to them.

India also has yet to solve many of the social problems that largely China has left behind. Its population was growing by 2.13 percent per year at last count, more than three times as fast as China, despite a rate of infant mortality that is more than twice as high and a continuing tradition of female infanticide, particularly among the poor. (The wealthy and middle class, illegally but with growing frequency, use ultrasound to identify unwanted female fetuses and abort them before more distasteful measures become necessary.) By 2015, more than half of India’s population will be less than 20 years old!

Religious rivalries seem to have abated, at least for the moment. The murder of Christians by Hindus in Gujarat and Orissa five years ago has died down, and the last major killing of Muslims by Hindu mobs—900 Muslims dead in Amedhabad following a Muslim attack on a train full of Hindus—occurred in 2002. Yet in the wake of the May elections that stripped them of power, several prominent members of the BJP attributed their loss to the government’s failure to pursue Hindu supremacy with sufficient zeal. This invites concern for the future.

Yet the oldest and most intractable divisions are among Hindus themselves. Discrimination against the lower castes and Dalits is officially illegal, but remains a basic part of Indian life. An estimated 200 million people are viewed as untouchable, and if some Dalits manage to escape poverty—former Prime Minister A.B. Vajpayee is a Dalit—most do not. An estimated 90 percent of Dalits live in poor, rural areas, nearly half as landless farm laborers. Illiteracy is half again as common among Dalits as among rest of the Indian population; an estimated 90 percent of more of Dalit women cannot read. Violence against Dalits by members of higher classes remains common and is seldom punished.

India’s environment, like China’s, is declining rapidly. Air, water, and land all are polluted. The countryside around many cities has been denuded of trees, which have long since been burned as firewood, and biodiversity is being lost as habitats are destroyed. About 81 percent of Indians reportedly have access to potable water. However, it is not clear that water deemed potable in India would be considered so in the developed lands, and "access" can mean the presence of a single well within walking distance. Water shortages are common, particularly in some areas where water itself is abundant, but is collected by dams and piped to distant cities. Air pollution is growing in parallel with industrial development. The amount of particulates, sulfur dioxide, and nitrogen oxides emitted from power plants and transportation in India has growth by roughly a factor of 100 since independence half a century ago. Yet, ironically, the worst air is found where cars and electricity are scarcest, in the homes of the rural poor, where women still cook over indoor fires fueled by dried animal dung.

Internationally, India has only two worries—but they are big ones.

China, its economic rival to the North, might someday become a military rival as well. The two countries are the largest and most powerful in the region; they are natural competitors for regional and world influence, and they have a longstanding dispute over their mutual border. There is little chance they will ever go to war again, but it is a possibility with such enormous consequences that military planners cannot ignore it. Much of the restructuring now being carried out by India’s armed forces is designed to counter this eventuality. India has turned this into an asset, designing modern high-tech weaponry and joining with Israel and South Africa to build a profitable arms export industry.

The more immediate problem is Pakistan. The armed standoff over Kashmir has flared into three declared wars and endless skirmishes since the two gained independence in 1947. Militarily, Pakistan is negligible. In an all-out war, three nuclear weapons from India would destroy it as a unified country—to the limited extent that it is a unified country at all. Yet Muslim extremists based in Pakistan regularly flow across the line of control, attacking Indian outposts, murdering officials, and occasionally striking deeper into the country. It is a problem India can live with, but would dearly like to solve.

Looking Ahead
For many investors, it is an easy decision: China is the largest, fastest growing economy in the world, with the biggest supply of potential consumers. It even has what could have been a serious population problem well under control. Given a choice between China and India, China is the obvious place to put your money.

Last May’s election reinforced that stand. When investors believed that Sonia Gandhi would be the next prime minister, the Bombay stock index dropped more than 10 percent in a single day, the largest one-day decline in history; at the bottom it was down 15 percent, and regulators twice closed trading to prevent a further collapse. Investors were particularly spooked by a declaration from a Gandhi ally in the Communist Party of India-Marxist that the government would henceforth work to raise the living conditions of the poor, even at the cost of economic growth. The next day, on learning that Sonia would not take the post and that the next prime minister was likely to be Manmohan Singh, the architect of the country’s economic reform in the early ‘90s, the market shot up 8 percent. By the day after the collapse, the Bombay index was actually higher than it had been when the chaos began. Yet it was clear that the Congress Party’s debt to its supporters on the far left could spell trouble for India’s economic miracle. One more reason to put your money in China.

At Forecasting International, we are not convinced. Though China is clearly ahead at the moment, and probably will remain ahead for the next five years, India has some long-term advantages that China does not. As a result, we believe that India will be Asia’s economic leader by 2015. Dragons may fly, but tigers can move fast when they want to badly enough. And India is determined to move fast.

Here are the key points:
Prime Minister Manmohan Singh is not about to undermine the economic revolution he began in 1991. Less than a week after the election, the Congress Party affirmed that it would try to do a better job of improving the lives of the poor than the BJP had done—but within limits. It offered a guarantee that all households will get at least 100 days of work each year. Beyond that, the government will not allow economic growth to fall below 7 or 8 percent per year. With the exception of the employment guarantee, any social program that threatens to bring growth below that level, will be tossed overboard. Privatization could slow under the Singh government, which would just as soon hang on to any companies that are managing to make a profit, but it was moving slowly even under the BJP.

The Congress Party’s Communist allies are no more likely to make radical changes in economic policy. Though West Bengal and Kerala are ruled by Communist parties, both states have worked hard to promote foreign investment and capitalist development. West Bengal courted IBM for years, and the computer giant has recently agreed to open a major facility there. So long as they can deliver a few benefits to their constituents and do a little to mitigate India’s harshest poverty, the Communist parties will be happy to accept policies that stress growth over welfare programs.

In contrast to India, China is struggling to bring its growth rate down to 7 percent and failing. Fear of inflation is rife, at least among government leaders. China’s trading partners, tired of their massive balance-of-trade deficits, are pushing Beijing to raise the price of the yuan, which is about 40 percent undervalued on exchange markets. This would rein in exports and bring the growth rate down handily, but Chinese economists view it as a cure worse than the disease. They will bite the bullet within the next few years, changing the exchange rate as gradually and as little as possible. When they do, even a 4 percent growth rate will feel like a recession to Chinese accustomed to boom times. The alternative could be worse.

India is a democracy; China is not, and has no intention of becoming one in the near future. No need to go into detail on this point. Democracies are simply more efficient than any other form of government, because elections provide a feedback mechanism that encourages the speedy correction of mistakes. Democracy does not guarantee that governments will get things right. It does improve the odds.

Both India and China suffer from bureaucracies that are horrendously entrenched, rigid, and corrupt. However, India is doing a better job of fixing the problem. China occasionally sends a corrupt official to the wall, but for every one whose misdeeds are too flagrant to be ignored, thousands more quietly carry on business as usual. India has established dozens of "vigilance commissions" whose job it is to root out corruption at all levels of government and industry. The Central Vigilance Commission headed by N. Vittal has gone a long way toward cleaning up India’s banking industry. This is only a beginning, but it is a good one. Ten years from now, India’s economy will work much better than it does today; unless things change unpredictably, China’s will not.

Over time, India’s economic growth will have a greater impact on the lives of the country’s people than seems possible for China. At an average of 6 percent growth per year, which India achieved throughout the 1990s and which FI expects to see for at least the next 15 years, a majority of people in India’s south, west, and northwest should have entered the middle class by 2025. Those in the poorer eastern states should catch up a generation later. And by 2068—admittedly a long time from now—India’s people can expect per capita incomes equaling those of the United States. It is difficult to see China matching that performance.

At its current rate of growth, China already is running short of resources. Demand for steel, aluminum, cement, and other raw materials has far outstripped supply. In many cities, thieves make a healthy profit by stealing manhole covers from the streets and selling them for scrap. However, the real problem is energy. Once an oil exporter, China has had to import petroleum since 1992. Its feverish demand for energy is a major cause for the spike in oil prices in April and May. Coal provides 70 percent of its power; production rose by 100 million tons in 2003, and still there were shortages. In the two years ending in December 2003, China’s total energy consumption rose by one-third! Demand is expected to double again by 2020—and based on current performance that estimate could be significantly low.

China is working hard to solve its energy problem. Its new energy efficiency standards are tighter than any in the West, but it will take years to put them into effect. It is negotiating oil deals with Russia and Kazakhstan. It plans to build 20 nuclear power plants by 2020. It is building vast hydroelectric projects on rivers from the Yangtze to the Tibetan plateau. In all, at least 100 new power plants are either planned or under construction. But until they start producing power, economic development in China will be significantly handicapped.

Electricity also is a problem in India, largely because the state-owned power company is hopelessly inefficient. However, India has an advantage here, because it has attempted to bypass heavy manufacturing and has staked its future on services, and particularly information technology. Its GDP per BTU should be significantly higher as a result. In addition, substantial reserves of natural gas under the Indian Ocean have yet to be tapped. When they come on line, India will gain an abundant source of relatively clean energy to supplement its coal reserves.

India’s commitment to IT gives it another advantage over China: openness. Though Internet connections are still scarce in India—as of 2003, India had about 16.5 million Net users, compared with nearly 80 million in China—cybersurfers there get an unobstructed view of the world. In China, the government controls what parts of the Net its citizens can see; politically sensitive topics are blocked. China has good reason to fear the Net. Beijing’s leaders worry that any force that promotes a quick transition to democracy could set off the kind of chaos that allowed the formation of a kleptocracy in Russia, and they may well be right. As China integrates itself into the World Trade Organization over the next few years and further opens to foreign investment and trade, it is likely to loosen many of internal controls as well. These may well include its restrictions on the Net. Until then, India will find it easier than China to develop new ideas and new business.

Both China and India are opening up in one other significant way, China as a matter of policy, India is a matter of individual choice. The middle class can afford to travel, so China and India both have gone in for tourism in a big way. An estimated 4 million Chinese vacationed outside the mainland in 2001, 10 million in 2003 (one estimate puts the number at nearly 12 million in the first eight months of the year), with 16 million projected for 2005. In 2000, an estimated 4 million Indians vacationed abroad; by 2005, 10 million will follow them to Europe, Australia, New Zealand, and places closer to home. The World Trade Organization estimates that by 2020 no fewer than 100 million Chinese will fan out across the globe, replacing Americans, Japanese, and Germans as the world’s most numerous travelers, while 50 million Indians will tour overseas. At the same time, both countries are developing new destinations for foreign visitors. China plans to train 10 million new specialists for the hospitality industry over the next ten years. Beijing’s usually puritanical leaders even have announced a scheme to turn Macau into a gambling Mecca on the scale of Las Vegas.

This expanding contact with the outside world could do more to promote the democratization of China than any other single development. One tour planner in Australia reports that the single most popular attraction he offers Chinese visitors is a tour of his own home. The men in particular are fascinated by his lawn; they cannot figure out why he has not planted the area with vegetables instead of grass. When enough of them do, Beijing can expect to face some serious questions about its leadership and policies.

Environmentally, both China and India face a grim future. In China, air pollution already costs about $13 billion a year in lost productivity. In India, it is blamed for 2.5 million premature deaths annually. Industry uses about 15 percent of the water consumed in China, that will rise by a factor of five in the next two decades, leaving even less clean water for agriculture. In India, water shortages are common, and water pollution kills 1.5 million pre-school children each year. The situation can only get worse in the coming decades. It will be most of 20 years before India and China accept the need to clean up their environments.

However, several potential problems will not be realized, and they may be among the most important. India and China will not go to war. Neither will India and Pakistan. And Taiwan will allow itself to reintegrated into China voluntarily, rather than by force. For military planners around the world, all these pending developments can only come as good news.

India and China have participated in no fewer than 13 working group sessions over the years to resolve their boundary dispute. This is clear evidence that they both recognize the danger of a conflict with their neighbor. Strategists in both countries will continue to forge deterrents against, and plan responses to, possible aggression. Diplomats will work to resolve the countries’ differences. But most importantly, trade will continue to grow between Asia’s dominant powers. In the end, it will be just too costly to irritate valuable trading partners, much less make war on them.

India and Pakistan both have compelling reasons to settle their dispute over Kashmir. After a Pakistani suicide bomber attacked India’s Parliament in 2001, several Fortune 500 companies quietly told the Vajpayee government that a war would compel them to move their Indian operations back to the U.S. The situation soon calmed, as India recognized that war with Pakistan would never be worth what it cost. Pakistan, in turn, has discovered a strong interest in remaining on good terms with the United States, a goal that excludes any possible attack on India. Probably within five years, and in no more than ten, India and Pakistan will finally accept the current Line of Control as a permanent border. Neither side will be entirely happy with this outcome. Both will consider it better than any possible alternative.

The situation between China and Taiwan is considerably more volatile, because China really will conquer Taiwan militarily if it can see no other way of returning them to the fold. Taiwan, on the other hand, has invested well over $50 billion in the mainland, no less than 40 percent of Taiwan’s outward investments; fully 70 percent of Taiwanese companies had investments on the mainland by 2000. In order to redress the imbalance, Taiwan recently ended a half-century ban on investment in the other direction. Five to ten years into the future, this economic relationship will have become so close that Taiwan will bow to the inevitable: It will accept the status that Hong Kong now enjoys, as a semi-autonomous part of China. And why not? It will be well on the way to owning the mainland already.

The Bottom Line
Forecasting International believes that China and India will successfully meet all the challenges of economic development, social change, and national security that will face them in the years ahead. It will happen only with difficulty, but it will happen. Beijing and New Delhi will spend the next 20 years struggling to balance capitalist profit against rural need, environmental damage against development, military spending against domestic priorities, the need for economic cooperation with their neighbors against the realities of trade competition. This will be a difficult balancing act for Asia’s dragon and tiger. Yet in 20 years, both these countries will be stronger, wealthier, more stable and free than they are today.

India will get there first and best for all the reasons above, but especially because of its two greatest assets:

The first is the English language. In the modern world of technology and business, there is no more useful tool. India’s most recent "native" tongue has been its greatest asset in building a global IT and business services industry. Anyone who doubts the value of an English-speaking education need only look at how many American consumer-products companies have outsourced their call centers to China instead of India.