Sunday, July 03, 2005

India versus China in the World Economy

A friend has just sent me a copy of the paper, "China and India in the World Economy", which will be presented on 7 July 2005 to the International Conference of Commercial Bank Economists in Bahia, Brazil, by the Chief Economist of ANZ Bank in Australia, Saul Eslake.

Quite simply the best and most comprehensive paper on the subject that I have seen so far, it makes for uncomfortable reading by Indians. For example, Eslake points out that "growth rates (in China and India) are rapid by historical standards, but they are by no means unprecedented for economies at China’s and India’s stage of economic development….Despite … impressive growth, China and India are still relatively poor countries. China’s per capita GDP (in US$ at PPP) in 2005 of $5,642 places it in 95th position among the IMF’s sample, while India with $3,029 ranks 120th".

Even in 2015, when (assuming that the long-term consensus projections compiled by Consensus Economics earlier this year are vindicated), China will have just overtaken the United States as the world’s largest economy, and India will have moved past Japan into third place, "China and India will still be relatively poor countries in 2015, despite their size….China’s per capita GDP will be barely more than one-fifth that of the US (cf. about one-seventh in 2004) and slightly less than one-third of Japan’s (cf. a little over one-sixth in 2004); while India’s per capita GDP would be about one-tenth that of the US (cf. about one-thirteenth in 2004) and about oneseventh of Japan’s (cf. about one-tenth in 2004)".

Eslake seems to be more sanguine about China than about India: " While India does enjoy an advantage over China in regard to its relatively large number of English speakers, in other respects it seems difficult to argue that India is better placed than China to compete internationally in this field. China spends 5.3% of its GDP on IT, compared with India’s 3.7%; China has 27.6 personal computers per 1000 people, as against India’s 7.2; and China has 63 internet users per 1000 people, compared with 17 in India. More generally, China has 633 R&D researchers per million people, more than five times as many as India’s 120 per million, publishes almost twice as many scientific and technical journal articles per million people, and spends half as much again of its GDP on R&D (1.2% against 0.8%)".

He seems to me to underrate or ignore some key factors and questions

1. However clever the rulers of China may be, they can only make decisions on the basis of the information that reaches them - and systems (both in politics and in business) have a way of ensuring that unlikeable information is not sent as a matter of preference to people in power. In addition, people (whether or not in power) themselves do not like to look at information that is disagreeable to them or confronts their prejudices. The result is that systems tend to brainwash themselves in line with their own prejudices. Sometimes, this is called "tunnel vision".
An open culture is the only safeguard against this kind of "boxed-in thinking".
That is why the open system of democracy and a free press, though in the short- and medium-term slower and more unsatisfactory than a benign dictatorship, is so much better in the long run. Everyone in a democracy can see the problems, issues and challenges quite clearly, can check the facts, propose solutions, put pressure on those in power, and so on. Let's take a simple point: how much of Pudong is let at all? How much is let on commercially viable rates? Who knows? Who can find out?

2. One-pary rule makes sense if it is entirely meritocratic (Singapore's system went a long way towards this under Lee Kuan Yew), but such a system is also open to abuse (as we have started seeing alread in Singapore).
One-party rule also makes some sort of sense where it is driven by an ideology (as in Maoist China and Mullah-run Iran). What sense does it make in a China which has decided to integrate into the world economy? The "Party" now consists only of those who have a vested interest in controlling the system - to their own advantage of course (even a preliminary investigation of the purchases and investments made by Party members outside China is very revealing).

3. If bank loans amount to 160% of GDP, as in China (according to Eslake, the highest in the world), can that really be considered a stable economy? In a closed polity, where these loans are still made on the basis of political considerations, how much of the economy consists of bad loans? Who knows? Who can check?

4. Eslake acknowledges that the money supply is controlled by the People's Bank of China, but he does not tell us whether and to what degree the money supply is manipulated by the Bank in such a way that the outside world can have confidence in its ability to handle downturns in the world economy. In other words, how much of a bubble is the Chinese economy?

For Indians, the most interesting question raised by Eslake's paper is: If India was really the world's largest economy till the 14th or 15th century AD, what caused it to begin to lose that position? Eslake suggests (in line with Jared Diamond) that the Chinese were more technologically innovative than Indians. And if that is so, does that say something about the Chinese character as against the Indian one? Or is it possible that the rise of Vedantic philosophy and specifically Tantra made us more gradually more and more unworldly than the Chinese, allowing us first to be increasingly plundered by foreigners and then to be ruled more and more by foreigners - which, in turn, increased the corruption and venality of our ruling classes in line with the increasing rigidity of the caste system?

India's problem was, and remains, principally that of a corrupt political elite that wants to continue political and economic controls primarily because that is to its own benefit. The people want change but the rulers don't.

China, by contrast, has a political elite determined to build the country even, where necessary at the cost of its own advantage.

The challenge for China is that its elite has credibility but little legitimacy. The challenge for India is that its elite has legitimacy but little credibility. Both countries need to move to more open markets as well as a properly open polity.

The final question Eslake raises, in terms of possible power struggles between China and the rest of the world is a worrying one. However, he mindlessly echoes Lee Kuan
Yew's view that , “in 20 years time the centre of gravity of the world will shift from the Atlantic to the Pacific and Indian Oceans”. Yew, and Eslake, ignore the essential question of who owns and who will own these economies (assuming they undertake sufficient political reform to stay stable in the meanwhile). We live in an increasingly interdependent world, in which Europe, China, India and other developing countries own an increasing part of the United States economy, at the same time as Americans (including Chinese and Indians resident in the US) own increasing proportions of China's and India's economies. That is the best guarantee of peace, even though it does not guarantee that the political elite in China will move sufficiently quickly to prevent internal chaos or collapse, much to the discomfort of the world economy.

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