June 30, 2003
india and China I

There has been a spate of coverage recently about the Vajpayee's summit meeting in Beijing. Frankly, it is pretty rare for good news from South Asia to get so much coverage here! I suspect part of the underlying cause is the subterranean Western media paranoia about China.

Like most other Indians, I am a tad obsessed with China. And would probably spend the next few days trying to post my thoughts on the subject.

In a excellent report titled 'Two systems, one grand rivalry' Economist (June 21-23, 2003) compared the two economies (it is not available free):

"China's and India's relative success in attracting FDI represents the sharpest contrast of all between the two countries. According to official data, China received 527 billion last year; India just 4% of that amount. Again some Indian economists cried foul.

India's figures are understated, they say, because they exclude foreigners reinvested profits, the proceeds of foreign stockmarket listings, intra-company loans, trade deficits, financial leases and so on. China's, on the other hand, are inflated by "round tripping of domestic investment through Hong kong. ...As for FDI, Sadhana Srivastava, in an article in India's Economic and Political Weekly, has recalculated both India's and China's figures for the year 2000 to make a fairer comparison. He found that China's FDI fell by half, while India's more than tripled. This meant that, as a percentage of GDP, there wasn't much differenc; 1.7% for India against 2% for China.

.....However, even on this basis, India was still attracting just 40% of the amount of foreign investment that went to China. Much of the gap is attributable to the activities of overseas Chinese ..they have ploughed back far more of their money into the motherland than have non-resident Indians..."

It goes on to ask

"Can there be much argument about the relative pace of growth fueled by such investments?....All evidence of the senses suggest that it is far faster than India's. This is specially true of industrial growth, and above all of manufacturing, which in 2002 made up just 15% of India's GDP, compared to 35% of China's ...

Much that holds India's economy and businesses back has little to do with democracy has such: corruption, fiscal mismanagement, a lack of international ambition and a history of over-protection at home.Where India overcomes these obstacles, and has a clear competitive advantage- as in software and other information-technology services- it can be a huge success...The way India's democracy has evolved has undoubtedly complicated policymaking. Coalition governments give disproportionate power to regional and caste based minority parties. Worse, the electoral time table, with many important states holding polls between the national votes, tends to put governments into cautious, electioneering mode for much of their time in office."

I completely agree that endemic corruption and red tape are huge hindrances against the growth of manufacturing sector in India. It not only acts as a break to existing ventures, it stops young people from starting out on their own.

But one the key reasons behind China's gigantic leaps in the manufacturing sector (and here I am on dangerous ground) is the incredibly cheap Chinese labour. India does not have that sort of cost advantage. In an earlier story Economist had referred to it,

"It is already by far the biggest garment exporter in the world, with average wages in the industry of 40 cents an hour?less than a third of, say, Mexico's. Now that China belongs to the World Trade Organisation (WTO), moreover, it will benefit from an agreement by members to eliminate the quotas completely by 2005. As a result, according to estimates by the World Bank, China's share of world garment exports will increase from about 20% today to 50% by the end of this decade.

Shoes, semiconductors and televisions are expected to follow. .. Heinrich von Pierer, the boss of Siemens, a big German electronics and electrical conglomerate, has called the country ?a global factory? for his company. Comparisons are made with Manchester during the Industrial Revolution. China, it is said, is becoming the ?workshop of the world?.

A few weeks back, I read a fascinating conversation on the net. While commenting on James Surowiecki's column on the impact of the spread of SARS on world economy, Paul Krugman took us on a historical analysis of causes behind the rise and fall of slavery in Western civilization.

"Imagine a pre-industrial society where population is pressing on limited land supplies, and the marginal product of labor - and hence the real wage rate under competitive conditions - is barely at subsistence. In that case, why bother establishing property rights in human beings? It costs no more to hire a free worker than to feed an indentured laborer. Indeed, by 1300 - with Europe very much a Malthusian society - serfdom had withered away from lack of interest.

But now suppose that for some reason land becomes abundant, and labor scarce. Then competition among landowners will tend to push up wages of free workers, and the ruling class will try, if it can, to pin peasants down and prevent them from bargaining for a higher standard of living. In Russia, it was all about gunpowder: suddenly steppe nomads were no longer so formidable, and the rich lands of the Ukraine were open for settlement. Serfdom was an effort to keep peasants from taking advantage of this situation. (And if I've got it right, those who were venturesome enough to run away and set up outside the system became Cossacks.)

Meanwhile, the New World opened in the west. Sure enough, the colonizing powers tried various forms of indentured servitude - making serfs of the Indians in Spanish territories, bringing over indentured servants in Virginia. But eventually they hit on a better solution, from their point of view: importing slaves from Africa."

He ended by asking ....

"And an even bigger question: why hasn't indentured servitude made a comeback in the modern era? Yes, I know, human rights and all that - but if it was profitable to have indentured servants in the modern world, I'm sure that Richard Scaife's think tanks would have no trouble finding justifications, and assorted Christian groups would explain why it's God's will."

Dr Brad De long addresssed it in his weblog:

... Elites in developing countries can no longer be confident in their ability to earn hefty incomes by employing workers and paying them much less than their average product: an elite monopoly of land ownership is no longer worth much. So why haven't they responded to the potential erosion of their collective economic edge by turning to politics and force to bind workers. One answer is that, to some extent, they have: Consider that modern states are surprisingly effective as tax-collection machines, and in large chunks of the world the elite's power and (relative) prosperity is rooted in its "new class" control over the flow of resources from the state. Consider, also, the Communist Party of Vietnam--what is it but a gang labor boss for unfree labor deployed to produce shoes for Nike?"

Towards the end of an otherwise excellent article published last year (that I had linked to earlier too), Kenichi Ohmae bared the dark secret of China's cheap labor:

".... At the same time, I do not believe China should be forced to hold democratic elections, even if that were possible. Its population would vote for leaders who distribute wealth to the poor. But there are still 900 million farmers in China with an average annual income of $500; distribution of wealth would simply be a synonym, as it is in India, for the distribution of poverty.

The Western debate over China?s political acceptability should not be cast as a simple matter of right or wrong, but of when and how. Politically, China is comparable to the United States of 1800: an emerging nation with high ideals but widespread poverty and a great many practices that other regions find intolerable. People tend to forget that the U.S. did not establish civil rights legislation until the 1960s. A decade or two of economic growth, under the shrewd and highly motivated leaders of Chung-hua Inc., will provide China?s people with the necessary education in the ways of capitalism,...."

I am not claiming here that labor in India does not operate under slavish conditions. But that sort of activity happens largely away from the glare of governmental inspection processes in semi organized sectors like bangles, carpets etc. In the vast majority of larger manufacturing companies, in spite of the all the corruption, all the thuggery, labor has recourse to unions and access to press and the judiciary.

Neither do I mean to denigrate the superhuman achievements of China in all aspects of business in the last two decades. But I also do believe that the Chinese advantage on cheap labor partly derives from the nature of government that it has at local levels. it is foolish to compare oneself or even try to compete with it on low end cheap labor products. I'll try to take off on this tomorrow.

Posted by Kaushik at June 30, 2003 05:58 PM | TrackBack
Comments

hey i think you should have more random notes on china schooling and other stuff like that ok thanks have a good day good-bye

Posted by: sarah currier on January 27, 2004 11:17 AM

I think you can buy it article online from the Economist website. But it is probably not worth it (it is good, but not that good!). You can also try your local library. Many large libraries in many countries carry it.

I buy the print edition off the shelf at times and hence dont have access to the the print content online which subscribers do ...

Posted by: Kaushik on July 22, 2003 5:36 PM

i'm very interested in the article titled 'Two systems, one grand rivalry' , but it's not availale now. who can help send this article to me via e-mail?

Posted by: on July 18, 2003 6:22 AM
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