Posted on 12/05/2003 9:06:05 AM PST by Willie Green
For education and discussion only. Not for commercial use.
The China-India comparison is a macroeconomist's paradise, but hardly anyone has managed to study it at a holistic level of analysis, economy-against-economy. Harvard scholar Subramanian Swamy's new book discards the piecemeal sector-against-sector approach and manages to create the most comprehensive tale of the tape between the world's two fastest growing economies that, ceteris paribus, are expected to become the world's second and third largest economies by 2020. Swamy's central thesis is "conditional Beta convergence" (if two economies have different savings rates and technologies, growth and per capita incomes will converge conditional on each economy's own steady state). The Chinese hare may have been the first to get off the marks and be a quicker sprinter but the Indian tortoise will eventually catch up.
Swamy discounts the cliche that the two postcolonial economies were identical at the dawn of independence. By 1950, when both nations were liberated from imperialist domination, the initial economic conditions prevailing were varied. China had achieved a growth rate in foodgrain production (0.6 percent per annum) six times that of India's, and a marginally higher growth rate in non-foodgrain crops. Higher per capita grain output and the absence of many famines in pre-independence China translated into higher calorific consumption vis-a-vis India. China's relatively comfortable food surplus enabled the country to carry out a strategy of rapid industrial development, whereas India was forced to slow down its industrialization due to two-century-long declines in agricultural yields.
Before vetting comparative growth rates in the reform period, Swamy lodges a caveat about the danger of accepting official Chinese data at face value. While there is no evidence of systematic or deliberately fabricated book-keeping at the National Bureau of Statistics in Beijing, "Official mendacity is improbable" (p 28), and unreliability, uneven quality, dilution (shuifen) and inaccuracy of figures are serious problems. Local officials falsified figures for promotions and to curry favor with provincial bosses. They tend to overstate growth of output and underreport investment and population figures. Annual additions to inventories are counted as incremental output and true industrial output is not properly deflated by a representative price index. A substantial part of constant price growth domestic product is in fact calculated in current prices.
Swamy's facts corrected for "under-deflation" and "institutional effect" convey that Chinese gross domestic product (GDP) growth since 1980 cannot be 10.1 percent but must be 7.4 percent, compared to India's 6.0 percent. China's growth rate for 1992-99 is no more than 6.5 percent. The China-India GDP gap is thus "not as wide as estimated in World Bank and UNDP publications" (p 50). It narrowed considerably in the early '90s and convergence is well established for the late '90s.
Today, Chinese life expectancy is longer and fertility rates are declining, even as the public sector is being privatized. These prognosticate a decline in the country's high savings rate, which in the last two decades has fuelled China's rapid growth. With well-designed economic reforms, there is a strong possibility that the Indian savings rate will rise to reach the concomitantly declining Chinese level. If financing costs are compared, provided the current rates of inflation are factored in, the real interest rates for China and India are not that wide either.
The 2002 Global Competitiveness Report rates India equally with China in technology and administrative procedures and evenly matches the settings for increasing productivity in both countries. Total Factor Productivity (TFP) has been declining in China, originally in agriculture and then for the economy as a whole since 1992, while it is increasing slowly in India. It is probable that there will be convergence in TFP growths in the coming 20 years.
On the distributive side, China has turned into a "polarized inegalitarian economy". Any standard inequality index places it above India. During the reform period, both poverty and inequality decreased in India, but for China, inequality has increased. Huge interior-coastal disparities in wealth have led to the coinage of a new term for regional inequality-induced reduction in productivity - "Sinosclerosis". Urban-rural income disparities explain 75 percent of the increase in overall Chinese income inequalities. They stand at a ratio of 3.5 to India's 1.6. China's Lorenz Curve is now more convex and outward than India's. In 2002, then premier Zhu Rongji called the shrinking incomes of rural citizens his "big headache". There are obvious economic disadvantages to the government's plans to reapportion resources to neglected areas. China's World Trade Organization (WTO) entry could accelerate this disparity as coastal provinces and urban areas will benefit from the expansion of foreign trade, while agricultural provinces could lose out from steeper price declines.
How China and India modernize their decision-making apparatus with information technology will be a determinant of their economic destiny in the age of globalization. Chinese telecom density is more than 20 percent compared to India's 3.5 percent, but recent deregulation of the sector in India has raised hopes of a sharp acceleration of this figure and the possibility of bridging the gap with China. India beats China by a big margin in software exports, but Indian software companies have failed so far to enlist Indian industries as customers, putting a cap on growth through the internal industrial market. China's telecom infrastructure and research and development (R&D) leads can help jump-start a spurt in software to match India soon.
In external openness, the Indian economy is far behind China's. "Countries that open their doors to fresh ideas and new concepts will be the ones that prosper." (p 123) Still, China's incredible success in trade is overstated by the "production chaining" and "double counting" effects (processing and assembly tasks are outsourced to the mainland). Its true export penetration of G3 markets has been exaggerated for the last decade. Content-wise, China's much hyped electronics sector trade profile is a confirmation of its general low-wage labor intensive status and its inability to climb to the higher end of the value chain. Unnoticed by many, China's domestic trade deficit is shooting up as import liberalization gets into gear, resulting in an overall current account deficit in the coming decade. India is "more securely placed because its foreign trade is not yet structured on the elements of processing trade" (p 136). Still, the subsisting anti-export bias of the Indian economy is a drag.
Uncorrected Chinese foreign direct investment (FDI) is 13 times India's, but if "round-tripping capital" (funds sent out of China and returned via Taiwan, Macao and Hong Kong) is excluded and India adopts the International Monetary Fund (IMF) definition of FDI, the gap is narrower than popularly perceived. "The real difference is not 1:13 but 1:2.5" (p 153). This is not to deny that India's underperformance in returns on investment and risk have discouraged global FDI inflows. In March 2000, the Indian government inaugurated Special Economic Zones (SEZs) to attract foreign investors along the lines of China's celebrated SEZs. But unlike Chinese SEZs, the Indian newcomers are smaller in land area, lack hire-and-fire leeway, enjoy scant access to the domestic market and have over-centralized approval systems.
In the wake of the 1997 East Asian meltdown, Swamy reckons that on a scale of crisis probability, China's vulnerability has slightly increased while India's has diminished. China's greater dependence on export markets for economic growth is one reason. The other major cause is that the Chinese banking system, compared to India's, is facing severe financial strain and the threat of bankruptcy. Exposed to innumerable "soft budget constraints", the banking sector is a "ticking time bomb embedded in the Chinese economy" (p.196). It creates hurdles for private Chinese firms, especially smaller ones, trying to obtain capital. Chinese bank lending is tailored to state-owned enterprises even though directed credit often ends up as a non-performing asset.
India's financial system also has acute maladies. Banks are rewarded more for holding government securities than for lending. Caught in a liquidity trap, an Indian bank is left with barely 39 percent of its deposit base for commercial lending. Nevertheless, the Indian banking supervisory system is superior to China's. India's non-performing loans are weighty but represent "manageable systemic risk" as opposed to China's unmanageable risk. China's fiscal deficit is in the order of 6-7 percent of GDP (ie higher than India's). Without urgent financial reforms, Chinese public debt could exceede 90 percent of GDP by 2010. The political rub lies in the fact that banking reforms would weaken Chinese state and party control of the economic system.
Accession to the WTO requires China to allow foreign companies freer access to its domestic market. This has the potential to disrupt inter-sectoral balances created by the state-directed economic apparatus and eventually to sizeably reduce China's growth. Another warning signal is mass open unemployment (14 percent) that has remains after 20 years of reforms and eight percent growth, spelling socio-political danger to the entire artifice that Deng Xiao Ping has built.
For India too, Swamy warns of the consequences of worsening fiscal indicators since the mid-'90s. Public expenditure has shifted toward consumption and non-infrastructure investments since 1995, thereby crowding out private investment. Labor market reforms are long overdue not only to attract FDI and cut wage bills, but also to induct workers with more contemporary skills and higher productivity. Unless Indian GDP grows closer to 10 percent, the country could face unemployment as high as 16 percent by 2010. A 10 percent decadal growth will, on the other hand, transform India and pull it abreast of China. As a minimum condition for closing the China gap, India will have to make strenuous fiscal efforts to raise the rate of investment to 30 percent. Misguided Indian trade policies that have forfeited millions of jobs, opportunities and productivity gains to China, need a facelift.
The Indian economy has lost one precious decade to China due to delays in initiating real market reforms. Yet diminishing returns to capital and limits to exponential growth give the former a chance to redeem itself in relation to the Chinese miracle. The 21st century, Swamy suggests, can belong to both the Chinese hare and the Indian tortoise.
Economic Reforms and Performance. China and India in Comparative Perspective, by Subramanian Swamy. Konark Publishers, New Delhi, 2003. ISBN: 81-220-0656-6 Price: US$11.50, 308 pages.
Ricardo never predicted that. on the contrary, he made strong arguments for international free trade as a way of improving living standards due to the law of comparative advantage.
Deny it all you want.
People can read Ricardo what Ricardo says for themselves: On The Principles of Political Economy and Taxation
Here are a few excerpted paragraphs:
In the natural advance of society, the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate...
'Gold and silver, like all other commodities,' says Adam Smith, 'naturally seek the market where the best price is given for them; and the best price is commonly given for every thing in the country which can best afford it. Labour, it must be remembered, is the ultimate price which is paid for every thing; and in countries where labour is equally well rewarded, the money price of labour will be in proportion to that of the subsistence of the labourer....
Diminish the cost of subsistence of men, by diminishing the natural price of the food and clothing, by which life is sustained, and wages will ultimately fall, notwithstanding that the demand for labourers may very greatly increase....
BTW, Ricardo had absolutely no highfalutin' moral goal of improving living standards.
His economic analysis is very cold and objective, void of any emotional conscience or ethical influences. His theories are advanced by equally disinterested Third Parties: transnational corporations seeking to profit from the exchange between nations, pitting the resources of one against the other in a race to a global subsistence level standard of living.
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