Asia's peasant problem
China and India face a crisis if they don't share their new wealth.
By Geoffrey Colvin, FORTUNE senior editor-at-large

(FORTUNE Magazine) - Overlooked in the daily rush of news about China's and India's stunning economic growth is a mammoth-scale economic problem - which neither country can any longer avoid. It's this: Most of their people haven't participated in the boom.

A majority of people in the world's most populous countries (China's total population: 1.3 billion; India's: 1.1 billion) have watched fellow citizens vault ahead of them to prosperity and even serious wealth. And the left-behinds don't want to take it anymore.

Global brands are stepping in to monitor working conditions at factories --but producing real change isn't easy. (Read the column.)

The conflict can be tough to spot in China. On my latest trip I walked quickly through Shanghai's sweeping new airport and got into the hotel Audi, which carried me along an eight-lane highway to the district of gleaming skyscrapers and new four-star restaurants. What you don't see, unless you go looking for it, is rural China - 800 million people, many of whom struggle to feed themselves.

Battling for subsistence is something they can deal with. What they can't stand is when China's economic expansion makes them worse off. The increasingly common pattern is that entrepreneurs pay the government to use large tracts of farmland for factories, shopping malls, and such.

Most of the money is supposed to go to the farmers who work the land (but cannot own it under Chinese law). Instead, local officials often pocket the cash, leaving the farmers with no money and no land.

Farmers' fury began boiling over last year and has continued into this spring, with thousands of protests nationwide, some of which resulted in protesters being killed by police. Chinese authorities have tried to quash news reports of the uprisings but clearly take them seriously.

Prime Minister Wen Jiabao said in the government media, "We absolutely can't commit a historic error over land problems." The term "historic error" is significant in Chinese politics, referring to the most serious mistakes.

In contrast to China, seeing the rich-poor divide in India is deceptively easy. When I recently stepped out of Mumbai's fanciest hotel - and very nice it is - I was accosted within moments by street kids pulling on my arm asking for money as I tried not to trip over the mangy dogs that seem to be everywhere.

The scene is deceptive because it doesn't show you the most serious poverty, which again is rural. Farmers are 60% of India's workforce but produce only 20% of its minuscule per capita GDP. Hundreds of millions of Indians survive on less than $1 a day. Nearly half of all Indians, and most Indian women, are illiterate.

All those software writers, microchip designers, X-ray readers, bond analysts, call-center operators, engineers, and other service providers we read about, although numbering in the millions, are a small percentage of the population.

Poor farmers were key in the election of Prime Minister Manmohan Singh, who in April put a startling idea on the table: Companies should voluntarily adopt an affirmative- action program to make their workforces "broad-based and representative," which in India means including members of certain castes and tribes that have historically been excluded from advancement.

Indian executives, suspecting they spied a looming government mandate, responded bluntly: No way will we be required to do this. But they quickly began publicizing their existing training programs and announced an "affirmative-action task force."

What will happen next in China and India seems clear. Indian industry will jack up its efforts to educate, train, and eventually hire more of the poor, spurred by the implicit threat of government requirements. China will spend more on integrating the rural poor into the industrial economy, though many just aren't ready for it. Near term, that's inefficient for both countries. They'll be spending money they'd rather not because they're afraid of what might happen if they don't.

But less efficient Chinese and Indian economies are hardly good news for American workers, because of what happens next: Perhaps a billion new participants enter the global labor force - rural poor who have been economically invisible so far. There's evidence that the large numbers of manufacturing and service workers in China and India have already been holding U.S. wages down. The hard truth is, we ain't seen nothin' yet.

FEEDBACK gcolvin@fortunemail.com Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.