India and China

24.11. 2005 Business
OR the past two years and, according to projections, this year and next as well, the Indian economy has managed to grow at around 7% or better. That allows optimistic souls, in London, New York and Tokyo as well as in Delhi and Bangalore, to hope that India might now be on the verge of repeating China's awesome transformation. By averaging annual growth of 9.5% for almost three decades, China has lifted hundreds of millions out of poverty in the most rapid and far-reaching economic transformation in history.

Such talk, alas, is just that: optimistic. Even India's prime minister, the courteous and intellectual Manmohan Singh, admits as much. He admires China's discipline in driving through big infrastructure projects and economic reforms, he says; but notes (with diplomatic phrasing), that China is “more focused than India, as a democracy, can afford to be.” It is, he reckons, a price worth paying; he has no desire to see India change its political system. Yet just at the moment, democracy is proving far from helpful to Mr Singh as he struggles to move India's economic reforms on to the next stage. In the early 1990s, then serving as finance minister, he became every economist's darling by introducing measures that set India back on the path to growth. Tariffs were slashed, exchange controls scrapped, the “licence raj” that strangled business in red tape largely abolished. In retrospect, that was the easy bit. The reforms of the 1990s required vision, but tended to benefit everyone and harm no one. What India needs now is a raft of supply-side reforms that will, in the short term at least, hurt powerful interests. These are principally the trade unions which, through their control of the Communist parties that in turn prop up Mr Singh's minority government, are able to hold him to ransom. As we report (see article), the Communists have more or less brought Mr Singh's reforms to a halt. He has been unable to continue the task of privatising the plethora of inefficient state-owned businesses. He has found it almost impossible to ease the system of caps that limit foreign direct investment in many big sectors, notably retailing. And labour market reform is not even being discussed. It is not fair to blame Mr Singh for all of this, though he might have tried harder. He is in office but not in power. Although he is prime minister, it is Sonia Gandhi, the president of the Congress party, who takes the big decisions. Under her rule, the party has reverted to its traditional stance; left-leaning and not very interested in reform. For its part, the opposition Bharatiya Janata Party (BJP), which was once truly reformist, has lapsed into internecine and perhaps terminal bickering about the virtues of Hindu fundamentalism. The gloom should not be overstated: India today has a dynamism that has never been there before: witness the incredible growth of outsourcing companies, now doing legal and medical work for clients around the world, not just running their call-centres. The momentum from the earlier reforms continues, and despite his difficulties Mr Singh has been able to introduce a national rate of value-added tax, and pioneering public-private partnerships for road building. It probably is the case that the earlier reforms focused too much on the affluent city-dwellers at the expense of the rural poor—who voted the BJP out of office last year—so a period of consolidation may be no bad thing. Sooner or later, though, India will have to tackle its remaining rigidities. The fate of Mr Singh, increasingly these days seen as someone to be pitied rather than admired, is a reminder of just how powerfully politics can constrain economics. So too in China That is so in India, perhaps, but surely not in China, which may lack the benefits of democracy, but is at least free of its pitfalls? Only up to a point. China is clearly not a democracy in the sense of having an elected leadership or multiple political parties, but that is not the same thing as saying that its people have no power. The really interesting thing about the presidency of Hu Jintao, who completed the drawn-out business of assuming power only a year ago, is just how nervous he appears to be about popular discontent, and the lengths to which he is going to appease it. China officially saw no fewer than 74,000 riots and demonstrations last year—some small and peaceful, but many large and a number even violent. Just like Mr Singh in India, Mr Hu is consequently being forced to concentrate much harder on the rural poor than on the coastal cities. Cleaning up corrupt and abusive government is one priority for him, reducing the burden of tax on the countryside another. Tackling pollution, which invariably hurts the poor more than the affluent, has become a third. As in India, this renewed concern about discontent among those left behind by progress is tempering liberalisation. This is most obvious in the area of the Chinese economy which needs it most: the banking sector. As we report (see article), the Chinese government clearly recognises that its banks are under-capitalised and insufficiently profitable, and it has taken some impressive steps to correct these problems with determined efforts to recapitalise the weak and clear up at least part of what used to be a mountain of bad debt. But it has not been anything like brave enough. The government has not addressed the root cause: the big banks remain, ultimately, under the control of the government and not the rules of commerce, which is why foreign investment—which would improve efficiency by opening banking to lots more competition—remains restricted, just as it is in India. As long as this is so, the pressure to allocate credit on the basis of political patronage rather than market efficiency will persist. Fearful of ceding too many levers of control to the private sector, let alone foreigners, China's nervous leaders are still shying away from the toughest decisions. The method of getting rid of a government that is seen to be failing its masses might be different—revolution in China, the ballot box in India. But the world's largest autocracy and its largest democracy have more in common than one might think.

(Source: The Economist)

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