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Tiger Vs Dragon Who’s better?
Tuesday, October 1, 2002
FOR YEARS, INDIA HAS BEEN seen as a doddering behemoth caught at the crossroads between the Nehruvian era of Three-Four percent growth and the demands imposed by a billion plus population while China, powered by a government that brooked no dissent in its relentless march towards 'modernization' seemed to be the winner in the race to claim the status of Asia's superpower. Research has however unearthed startling facts that indicate that the Chinese economic growth may not exactly be as rosy as it seems and the gap between the two countries in terms of economy and growth may not be as large.


Admittedly, China has dazzled the world with its remarkable progress since embarking on the capitalist road in 1978. The economy has quadrupled in size in two decades. In the years 1997-2000 alone, according to figures released by China's National Bureau of Statistics, Chinese economy grew at a stratospheric 24.7 percent.


Economists have however picked holes in the figures released by the National Bureau Statistics.



Cooking the Books

The discussion was sparked off by the discovery of discrepancies in China's official figures by a University of Pittsburgh Professor of Economics. Prof. Thomas G. Rawski, who has studied the Chinese economy since the early sixties, found in the course of his research that the data released by the Chinese statistical institute was at odds with independent figures that serve as parameters to judge the accuracy of economic data.


In a study titled “China's GDP Statistcs- A case of caveat lector” Rawski quotes Chinese economists and statisticians to support the conclusion that 'beginning in 1998, a broad array of economic information, including official measures of provincial and national growth, has succumbed to a wind of falsification and embellishment (jiabao fukuafeng).'


“In the course of my research in 1998, I realized that something about their (China's) figures were wrong,” says Prof. Rawski. The official figures were at odds with other statistics available to economists and independent statisticians that common parameters to judge statistical veracity, he says.


Rawski however states that he does not doubt the broad accuracy of Chinese economic data over the previous twenty years till 1998.


Analysts indicate that the Chinese economy may have actually witnessed a slowdown of 2-3 percent in 1998 and 1999 and a growth of 3-4 percent in 2000 and 2001, putting China in the same economic growth bracket as India.


“The difficulties (for China) began when the Asian financial crisis threatened an economy already suffering from structural difficulties and from an overdose of anti-inflation medicine. Beginning in 1993, China applied monetary and fiscal brakes to cool the economy. When inflation abated with no big decline in growth, the government welcomed this soft landing, ignoring a steep decline in employment growth. As efforts to dismiss redundant workers moved into high gear, the number placed on furlough (xiagang) jumped from 3.6 million in 1994 to 5.6, 8.9, and 11.1 million during 1995-97 - China faced serious employment problems. The 1997 crisis compounded the danger by stalling the growth of exports and foreign investment,” Rawski says in his study.


“In order to stall this crisis,” says Rawski, “incoming Premier Zhu Rongji launched a crusade for 8 percent growth in 1998…Beijing issued orders to every province and city to achieve a certain target figure. Eight percent growth became a great political responsibility. Subordinates, fearing failure to deliver 8 percent might endanger their careers, forced statisticians into upward revisions or simply fabricated figures.”


The falsification of growth figures became so rampant that Rawski quotes a retired NBS official as having said, “deceiving the nation and tricking the people can lead to untold disasters.”


Companies that go to China as a potential market could be affected by China's over reported growth rate. In case a company like an airline were to go to China based on their reported income growth rates, it could spell disaster for them. The accepted norm for economists is that for every 1 percent growth in the economy, air traffic will grow by 1.7 percent. At that rate traffic should have grown at 15 to 20 percent but it has actually grown at only 3 percent. Had any airline decided to start operations in China based on the official figures, they would have found conditions decidedly unpalatable.



India-China bhai bhai?

The favorite comparison between India and China among western businessmen would be the respective economic and commercial hubs of Shanghai and Mumbai. While all over Mumbai, vast shantytowns have cropped up, Shangai is the picture of economic well being. This is not exactly a fair representation of the two countries' merits, many feel.


In a recent article, Rajeev Srinivasan, a columnist for Rediff.com says, “anybody flying into Mumbai has to traverse terrible slums en route into the city. These will make anyone believe that India has totally failed its citizens. The real reason is there are practically no restrictions on the free movement of Indians, and so they go wherever they believe their economic prospects are best. If China allowed for similar freedoms, their glittering showcase city centers would instantly be overtaken by millions of rural squatters fleeing the poverty of their villages.”


Indeed, so pervasive is the contrasting imagery of the two cities that it has been stereotyped in the western mind. And analysts say, this is precisely what the Chinese government is aiming at. By pouring money into infrastructure, analysts say China's government is diverting valuable resources that may be used for social welfare rather than into glitzy buildings and roads. Some analysts even suggest that the government maybe diverting public money (citizens' savings accrued in China's state owned banks) into infrastructure. This in itself may cause economic disaster, if, due to some emergency, citizens were to make withdrawals en masse, causing banks to go out of liquidity.


Says Srinivasan, “The first impression counts. Shanghai's apparent prosperousness might lead a visitor to have a mistaken impression that this is the case in much of China. Americans in particular, who tend to be superficial, are so much more impressed by China.”


Rawski does not put much faith in comparison of India's and China's growth rate based on available figures. “Unfortunately, I haven't been studying the Indian economy but it would seem that while China grew at a frenetic pace in the two decades until 98, India which has witnessed a growth rate of 5-6 percent has grown at a better rate for the past two years or so,” Rawski says.


Adds Rawski, “It is possible that India was among the fastest growing economies in the world in the last two years because many economies were suffering from severe financial crisises.”


Even in the case of the Foreign Direct Investment, statistics do not paint an accurate picture. Analysts pit China's $40 billion in FDI against India's paltry $3 billion. However, a series of recent articles have shown the figures to be mere fiction. A leading Indian financial daily carried an editorial that suggested that much of China's FDI may in fact be 'flight capital' (black money) returning to the country through a process called Round tripping. The editorial contends that upto 50 percent of China's 'FDI' may infact be money reinvested in the mainland by overseas Chinese.


“Moreover most of China's FDI is in real estate. In India, FDI in Research and Development and BPO or other services provides spectacular Return on Investment (ROI),” Srinivasan contends in his article. Srinivasan cites the example of GE's Jack Welch research center in Bangalore that has filed for 160 US patents in the first year of its existence. Says Srinivasan, “ROI in China is problematic, because of the middlemen who siphon off your profits. However, their infrastructure is good, and labor is quiescent, so you will be able to manufacture better. In India ROI is likely to be much higher in R&D and in services. In terms of stability, China is more likely to be unstable because of regional tensions and the increasingly tenuous grip of the party.”



Policy matters

So what is the future growth course for China? Since their decision to accede to the WTO, their government will be treading a thin line between disaster for State owned Enterprises (SOEs) and the need to submit to the changing face of world economy. Prof. Rawski says, “I see big changes due to the WTO and there is no way of finding out whether the balance will be favorable or not. For example they produce motorcycles that retail for $250, whereas the U.S. motorcycles may cost between $15000-20000. If Chinese firms could produce good quality motorcycles at a unit cost of US$5000, they might find a substantial market in the U.S.”


China may be seeing the WTO as a way to weed out their worst SOEs. India, another country to have a substantial number of SOEs, has already embarked on an ambitious drive to privatize, thereby gaining the government desperately needed funds that could be used to power social welfare programs. However, accession to the WTO could also mean risking unrest among labor that have, for too long been used to an idyllic, often unproductive life. In many ways, China owes its significance in the world economy as well as the peculiar problems it faces, to its government. China has witnessed great economic growth in the reforms period of 1978 to 1997, but there has been a considerable slowdown since then.


However, not even through the rosiest of rose tinted glasses would anybody be able to see India as a victor between Asia's dragon and the tiger. China still boasts of a GDP ratio of 2:1 with India. And in terms of popular development indicators, China is still miles ahead. India needs to focus on sustainable development as opposed to knee-jerk measures, such as those undertaken by China in 1998, if it is to regain the eminence of its pre-colonial industry.



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