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Suman Bery: Great powers in transition

Given leadership challenges in the US and China, India should hope the US stays engaged, and that China moves forward

Suman Bery 

China and the United States are the world’s two largest economies. According to the International Monetary Fund, in 2010 they accounted for 14 per cent and 19 per cent respectively of global production, measured at purchasing power parity (PPP). For those who distrust PPP conversions, the World Bank reports 2011 global GDP at $70 trillion at current prices, with US output at $15 trillion and that of China less than half that, at $7.3 trillion. (The Indian economy, at $1.8 trillion, is just short of one-quarter the size of the Chinese economy on the same measure, despite a population 92 per cent as big. According to the same source, a decade ago, our economy was half as large as that of China.)

November marks a crucial political moment in both countries. The Communist Party’s 18th Congress, which starts on November 8, will conclude by announcing the membership of the new standing committee of the party. The new general secretary is almost certain to be Xi Jinping, replacing Hu Jintao (who also serves as president). Somewhat before then we will learn the result of the US presidential election. While the polls indicate this is too close to call, the online betting site Intrade still predicts a comfortable victory for President Obama.

By themselves, each of these countries is crucial for the world economy. Just as important is the quality of their bilateral interaction, which will define the coming decade even more profoundly than it has the last. Finally, each is of fundamental importance to India, strategically and for our economic prospects. So what can we look forward to?

Let me start with China. As pointed out by The Economist (“China’s new leadership”, October 27), the outgoing team of Mr Hu and Mr Wen can point to many achievements over their decade of stewardship. The size of the economy has quadrupled, and China has become the world’s largest merchandise exporter. Largely because of its economic reach it has become a diplomatic force second only to the US (although admittedly a distant second).

Despite these achievements, and perhaps in large measure because of them, China is uneasy at this moment of transition. In the same article, a participant at a recent conclave of senior scholars describes the consensus view of present-day China as “unstable at the grass roots, dejected among the middle strata and out of control at the top”. The economic challenges facing China are well understood by its technocrats. These are articulated in its 12th Plan, which began last year and runs till 2015. The longer-term road map has been further detailed in a semi-official study conducted jointly between a government think tank and the World Bank, released publicly earlier this year (“China 2030: Building a modern, harmonious and creative high-income society”, ).

China’s immediate problem is that it invests too much, partly because it saves too much. Capital is much cheaper than it should be in a still-poor society. The resulting misallocation of capital, in turn, threatens the long-term safety of the financial system. As pointed out in a recent analysis by Citi (“China and emerging markets”, July 16), both Japan and Korea faced similar transitions in the past, when the rate of return to investment fell to unsustainably low levels. Today, China’s investment (gross capital formation) is reported by the World Bank to be 48 per cent of GDP. Japan is 20 per cent and the US is 15 per cent. India is at a respectable 36 per cent of GDP. Even more striking is the comparison of saving rates. The World Bank reports China’s gross domestic saving at a staggering 53 per cent of GDP. Japan is down to 21 per cent, while the US happily subsists at 12 per cent, writing cheques on the rest of the world as and when it needs to.

While the direction of change is clear, managing the transition will be hard, and this is where politics comes in. The present structure reflects the dominant role of state-owned enterprises and publicly owned banks in China, each of which is protected from real competition. While this was true of both Japan and Korea (and to a degree remains the case), the Chinese case is complicated by the ambivalence that the Chinese administration continues to feel about a powerful private sector potentially able to challenge the political authority of the Communist Party. Time alone will tell whether the incoming leadership is interested and able to do what is needed, or whether it will be tempted to proceed down the current path for a while longer, leaving it to its successors, or to a crisis, to do the inevitable dirty work.

If China’s fundamental problem is to rein back the state, the US needs to develop a national consensus on the appropriate role for the state in addressing its structural problems of education, infrastructure and social protection. For historical reasons there is considerably greater scepticism in the US than in other advanced economies on the effectiveness of state spending. It is noteworthy, though, that the tax-to-GDP ratio in the US is not very different from that in Japan, a country where the bureaucracy is held in high esteem and one which enjoys excellent health care and social indicators. The Progressive Era at the beginning of the 20th century, the New Deal in the 1930s and Lyndon Johnson’s Great Society in 1965 all marked high-water marks for a broadly bipartisan belief in activist social policy. The choice made on November 6 will be claimed by the victor as providing a mandate in one direction or the other, even if legislative deadlock prevents immediate action.

India would benefit greatly from a successful transition in China to a model that is less investment- and material-intensive, one where China moves up the value-added chain by shedding labour-intensive manufacturing. Not all good things come together, though. A successful China would be an even more powerful pole for the rest of East and Southeast Asia, knitted together by trade, investment and finance. India will need to raise its own game to remain relevant in this region. As for the US, there is a small but important risk that in refocusing on its pressing domestic agenda the US will retreat inwards. It is in India’s vital long-term interest that the US stays globally engaged, militarily and economically. India should use the limited tools it has to work towards that outcome.


The writer is chief economist, Shell International.
These views are his own

First Published: Tue, October 30 2012. 00:52 IST