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Shyam Saran: The myth of Chinese invincibility

The country's economic policies are unsustainable even in the medium term

Shyam Saran 

A self-defeating mood of pessimism and passivity has become endemic in the and western Europe, thanks to the continuing global financial and economic crisis. Accompanying this is an almost irrational belief in China’s inevitable ascendancy and invincibility. China’s apparent confidence, even bluster, is contrasted with the indecision and disarray among the leaders of liberal democracies.

An insidious notion is taking hold in western societies and intellectual elites that perhaps the Chinese model of political authoritarianism and guided capitalism is proving superior to the open, free-wheeling and plural democracies, which only a decade ago was being celebrated as the only model validated by history. This doctrinal infection is beginning to spread in India as well, despite our continuing success as an emerging and vibrant economy. This is dangerous. It engenders the seductive allure of a dictatorial polity as a panacea for our numerous economic and social ills. It persuades us to more readily acquiesce to an emerging world order that is assumed to be dominated by

In his latest book, Eclipse: Living in the Shadow of China’s Economic Dominance, appears to suggest that the world reconcile to the inevitability of China’s overwhelming power. We in India need to do our own sums and make critical judgements, based on an independent scrutiny of the assumptions that underlie such exaggerated forecasts.

has sustained higher much longer than other economies that traversed a comparable stage in their growth trajectories, such as Japan and the Asian Tigers. The key drivers of this growth have been the consistently high rates of fixed investment and rapidly rising exports. From 1979 to 2009, China’s fixed investment grew from 35 per cent of GDP to 45 per cent, while export turnover grew from five per cent of GDP to 30 per cent. Consumption, on the other hand, declined from 60 per cent of GDP to less than 40 per cent. Currently, it is even lower, at 33.8 per cent, according to the latest Year Book. The spectacular rise in China’s exports was possible only because consumption grew both in the US as well as western Europe, much beyond the trend line, fuelled by rising housing prices in the US and by the growing sovereign debts of prodigal governments in Europe. For example, in the US the normal consumption levels were around 66 per cent of GDP around the last quarter of the 20th century. By 2007 they had reached 75 per cent, unsupported by the income-generating capacity of the US economy.

A reversal to trend line would require massive and painful rebalancing, which cannot but impact China’s main export market. The speedier the relative decline in China’s exports, the greater the pressure to compensate through seeking alternative markets in emerging economies and simultaneously raising domestic consumption. How feasible is this?

In 2009, personal consumption in the US was estimated at $10 trillion, in at $7.5 trillion and Japan at $2.5 trillion. Two of the largest emerging economies, and India, together accounted for the same level of consumption as Japan. There is no way that rising demand in and India could offset a significant fall in consumption levels in the West and Japan for several years to come, even if they were to grow at double-digit rates. In any event, to expect to reverse course in a short time frame and raise its consumption level from the current 34 per cent of GDP to the more normal level of 50 to 55 per cent in Asian countries is unrealistic. Maintaining high growth rates would, therefore, require the continuance of the current investment-oriented strategy, to compensate for declining level of exports and stagnant consumption. This will further exacerbate the already serious problem of over-capacity, particularly in the important construction sector and compound the associated issue of rising non-performing assets in the Chinese banking sector. Housing investment in is about 25 per cent of all fixed investment and, therefore, a critical driver of growth. Any retrenchment in this sector would not only drag the economy down but also generate spread effects on the supply industries such as steel.

What is obvious is that in a highly interdependent and interconnected global economy, China’s economic and trade imbalances are as serious and threatening as are those afflicting the West. cannot escape the vulnerabilities generated by the inevitable global rebalancing that is taking place, painfully, sometimes by reluctant choice, sometimes by compulsion. No economic model capable of indefinitely suspending the laws of economics has been created so far in history. is unlikely to prove an exception. A linear extrapolation of past growth trends into the future is an erroneous assumption to make. is and will be a great and powerful country and it has achieved incredible success. However, it is more likely that in the coming years it will see significant deceleration in its growth while the rest of the world will not be standing still. The relative power balance within the next generation may continue to see a steady shift in the centre of gravity of the global economy from the transatlantic to the Indo-Pacific but there is likely to be a steady diffusion of power rather than its concentration in alone.

India’s strength lies in its relatively balanced economy, much more domestic demand driven than It has a high savings rate given its favourable demographics and an investment rate of about 35 per cent of GDP, which is what one should expect at this stage of a country’s development. Our consumption rate is also close to the normal trend line of almost 60 per cent. If there is an imbalance, it is in the unusually high contribution of the service sector to our GDP growth, estimated at 58 per cent against China’s 40 per cent. India’s manufacturing sector needs to grow much faster and so must exports of manufactured goods. These adjustments are well within the realm of possibility and are, in fact, beginning to happen. In the longer run, the resilience of the Indian economy will prove to be a far greater asset than its ability to deliver Chinese-style double-digit growth. And I believe Indians would any day accept two per cent less GDP growth if this is the price they must pay for the privilege of living in a plural, free-wheeling and liberal society.

The author is a former foreign secretary.
He is currently chairman, RIS and senior fellow, CPR

First Published: Wed, October 19 2011. 05:20 IST