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Moneylife » Economy & Nation » Economy » Can Modi really adopt, afford the Chinese model of development?

Can Modi really adopt, afford the Chinese model of development?

William Gamble | 30/06/2014 12:28 PM | 

Narendra Modi has a strong mandate, so there is hope that he might get a few things done. But one thing is sure, following China’s example is neither possible nor desirable

According to a recent report, India's newly elected Prime Minister Narendra Modi, wants to emulate China in two ways. He wants to welcome foreign investment and build infrastructure. He apparently believes that both of these things would help India transform itself into “a globally competitive manufacturing hub”.

 

The question is whether Mr Modi can actually emulate China? To answer this question it is necessary to analyze exactly how China was able to achieve such success. The short answer is that China was able to use its financial and institutional systems to transfer wealth from households to investment. By increasing investment, especially in infrastructure, China was able to achieve incredible growth. The by-product was also jobs.

 

The result is that China built an extensive new infrastructure. The way they were able to transfer wealth into infrastructure investments is interesting. The Chinese, unlike Americans, Indians or Europeans, had very little choice in the places available to invest their money. Until quite recently, they were forced to save at one of the state owned banks. The amount of money the banks could pay on deposits was capped, as was the amount that the banks could charge for loans. This guaranteed large profits for banks and cheap loans for local governments and state owned industries. It also had the effect of imposing a very high financial repression tax on households.

 

Most people believe that the Chinese save because there is something inherent in their culture. I personally doubt this thesis. I believe that the Chinese save because the country has few safety nets. Anything, from healthcare to schools, require payments. The effect is that the Chinese, unlike the Europeans, cannot depend on the state for much. The only way they can protect themselves is to save.

 

The combination of the implicit tax and high savings meant that consumption was very low as a percentage of GDP. In contrast, investment was very high, especially by local governments, in infrastructure.

 

There is one problem with this model. It is unsustainable. Much of China's massive investment spending channelled to local governments and state owned industries has been wasted on projects with negative real returns. The credit growth necessary to continue this investment boom has reached levels almost twice the levels reached in the US, Japan, Korea and the UK before their meltdowns.

 

So the first question about whether India can follow the Chinese model is why would India want to? The second is whether it is possible? Probably not. India has a far more open economy and a convertible currency. Even China does not have a complete monopoly on its financial system. India never did.

 

Welcoming foreign investment into India would be an excellent idea. A large part of China’s export growth was built on foreign investment, but not necessarily because the Chinese wanted it. It was safe for the Communist Party to empower foreigners who could be expelled at any time than free local entrepreneurs. Even better, foreign investors brought with them advanced technology, which could be “liberated” and used by local companies. There was no need to consult anyone who might be put out of business by new entrants. The local Communist Party officials made decisions themselves. Generally foreign investors were only required to form partnerships if they wished to exploit local markets.

 

Allowing foreign investment into India has been a massive challenge. The most recent attempt at allowing foreigners into the retail sector met with formidable resistance. No doubt, allowing foreign investment into infrastructure projects would meet with similar problems.

 

Indian government officials are not the only power group in town. To allow foreign investors in would require approval from other groups, whose interests would be affected. The Indian government must also abide by the law, which does protect foreign intellectual property.

 

In the beginning one of the main attractions of China was the cheap labour. Any rules putting limits on how companies exploited that labour were not enforced. Now, Chinese labour has become relatively expensive and fairly restive.

 

China’s loss of a labour competitive advantage can be exploited by India, but only if it can reform its labour laws. It should follow the US model, which allows companies to dismiss workers without government approval. But the probability of Modi getting this through appears to be rather slim in my view.

 

This does not mean that Prime Minister Modi cannot do a lot to reform India. A technocrat’s dream reform agenda has been around for years, but goes nowhere. The main impediment has been the coalition governments and powerful states. Mr Modi has a strong mandate, so there is hope that he might get few things done. But one thing is sure, following China’s example is neither possible nor desirable.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)


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5 Comments
Yerram Raju Behara

Yerram Raju Behara 1 month ago

The main difference is that in China every body can work and most cannot talk as they wish. The laws allow what they would like to do in the interest of the country. There are instantaneous penalties and rewards for good work have to be sought from the system. With us, we are prisoners of laws and there are rules within laws that also hold us up. We are also prisoners of our Constitution that was written at far different times than what the future beckons. Even after over 120amendments to the Constitution we are not prepared to rewrite the Constitution by retaining the Directive Principles in tact. An economy that is naturally dependent on the vast human resources, young and growing cannot afford the luxury of living in the past and keep looking at neighbours instead of looking at itself as to what best is in its interests.

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Dayananda Kamath k

Dayananda Kamath k 1 month ago in reply to Yerram Raju Behara

indian constitutions was written thinking that public good will be the basic principle of rulers. but more than 120 amendements were made to facilitate the dectates of ruling individuals. that is why you can be caught on the wrong foot any time they want.

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Prakash  Basrur

Prakash Basrur 1 month ago

The long & short of China story seems to be "stop talking and start working" ! This behaviour is intrinsic in mongoloid race and Japan , Korea and China ( in that order in 60's,70's & 80's ) exploited it to their respective advantages through different means with the same end result of prosperity ! Could Indians have done that in the last 65 years after their independence ? "Unity in Diversity" is a good slogan but we have not been able to harness its strength for positive higher economic growth commensurate with our huge population ! State Industrial Development Corporations in competition with each other have done their bit but unfortunately the SEZ's and IT parks have not improved the lot of our villagers in terms of fulfilling their basic needs of "Roti , Kapda Aur Makaan" ! We have built a sizeable pool of Foreign Exchange post 1980 but it was at the expense of neglect of Agriculture and the core Industrial sector ! The results are visible 2000 onwards in terms of adding to more billionaires and , at the same time , more Farmer Suicides ! What China has been doing in last 40 years after Mao era has been what Nehru often called "Democratic Socialism" ! Whereas China did a better job of it using their Mangoloid "To-Be" characteritic , however , we have not been able to catch up with them in our "To-Be-Or-Not-to-Be" character ! All that talk of GDP growth and SENSEX we have failed in the race and will continue to do so ! Jai Hind !

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Dayananda Kamath k

Dayananda Kamath k 1 month ago in reply to Prakash Basrur

in unity in diversity emphasis is given to diversity than unity. in democratic socialism instead of using advantages we are using disadvantages to the hilt. we can take good points of china model and emphasize it. and modi has that capabilities if he really applies his mind. the best example is brt in ahmedabad. its sucess is he avoided all the mistakes of delhi brt.

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Prakash  Basrur

Prakash Basrur 1 month ago in reply to Dayananda Kamath k

Ho!Ho! One more case of high expectations from Narendrabhai! Like the "Mangoloid" race of China/Japan?Korea, Gujarat has one "Gujarati Character" which is "apdo Gujarat" (i.e. "My Gujarat") and all "bhai & behnas" from Gujarat ( including the Gujarati speaking Muslims !) united under "Apdo Narendrabhai" to generate the extra-ordinary synergy during last 12 years of "Modi Raj" !
The moot question, with Mody as the P.M. in Delhi , is whether Mody has truly been accepted as "Apna Admi" all-India-wise (like the "Apdo Narendrabhai" all-Gujarat-wise ) !
Secondly , the most crucial element in the government is the huge Army of Baboos ( "IAS Fouj") without whose deligence and sincerity of work towards the national goal nothing will work ! If the Baboos were "cosy" under the "Congress System" and wouldn't like that to "change" at all then they will en-mass resist changes that need to be made by the new government ! In that case Mody and NDA) will not be able to improve the situation !
Thirdly , with his popular slogan "Achhe Din Ayenge" , Mody has unwitingly set in motion a desperate race against time for himself and his government !Within 100 days the Media ( particularly the English news channels of TV ) is pouncing upon Mody using his above slogan against him in every panel discussion !
Unfortunately , our "Aam Admi" too wants Mody to remove those 66 years-old "Bure Din" and bring in "Achhe Din" with some sort of a "Magic Wand" !
Only another "avatar" ( on the basis of "yada yada si Dharmasya glanee bhavati Bharat" ) is awaited in India thatis Bharat in order to have "Acche Din" ! Jai Hind !

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