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Will India Overtake China In The Next Decade? – Analysis

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By Ganeshan Wignaraja

There is renewed interest in the Asian giants in the wake of sluggish growth in advanced industrial economies. Over the past decades China and India have become super-exporters and surpassed all other developing countries (Winters and Yusuf 2007; Bardhan 2010). Some are predicting that India’s trade and growth performance will soon outpace China’s. The reasons given for India’s expected rise compared with China tend to focus on its democratic political culture and more favourable demographics, both of which are viewed as being more conducive to sustaining rapid trade-led growth over the long-term. Amid such speculation, my recent research suggests that key factors – including market conditions, trade and investment policies, and supply-side factors – point to China continuing to outperform India for the next decade (Wignaraja 2011).

The giants rise in world trade

China and India have followed similarly impressive growth trajectories in recent decades. While China began to open its economy to market forces and foreign investment in 1978 – more than a decade before India – both countries have enjoyed years of rapid trade-led growth that has lifted millions out of poverty (Winters and Yusuf 2007). The two Asian giants’ exports increasingly comprise sophisticated manufactures and services, rather than simple labour-intensive products. Furthermore, in spite of the global financial crisis and worries about a double-dip recession, this year seems bright. Forecasts by the Asian Development Bank suggest that robust economic expansion is expected in both countries in 2011 – over 9% in China and 8% in India. If weak demand in industrial countries remains weak, slightly lower growth might occur in 2012.

China currently dominates world manufacturing export markets, while at the same time it is taking a larger global share of medium- and high-technology exports. In achieving its pre-eminent status, China benefited from favourable initial conditions including a large domestic market, low-cost productive labour, and the geographical advantage of its proximity to Japan, the previous engine of Asian growth. Even more importantly, China pursued a swift and coordinated economic liberalisation programme beginning in 1978 that served as a catalyst for subsequent decades of economic growth. This reform programme included:

  • An open-door policy toward foreign direct investment (FDI),
  • Promotion of technology transfer through FDI,
  • Steady liberalisation of a controlled import regime,
  • Export incentives, and
  • A strategic approach to free trade agreements (FTAs) with neighbouring Asian economies.

By comparison, India’s economic liberalisation did not begin until 1991 – more than a decade later – and it focused more narrowly on easing restrictions on FDI and imports. In recent years India has accelerated reform of FDI entry regulations and import tariffs (Bardhan 2010). For instance, India’s simple average import tariffs reached 13% in 2009 compared with 10% for China. Nonetheless, as a result of China’s “first-mover” advantage and more comprehensive liberalisation programme, it has been able to achieve consistently higher trade growth than India for the past several decades and has a much larger export base than India.

From less than $10 billion in 1985, Chinese exports ballooned to $1.8 trillion in 2010, accounting for 11% of world exports (see Figure 1). Meanwhile, Indian exports, which were also less than $10 billion in 1985, have grown more modestly to $326 billion in 2010 and account for 2% of world exports. Over this same period, China’s share of world export manufactures jumped from 0.5% to 11%, while India’s share increased from 0.5% to around 2%.

Amid this boom, China has moved away from a heavy reliance on exports that are resource-based (eg food) and low-technology (eg textiles, garments, and footwear) exports to become a growing supplier of the world’s high-tech manufactures (eg electronic and electrical products, aircraft, precision instruments, and pharmaceuticals). In 2008, China accounted for 14.3% of the world’s high-tech exports, up from only 0.1% in 1985 (see Table 1). While China’s resource-based exports did comprise a larger share of the world market in 2008 than in 1985, rising from 0.8% to 3.5%, resource-based exports declined sharply as a percentage of China’s total manufacturing exports over this period, plunging from 38.9% to 8.5%. China has even made significant progress in the export of services, which has increased on average by 18.6% per year since 1985.

India’s manufactured exports have also increased since 1985, although not nearly as much in terms of global market share as China (less than 2% vs. 11%). On the other hand, Indian exports are increasingly led by more-sophisticated, skill-intensive services such as IT, business process outsourcing, and financial services (Kowalski 2010). In each of these areas, Indian exporters account for more than 4% of the global market, compared with China’s share of less than 2%.

Differing paths to reforms and regionalism

Firms operating in China today enjoy a more competitive business environment than their counterparts in India, with more market-friendly rules for business start-up, property registration, contract enforcement, and bankruptcy. For instance, China is ranked 79 on the World Bank’s Doing Business Index compared with 134 for India (see Table 2). Beginning in the 1970s, China attracted FDI into manufacturing to serve as the cornerstone of export-led growth. From the early 1990s onward, China attracted record levels of FDI, with inflows amounting to $54 billion a year during 1991-2010. Technology transfer accompanied FDI inflows while controlled liberalisation of protected industries led to increased efficiency and industrial restructuring. In recent years, Chinese outward investment into the region’s developing economies has become commonplace.

India was slower to adopt a comprehensive liberalisation framework and focused more narrowly on easing restrictions on foreign ownership in its first decade of reform that began in 1991. With the recent acceleration of reforms, FDI inflows increased, amounting to $9.5 billion a year in 1991-2010. Meanwhile, the two giants’ managed floating exchange-rate policies have been broadly similar as they both faced tariff reform gradually, seeking to use the exchange rate as a critical tool for encouraging exports. Both had success in the 2000s in maintaining a favourable real effective exchange rates for exports, although China’s stance provided better incentives for exporters.

China has been adept at using FTAs to deepen regional production networks, with increased competitiveness in export manufacturing as a result of a policy of trade openness that began in the 1970s. China has long pursued a strategy of using FTAs to link its economy with those of Hong Kong, China; Macao, China; and Taipei,China – with dividends that are being realised today. For example, while the Apple iPhone was developed in the US, its various components from suppliers around the world are assembled in a factory in Shenzen that is owned by a firm based in Taipei,China.

China is also integrating its economy with those in neighbouring Association of Southeast Asian Nations (ASEAN) through an FTA that has begun to reduce or eliminate tariffs on trade in goods (2005), trade in services (2007), and investment (date of implementation currently under negotiation). China seeks to benefit from free trade with ASEAN members by expanding its regional production networks to support additional export-led growth. And China now wants a Shanghai Cooperation Organization FTA to facilitate access to raw materials and energy supplies for its global factory.

India too has pursued the use of FTAs to expand trade regionally and globally. However, India’s initial FTA strategy focused on expanding South-South trade, possibly at the expense of maximising efficiency gains from free trade in general. More recently, India has moved toward expanding market access to major developed countries and East Asia. Indeed, with the prospect of slower growth in major industrial economies, closer India–East Asia economic relations can bring mutually beneficial gains and prosperity in the future.

Future prospects

While India’s working age population is expected to grow by an astonishing 136 million over the next 10 years, China will add a relatively modest 23 million new workers. India’s huge increase in the working-age population is perhaps a mixed blessing. India’s literacy rate of 63%, compared with a rate of 93% in China, suggests that the country may face an imbalance of low-skilled and high-skilled workers just as the knowledge sector of its economy is poised for continued rapid expansion. As Table 2 shows, China allocates significantly more resources than India to infrastructure and R&D, both key determinants of future trade and growth. Estimates by McKinsey, a consulting firm, suggest that just to keep pace with its rapidly growing urban population India will need to spend $1.2 trillion on urban infrastructure over the next 20 years, or eight times its current rate of spending.

Both Asian giants have a solid foundation for continued rapid economic growth. Growth in both countries will be driven by exports comprising increasing amounts of medium- and high-tech manufactures, as well as services. India has made great strides in reforms in recent years. Yet China’s economic policies, investment climate, and supply-side conditions remain more favourable than India’s. Accordingly, China’s trade will likely continue growing more rapidly than India’s in the decade ahead.

India has scope for closing the gap in trade performance with China by enhancing supply-side measures, such as investing in infrastructure, boosting literacy and skill creation, and fostering industrial R&D. Continuing with economic reforms and regionalism in both giants can also help sustain trade performance.

Many uncertainties and challenges lie ahead which will impinge on the giant’s trade. These include unexpected internal events, external demand shocks, protectionism, and macroeconomic issues, to name a few. How each giant tackles these issues will ultimately determine their growth and trade performance in the next decade.

Author:

Ganeshan Wignaraja is a Principal Economist at the Asian Development Bank’s Office of Regional Economic Integration. He also represents ADB on the WTO Director-General’s Advisory Group on Aid for Trade.

References

Bardhan, P (2010), Awakening the Giants: Feet of Clay, Princeton University Press.

Kowalski, P (2010), “China and India: A Tale of Two Trade Integration Approaches” in B Eichengreen, P Gupta and R Kumar (eds.), Emerging Giants: China and India in the World Economy, Oxford University Press.

Winters, A and S Yusuf (eds.) (2007), Dancing with the Giants: China, India and the Global Economy, World Bank.

Wignaraja, G (2011), “Economic Reforms, Regionalism and Exports: Comparing China and India”, East-West Center, Policy Studies No. 60.

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15 thoughts on “Will India Overtake China In The Next Decade? – Analysis

  • October 1, 2011 at 2:19 pm
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    Sorry. But, India will lag far behind China for the entire 21st century. It has invested next to nothing in infrastructure and as a consequence power cuts and road links are a lid on development. In addition, the benefits of Inda’s strange version of democracy are hugely limited – the Italian born Prime Minister was voted in purely because of her husband’s name – while others in Parliament are mostly voted in for cricketing skills or fame secured in Bollywood. The aim of all is to line their pockets at the expense of an impoverished populace. The literacy figures are a clear indication that India has a small middle class, while the rest are little more than slaves, paid a marginally above subsistence. The still booming birth rate, which appears to be the basis of this India ‘gant’ claim by Mr Ganeshan Wignaraja, is really the seed of India’s next great calamity. Already, most people in India struggle to feed themsevles and that will be a rising challenge. By contrast, China’s greatly reduced pool of labour is in fact a benefit and a huge relief for the dictatorial Communists. The great fear of The Party was a failure to find work for the estimated 100 million migrant workers in the country. They have proved themselves prepared to undertake any means to reduce the birth rate – including the indefensible One Child Policy, because had they failed, there could well have been a second Mao in the countryside ready and able to persue a military agenda. So, you see, far from overtaking China, India will be lucky to avoid a decade of famine. I for one really hope so, but I think it might take a little more compassion and concern on the part of the country’s intellectual elite – and that includes learned economists with rose tinted glasses and a propensity for very long articles.

    Reply
  • October 1, 2011 at 4:19 pm
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    India has the same problems as China to influence the future. That influence is from Copyright acts and Patents.Both are filled to the brim…so to speak with natural resources(Gold) and especially the intellectual powers necessary not to be forced to dig everything under them up.
    The charts do not always reflect actual living conditions, as there are some in South America not listed on a chart, yet are not heard complaining.
    It’s interesting how China is hooking up 2000 ATM’s that India would be very capable of following the same pursuit, along with their geographical neighbors, and giving so much weight to guns, planes or bullets that are very popular at the moment, but end in a gaseous state or thrown around beyond recognition.

    Reply
  • October 2, 2011 at 4:09 am
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    Typical basking in reflected glory: by mentioning itself in the same article or even the same sentence with China, Indian commentators shamelessly try to borrow some of the shine from China to make India look better.

    It’s kind of like me running into a famous celebrity on the street and decide to take a picture with her so I can brag to my friends.

    Pathetic.

    Reply
  • October 5, 2011 at 12:01 pm
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    First to gordon

    1)US is supposed to be from where everything s referred to as standard. What is arnold schwazznager ? Actor or politician.

    Even if in india ter are ppl from bollywood or gandhi family coming to politics they represent very small minority. Total of 560 parliment seats are ter and not all are represented by them

    2) We have a total of 70 crore youngsters who dont want to live in poverty. we are a new nation and evolving ( 50 yrs is a small time for such a big nation). cant compare ourselves with japan and singpore, korea. these countries more or less came by the backing of US for the fear of commies

    3) now lets talk about europe

    Germans were busy working making mercedes and greece were enjoying it with printing notes. do we need this kind of economic growth in india.
    well UK should be the worried lot cos u were money were spent in ireland ( well some thing that was stolen from africa..)..

    most of the parties come under the backing of relegion there. atleast we are a secular country..

    agreed there are some small incidents here and ter but those are mostly due to conversionist who try to forcefully convert ppl here.

    we have jews living in our country for over 2000 years without any problem for them following their relegion as it was 2000 years before.

    if u were swiss and basking on the corruption money from the world neither u shd be talking about india. we ve not done any of the above stealing !!!

    4) one child policy..chinese harvest even the organs of dead people.. if u ve more than one kid at ur home they wil take ur kid to factory and u may never hear from him for the rest of life. well we dont want that thing in our country. some blind nos to satisfy some economists. well we are not agreed.

    5) we are working towards eradicating malnutrition not only for us but also for people around us. there are people working around for that as well.. sadly our media always portrays us in bad light so good things done by the elite are never known. second in another twenty years the whole world will be in problem not just india due to peak oil.

    global food cycle is supported by petroleum products and once its rate reduces the impact will be huge.. we are working to avoid that as well. there are research being done in those field as well.. we work for the good for entire mankind . instead of focussed on our country alone…

    6) many of the ppl are not focussed on cheating the patent rights of other countries. but all we are saying is that there should be some sense is how much patent amount can be takne by pharma companies. because they have found a formulation doesnt mean that ppl shd keep dying when some capitalist keeps making profit.

    we stand by humanity here..

    7) finally to jeff

    nobody in india cares about being compared to china. we know we as country face challenges and yes ter are areas of concerns which we are facing. but we wil come up of it

    talking about china..
    a set of ppl sitting at top and making others work in a pyramid . exploiting the world by dividing ( just what the british did.. e.g sudan) . is this what u want. one part of humanity standing against another part so that some metal goes and sits in vault.

    we as a country would hate that to happen.

    i jst responded because i felt there was no voice from our end and jst india bashing was happening..

    lastly for everyone instead of thinking that i am attacking ur countries think in the larger perspective of mankind and u wil find the fault which have been mentioned above.

    chinese may feel bad that i have mentioned wrong about their activity in sudan. but a chinese should feel that by killing ppl in sudan they are just changing themselves to bad humanity for the evil purpose of accumulating wealth which in the longest of term will come to know that was not worth it !!!

    Reply
  • October 5, 2011 at 4:16 pm
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    It is a fact. Most of the developed countries – USA, Japan, EU…. have become slaves for cheep chinese goods. Their super market stores are full of (more than 75%) chinese items. America is feeling the heat. There is a possibility that entire computer hardware manufacturing will go out of USA. IBM PC biz has gone to Lenova China, Apple products are sourced from China. Now HP PC biz may go to china. The list is endless. USA, Japan, EU should Stop the reckless consumption of chinese items. It is a threat to world piece and stability.

    Reply
  • October 5, 2011 at 4:26 pm
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    It is a fact. Most of the developed countries – USA, Japan, EU…. have become slaves for cheep chinese goods. Their super market stores are full of (more than 75%) chinese items. America is feeling the heat. There is a possibility that entire computer hardware manufacturing will go out of USA. IBM PC biz has gone to Lenova China, Apple products are sourced from China. Now HP PC biz may go to china. The list is endless. USA, Japan, EU should Stop the reckless consumption of chinese items. It is a threat to world piece and stability. Indians least bothered about super rich china infrastructure and development. Our main worry is super rich china will pose a existential threat to India. So there is a need for India to match China to exist as a country.

    Reply
  • October 19, 2011 at 9:26 am
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    My personal view is that many Indian bloggers and Indians residing either inside or outside India just could not get over that China is better than them. Hence the hysteria over topics or issues concerning the two countries whenever they occurred. This India versus China competition is truly senseless. Take the case of Huawei telecommunication being barred in India, you ought to see the kind of venom spilled out by internet. Many fail to realize that trade is a two-way thing benefiting buyer, seller, people employed and users.
    It is sad to see many Indians boast of superpower status in so and so years without even having the basic facilities of a third world country in many years to come. Try talking the superpower boast to the Mumbai slum dwellers whose illiterate children could die of diseases or malnourishment anytime – they probably spit you in the face !!

    Reply
  • November 5, 2011 at 4:11 am
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    This is what happens in communism, a rapid growth and a sudden downfall just like in russia. India produces and exports high quality products and we all know the quality of chinese products. Even the chinese people dont trust the drugs made in china…guess what most of it is imported from India!! The rapid growth in china is the only thing the communist party has to divert the minds of the chinese people from the fact that they dont have human rights!! (remember the Tiananmen square incident). We must also not forget what india could have been if the british did not plunder her for more than 2 centuries.( india was called the golden bird before the brits looted everything)

    Reply
  • November 7, 2011 at 4:31 am
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    I do not know whether the Chinese trust the drugs made in China or not but i know for sure that many Indians do not do not trust Indians drigs. I can tell it with confidence cos I am well aware about Indian drugs.

    We go at length talking about Chinese human rights status citing the Tiananmen Square (and it is a good thing that we must make it known) but an Indian will seldom ( not never) talk about the ethnic cleansing that has been going on in Kashmir for decades.

    The idea that the British plundered India for centuries sounds totally ridiculous. Some of the few things that India boasts today are the modern education system, the longest railway system and the culture of democracy. And most interestingly, they were all inherited from the British.

    The idea that US is the gold standard and just cos US has Arnold into politics does not justify that India should follow suit. US politics is much more than Arnold an actor being a politician cos of his on screen charisma. Trying to compare oneself with Einstien just cos u too smoke a lot is stupidity!

    The idea of India being a secular country is again a funny thing. Don’t forget that a die-hard Hindu nationalist party was holding the helm of the Indian government not long ago. And even today it is a major political force in India.

    But does this all mean that India is going backwards. No, in fact she is developing at a good pace. However, we should not forget that whereas China has picked up the pace of Hyundai and US is still the BMW (though a second hand one after the bickering over the debt), India has just shifted from the Maruti800 to the Tata Nano pace. She may hopefully outsmart China in the next century, but cliaming so to happen in this century will be like making castle in Spain.

    Reply
    • November 8, 2011 at 6:38 am
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      Dont forget the price india had to pay for the railway and modern education…she could have done much better without that kind of “HELP”!! F.Y.I when cities like yijayanagaram were flourising and sciences at there peaks in india…the whole of europe was living in the dark ages (you need to read more) And can Mr. Upadhaya give us an example of an indian drug which he cannot trust .. or was that just to contradict the facts ? And i beg to differ that not only indians but the whole world knows and speaks about the tiananmen square incident.
      There are many organizations and websites in the world that say ” free tibet”….can you tell me how many say “free kashmir” ?(o is the answer NONE? maybe because kashmir is already free and kashmiris take part in the democratic elections)
      The major political party that was in power is not a hindu party(ridiculous) but a secular one.(again u need to read more).
      No one said that u.s was the gold standard..the arnold thing was the answer to the statement of movie and stars and celebs being involved in indian politics(you really do need to read more) and the einstein thing was totally super lame. Now the brits dont have any country to plunder so they are facing a crisis. If they didn’t invade india , indians would be thd ones with b.m.ws’ or i should say there could have been an I.M.W but i am not sure whether the brits would have been able to build even a maruti 800!! Adios

      Reply
  • November 10, 2011 at 6:05 am
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    Dear Nick,

    1. India has been pinpointed by far as the biggest culprit in making fake drugs as – according to the 2005 TAXUD statistics released by the European Commission , 75 % of the global cases of counterfiet medicines originated from India , 7 % from Egypt and 6% from China.
    Source: http://www.outsourcing-pharma.com/Contract-Manufacturing/New-counterfeit-report-highlights-worrying-trends

    2. Is this not absurd that you are boasting about a flowery past when what is before us at present is misery, poverty and illiteracy? How about looking at it this way? When the Europeans were in the Dark Ages we were civilized, but now they have outsmarted us and all that remain with us is a beautiful history with the present filled with misery.

    3. If you read my earlier comment more carefully, you can see within parenthesis what is feel about the Square Massacre . Besides, just because you hear about “free tibet” more than you hear “free kashmir” doesn’t change the fact that India is running its state funded project of ethnic cleansing in Kashmir.

    4. I do not understand how could do you define Bharatiya Janta party Party as a secular one. But as you have suggested, I am on a reading spree trying to find any proof that justifies that the abovementioned party is in any way secular!

    5. About US being the standard for everything I was answering Ravichandran’s comment. I brought the Einstien example to refute his primise. If you find it lame, I don’t have a problem with that.

    6. Is it not interesting that the Brits are facing crisis and India booming; still the Indian youths are dying to get into Britian, whether legally of illegally? The world is full of paradoxes.

    Al last, I really need to thank you because of your earnest advice to read more; I read more and came up with even more evidences to support what I had said earlier was true. Thankx buddy that ur advice gave me a chance to substantiate my claims.

    Reply
  • November 11, 2011 at 10:38 am
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    Never mind buddy . I presumed it was my duty to help you out. Glad you liked it. And
    about your stats with the counterfeit drugs…. I wasent very sure of the reliability of the data provided by the link you posted so i did a bit of research myself. Just type in the words “counterfiet drugs” in wikipedia and read what it says about china ,india and the us. It states that 75 of it comes from india but india is also one of the biggesta manufactures of high end pharma. products. Further it also states that counterfeit anti-malarial drugs were ceased in nigeria that were labelled “made in india” but were traced to actually have been manufactured in CHINA. I wonder what part of the 75% worldwide indian counterfeits would trace back to china?!!?

    Really Sorry, i could and i would but all of my sane human senses are preventing me from dignifying the rest of the absurd points with a reply.

    P.S : why did the chinese print “MADE IN INDIA” on their counterfeit drugs ??
    Oh right….Thats because even the chinese know that no one trusts their drugs and that indian drugs have a high market reputation. ( just like they print “made in japan” on their cheap worst quality rip offs’ of sony and jvc )

    Reply
  • November 12, 2011 at 4:00 am
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    Pls don’t talk about what you wonder. If you can, then provide stats.

    Before you were claiming that “counterfiet drugs” is all a China thing. Now you accept that India is responsible for 75% of the blame. But still you use ur quixotic fancy to wonder what part of that is a China infiltration citing just an isolated incident.

    Imagination is a good starting point, after that we need reason.

    Anyway, take care.

    PS: The worst part of an argument is to say “I could have answered this, but something is holding me from doing so.” I never imagined that the guy who inspired me to read more would finally come up with such a lame excuse!

    Reply
  • November 12, 2011 at 5:28 am
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    If u READ my comments carefully, i never mentioned it to be an “only china” affair. As of now i have just quoted an “isolated” incident but india has a censorship free media so i assure u i’ll get to you with more soon.Then plz dont call them isolated. Sure no entity is perfect …but you cannot deny the fact that india also makes high quality drugs. U said u dont trust ’em…so you can have ur MADE IN CHINA “super quality” drugs.
    And truth be told …I wasent wasent into an argument!! I was just expressing my thoughts( one of many liberties that india grants) and i would considering to go on further until “someone” dragged this whole thing so low that i felt it would harm the dignity of this wonderful article, the people who commented on it, and most importantly the dignity of any chinese or indian who reads this if this thred was not ended. I mean someone had to do it…So in the interest of the above, if “someone” READS my earlier comments carefully, he/she will find the answers to all the issues raised by “someone”. If not, for those who live in countries with censored media, please feel free to come to india and utilize the free media to search for the answers. ” May God bless those who are ignorant. May God bless the world.”

    Reply
  • November 13, 2011 at 5:07 pm
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    My mentor seems to be taking it personally. Ouch!

    PS: The Chinese life expectancy is 73 and the Indian is 64.7. Oh yes, the Panda lives a bit longer than the Tiger. Who knows, it may be cos of the “super quality” Chinese drugs!

    Bonne nuit!

    Reply

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