Sunday, August 1, 2004

Peacock and the Dragon

Peacock and the Dragon
By Narendra Luther

India became independent in 1947. Two years later, the Peoples Republic of China came into being ending decades of foreign domination and exploitation.

Comparisons between the two great Asian neighbours were inevitable. While India was a democracy, China was a totalitarian society. China had a centralized state economy; India had a mixed economy. Whereas there was an established system of data collection for economic planning and the publication of its results in India, China was closed to the rest of the world. One had to rely upon the figures given out by the official agencies. It was quite common for many intellectuals in India to highlight the poor performance of India as compared to China.

Around that time one of my friends, Virmani, a Climatologist in ICRIASAT (International Crop Research Institute for Semi-Arid Topics) located at Hyderabad went as member of an official delegation to China. On return he told me that an average agriculture graduate was about four years behind ours in his knowledge of the subject. The reason was that China had closed all contacts with the outside world and did not let even knowledge of advances made in science penetrate the country.

The Four Modernizations

The myth of China’s greater progress was exploded in 1978 when its leader, Deng Xiaoping launched the program of ‘Four Modernizations’. They were to cover agriculture, industry, science and technology, and national defense. The goal was to make the country a relatively advanced industrialized nation by 2000.

One of the methods of accelerated development adopted was the creation of ‘Special Economic Zones’. Four such Zones in small coastal areas were established in 1979 to promote economic development and introduction of advanced technology through foreign investment. Special preferential terms and facilities were offered to outside investors in taxation, land-use fees, and entry and exit control for joint ventures, cooperative ventures, and enterprises with sole foreign investment. These SEZ’s were given greater decision-making power in economic activities than provincial-level units. Since then, their number has increased manifold. The Stock Exchange, which was closed by Mao Zedong, was opened in 1992.

Comparison with India

Post- Modernization, once again people started making comparisons with India and again China was shown as overtaking India. Lately, we have seen our markets flooded with goods made in China. Fears have been expressed that it will kill our manufacturing industry.

When a topic becomes hot, it lands up in seminars and workshops. It was therefore appropriate for the Economic Forum at the Indian School of Business to pose the question ‘Will the 21st Century belong to India and China?’ to an International Conference last month. It was attended by prominent business leaders, academic scholars from abroad, and, amongst others from India, a member of the Planning Commission.

A study done by Mackenzie quoted there noted that the growth of per capita GDP since 1990 had grown to 2407 in India as compared 3829 in China. The share of manufacturing and the GDP in 1999 was only 6% in India compared to 19% in China. The Chinese manufacture - and exports - comprises largely bicycles, toys, leather goods and computers. The increase in growth of manufacture in China was largely due to increase in productivity which was three to five times that of India. For example where as an Indian worker produces three pairs of shoes per man-day, the Chinese production is eleven. The growth in manufacture is not due to exports as is commonly believed, but due to domestic consumption. The average per capita consumption of consumer goods in China is three times that of India. Prices of consumer goods are cheaper by 14% in the case of motorcycles to 53% for DVD’s compared to those in India. The study pointed out that lower prices where not due to subsidy and marginal costing but because of fundamentals like lower indirect taxes, lower import duty and lower interest rates. It rubbished the myth that the Chinese products are of poor quality. If that were so they would not be such an increase in exports particularly to quality conscious countries like the United States.

China has also attracted more foreign direct investments than India. The lesson from Mackenzie was that a reduction of prices of consumer products would increase the market. There is a need for reducing import duties to 10%, introduce VAT and to reform labor laws. These measures will improve employment and raise exports considerably.

The Prospects

John Talbott, currently consultant at the Indian School of Business, provided the antithesis to this analysis and approach. He believes that the statistics given out by China are not reliable. In China, he said that nobody could publish statistics because he would be jailed for revealing ‘state secrets’! China is a repressive dictatorship. Only eight countries rank lower than China in political freedom. Even Internet access in China is restricted. There is an absence of social benefits and of regulations on pollution. China’s military expenditure is high and will outgrow that of America in a decade. He therefore thought that China was a poor model for development.

China today is the manufacturing hub of the world; India the IT platform. The Asian Development Bank believes that India would catch up with China by 2020. The FICCI View is that by 2050 China would be the largest economy of the world followed by U.S and India.

The Indian Constraint

There was general agreement that India’s greatest handicap is lack of proper infrastructure. For that FDI should be encouraged. However the left parties which today constitute an important ally of the ruling coalition at the Centre are opposed to it. The Common Minimum Programme of the ruling United Progressive Alliance talks about the imperative of consensus on these critical issues.

Management experts per se need to develop a greater appreciation of the context in which the economy operates. China and India represent two different, contrasting models of growth. India is a democracy where there is debate and dissent arising out of diversity and pluralism. The constraint of democracy is compounded by the compulsions of coalition. Democracy provides for opposition in the legislature; coalition brings it into the political executive. That retards further the speed of decision-making. A dictatorship, suffers from no such handicap. It also lacks a system of feedback to provide for a corrective mechanism for mistakes in time.

Our reforms will have to start with politics because that constrains economics. If we can lay down that only parties with a clear-cut majority will rule the Centre and the States we will have removed the greatest obstacle in the way. That will strengthen the establishment and relieve it of its constant search for a consensus beyond the bounds of the parliamentary system. The difference between the two countries is symbolized by the peacock, which is our national bird, and the dragon which is China’s traditional mascot

Next time there is a debate of this type of topic, I hope to see some political scientists, or better still, some active politician to moderate it.


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