Targeting high growth with equity
By Shahid Javed Burki
Monday, 15 Mar, 2010
THE two continental Asian giants – China and India –seem to be adopting basically the same set of policies for moving forward the two large economies.
At first glance, Beijing and New Delhi, having recently announced policies they will be following as the recovery from the recent downturn takes hold, appear to be embarked on the same course. Parnab Mukherjee announced the budget for the year 2010-11 on February 26 and promised that the rate of Indian economic growth was headed towards double digits. He also opened the economy a little bit more to those outside the country who would like to place their bet on an expanding economy. Prime Minister Wen Riabao delivered his annual economic speech to the National People’s Congress on March 5 and also saw his country’s economy moving ahead briskly.
Both leaders were cautious about the international environment in which the two economies will be functioning. “While the global financial condition has shown improvement over the recent months, uncertainty about the revival of the global economy remains. We cannot, therefore, afford to drop our guard”, said Minister Mukherjee in his Lok Sabah address.
Much the same sentiment was expressed by the Chinese leader. “We must not interpret the economic turnaround as a fundamental improvement in the economic situation. There are insufficient internal drivers of economic growth” said the Chinese leader in his two-hour long address. In other words both capitals were indicating that they will not be pulling back on the efforts to stimulate their respective economies. These efforts had paid off but it was not the time to ease off.
Both leaders, while emphasising the importance of high rates of growth in their economies, gave a great deal of attention to distributive aspects. While the emphasis on redistribution was not new in the Indian way of thinking on economic issues – it was the platform on which the Congress Party was elected last year to another term in office – the stance adopted by the Communist party of China was a relatively new one.
A Communist country was supposed to look after its poor and the less advantaged. It didn’t have to make an explicit commitment to such a policy in its pronouncements and plans. But Prime Minister Wen went some distance in ensuring his citizens that meeting their social needs will be a high priority of the administration he was heading.
“We will not only make the pie of social wealth bigger by developing the economy, but also distribute it well. We can ensure that there is sustained impetus for economic development, a solid foundation for social progress, and lasting stability for the country only by working hard to ensure and improve people’s well being” he said in his address.
Reading together the two statements it is striking how much the Indian leadership emphasised the need to maintain high levels of growth rates while the Chinese leaders were promising to care for the poor.
Until recently – in fact up to the Great Recession of 2007-09 that shook the global economic system – the two countries had followed different models. China had relied much more on using external markets to develop scale for its industrial system. In that and several other respects, it had followed the East Asian model of export oriented industrialisation.
India, on the other hand, had pursued import substitution for industrialisation for more than first 40 years after achieving independence. When it opened its economy to the world outside starting in the late 1980s but more fully after 1991when the then Finance Minister Manmohan Singh had to deal with a serious balance of payments crisis, the Indians continued to be cautious about foreign participation.
Although the “license raj” that owed its existence to Jawaharlal Nehru’s socialisation of the Indian economy was dismantled, the participation of foreign capital remained constrained. It was allowed in a limited way into some sectors of the economy. Its involvement in the sectors of finance and retail trade was quite severely constrained. Foreigners were also not encouraged to participate in the development of the social sectors, in particular education. The Indians were now making an effort to open their education sector. They indicated that new incentives will be offered to private operators from the outside to enter the education market.
The Indian budget also promised a major effort in improving the quality and reach of physical infrastructure. The development of high-class highways was to be given special attention. In the budget for the railways, there was promise that quality of the services provided will be greatly improved by developing high speed railways. Here the two countries have adopted different approaches. The Chinese, having anticipated that a rapidly developing economy will need a well functioning transport system, began to invest in highways and railways early on. The Indians were now playing catch-up.
There are subtle differences in overall direction of public policy in the two countries. It is growth with continued emphasis on poverty alleviation in the case of India. It is considerably greater focus on distribution while maintaining a reasonable rate of growth in China’s case.
The Indian policy statement can be read as more directed at foreign audiences while that of the Chinese was more aimed at its own citizenry. New Delhi seemed anxious to make the case to foreign investors that the country should be a major destination for the funds they controlled.
With a high trade deficit and with still lower rate of savings than China’s, New Delhi was more dependent on foreign capital flows. It would like these to take the form of foreign direct investment. Portfolio investments were welcome but they had proven in the past to be a very volatile source of external flows.
However, to receive FDI in large amounts, potential investors had to be convinced that the Indian economy could expand at the rates that were comparable to those achieved by China and sustained over a long time. Minister Mukherjee, by repeatedly underscoring that a double digit rate of growth was well within India’s grasp and that such a rate of expansion could be sustained over time, was speaking to the foreign investor.
The audience for Prime Minister Wen was mostly within the country. He and his colleagues had heard the people. The people had voiced many concerns. The escalating price of urban housing was one of them. The discrimination against migrant workers said to number 240 million was another. Not only were their wages relatively low, they did not have access to the many social services that were available to the common urban dweller. They were also not secure about their place of residence. The Chinese law and practice required the unemployed to return to their place of origin.
Voices had also been raised about corruption in the ranks of the Communist party. The more informed public opinion that had the knowledge of such affairs was also worried about the widening income disparity. While Deng Xiaoping had famously said that it was glorious to be rich, he did not envision the kind of wealth accumulation that had occurred under the watch of his successors. It was interesting that an authoritarian structure was being so sensitive to the concerns of the common men and women. The Chinese prime minister promised to reduce the gap between the rich and the poor and between the more advanced parts of the country and those that had fallen behind.
In sum, Beijing and New Delhi were moving forward but were taking slightly different routes. For India achieving high growth rates was critical; for China, there had to be renewed commitment to improving the lot of the poor.