Why the elephant can dance better

on Monday, August 4, 2008


In last column, i argued the case for Sino-Indian economic cooperation, suggesting the two countries had complementarities that could make such co-operation mutually beneficial (as some companies in both countries are already proving). I also dismissed any talk of comparing India to China, arguing that the two countries’ systems are so different that we simply can’t compete with China in the growth stakes. Lest some readers infer from this that i think China is superior to India in every respect, let me assure them that they are wrong.
Certainly, in absolute numbers, the Chinese are way ahead. Their export of electronic goods now tops $180 billion a year. One out of every three shoes exported in the world is made in China. They make 75% of the world’s toys. Foreign direct investment is at the level of $70 billion a year (for comparison, India gets $15 billion). Shanghai alone has nearly 4,000 skyscrapers (more than all of India, and exceeding Los Angeles and Chicago combined). China has built an estimated 60,000 kilometers of expressways in less than two decades and will soon outstrip the total length of the US highway network. Per capita income has risen nearly 10-fold since 1978 to over $6,000 a head, and the number of people living in absolute poverty has dropped from 425 million two decades ago to 26 million
today. The population is almost totally literate; life expectancy is reaching developed-country levels. This year, China is expected to overtake Germany to become the world’s third largest economy, behind the US and Japan. It won’t stay Number Three for long.
Against this, though, are a number of factors suggesting that not everything is rosy in China. Economic growth has occurred at breakneck speed, but that means some necks have been broken: the human cost of development has not been negligible (population displacement,
farmers thrown off their lands, villages flooded by dams, mounting pollution, low-wage labour in appalling conditions, widening disparities between the rich and the poor, an absence of human rights and few checks on governmental abuses). The Chinese have seen great and rapid improvements in their Internet access, but Beijing employs some 40,000 ‘cyber-police’ to monitor politically-undesirable activity on the Web.
Equally important, China’s success has not just been China’s; a disproportionate share of the benefit goes abroad, to the foreign companies who have set up factories in China. It has been estimated that of the $700 American price of a Chinese-made laptop, only $15 remains in China. Only four of the country’s top 25 exporters are
Chinese companies, according to Forbes magazine’s Robyn Meredith, who adds that in practice, ‘Made in China’ really means ‘Made by America (or Europe) in China’. The Chinese financial system also leaves much to be desired. Where India has been running sophisticated stock markets since the early 19th century — and Indians are so skilled at doing so that they got the Bombay stock market up and running within 24 hours of the 1992 bomb blasts — China is new at the game, and not particularly adept at it. The financial information provided by China’s companies, especially those in the large governmental sector, is notoriously unreliable, and standards of corporate governance are low. There are no world-class Chinese companies with sophisticated managers to match Tata or Wipro or Infosys. China’s capital markets are weak and its banks inefficient: the Chinese banking system carried an estimated $911 billion in unrecoverable loans as of 2006, mainly to government firms. Stateowned enterprises still account for half of China’s economic assets. China has yet to master the art of channelling domestic savings into productive investments, which is why it has relied so extensively on foreign direct investment. And the world has yet to develop any confidence in China’s legal system (where a contract still means whatever the government says it means). In other words, it still lags behind India on the ‘software’ of development — not just technical brainpower or engineering know-how, but the systems it needs to operate a 21st century economy in an open and globalising world.
And then there’s politics. Whatever you might say about India’s sclerotic bureaucracy versus China’s efficient one, our tangles of red tape versus their unfurled red carpet to foreign investors, our contentious and fractious political parties versus their smoothly-functioning top-down Communist hierarchy, there’s one thing you’ve got to grant us: India has become an outstanding example of the management of diversity through pluralist democracy. Every Indian has
been allowed to feel he or she has as much of a stake in the country, and as much of a chance to run it, as anyone else: after all, our last elections were won by an Italian woman of Roman Catholic heritage who made way for a Sikh to be sworn in as PM by a Muslim president, in a nation 81% Hindu. And our largest state is being ruled by a Dalit woman, from a community once considered ‘untouchable’, who bids fair to rule the entire country if she can make the coalition arithmetic add up right after the next election. She wasn’t promoted by the Brahmin elite in New Delhi; she rode to the top on the ballots of her political base. Contrast this with Beijing, where political freedom is unknown, leaders at all levels are handpicked from the top for their posts, and political heresy is met with swift punishment, house-arrest or worse. India’s politics means its shock-absorbers are built into the system; it has endured major road-bumps without the vehicle ever breaking down. In China’s case, it is far from clear what would happen if the limousine of state actually encountered a serious pothole. The present system wasn’t designed to cope with fundamental challenges to it except through repression. But every autocratic state in history has come to a point where repression was no longer enough. If that point is reached in China, all bets are off. The dragon could stumble where the elephant can always trundle on.