July 26, 2002


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Rajeev Srinivasan

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 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)
  • an article in the San Jose Mercury News (March 25) titled China's 'growth' is not what it seems
  • several articles in Time (June 17), for example Workers' Wasteland
  • a story in Newsweek (April 8 International Edition) titled 'How Much Is China Cooking Its Numbers?'
  • a story in the Singapore Straits Times (March 27) titled 'Is China's Economic Growth Just a Charade?'
  • an opinion piece in The Asian Wall Street Journal (February 26) titled India and China: Asia's Tortoise and Hare
  • an opinion piece in The International Herald Tribune (April 2) titled 'China: the Big Four banks head towards collapse'
  • an article in The Economist (March 14) titled China: How cooked are the books?
  • 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.

Part II: China: From mismanagement to collapse or war

Rajeev Srinivasan

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