If only
economist Milton Friedman were still alive, he
would weep at the recent turn of events
encompassing Asian politics in recent weeks. No, I
am not talking here about North Korea's nuclear
weapons or even the US economy's downward spiral,
but instead the rising dominance of Asian
communists.
Even as China confronts its
age-old corruption problem and India attempts to
re-equalize the playing field, the chief
beneficiaries have been diehard communists in
these countries. A leftward tilt
in
Asia spells disaster for the region's growing
economies, and will likely herald an era of
falling stock and property markets.
The
backdrop for this surge in populist policies is
surprising. Asian economies have continued to
grow, mainly because of the ability of Chinese and
Indian consumers to expand their purchases even as
the American consumer begins to show signs of
self-doubt. The primary factor has been the growth
of income inequality, which combined with greater
political liberalism has imperiled the current
economic equilibrium across the continent. At its
most extreme, one thinks of countries such as
Nepal, where a communist insurgency has nearly
wiped out government infrastructure, replacing it
with a parallel state. Similar problems prevail in
other parts of Asia, to varying degrees.
All these micro-trends, though, pale in
comparison to the surge toward the left in China
and India.
Gini lets the communist
genie out A lot of newsprint has already
been expended on the crackdown on corruption in
China, which netted prominent members of the
Shanghai clique, which owed its allegiance to
former president Jiang Zemin. While the process of
replacing bureaucrats and ministers under new
administration is hardly new - and particularly
not in China, where new emperors frequently
changed their generals and key ministers - what
might be left unnoticed is that it is more
traditional communists who are being tapped to
take up these vacancies.
The idea that
"communism with Chinese characteristics" has
rendered many officials corrupt [1] is neither new
nor surprising, but the notion that the Chinese
Communist Party (CCP) has not suffered as a result
is contentious. Indeed, the rising number of
"public disturbances" and "mass incidents" over
the past few years is well documented by Chinese
authorities. These show that protests over the
provision of services, embezzlement, lack of
policing and other civic issues have been on the
rise.
In an earlier article, [2] I wrote
about the factors limiting the reform impetus in
China, including the fear of authorities that
accelerating the pace of industrial reforms would
produce far too many unemployed people, in turn
affecting social stability. This is a lost
opportunity for China, as it will become more
expensive and difficult to institute reforms in
future years when the country's demographics
worsen.
Another factor that imperils the
ability of authorities to impose reforms is the
significant increase in wealth disparity. China is
estimated currently to have a Gini coefficient (a
way of measuring economic inequality) higher than
that of the United States, [3] suggesting that a
trend toward the "robber baron" politics of Russia
where a handful of people control more than
three-quarters of all output isn't impossible.
From the perspective of Beijing, the above
adds up to a fear of losing control over the
population, particularly if recent experiences
with citizen activism are an indication of future
potential. Accessing more media including blogs
and mobile-phone text messages, Chinese are now
able to communicate faster, even with the presence
of censors and monitors. In turn, authorities have
to "behave" themselves, which is why Beijing chose
to crack down on the most egregious examples of
power abuse in cities such as Shanghai.
Going forward, more focus is likely to be
placed on addressing the growing wealth inequality
in society, hence a resurgence of "redistributing"
income as a way to maintain support for the CCP.
For example, in the area of housing, it is
possible that various city and local governments
will be forced to increase their investments in
public housing, which are designed to be given to
needy party members. This reverses some of the
gains made by private developers in China in
recent years, but will prove populist enough to be
pushed through by the party. For the same reasons,
China will prevent its banks from withdrawing
liquidity from loss-making companies, to avoid
employment losses. This will surely disappoint
investors who have bought into recent bank
listings from the country, but would hardly
surprise political analysts.
The shroud
strikes back If Chinese authorities face
resurgent communist ideology focusing on a
redistribution of income, Indian politicians have
a more basic problem. The current United
Progressive Alliance (UPA) government got into
power in India on the platform of debunking the
previous government's record on economic growth by
pointing to growing inequalities. India's Gini
coefficient is better than China's, and yet the
level of fretting from politicians would lead one
to believe that a Russia-type situation has
prevailed already.
Recently Sonia Gandhi,
president of the Indian National Congress, gave a
speech to the chairpersons of the other parties
making up the UPA coalition in which she called
for an end to the country's obsession with
becoming a superpower, and urged instead a focus
on more basic issues. Her slogan, on which
speechwriters must have spent a few hours, used a
catchphrase - "It's not about e-quality" -
referring to the country's burgeoning
information-technology-led service exports - "but
rather equality that matters."
That simple
statement unfortunately takes the Congress party
and its cohorts in the UPA back to the disastrous
experiments with socialism that characterized the
era of Indira Gandhi and her father, Jawaharlal
Nehru. Already saddled with hare-brained schemes
such as the Rural Employment Guarantee program,
India's federal government will likely embark on
more populism in coming months. This comes at a
dual cost to the economy - the government, first,
wastes money that would be much better utilized by
the private sector (the "crowding out" effect),
and second, incurs substantial borrowings for
limited gains. That the Congress party will find
itself in an indefensible position on reforms
comes as no surprise to me, [4] but the speed at
which this eventuality has come about is
staggering.
Failing to notice that the
country needs to create wealth before it
can be redistributed has been a hallmark of Indian
politics, and Sonia Gandhi appears to represent no
exception to this. The regressive tax regime that
still pervades the country and the general
mistrust that Indian society shows toward
successful business people both operate as key
impediments in India's path toward growth. It is
not without reason that Sonia Gandhi has been
dubbed by the Indian intelligentsia the "Shroud of
Turin", a reference not so much to her Italian
ancestry from that city as to the apparent
inability of any sound economic thinking to get
through her intellectual defenses.
In this
scenario, lower economic growth is almost certain
for India in the next few years. This is, however,
not fully priced into the country's surging stock
and property markets, much like the experience in
China. When the time for a reckoning comes about,
perhaps accelerated by the slowdown in the US
economy, investors in both China and India will
realize the deleterious impact of left-leaning
thought in these two countries. There is yet time
for redress, but the window grows shorter by the
hour.
