FDI
Revisionism
A
Chinese-American academic is a Sino-sceptic but an Indo-bull
Yasheng Huang, a Chinese-American and an Associate Professor at the
Harvard Business School is fast becoming a favourite of Indians-both
here and abroad. This is because of his recent publications that assert
that China’s achievements are exaggerated, while India’s advances have
not received due recognition. He has co-authored, along with his colleague
Tarun Khanna, an article Can India Overtake China? that appeared in
the July/August issue of the prestigious magazine Foreign Policy. The
dons argue that “China and India have pursued radically different
development strategies. India is not outperforming China overall but
it is doing better in certain key areas. That success may enable to
catch up and perhaps even overtake China”.
Now Professor Huang’s
more detailed book Selling China: Foreign Direct Investment During the
Reform Era, is also out. In this, Huang explains that the massive foreign
investment inflows into China are actually a sign of structural weakness
in the Chinese domestic economy and do not in any way reflect a “boom”.
These inflows are, no doubt, helping to make the economy more efficient.
But they have been a pervasive phenomena in China because domestic private
firms have been deliberately stifled and are simply uncompetitive to
respond to new business opportunities. According to Huang, foreigners
are investing more in China while domestic firms are investing less,
although the distinction is blurred because of “round tripping”(the
flight of resident capital and its return as foreign investment) via
Hong Kong.
China has had a spectacular performance since 1978 when reforms were
first introduced. In about a quarter of a century, GDP is estimated
to have zoomed by an astronomical 8-9% compound annual average growth
rate-translating to a doubling in less than 10 years. But these numbers
are being challenged. Thomas Rawski a professor of economics at the
University of Pittsburgh in the USA has concluded that Chinese GDP figures
could be puffed up by at least 2-3 percentage points. Rawski’s analysis,
however, has been questioned by other eminent economists like Nicholas
Lardy now at the Washington-based Institute of International Economics
and author of a number of acclaimed works on the Chinese economy.
Then there is the
American lawyer of Chinese descent Gordon Chang who hit the headlines
two years ago with his The Coming Collapse of China. Chang argued that
the Peoples Republic has at most a decade before it crumbles. The trigger
is the accession to the WTO that happened in December 2001 but there
are other pressure points—a banking system that has all but failed,
state-owned enterprises that are visibly dying, the Internet that is
proliferating inspite of efforts to control it, a private sector that
is strangulated, a society being wrecked by corruption and a state that
is simply unable to accommodate the growing aspirations for freedom.
Chang observes that China’s economic success is built on very shaky
and precarious political foundations and it is this that is causing
growing unrest in that country.
It is not as if private Chinese companies do not exist. The top ten
companies (groups) are Legend, Wanxiang, Hengdian, Chint, Delixi, Guanghui,
Fosun, Xingaochao, China Orient and Tengen. However, the total turnover
of these top ten is about half the turnover of the top ten Indian private
companies. Huang talks of Indian private companies like Infosys and
Wipro, Cipla, Ranbaxy and Biocon, and the Tata group as world-class
firms owned and managed by Indians themselves. Since China has become
the manufacturing platform for the world, a very large number of “Chinese”
companies that are successful are actually affiliates or subsidiaries
of companies from the USA, Japan, Germany and other countries. The Chinese
corporate scene, however, is not entirely blank. Companies like Legend
Computer, Haier, Kelon and Huawei—some of whom are coming to India
as well-have emerged as global players. The Shanghai Stock exchange
is being engineered to be a global bourse in five years time (if only
the Indian government has been more proactive TCS may well have won
the contract for its computerization that was awarded recently to American
firms).
One of the reasons why China has attracted more foreign investment than
India is because in India there has an influential business lobby against
foreign investment, a lobby that has powerful political backers as well.
This lobby is not as vociferous as it used to be but there are still
a number of Indian companies who refuse to have anything to do with
foreign investment. Sundram Fasteners, for example, has become a global
supplier of radiator caps to General Motors and its success has not
come out of any foreign investment inflow. Reliance is another example
of such a company which has achieved global scale and standards without
foreign investment. But there are other companies like Hindustan Lever
that depend on foreign investment. Companies like Infosys and HDFC,
of course, does not depend on FDI but more on FII-that is foreign institutional
investors who invest for returns and not for management control.
Huang has certainly
dealt a blow to the large tribe of Indo-critics and Indo-pessimists
even though his sample of “successful” Indian companies is
limited mainly to a couple of software and pharmaceutical firms. Sure,
India has had a long tradition of private enterprise and pre-1991 policies
may have created the platform for entrepreneurial take-off. But there
were many elements of the ancien regime that, ironically, helped Indian
enterprise. The public sector, for example, has fostered entrepreneurship—the
growth of Bangalore and Hyderabad has been heavily dependent on public
investment in high-tech areas of defence, space and engineering.
Huang is right to focus on the domestic economy. Sure, entrepreneurial
drive and dynamism in India is greater reflecting vastly more political
and social freedoms here. But the business-like manner in which the
Chinese are moving, using the WTO as a pretext to carry out sweeping
reforms, is striking. This is in stark contrast to India where reforms
of domestic taxation particularly have been stalled, as evidenced from
what has happened to VAT. In addition, structural change in India has
been skewed. Agriculture’s share of GDP has fallen as it should. The
share of services has risen disproportionately to over 50% of GDP at
the cost of industry, especially manufacturing. At less than a fifth,
India has lowest share of manufacturing in GDP among all major countries.
Manufacturing has staged a revival in recent years but there is still
a very long way to go. Further, the share of agricultural employment
has remained more or less unchanged because of rigid labour laws and
small-scale reservations.
Huang raises an
ever more fundamental issue. How is that while India’s growth is 80%
that of China between 1997 and 1999 (actually, about two-thirds if a
longer 1980-2000 period is taken), India achieved this on the basis
of about half of China’s savings and investment rate and less than 10%
of China’s foreign investment inflows. Does this mean that capital utilization
in India is more efficient than in China?
Foreign
investment has made China the sixth largest trading nation in the world
in a span of just over a decade. It is galloping foreign trade fuelled
by “foreign” investment that has transformed China in recent
times. Huang’s radical work cannot detract from that reality.
