FT : China India Have Little In Common

Thursday, November 30, 2006

In the argot of today’s financial markets, Chindia is a magical land where China’s and India’s economies supposedly combine to produce untold riches.  It is an alluring vision that has gained lustre from Hu Jintao’s visit to India last week, the first by a Chinese president for 10 years, and by both sides’ sonorous pledges to set aside past quarrels and stride together into the future.  There is just one problem: the idea that their economic destinies are inseparably intertwined lacks any basis in fact.  Their only obvious similarities are that each occupies much of Asia’s land mass; each is populous; each is poor; each is growing fast and each is hungry for natural resources.  Beyond that, it is no more useful to bracket China with India than with King Vlad (the Impaler, a bloodthirsty 15th century monarch who inspired the fictional Count Dracula) who, when not ruthlessly suppressing dissent, shared Beijing’s concern with improving the raods, reigning in renegade provinces, and periodically purging corruption.  In most ways, the two countries are polar opposites. 

  • China is a communist autocracy that has instituted sweeping economic reforms, opened its economy to the world and mobilised vast resources for development.  India is an unwieldy democracy whose last big economic reforms were forced on it by financial crisis in 1991, since when political gridlock has frustrated liberalisation. 
  • China has thrived because of government policies; India has prospered in spite of them.
  • China’s rise has broadly followed a well trodden east Asian path, being investment and export-driven and fuelled by abundant domestic savings.  India, with a more closed economy and far lower savings rate, depends heavily on domestic consumption to sustain growth. 
  • China struggles to control excessive fixed asset investment, while India is constrained by scarce capital and woefully inadequate infrastructure spending. 
  • Low-cost production is the engine of China’s real economy.  Indian manufacturing still generates a small share of national output – as do its much-vaunted software and services industries. 
  • India has a reasonably sound banking system and a long-established stock exchange.  China’s shaky banks have yet to learn how to price risk and lend prudently, and its equity market is primitive.

Furthermore, the two economies interact only at the margins.  While bilateral trade has grown fast, India accounts for only 1.3% of China’s exports.  Almost 8% of India’s exports go to China.  But, to the former’s chagrin, most are low-value commodities, while trade in the opposite direction is dominated by manufactured goods.  Two-way investment remains a trickle and each side complains of the difficulty of operating in the other’s market.  By most measures, China today is more deeply integrated economically with the US than with India.  Those disconnections make it fanciful to suppose that the nascent dialogue between China and India will lead to rapid breakthroughs in economic co-operation.  More likely, their governments’ primary aim is damage limitation.  Both want to prevent old rivalries, quarrels and mistrust interfering with their race to development.  But they will continue to take distinctive routes to that end.  The question then becomes which route will prove more effective. 

Near-term, the main risk in China is that failure to deal with the root causes of wasteful over-investment will turn boom into bust.  In India, it is that failure to modernise the country’s creaking infrastructure will choke off growth.  On the downside, a global economic downturn would hurt both. India, less dependent on exports, might appear better placed to weather the storm.  But its reliance on short-term capital inflows from abroad to finance growth could make it vulnerable if global investors deserted emerging markets.  Tight exchange controls insulate China from international financial turbulence.  Weaker exports would hit many of its low-margin producers.  But the country can call on substantial financial resources to mitigate the impact of external shocks.  Further ahead, the biggest uncertainties in both countries are political.  Unless India’s politicians bite the bullet on reform, open up to foreign direct investment and start tackling structural obstacles to growth, the economy will perform below potential and its momentum may fade.  The most pressing longer-term question facing China is whether its authoritarian regime can manage the challenges created by the rapid growth on which its tenuous legitimacy depends; or whether dealing with growing inequality, corruption, popular unrest and, possibly, stronger demands for political enfranchisement will stretch the system to breaking point.  Indian democracy, for all its flaws, has long been renowned for its resilience.  But it grew up in an era of rigid social structures, in which everyone was resigned to his or her place in the hierarchy.  Faster growth is challenging the old order.  While giving hope to many, it is also sharpening the disparities between an affluent urban elite and vast numbers of rural poor eager for a better life.  Meeting those aspirations and maintaining social stability poses a huge test for the country’s political system.  In that respect, at least, China and India have something in common.

Reference : http://www.ft.com/cms/s/6dea590a-7fd8-11db-a3be-0000779e2340.html

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