Crouching Tiger, Flying Dragon

The hottest debate which has engulfed India in recent times is whether it can overtake China in the race for economic supremacy. Now, if only statistics were to be considered, then China would be ahead of India by leaps and bounds, both in terms of national income and economic prosperity. But as always there is a twist in the tale. However, before the twist comes the tale i.e. the statistics.

Well, roughly speaking, China’s population is 1.2 times as large as India’s, whereas its GDP is 3 times India’s GDP. Its poverty rate is less than half of India’s 35 %( World bank). Female adult literacy is nearly double India’s pathetic 45%. Life expectancy in China is a full 8 yrs longer. The rate of malnutrition in children under 5 yrs in China is only a quarter of India’s staggering 46%. In terms of infrastructure, China’s lead is even more striking. And soon it is slated to host the Beijing Olympics.

Electricity production in China is nearly 3 times higher than in India. Even after the so-called ‘Telecom Revolution’, the number of landlines and mobiles in India is only a sixth of the number in China. The World Bank ranks China 83rd in doing business whereas India occupies a lowly 120th position. China gets $40 billion worth of FDI, India a pitiable $3 billion. Coming to the external sector- China exports an impressive $600 billion worth of merchandise compared to India’s meager $80 billion….and so the list goes on and on.

Well, all this actually shows that China has been more proactive in taking up reforms, opening up its economy and removing controls and restrictions. China’s mind-boggling achievements are all the result of determined state initiative and efficient execution of projects. On the other hand, inefficient management, constant delays, spiraling costs, political bickering, regionalism, corruption have all proved to be India’s bane.

Now that I have created a very rosy picture of China, it is time to reveal the chink (or rather chinks) in the armour. Well, firstly, China kick-started reforms more than a decade before India. Part of the gap between their performance can simply be attributed to that earlier start ( after all, a 10yr old child’s and a 20yr old mans height cant really be compared). Secondly, when it comes to statistics released by the Chinese government, it is simply not reliable. The authoritarian government there has a history of glorifying China’s economic performance and releasing inflated figures. Some of their economic achievements are pure propaganda or rather castles in the air (Some skeptics estimate that China grew by a mere 3-4% in 2000-01). In India at least the figures are more or less reliable. There are several institutions in place to keep a check on the government. There is the judiciary, the opposition, the RBI etc. So the Government can’t really fool the public.

Now coming to the FDI myth, almost 50% of China’s FDI is Flight capital (i.e. black money) returning through the process of Round Tripping. A large amount of Chinese black money is recycled through Hong Kong and sent back to the mainland as FDI by manipulating export and import receipts. So the actual level of FDI received by China might be nearer to $20 billion than $40 billion. India on the other hand, underreports its FDI by not ascribing to the IMF approved methods. India’s FDI figure excludes reinvested earnings, subordinated debt and overseas commercial borrowings which are included in the FDI figures of most other countries. Standard computation would raise India’s FDI level to $8 billion which doesn’t seem too bad when compared to China’s $20 billion.

All this doesn’t mean that China’s overall supremacy over India can be denied. Its socio-economic parameters have been constantly better than India’s. However India can take heart from some facts. Firstly, China’s export led manufacturing boom has been largely a creation of FDI, which has effectively served as a substitute for domestic entrepreneurship. On the other hand, India’s long list of homegrown entrepreneurs may give it a long term advantage over China. It is the Tatas, Birlas, Ambanis and Murthys who have taken India to places whereas it is hard to find a single name who symbolizes China’s prosperity. Secondly, by 2040, about a third of the Chinese population will retire. This will place enormous demands on the country’s finances in the form of old-age benefits, pension and healthcare cost. In fact, some economists think China might actually grow old before it grows rich. India, on the other hand will have a thriving young population who will be in the most productive phase of their lives by that time. Moreover, the global demand for skilled labour will also rise significantly. Hence, India will have a golden opportunity which it will only be able to capitalize by providing quality education to all its citizens. Hence demography and human capital are advantages which can not be denied to India.

Finally, coming to the strength which will prove to be India’s weapon of mass destruction i.e. its soft infrastructure. The political system, the rights and freedom of the people, the cultural diversity are all elements which constitute the soft infrastructure of a country. India not only has a democracy, but a uniquely diverse culture which binds people together. The state does not interfere with the people’s freedom, people have the right to disagree, the right to choose and the right to make their voices heard. Moreover, India’s independent judiciary is its biggest asset- justice may be delayed but it is denied to none.

On the other hand, the Chinese government is infamous for repressing its population (Tiananmen Square, Tibet etc). Citizens have to tow the official line; any sort of dissent is not viewed with a kind eye. There are major restrictions on labour movement. Private property exists only in name i.e farmers can lease land but not sell it. Moreover, the judiciary is not independent-justice is rare. People can not elect their own representatives. Till now, China has been able to satisfy the basic needs of its people. But as economic prosperity grows, people will start aspiring for more. And then China will have to make the expensive but inevitable transition to being a democracy. Till then China will continue to be a dual nation- one which is politically a communist state but economy wise a free market economy.

So if seen in absolute terms, India is miles behind China. However, India’s foundation is strong, whereas China’s seems shaky. So who knows the crouching tiger may finally overtake the flying dragon. And then the twist in the tale will be complete.

Our Fire-Spewing Neighbour Dragon

China’s economy is hungry and is growing hungrier by the day. The country accounts for a fifth of the world’s population but it consumes nearly half of the world’s produce of cement and pork, a third of its steel and over a quarter of its aluminum. The world-over rise in oil prices can be attributed to the continuous increase in demand of oil by the developing countries, primarily China. Indeed, the consumption of petrol in the United States is declining. On the contrary, according to the International Energy Agency, China’s imports of oil might triple by 2030. Furthermore, the demand for resources by China is driving the developing economies around the world; African and Latin American economies are growing at their fastest pace in decades.

The prices of all kinds of fuels, metals and grains are touching new peaks, thanks to the growing demand of the developing nations. Yet, China’s growth is posing problems for the world too. It is being argued that the Chinese are in a race to win over physical resources to feed their continuously growing economy. Some of the Non Governmental Organizations worry that in the rush to secure resources, the Chinese firms will ignore environmental, legal and labour standards and leave behind a trail of corruption and environmental pollution.

The Chinese government is providing big aid packages to countries which welcome Chinese investment. For instance, Angola is receiving so much monetary incentive from China that, in 2006, it refused the aid given by International Monetary Fund (IMF). It must be noted that a pre-requisite for aid by IMF is having transparency and sound economic management.

The West has vocalized its concern on the way the Chinese are moving ahead. One obvious reason that comes to the fore is that the West is “losing” Africa and its resources, definitely not pleasant for them. The backlash of this unpleasant idea has come in the form of criticizing the way in which China is operating. As a Western critic put it, “Washington consensus of economic liberation and democracy will find itself in competition with a Beijing consensus of state-led development and despotism.” However, the Western companies themselves are no better than their Chinese counterparts are. Several years of American and European aid and investment could not do much for Africa. A different approach from China might just work. At least it will challenge other donors to find methods that are more effective.

All the hue and cry about the repercussions of China’s activities are dissolved in the face of the effects that China has to bear back home. Its appetite is increasing not only because of the rapid growth of the economy but also because Chinese growth is concentrated in industries which require a lot of raw materials. Moreover, over the past few years, there has been a marked shift from light to heavy industries in the country. Therefore, for each unit of output, more raw materials are required. This, in turn, is accentuating China’s already grim pollution problem. Also, heavy industries require huge amounts of power. Steel making, for instance, uses up to 16 per cent of the total power in the economy against a total of 10 per cent used by households. These factors are acting as drags for the economy. Pollution costs borne by the society in the form of increased medical expenses, loss of productivity due to thousands of premature deaths and lower crop yield together make up for 10 per cent of the GDP of the Chinese economy. Authorities are struggling to ensure clean air for the athletes slated to participate in the Olympics in Beijing this summer. China needs to self evaluate its policies to see where it is headed. The efforts to temper the economic growth, to avoid over heating of the economy and to follow a path of sustainable development have to be evaluated and approached again. Otherwise, China will spiral into a less prosperous, a more unstable and a completely unsustainable place.