CHINA MAY ESCAPE A ‘HARD LANDING’

Geopolitical notes from India

M D Nalapat

Friday, September 18, 2015 – Around 1983, after a few years of experimentation in the Chinese fashion, Paramount Leader Deng Xiaoping took a decision to concentrate on economic matters and keep aside other considerations. The following two decades of peace, when China deliberately avoided any reference to its growing military prowess, made the difference. The country became a superpower, and in purchasing power parity terms, several measures already place it ahead of the US. As the experience of the USSR has shown,a well-endowed military is of no value unless backed by a stable and expanding economy. As for the possession of nuclear weapons, North Korea has them, but this does not help the many in that country who lack adequate food each day.

While Mao Zedong unified China in a manner not seen earlier in that country’s history, it was the pocket-sized French-language expert, Deng Xiaoping, who is the architect of modern China. The country has had a generation of double digit growth, and this has resulted in the sharpest reduction of poverty within any country in a comparable period of time. Up until the 1990s, unless a country was on amicable terms with the US, it was unlikely to grow at a fast clip. India lost the chance during the 1960s and the 1970s,when circumstances forced Delhi to prefer Moscow over Washington in the geopolitical arena. However, for the past sixteen years, unless a country has a stable economic relationship with China, that country is unlikely to witness strong growth. Even Japan, which is now in a somewhat rocky phase of its relationship with China, needs the bigger country for the prosperity of its people.

Since the end of the 1980s,there has been an emphasis on the wealthy within a society, the calculation being that if they became even richer than they were, much of the extra cash would filter down to lower levels. Whether it be Ronald Reagan or Margaret Thatcher, whether it be India or China, the rich have grown even more wealthy while the poor remain where they are. The financial industry has perfected the science of sucking money away from the middle class and funneling it into the bank accounts of the growing number of billionaires on the planet. Stock exchanges have witnessed huge transfers of money from retail investor to the super rich. Even in China, during the past two months, retail investors (many of whom borrowed money to buy shares) have seen the value of their investments fall sharply.

Since 2011,there was a perception that the government was unhappy with the rising cost of housing, and would take measures to cool down the market and ensure that prices fell. Indeed, some steps were indeed announced by Beijing when Wen Jiabao was the Prime Minister. This drove investment into the stock market, raising the price of equities to unsustainable levels. A crash was inevitable, and when it came this year, millions of small investors lost out. This has once more revived interest in housing, and sales of dwelling units are rising after a period of stasis The fall in equity prices has given new life to the China doomsayers, who claim that the economy of country is on brink of collapse. It needs to be remembered that in the 1960s and the decade thereafter, there were multiple learned tomes written about India, and how the country was about to break up.

Instead, India is on track to have 800 million internet-enabled mobiler devices within the next five years,and Bangalore is as important an information technology (IT) hub as San Jose. Within a decade, the size of the IT sector in India is estimated to cross $ 1 trillion, despite the fact that several government policies have in the past weakened rather than strengthened the industry. Indeed, during the 1980s, intrusive officials sought to control the nascent industry the way they have other sectors, but were taken aback by the rows of binary numerals and cards. Eventually, they left the industry alone, with the result that in the 1990s,after Pamulaparthy Venkata Narasimha Rao liberalised some aspects of the economy, the IT sector began to boom, earning foreign exchange and creating jobs on an unprecedented scale.

Unfortunately, from 1999,the government again tried to get control of the industry through a multitude of regulations, a process that was sharply accelerated after Manmohan Singh became Prime Minister in 2004. Sadly for the economy of the country, real power vested not in 7 Racecourse Road (the Prime Minister’s House) but in 10 Janpath, the residence of Congress President Sonia Gandhi. Officials and ministers knew that there was little consequence in disobeying an order from the Prime Minister’s Office, but that they could lose their jobs if they disregarded a command from Ahmed Patel, the quiet and super-efficient Political Secretary to the Congress President.

The new President of China has launched a campaign that has hit even the most powerful, such as former members of the Standing Committee of the CCP. The number of high officials in prison for corruption has risen to the hundreds, and the consequence has been that a window of opportunity has opened up to ensure that the SOEs be handed over to the control of those who get their jobs on merit rather than through accident of birth. Should such a re-engineering of the higher managements of the SOEs take place, these giant enterprises are likely to become competitors in several fields to the major international brands. More important, Xi Jinping and Li Keqiang need to ensure a more level playing field between those entrepreneurs without political influence and those who come from well-connected backgrounds.

Clearing SOEs of deadwood at the top and opening major sectors to domestic competition will result in a rise in performance levels, and to the Chinese economy humming once again. Given the importance of China as a producer, as a market and as a source of investment to economies around the globe, many will be hoping that a “hard landing” can be avoided and the economy enter into a Middle Income equilibrium, with domestic producers and consumers playing the key role rather than foreign investment.

—The writer is Vice-Chair, Manipal Advanced Research Group, UNESCO Peace Chair & Professor of Geopolitics, Manipal University, Haryana State, India.

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