MUST READ OR ANO69
SunnyD
India vs China: Startling economic facts
Is China totally leaving India in the dust? The usual impartial Martian
would believe so after a quick look at the world's media. Pundits
pontificate about how China is the obvious superpower and hegemon in Asia,
the world's future center of all manufacturing, the largest economy in the
world in 25 years. In short, the greatest economic miracle of all time. I
have never quite believed all this self-serving drivel; I am one of the very
few in the Indian media who thinks India stands a decent chance against
China.
I have been skeptical about China partly because of circumstantial evidence:
migrant Chinese men stuff themselves into cargo containers and arrive
asphyxiated after a Pacific crossing; mainland Chinese prostitutes flood
into Southeast Asia (The South China Morning Post carried a story recently).
These are not indications of a nation where all is well.
But there is also a lot of hard data that suggests China's 'miracle' looks
more like a 'debacle.' I have been reading quite a few pieces recently about
the hollowness of their propaganda. This means the US State Department
wishes to put a little pressure on the Chinese these days: the US media
(unlike its Indian counterpart) entirely toes the government line on foreign
affairs. This sentiment is cropping up all over:
a.. a surprisingly negative survey in The Economist (June 15) titled A
dragon out of puff (the magazine is the unofficial voice of NATO, and they
generally like totalitarian states, so the tone is quite amazing)
b.. an article in the San Jose Mercury News (March 25) titled China's
'growth' is not what it seems
c.. several articles in Time (June 17), for example Workers' Wasteland
d.. a story in Newsweek (April 8 International Edition) titled 'How Much
Is China Cooking Its Numbers?'
e.. a story in the Singapore Straits Times (March 27) titled 'Is China's
Economic Growth Just a Charade?'
f.. an opinion piece in The Asian Wall Street Journal (February 26) titled
India and China: Asia's Tortoise and Hare
g.. an opinion piece in The International Herald Tribune (April 2) titled
'China: the Big Four banks head towards collapse'
h.. an article in The Economist (March 14) titled China: How cooked are
the books?
i.. an article in The New York Times (March 19) titled 'Factories, Fewer
Workers Bring More Labor Unrest To China.'
I have also read excerpts from Gordon Chang's relentlessly pessimistic book,
The Coming Collapse of China (Random House, 2001). To balance this, I read
Keniichi Ohmae's Profits and Perils in China, Inc relentlessly optimistic
(thanks to reader Jerome).
Chang is an American lawyer who worked in Shanghai for 20 years, and Ohmae
is the well-respected former Asia-Pacific head of management consultants
McKinsey. Both make their points well, but on average, Chang's contrarian
perspective appeals more to me. Ohmae's perspective seems a little
out-of-date, and his numbers, eg. from the Economist Intelligence Unit on
FDI, needs updating.
Chang's testimony to the US China Commission is compelling. Chang predicts
that the Communist Party in China will collapse within the next five years.
Says he: 'China is not prepared for accession to the WTO. Its state-owned
enterprises and banks are not ready for increased competition. The economy,
in reality, is stalling, not growing fast enough. The result is worker and
peasant unrest. The central government's finances are in bad shape, and one
day the People's Republic could run out of money. But before that happens,
the rulers of China will run out of something even more precious: time.'
As I have consistently suggested in previous columns, for instance Two
strikes, I am not surprised by all this bad news: I generally do not buy all
the irrational exuberance about China, although I am disappointed at India's
failures as well. I mourn the fact that India has not exactly distinguished
itself in comparison. 40 per cent of the world's hungry are in the Indian
subcontinent, according to the Food and Agriculture Organisation. This
signal failure can be laid at the door of India's misguided leftist
policies, pretty much the same as in China.
If you look at the odious comparisons between India and China, most people
seem to pinpoint the following:
a. the gap in total gross domestic product and per capita GDP between the
two
b. the gap in foreign direct investment between the two
c. the difference between the sparkling new skyscrapers in Shanghai and the
endless shantytowns of Mumbai's Dharavi.
It turns out all these comparisons are specious: if you look at the facts
carefully, the Indian tortoise compares quite well to the Chinese hare.
Let us consider these in turn. It is true that China's GDP is more than
twice India's, and so is the per capita GDP both in nominal terms and at PPP
(purchasing power parity), namely the value of a comparable basket of goods
and services. This, of course, is partly a function of the fact that China
liberalised its economy quite some time ago, whereas India continued under
the Nehruvian straitjacket for at least a decade longer.
China has successfully sold the world the mantra of 'a billion-people
market' whereas the set of actual consumers with disposable income is far
smaller. To give credit where it is due, China is indeed a market leader in
manufacturing many low-end products at low cost, although they have severely
understated the cost of labour and especially of capital, which is why
accession to the WTO is likely to be truly painful. Genuine as some of their
achievements may be, there is enormous propaganda puffery too.
For instance, it is widely believed that China enjoyed growth rates in the
double figures for several years, and that it continues to grow at the rate
of over 7 per cent a year. However, I have previously quoted authoritative
sources (see my column China doesn't matter) that suggest that at least 2 to
3 per cent of GDP growth is simply made up. A rigorous and detailed study by
Thomas Rawski of the University of Pittsburgh based on publicly available
information casts even more doubt on these numbers.
According to Rawski, the numbers are significantly inflated. Rawski compares
China's figures with those of many other developing economies, and asks
pertinent questions: if the Chinese economy is doing so well, why is energy
consumption actually falling (it fell by 12.8 per cent in 1997-2000 while
GDP allegedly grew 24.7 per cent)? Why is unemployment rising? Why are
retail sales sluggish? Why are incomes falling sharply in rural areas?
In "China's 'growth' is not what it seems", in the SJ Mercury News, Arthur
Waldron, director of Asian Studies at the New Enterprise Institute (thanks
to reader Sudarshan), quotes Rawski's suggestion that the Chinese economy is
in fact in recession, and has been contracting on and off since 1998. Not
stratospheric 7+ per cent percent growth, but a shrinkage of 2 per cent in
1998 and 1999, and growth of about 3 to 4 per cent in 2000-2001! Waldron
quotes Chinese strongman Zhu Rongji, who told a Chinese television audience
that his economy would have 'collapsed' in 1998 without the state stimulus
spending currently taking Beijing's government debt to record levels. We
will come back to government debt later.
Waldron, in the above article, asks a relevant question: why are so many
people so willing to suspend disbelief and accept this economic fantasy? His
answer: 'Because of the chronic pathologies of China watchers: groupthink
(in the academy and government), fear of Chinese reaction, job pressure (in
the intelligence community and the media) and greed and wishful thinking (in
the case of business). Once again, we look like gullible fools to the
Chinese.' He is absolutely right. This syndrome of mindless servility to the
Chinese is especially acute in Indian 'intellectual' circles, alas!
Says Bruce Gilley in The Asian Wall Street Journal article 'Asia's Tortoise
and Hare:' 'North Asia's colossus appears to be a paragon of efficient
government and high growth. Its South Asia counterpart seems mired in
political stasis and sluggish growth. That view is propagated most
forcefully by Western investment banks and multinationals, and eagerly
embraced by Chinese nationalists and disaffected Indian intellectuals. Yet
it is a gross misreading of the comparative achievements of the two
countries. A closer reading shows that, in the last two decades, India has
done better than China both in social and economic progress and in the
expansion of rights and freedoms.' [Emphasis mine]
Gilley has correctly identified craven Indian 'intellectuals' -- India's
greatest liability -- as those most eager to embrace the views of Chinese
nationalists. In other words, 'secular,' 'progressives,' Nehruvian
Stalinists, JNU-ites and Marxists. Unfortunately for them, they are wrong,
as Gilley goes on to demonstrate in the rest of his article.
These self-same 'intellectuals' committed economic crimes against India's
poor through perpetuating the Nehruvian Rate of Growth of 2 to 3 per cent in
GDP per annum. Once liberalisation began in 1991, this accelerated toward
the Hindu Rate of Growth of 8 to 12 per cent: harkening back to the natural
growth that made India perhaps the richest nation in the world in centuries
past. India needs a decade or two of the Hindu Rate of Growth before poverty
can be eradicated.
I don't know if reported GDP growth rates for India are particularly
accurate, but I am certain that such entities as the Center for Monitoring
the Indian Economy do not err on the side of puffing up the numbers. If
anything, given the general tendency in India to play down every positive
accomplishment, I would imagine that the rates are under-reported, and that
India is actually doing reasonably well.
This factor of underestimating India's results is seen in the second issue
as well: that of the famous FDI. I keep hearing about China's $40 billion in
FDI, and India's pathetic $3 billion. But it is a fact that, discouraged by
the dismal rate of return, hardly any Americans or other foreigners have
been making significant investments in China lately. So where does all this
money come from?
It turns out that about 50 per cent of this alleged FDI is in fact flight
capital, also known as black money, returning through a process known as
'round-tripping' (see an editorial, in the Financial Express of June 5).
Chinese businessmen take capital out of the country through under-invoicing
exports and over-invoicing imports, and park this flight capital offshore.
Then they send it back as 'foreign direct investment' to take advantage of
preferential tax treatment. I suppose it is true that if resident Chinese
are investing their money back in China, even through bizarre means, it
shows some confidence in the economy. They may, however, be deluding
themselves that their investments are safe, much like the average Chinese
saver who puts his money into state banks that are perilously close to
default, but we'll come to that later.
And what is the case with India? True to form, India under-reports its FDI!
It is general IMF-approved practice to include various other inflows such as
reinvested earnings, overseas corporate borrowings, and subordinated debt in
FDI. But India does not. Therefore, the reported FDI for India is
considerably less than the reality: thus, in fact, on an apples to apples
comparison, India's FDI goes up to $8 billion or so and China's comes down
to $20 billion or so: roughly proportional to their nominal GDPs. So it is
not the case that India has done frightfully badly in FDI.
And some of the FDI in India results in spectacular return on investment: I
read somewhere that General Electric's Jack Welch research center in
Bangalore has filed for 160 US patents in the first year of its existence.
Real intellectual property development fueled by Indian engineers and
scientists. I am sure GE is investing millions more to take advantage of
this productivity. Whereas a fair amount of the actual FDI in China is for
buying real estate!
Furthermore, in May 2002 alone, FDI flows into India (despite war fears and
communal riots) went up by 87 per cent (to $501m from $268m in May 2001);
and for the period January to May, by 60 per cent from $1.18 billion in 2001
to $1.89 billion in 2002. And this does not include GDR/ADR (global/American
depository receipts) floated by Indian companies in overseas capital
markets. So the picture in Indian FDI is certainly not all that grim.
Also, out of the $20 billion or so real FDI in China, indications are that
roughly 80 per cent comes from overseas Chinese entrepreneurs -- in Taiwan,
ASEAN, North America, etc -- who are looking to use a bit of good old
guanxi, connections. The idea is to use the mainland as a sweatshop with
slave wages: leading to instances of death from overwork. Whereas in India's
case, the overseas Indian, usually a manager or technical person, urges his
company to invest in R&D or BPO in India.
Then there is the third odious comparison, the sparkling, fancy new Bund in
Shanghai and the ghettoes of Mumbai. Admittedly, anybody flying into Mumbai
has to traverse terrible slums en route into the city. These will make
anyone believe that India has totally failed its citizens. It is almost
inconceivable that human beings choose to live like this. Why don't they go
back to wherever they come from?
But that very question signals a deep difference in the way India and China
function. There are practically no restrictions on the free movement of
Indians, and so they go wherever they believe their economic prospects are
best. If China allowed for similar freedoms, their glittering showcase city
centers would instantly be overtaken by millions of rural squatters fleeing
the poverty of their villages.
The Economist says: 'Ultimately China's surplus rural workers will need to
move into urban areas. But the government, fearful of creating its own
versions of Mumbai with endless shanty-town sprawls, is hesitant to open the
doors to peasant migration. The booming cities of skyscrapers and glittering
shopping malls that so impress foreign visitors to China will, over time,
begin to look more like cities in other developing countries as country
dwellers move in. The shanty-towns will spread.'
The bright lights of China's cities remind me of the facades put up by the
Tsar's kulaks: 'Shanghai' must mean 'Potemkin village' in Chinese!
Thus, on all three of these most common and superficial comparisons, India
is not doing as badly as people think, and China is doing worse than people
think. But Indians have no reason to pat themselves on the back -- indeed,
India has done outstandingly badly. In comparison to real potential, China
has done badly, India has done even worse. But Indians also have no reason
to be overawed by a mythical Chinese success story. That is the intent of
this essay, to urge Indians to not blindly follow China's example. This is a
real danger, because India's 'intellectuals' are uncritically starry-eyed
over China. In the next part of this analysis, I look at what really ails
China, and the lessons India can learn from their mistakes.
Don't miss the concluding part of this column tomorrow!
Rajeev Srinivasan
Demorising
second part when it becomes available.
The article mirrors much of my own analysis of the Chinese economy. I have been
arguing for years that the almost-permanent 7-8% GDP growth of the "P"RC
economy is phony, and that in 1998-9 the "P"RC economy even contracted [for the
record, I am not Prof. Rawski]. Don't believe the hype, especially when it
comes from a government that always sugarcoats the truth in its own favor. But
in reality, the CCP does not know the truth itself, the same way not everyone
could agree the tech bubble in US was in fact just that. The Chinese economic
bubble will collapse as all bubbles before it have; when something seems too
good to be true ... well, it isn't true.
I am predicting a crisis in "P"RC that will result in the cracking of the CCP
before the scheduled Olympics in 2008. The collapse is especially dangerous for
China because the only reason for legitimacy for the CCP comes from the
perceived economic development, and there is no room for error. Pencil in 2007
for the collapse, but it could come sooner.
SunnyD posted:
>India vs China: Startling economic facts
>Is China totally leaving India in the dust? The usual impartial Martian
>would believe so after a quick look at the world's media. Pundits
>pontificate about how China is the obvious superpower and hegemon in Asia,
>the world's future center of all manufacturing, the largest economy in the
>world in 25 years. In short, the greatest economic miracle of all time. I
>have never quite believed all this self-serving drivel; I am one of the very
>few in the Indian media who thinks India stands a decent chance against
>China.
> ...