| |
China, India weigh war
costs
By Jayanthi Iyengar
NEW
DELHI - Wars are generally bad for everyone. Yet the new
Gulf War is more so for China than for India, given the
fact that it comes at a juncture in China's political
history when there's been a change in leadership, along
with a change in approach to growth.
Until now,
China's focus has been on growth and growth alone, with
scant attention to the hardship that this course of
action may have brought on its people. This has caused
widespread labor demonstrations, unhappiness and
dissatisfaction among the population, apart from sharp
criticism from the international media and China
watchers.
Despite China's phenomenal growth, the
per capita annual income is still only about US$750 per
person, and the new leadership under President Hu Jintao
and Premier Wen Jiabao, though communist in nature,
faces the daunting task of giving a human face to the
country's reform process. To humanize reforms and to
create greater acceptability, the new leadership is now
committed to creating a greater number of jobs and
greater opportunities and income for its people.
Hinting at the challenges ahead, Hu said in his
first statement to the Chinese legislature, broadcast
live nationwide, "China's development is at a new
historical starting point." Both Hu and Wen have
committed the Chinese government to "achieving the great
rejuvenation of the Chinese nation". Just prior to being
elected, Hu, who comes from a rural background, had
visited the Chinese hinterland to check on the
well-being of the people, an event unheard of under
Jiang Zemin's leadership, clearly signaling a pro-people
tilt to the Chinese style of capitalism.
At the
ground level, these commitments mean that China must top
the current 8 percent gross domestic product (GDP)
growth to sustain current levels of employment, as well
as to create new jobs. In economic terms, this
translates into maintaining Chinese industrial growth at
more than 20 percent per annum. For this, it needs oil
to feed its industries and fuel growth.
Oil
prices have fallen and stock prices have soared after
the US attack on Iraq, but the fears continue that a
cornered Saddam Hussein may fight longer than expected
and oil prices might rise again. For China, this could
spell disaster. It is the world's third-largest consumer
of crude, after the United States and Japan. It imports
one-third of its oil requirements, 60 percent of which
comes from the Middle East. Western commentators were
bemused as to why the Chinese were chasing oilfields in
the Caspian Sea on the eve of the US attack on Iraq, but
reports now indicate that China has no strategic
reserves and its commercial stocks are estimated to be
good for only two weeks. India also has not yet created
a strategic reserve, though it claims that it has stocks
to last for two months. The oilfields in the Caspian Sea
cannot be immediately exploited, but China obviously is
planning ahead to reduce its dependence on the volatile
Middle East.
Estimates are already being put
forth of how this war will shave reduce China's growth,
and experts note that this limit could become
substantial in the event that the war is prolonged. "If
the war is over within a month, the effect won't be that
big, but if it continues for more than three months,
there could be a relatively large impact, mainly because
of worsening trade conditions for China," said Zhu
Jiangfang, an analyst with Huaxia Securities, in an
interview with Reuters last week. China Development
Institute analyst Liu Xianfa has forecast a slip of 0.3
of a percentage point if war ends within three months
and 0.5 of a percentage point if it goes on for six.
To pay for its oil imports, which are expected
to go up both on account of growth as well as an
anticipated increase in oil prices over the long term,
China will need more foreign-exchange earnings through
exports, tourism and foreign direct investment (FDI).
Foreign investors are not expected to abandon China,
even in the postwar scenario - FDI inflows jumped by 54
percent in the first two months of 2003, despite the
gathering war clouds - but China will have to prove that
it is business as usual in the country despite the
disruption in the Middle East. For this, it must
maintain uninterrupted availability of power, water and
oil supply. Its airlines have to be efficient and its
transport system faultless if it wants to continue
projecting the image of being the safe haven for foreign
investors under all circumstances.
Since the US
is one of China's largest trading partners - with trade
exceeding $150 billion annually - it needs to maintain a
weak yuan against the dollar to keep the terms of the
trade in its favor. It could also do with a competitive
depreciation of its currency against its neighbors' in
competing markets to corner market share further.
Fortunately for China and India, the yuan, like
the Indian rupee, both of which are pegged to the
dollar, has been weakening along with the slide in the
value of the US currency. This means that both countries
can now get more value for the same quantum of exports,
but there are predictions that this war will affect
overall exports themselves, along with tourism. Thus,
the gains booked through a weakening yuan and rupee are
likely to be set off by the overall shrinkage in exports
themselves.
Foreign-exchange earnings through
tourism will undoubtedly take a hit, partially because
of travel plans being set aside on account of the actual
war and the warnings put out by Western countries to
their citizens. Yet there is a threatening possibility
that Americans may decide to stay at home even after the
war - a decision that will hit the Chinese more than the
Indians.
A New York Times/CBS News poll taken on
the night that the United States first bombed Iraq shows
that though 62 percent of the adult Americans polled
felt that the US was right to go ahead with the attack,
59 percent said the hostilities had increased the threat
of terrorism against the US. Only 8 percent thought the
risk had decreased. A CNN/USA Today/Gallup poll,
conducted at the same time, found that 65 percent of
Americans did not "personally feel any sense of danger
from terrorist acts", which meant 35 percent or
one-third the population polled did consider themselves
to be under enhanced terrorist threat.
In 2002,
China topped $20 billion in foreign-exchange earnings
through tourism, about $2.2 billion higher than the
precious year, clearly unaffected by the September 11,
2001, attacks that hit tourism earnings for countries
such as India.
In the case of India, the urgency
to grow and maintain growth is not as pronounced. The
coalition government led by the Bharatiya Janata Party
(BJP) is in its fourth year of its five-year term. Its
liberalization measures have already slowed down with an
eye on the forthcoming national elections, scheduled for
next year. The focus in India is now on populism rather
than economics. Even this has worked to India's
advantage when you compare it with the Chinese
situation. Since it is widely known that India had
debunked economic sense for populism, its information
has been discounted by investors. This is unlike China,
where investor expectations have been so high that even
the smallest sign of its inability to perform would draw
severe flak.
What cushions India from the
repercussions of its economic irresponsibility at this
point is its steady 5.5 percent annual GDP growth, which
occurs irrespective of everything. Many experts refer to
it as "the Hindu rate of growth" and the debate within
India is on how this growth rate should be topped rather
than basking in its glory. From the global perspective,
however, there are few countries in the world that have
consistently managed to notch this level of growth, and
within Asia, India continues to be second to China in
growth with its 5.5 percent GDP against the latter's 8
percent.
A competitive depreciation of the rupee
should work as much to India's advantage as should a
competitive depreciation of the yuan to China's. Yet for
the nationalist BJP, the rupee is a matter of "national
pride" and has been seen as being symbolic of the
strength of the country. Hence, the party has been keen
to keep the rupee artificially afloat, even if it means
forgoing the competitive advantage against neighbors in
competing markets. This might sound quixotic to
outsiders, but it marks a fundamental difference in
approach between the two countries to the reform process
itself, with India adopting reforms to the extent that
it suits its socio-political goals, while China goes
whole hog on the economic, if not political, front.
This is one reason the focus in India is often
on fiscal sops to exporters rather than on letting the
rupee find its natural level against the dollar, which
is generally considered to be about Rs50 at this time.
Even now, there is talk in India of supporting exporters
with "a war package" in the forthcoming Exim policy for
2002-04, rather than letting the rupee quietly slide
against the dollar to find the real rate of exchange.
Further, India is not as dependent on tourism
and exports for foreign-exchange earnings as China is.
India's exports account for 0.6 percent of global trade
and efforts are on to take it up to 1 percent. Against
this, China's share in world trade is more than 2
percent.
In the case of tourism, too, India's
foreign-exchange earnings from tourism have improved in
2002-03, but they are still lower than the levels in
2000-01 prior to September 11, 2001.
If one
looks at the complexion of India's foreign-exchange
kitty, it has been burgeoning primarily on account of
non-resident deposits and private transfers by Indians
residents working abroad. The latter comprise the
multitude of technicians, workers, nurses and their ilk
who work in the Middle East and repatriate their dollar
earnings to their families back home. There's a
possibility that this source could dry up - as it did
during the last war with Iraq - if the war spreads to
Kuwait and the rest of the Middle East, but otherwise,
India's foreign-exchange earnings themselves should not
be too badly hit on account of this war. That takes the
pressure off the Indian government to a great extent.
(©2003 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
|
| |
|
|
 |
|
