Sunday, August 14, 2005

The Future is Coloured Saffron

So I reckon the People's Republic is doomed. Where should we be investing? In India, of course! It has many of the strengths of China; a huge, cheap workforce and an enormous, expanding middle class. And some of the weaknesses, like endemic corruption. China has a few head starts over India - take infrastructure, for example. Anyone who's been to both countries will note the glaring differences in airports, expressways, rail networks, the list goes on. No doubt Chinese ports are of a far higher quality than their Indian counterparts. This, however, is a matter of investment, and the poor state of Indian infrastructure can be rectified over time. The more crucial differences are found in social structure and governance. Here are the main points that I believe lay the foundations for long term sustainable development in India, as opposed to the more transient boom currently seen in China:

1) India's growing population. China's population is growing, too, however thanks to Communist social engineering, the population is set to start dropping in the first half of this century, and will dip under a billion some time in the second. In a country where boys are longed for, the One Child Policy and modern technology has conspired to create a scenario whereby parents will go to bizarre lengths to ensure their one child is a boy. For example, 90% of aborted foetuses are female. Neglect of female babies causes far higher post-natal death rates for girls. The current newborn male-female ratio as of 2004 is 100:117. This discrepancy will be profoundly felt when today's youngsters come of age. Obviously, the birthrate is set to dip dramatically thanks to this imbalance. The oft quoted figure is that the Indian population will exceed the Chinese by 2025. This will make India a more relevant market to foreigners.

2) India has a more honest business climate. Selling to the Chinese in their own market is a tough game. They don't play by our rules. Western business ethics go right out the window. The Chinese government often doesn't like to let Western businesses enter the Chinese market without a Chinese partner in on the deal, however Chinese partners have a habit of defrauding their Western colleagues, sometimes in the most blatant manner.

3) India has a common law legal structure. Okay, the courts have a backlog of over a decade. However, Indian judges are more or less incorruptible, and the rule of law generally reigns. And the backlog can be dissolved by extra funding and making the system more efficient. Widespread corruption in India exists because the corrupt know that, if they are caught, their case will be pending for so long that the memory of the crime will fade. If prosecution becomes more efficient, corruption in India will decline rapidly. The Chinese legal system, by its very nature, actually accommodates corruption. Compare the Indian legal system with the ad hoc arrangement in China, where guanxi (influence) plays a much larger role in the workings of the legal system than that befitting an open society. Western companies are routinely fleeced by their Chinese partners, and the wronged party finds it has no legal leg to stand on. India has the vestiges of, and could easily become, a 'high trust' society. China doesn't and won't with its current legal framework. Contracts don't carry that much weight. Chinese businesses frequently operate in a ruthless, snatch-and-grab manner, with zero ethical constraints. Intellectual property rights are ignored if inconvenient. Western companies will discover a much more familiar business environment in India, where they can find legal recourse if their Indian partner does the dirty. In China, good luck.

4) A free press operates in India. China's press is still heavily censored. This means that major method of exposing corruption is shut off in the Middle Kingdom. Indian newspapers are notoriously inquisitive and often claim scalps. Chinese newspapers reveal only what the Communist party allows them to. A free press is a sign of a healthy, vibrant and mature society that can keep tabs on its great and powerful. It is a bulwark against tyranny.

5) India's political system is considerably more durable than China's and less prone to political collapse. If there is an economic collapse in China, the Chinese government will prove brittle. Collapse will entail hundreds of millions of people unemployed and penniless. They will, of course, blame the Central Government, with good reason. However, it's not as though the people can punish the Communists by voting them out of office. They will be overthrown. In a democracy, an incompetent or autocratic ruler can be thrown out come election time. This is precisely what happened after the Indian Emergency was finally called off by Indira Gandhi, who was surprised to find herself out on her ear after post-colonial India's brief jaunt with dictatorship. Political stability is important to foreign investors. India's democracy is strong and its democratic nature has sunk deeply into the national psyche. China's current political stability is conditional and will vanish if the economy comes unstuck.

6) India's big companies are far more promising, its developing industries are in more profitable sectors and its stock markets are considerably better run and more transparent than those in China. China's manufacturing muscle consists of low margin, low tech goods produced en masse. India is moving into high tech, high skill, high margin areas of developing pharmaceuticals and software. Okay, this will not provide widespread employment. However, India is also building a strong services sector, unlike China. India is set to become the "back office of the world". That will mop up an enormous part of the labour force. Basically, it comes down to the following fact - China doesn't innovate. India does. This will be important as Indian companies start to compete with the world's best, which they soon will. India's stock markets are dynamic and open, full of promising companies. China's stock markets are sclerotic, opaque and dominated by moribund, dubious, partially privatised State Owned Enterprises. Bleargh.

7) Indians speak excellent English. The Chinese speak awful English. The world's primary language is English. India's advantage in this area will be a decisive factor when it starts shaping up as a viable contender.

I will add to this list if I can think of more points. There are still problems that need to be rectified in India if it is to close the gap with, and subsequently overtake, China. It needs to remove regulations that stop foreigners from owning "strategic" Indian assets; these assets could do with a healthy dose of foreign investment to get them moving and growing. It must start charging for electricity across the board, so that greater investment in energy infrastructure can take place - a critical precursor of growth. It needs to cut its subsidies on items like fertiliser, which artificially inflate the cost of fertiliser and only benefit fertiliser companies to the detriment of everyone else - including the poor farmers who the subsidies are supposed to help. These are politically difficult decisions, however someone must summon the courage to make them, because India's future prosperity rests on reforms such as these.

5 Comments:

Anonymous Steve Edwards said...

I'd like to see China pay the depreciation costs on it's "brilliant" infrastructure without resorting to slave labour and dodgy patchwork.

There is no point embarking on massive capital works if you can't even finance maintenance - which they won't be able to (Solow growth model comes to mind). They'll probably dip into private savings or print money (or go cap in hand to the World Bank), but either way, it will soon become obvious their edifice is built on quicksand.

Mon Aug 01, 07:15:00 pm 2005  
Blogger Akshay said...

You're already seeing it happening with China's two step back economic policy. China's Communist Party can't handle democracy and I'm sure the Chinese people would want a full functioning democracy at some point. China can't handle a revolution of that magnitude and size.
You saw it in India when the BJP government went out of power because India's rural masses didn't buy their India Rising campaign. The truth is India and China still are mostly rural in there outlook and I don't think that rural China wouldn't want to be disenfranchised any longer.

Fri Oct 07, 08:30:00 pm 2005  
Blogger Meme chose said...

I find this rather naive, in that you just assume India's problems away.

Example: "No doubt Chinese ports are of a far higher quality than their Indian counterparts. This, however, is a matter of investment, and the poor state of Indian infrastructure can be rectified over time."

There are reasons, largely over-regulation, corruption and endemic socialist ideology, why India's infrastructure is so pathetic. Those reasons are not going away any time soon, no matter how much money is thrown at the problem. Those reasons are in fact why 'investment' is not occurring - nobody with access to any cash is stupid enough to believe it can be effective.

It's wishful thinking to believe that just because China isn't what we would like it to be then India must be the ticket. China and India are what they are: in many respects tragic messes.

Sun Jan 08, 05:34:00 am 2006  
Anonymous Mandy said...

This post is laughable. Have you ever been to India? "More honest business culture"? Hah! "Indian judges incorruptible"? Your naivete is really astounding. China has no innovation? Google "Suntech Power Holdings". Please do some research before making such outlandish claims.

Tue May 08, 01:34:00 pm 2007  
Anonymous Sameer said...

I'm not knowledgeable enough to comment on that *innovation stuff* But, one thing as a Indian I can assure that Judiciary is very strong and almost incorruptible in India. Factors like free press, democracy also contributed to this

Tue Sep 29, 04:26:00 am 2009  

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