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Economy: Catching Up With China

As appeared in www.saag.org

To understand the undoubted Chinese economic miracle and draw lessons for India, one should not treat China‘s as a stand-alone economy.One has to consider China, Taiwan, Hongkong and Macau as constituting a single economic zone, with the four components of this zone contributing to each other’s prosperity.

2. The following factors have contributed to the Chinese economic miracle:

  1. By coincidence, Deng Xiaopeng’s decision in 1978 to open up China gradually by starting with the opening-up of the coastal areas of Guangdong, Fujian and Shanghai came at a time of two significant changes in the economic landscape of Taiwan and Hong Kong. These two changes related to the gravitation of their economies from low-tech to hi-tech and from the manufascturing to the services sector. All those owning low-tech industries in Taiwan and Hong Kong took advantage of China’s Special Economic Zones (SPEs), dismantled their industries, transfered their machinery to China’s SEZs and started manufacturing and exporting from there to their long-established traditional markets in the US, West Europe and South-East Asia. Between 1978 and 1992, nearly 70 percent of the Foreign Direct Investment (FDI) flows came from within this economic zone and not from outside. Much of this investment came in the form of old machinery transferred to the SEZs and not in the form of cash flows.

  2. It was from 1992 that FDIs started flowing into China in a significant measure from outside this zone. Initially, the FDIs came from the overseas Chinese businessmen in South-East Asia. Between 1992 and 1995, FDI flows from within this zone and from the overseas Chinese outside this zone still constituted about two-thirds of the FDI flows. It was only from 1995 onwards that there was a torrent of FDI flows from non-Chinese businessmen. Initially, the FDI flows of non-Chinese origin came from Japan and South Korea and subsequently from other parts of the world.

  3. The FDI flows from 1992 onwards—whether from Chinese or non-Chinese sources— came essentially from medium and small-scale enterprises (MSEs).This was particularly so in respect of flows from S.E.Asia, Japan and South Korea. it was only from around 1995 onwards that there was a significant flow from the top guns in the world of multi-nationals. It is the overseas Chinese and the MSEs, which gave a kick start to the Chinese economic miracle.

3. In India‘s efforts to catch up with China, we face handicaps due to the following reasons:

  1. Our late start. China opened up in 1978. We started our process of liberalisation only in 1991.

  2. We did not have our equivalent of Taiwan, Hong Kong and Macao to give a kick start to our economic miracle

  3. Overseas Indians are qualitatively different from the overseas Chinese. Overseas Indians, barring some sections of the Gujratis and Marwaris, are largely salary-earners. The overseas Chinese are largely entrepreneurs. Salary-earners tend to be over-cautious with their savings. They prefer to keep them in bank deposits instead of investing in business enterprises. Risk-taking with money does not come naturally to them. Risk-taking with their savings by investing them in businesses comes naturally to the Chinese entrepreneurial class. Even among businessmen, Chinese businessmen are more risk-taking than their Indian counterparts. After the military seized power in Myanmar in the early 1960s, it drove out all Chinese and Indian (Chettiars from Tamil Nadu) businessmen and nationalised their establishments, without paying any compensation. When the present Government in Yangon again opened up its economy and invited the foreign businessmen to return, many of the overseas Chinese—despite their bitter experience of the past— ventured back into Myanmar, made fresh investments and have been making money. Not a single Chettiar businessman has gone back to try his luck again. So too in Vietnam, Uganda and other East African countries.

  4. The authoritarian nature of the Chinese State enables certain bold decisions which one cannot take in a democratic state. Four examples can be cited: First, when Deng opened up China in 1978, he allowed foreign investment flows only into Guangdong, Fujian and Shanghai and not into other parts of China. He wanted to study how it works and what impact it has on political stability and national security before opening up the interior parts of China. Only after 1992, China started opening up the interior areas. Second, during the period of the rigid Communist rule, a large number of Chinese, who had made money before the Communists seized power, had clandestinely sent their savings to their relatives in South-East Asia for safe custody. To encourage the flow-back of this money to benefit the Chinese economy, he ordered that no questions should be asked of Chinese citizens, who bring back their black money provided they invest them in business enterprises. A sizable portion of the so-called FDIs between 1978 and 1992 actually consisted of this native money flowing back in response to this assurance. Third, the Chinese kept wages arbitrarily low and maintained a rigorous labour discipline with no strikes allowed in order to make it worthwhile for foreign businessmen to invest in China. Fourth, there has been a consistency and predictability in policy and decision making in economic matters. No Prime Minister of India, even if he enjoys two-thirds majority in the Parliament, would be able to take these kinds of decisions.

  5. The appalling state of our infrastructure. Substantial and sustained investments in infrastrucure are essential for our economic as well as military strength. Compared to China, we hardly have any infrastructure worth boasting about except in the field of telecommunications and the Internet. A team of top German businessmen, which recently visited Chennai, expressed its shock at the poor quality of the road networks and warned that FDI flows into India are unlikely to pick up substantially unless and until we are able to improve our infrastructure on a crash basis.

4. The decisions of foreign businessmen regarding their investment destinations are influenced by the following factors:

  1. Security—-of their person as well as investments.

  2. Predictability and consistency in decision and policy making.

  3. Fast clearances at various levels.

  4. An ambiance, which is generally welcome to foreign businessmen.

  5. Profitability.

5. In respect of all these factors except security, China scores over India. While security in India is comparable to that in China, predictability and consistency are affected by the nature of our democracy. While more rapid clearances are becoming more the rule than the exception in New Delhi, they continue to be painfully slow at lower levels outside Delhi. While the ambiance has been improving, it is not yet comparable to that in China. Profitability is affected by delays and labour indiscipline and by what they consider as the continuing difficulties in the way of hiring and firing. They do not grudge the high salary and wage levels in India—as compared to the arbitrarily low levels in China—provided the other factors are favourable to them.

5. Another factor, which has come in the way of our faster development, is our over-fascination with the top guns in the world of multi-nationals and the inadequate attention paid to attracting the owners of the foreign MSEs. They very often run their businesses on a shoe-string basis—-with the owner himself doing a lot of work like negotiating the contract, making arrangements at ports for unloading and transporting their machinery, setting up their plants etc. .Unhappy experiences in their interactions at various levels and frequent instances of delays affecting their profitability make them keep away from India. Not only that. They advise their friends in the world of SMEs too to keep away from India.

6. Top guns such as Bill Gates etc interact at the top levels of our State and society. But the owners of MSEs have to interact at lower and middle levels. Many of them, with whom I have spoken, say that their experiences in India are not as pleasant as their experiences in China and that given a choice between doing business in India and China, they would still prefer China.

7. If we have to catch up with China, we have to pay serious attention to these factors and see how to make foreign businessmen—large, medium or small–feel that it is fun doing business in and with India.

(The writer, Mr.B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. E-mail:itschen36@gmail.com)

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