China, India rethink growth
strategies By Jayanthi
Iyengar
PUNE, India - China is the fastest-growing
economy in the world. India is a close second.
Both nurture dreams of dominating the earth, space and
virtual space with their economic and political
strength. Both share a certain commonality of founding
ideology. And by a strange coincidence, both now share a
point in their developmental history at which they would
like to refocus the direction of growth of their
respective economies.
As Professor George
T Haley of the University of New Haven School of
Business points out, there are some very discernable trends that
are responsible for the current situation. India's
educated suburban elite as well as the people in the
Beijing region and China's southeastern coastal region
have benefited tremendously, but the agricultural
sectors and hinterlands of both countries have not
shared in the growth. The urban poor have also failed to
benefit and the traditional industrial areas and
industries in both countries are disaster areas, such as
China's northeast and India's traditional textile
industries.
Farmers in both countries are
suffering, though India's agriculturists are being
particularly hurt. Hundreds, possibly thousands of
farmers have committed suicide. "The focus on helping
the agricultural sectors of their economies is long
overdue, and the failure of the Bharatiya Janata Party
[BJP] to develop a legitimate agricultural policy was
quite possibly the major reason its loss in the recent
Indian elections," Haley told Asia Times Online.
Comprehending the limitations of its
own progress and the failure of newly created wealth
to reach the masses, Chinese leaders today are applying
the brakes to slow down inflation or price rise
not accompanied by real growth in select sectors, such
as cement, construction, steel and real estate. They
would like to cool down these sectors, as they say, but if
one looks closely at the causes that led to them heating
up, one finds the same underlying issues that today
stall India's growth: much of the workforce rendered
jobless by free-markets-led growth and the overall elevation of
the living standards of the people.
Today
the Chinese leadership is disciplining the
provincial governments for what seems like mindless
overinvestment, yet these investments were made in the first place
with the encouragement of the central government. The
Chinese hoped that the investments made by the state
governments would push growth to such an extent that it would
result in the creation of new jobs, the absorption of
workers displaced by technology and right-sizing forced
upon enterprises by competition at home and as a result
of global integration.
Rigidity a problem for
China's system Yet the Chinese system, like any
other, suffers from rigidities. The government is
committed to creating 20 million new jobs annually, but
even 12 million per annum would be considered an
achievement, says Jonathan Story, professor of
international political economy and author of China:
The Race to Market. "These rigidities slow the pace
of growth and may contribute to inflationary pressures:
for instance, price controls in the energy sector, the
serious problems of many state and provincial woes, or
the fact that banks are obliged to continue lend to
loss-making concerns in order to slow down the
adjustment process, so that company managements and
local governments can think up ways of finding
alternative jobs for their dependent work forces," he
says.
He further tells Asia Times Online
that while some may see the weakness of the banking system
as responsible for China's woes, the weakness lies in
the corporates, the state-owned enterprises and township
and village enterprises. "Of course the government wants
to resist interest-rate rises because the indebtedness of
the banks would thereby be worsened," Story says.
India's problems are similar but clearer.
The democratic system is ruthless. It does not couch
the dissatisfaction of the people in comforting
estimations, interpretations and economics. Instead, it is direct,
as the recent elections have proved. In circa 2004,
the Indians like the Chinese want more: more in terms
of incomes, purchasing power, employment, facilities
and opportunities. Like the nominated leadership in
China, India's elected leadership understands this message
loud and clear. Hence, within days of taking over the
reigns of power, ministers such as Praful Patel, the new union
civil aviation chief, are stating that they would not
privatize the two national carriers, Indian Airlines and
Air India. Both these companies are in the red. One has
a staff of about 16,000, and the other about 20,000, way
beyond the carriers' requirements and international
benchmark of staff per kilometer.
Expert committees such as India's Naresh Chandra
committee, appointed by the previous BJP-led government,
have recommended the privatization of both the
national carriers. The new minister, however, has a
different viewpoint. He is an industrialist himself. Hence
he talks of increasing the fleet strength from about 30
now to more. That would improve the fleet-staff ratio,
spreading the staff thinner over a larger fleet, but it
would still not resolve the problem of revenues - the
airlines are in the red since what they earn is not
enough to pay for expenses, including their hefty wage
bill.
Indian ministers fear taking the ax to
ailing sectors Patel is not alone in this
seemingly irrational approach of not wanting to touch or
cut staff, or of wanting to pump good money after bad
into the sick and ailing sectors. Under the common
minimum program cobbled together by the coalition
partners, there are several schemes for increasing the
credit flow to the agricultural, village and unorganized
sectors, and to the sick units within the manufacturing
fold. Self-employment schemes too are likely to be an
additional dimension to this new prescription for growth
and development. All of these measures are based on
easing bank credit to that segment of borrowers that
have traditionally been considered risky by the
institutional lenders. Interestingly, this is exactly
what China has been doing, while it buys time to generate
jobs quickly for its teeming 1.3 billion people.
Significantly, while the compulsions that drive
the decision-making in both countries are the same,
experts say the fallout of the slowdown would be
different for India and China. "Posterity will judge
India badly and the Chinese move in a more favorable
light," says a private equity investor in India, who
spoke on condition he not be identified by name. Another
take on the issue comes from Bharat Kaushal, the India
country head and head of South Asia for the
international finance department of Sumitomo Mitsui
Banking Corp. He tells Asia Times Online that the
Chinese are smart market players, certainly smarter than
their Indian counterparts. "By being proactive they are
ensuring that they bring in the demand which was
otherwise getting plagued by a saturated appetite among
investors," Kaushal says. He points out that the Chinese
are worried about their non-performing assets (NPAs) and
they are ensuring that now only good deals are approved.
Haley adds that the dimension of a slowdown in
the two countries are different. "A slowdown in economic
growth will hurt both countries to the extent that both
need job creation to handle population growth, to offset
enhanced efficiency in their industries caused by
increased competition that is having the effect of
throwing thousands of people out of jobs, especially in
state-owned enterprises that are being privatized, the
need to move workers from underemployment to fully
productive employment, and finally, to provide their
populations with enhanced standards of living."
But having said that, he adds, "A slowdown will
help China in controlling the costs of its development.
India, because its significant growth trend was just
starting and its population is growing more rapidly, is
not in the same situation. A slowdown in its growth will
hurt across the board."
Significantly, what does
the slowdown in both the countries mean for Asia and for
the world? Haley points out that slowdowns in the two
economies may not be contained within the region. Within
Asia, there is a chance for some countries to benefit
through the reduced prices for commodities, though there
is a possibility that foreign direct investment (FDI)
into China and India, and toward emerging Asia, might
lessen. There is also the strong possibility that the
Chinese would allow the yuan to float upward, he says.
"The overall effect, however, is likely to be negative."
He explains that this is because most
Asian countries have tied their economies to the big
Chinese and Indian growth engines, especially China's. A
slowdown in China would hurt the economies of virtually all
of East and Southeast Asia. Japan, growing more
dependent on China by the day, might suffer to the extent
that its recent economic rebound may be derailed. "South
Korea should do better than Japan, but will still be
hurt. Southeast Asia will be hurt, but some countries
stand a better chance than others, Vietnam for instance,"
Haley says.
He further adds that if the new
Indian prime minister, Dr Manmohan Singh, can quickly
stabilize the Indian markets, India may benefit from a
slowdown in China. Simply by creating a positive media
buzz when investors were expecting the worst, India may
draw FDI that would have otherwise gone to China. "This
scenario is probably overly optimistic, but people
should not forget that much of the growth that the
former BJP government was taking credit for was based on
policy changes that Mr Singh helped to bring about
before the BJP took control," he says.
Professor Story has his own explanation for what could happen,
and both Haley and he point out that the US
government's policies and developments in the European Union may
have an impact on how the world moves forward following
this "blip" in Asian development. Story points out that
China has become the center of the Asia Pacific
economy. China's trade deficits are with the Asia-Pacific countries,
and its surpluses with the US and the EU. In other
words, China has been integrated into the value chain
strategies of multinationals, from Japan, the
Asia-Pacific, as well as from the US and the EU.
Over the past year, China has accounted
for about 50 percent of world growth, and so it
therefore has become a crucial market: for growth,
for manufacturing, for global consumption. "A slowdown in
China, though, would not be damaging to the world
economy, as long as the other poles of growth in the
world economy continue to grow," he says.
Jayanthi Iyengar is a
senior business journalist from India who writes on a
range of subjects for several publications in Asia,
Britain and the United States. She may be contacted at
jayanthiiyengar1@hotmail.com.
(Copyright 2004 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
