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Giants of the East

Print edition : Jan 12, 2007 T+T-

The two books reviewed deal with the emergence in the 21st century of Asian powers in the political and economic fields.

IT is a generally accepted proposition that if the 20th century was dominated by Western powers the centre of gravity of world affairs will shift to the East in the 21st century. It may also be uncontested that in the Asia of this century the three major powers will be India, China and Japan. What do these Asian powers have in common? Will their relationships be ones of cooperation or of rivalry? If the relationships are ones of rivalry, who is likely to emerge the strongest? These are the themes dealt with by the two volumes considered here, the former from a political angle and the latter, limited to China and India, from an economic perspective.

Brahma Chellaney points out why Asia is significant today. It has more than half of the world's population, with China and India being the most populous countries. Japan, China and India together will be the world's main economic locomotives in the decades ahead. Equally noteworthy is the fact that never before in history has there been a strong China, a strong India and a strong Japan at the same time. Asia is the largest importer of arms (since 2004 India has emerged as the largest importer of arms in the world) and also accounts for three-fourths of global terrorism. Not all the facts are complimentary, but they do indicate that Asia will be a central player in the emerging world. The question is whether the three Asian powers will strive to play a positive role in global affairs or whether, by their inability to take up leadership through mutual understanding, they will let the powers of the past, the United States and Europe, retain their position.

In trying to answer the question, the author evaluates the relative strengths of the three powers. Economically, Japan is the most powerful, next only to the U.S., and it represents 40 per cent of Asian gross domestic product (GDP). Its economy went through a bad patch a few years ago but has now revived. It also has a history of learning from all over the world and deciding how the best experiences from other parts of the world could be effectively internalised. But politically, Japan is yet to emerge from the post-War domination of the U.S., and militarily, it is not much of a power even in Asia.

In contrast, China and India are rising powers to be reckoned with. China is the most populous country in Asia and in the world. Its sustained high-level economic growth of the past two decades is unprecedented anywhere in the world. It has demonstrated the willingness and the ability to attract foreign investments substantially on its own terms as also the strategy to utilise them wisely. It is playing a fairly aggressive role in international trade and has made its presence felt globally.

In the political sphere, the Communist Party of China retains its hold without any organised opposition and has shown and continues to show that it moves with the times in the attempt to shape a modern Chinese society and nation. Militarily, China is a nuclear power and its power is fully recognised in Asia and even in the rest of the world. It has succeeded in influencing many countries in Asia and Africa, and in the reckoning of the U.S., China is the strongest power in Asia whose role in global affairs also has to be recognised as it is the only permanent member of the United Nations from the East.

But China has problems, many of which may be latent now but are sure to surface in the not too distant future. China has received global praise for containing its population growth, but this has some significant future consequences. First, China is likely to grow old before it becomes rich. Second, as a consequence its pension system faces "a demographic time bomb". And third, a shrinking labour force could seriously damage its economic prospects. In addition, there are many socio-political problems that could erupt at any time because of the power struggle between "cautious old technocrats" and a "rootless" and aggressive younger generation.

On the economic front, while it is true that the land distribution programmes of earlier periods combined with the rapid growth of more recent years have reduced poverty substantially, economic inequalities have also grown. With less than 1 per cent of households holding more than 60 per cent of the wealth, China is one of the most unequal societies in Asia. Regional inequalities and the rural-urban divide are also glaring. "Unrest is growing as rapidly as China's GDP," observes Chellaney. According to official figures, in 2004 alone there were 74,000 rural "incidents", which rose to 87,000 in 2005, involving millions of citizens, says the author.

Chellaney has his assessment of India also. India did not attempt any radical economic changes when it became free, and it has been slow in taking advantage of opening up to the rest of the world and hesitant in moving forward after it did that in 1991. Corruption at all levels is a major problem. "India's fundamental weakness arises from its revolving door politics and weak leadership, and the ensuing difficulty to both establish long-term plans and unflinchingly pursue them." Militarily, it is not a major power and remains the only large-size country in the world to import most of its conventional weaponry.

But things have begun to change. India's economy has begun to show a new dynamism, and in the Information Technology industry, it has emerged as a world power and the prospects there appear very promising. Where India has a distinct advantage over China is its democratic polity. Contrary to the doubts in the past, the last two decades have shown that a democratic polity does not stand in the way of rapid economic growth, and globalisation is no threat to India's democracy, while it poses many challenges to China's autocracy. "Unknown to many, India is a beacon of tolerance and inner strength. China, in contrast, portrays stability, clarity and direction, with the opacity of its system helping to hide the turbulence within. Its massive repressive machine is increasingly being directed to maintain social stability on the domestic front."

The future will also depend on the manner in which the big three in Asia interact among themselves and with other countries. After China and India opened up their once largely closed economies, economic interactions among the three have really picked up. Japan recognises India as an investment destination. China and India are building up bilateral trade relationships and are also trying to be economically linked to other Asian countries. But not all is smooth going. On matters relating to energy, the strategic considerations of China and India often diverge. In turn they also influence their military and diplomatic strategies. All three countries have big stakes in controlling the Indian Ocean because of its role in overseas commerce, oil and gas supplies and military matters. There are territorial disputes between China and India and China and Japan. Chellaney's assessment is that in all these matters "China's hard-nosed pragmatism and assertive projection of power far beyond its shores have contrasted sharply with Japan's pacifist constitution and India's smug didactic world view".

The future role of the big three in Asia and the rest of the world will also depend on how the U.S. perceives its interest in Asia under the changing conditions. It is not easy to say how America will plays its cards, but one thing appears certain: the U.S. will exert itself to the maximum to curb hegemonic domination by any one of the three Asian powers. Hence, there cannot be much difference of opinion with the author's observation that a strong China, a strong Japan and a strong India should find ways to reconcile their interests in Asia so that they can coexist peacefully and prosper.

Subramanian Swamy's study is a critical evaluation of the recent economic performances of China and India, with an accent on financial architecture. Swamy has been a student of the comparative performance of these Asian giants. While Swamy fully appreciates the tremendous strides that China has made, particularly since 1978, his familiarity with the Chinese economic system and official statistics enables him to provide a balanced view of China's performance in comparison with India's.

He offers some significant comments for a proper appreciation of China's economic links with the rest of the world. On China's growing exports, for instance, he points out that it is important to note that they consist of two components, imports from other Asian countries that are reprocessed and exported and exports of goods primarily originating in the domestic economy. China's trade surplus is completely due to the positive balance of the former, while the domestic-centred foreign trade is increasingly in deficit. In Swamy's view, there is a distinct possibility that China's current account will turn negative by the end of the present decade. It may be noted, too, that China is strict in ensuring that firms with foreign participation export a substantial part of their output. Some 40 per cent of China's exports are from such firms, while for India this ratio is a mere 8 per cent.

Similarly, corrections are needed on the volume of foreign capital flowing into China. The International Monetary Fund definition of foreign direct investment (FDI) includes equity capital, reinvested earnings of foreign companies, short-term and long-term loans, trade credits and some more items. China's definition includes all of them and also imported equipment as FDI, whereas FDI as reckoned by India includes only equity capital, with imported equipment being treated as imports in the trade data. As reported by the two countries, in 2004 China received over $60 billion as FDI, while India's figure was just above $5 billion, showing almost a 12:1 ratio. Swamy quotes an International Finance Corporation study that came to the conclusion that the real difference between the two countries in this regard on comparable data would probably be something like 2.5:1. It is pointed out too that almost 68 per cent of the FDI in China originates from China-rim Asian countries, mainly from people of Chinese origin. As the title of the volume indicates, Swamy's attention is mainly on the financial architecture of the two countries. His main point is that in their different ways the financial and banking systems of the two countries are under the domination of the state. This arrangement may have served a purpose in the early days but is not compatible with a rapidly evolving market-oriented and global financial system. It was not state protection that saved China and India in 1997 when many other Asian countries were rocked by a major financial crisis. The saving factors for China and India, according to Swamy, were that unlike the crisis countries these two countries attracted predominantly FDI rather than short-term portfolio capital (not true about India in 1997), the fact their foreign debts as proportions of the GDP were low, lack of capital account convertibility (wrongly stated as "capital accounts accountability" on page 188) and, above all, the current account position (surplus for China, low deficit for India).

But neither China nor India can claim immunity in the future. The main problem in China is that its economy is still dominated by state-owned enterprises, and a "soft budget" policy of making credit available to them still continues and cannot be easily reversed because of the enormous social consequences of rendering millions of workers unemployed. Swamy is blunt in his assessments: "There is today clearly a Catch 22 type political bind on the financial system. Either China will have to carry out financial reforms and face a possible political upheaval arising from a large number of urban workers laid off, or retain the political levers on the financial system and face an economic crisis caused by a banking bankruptcy that cannot be bailed out by fiscal measures."

However, the present position is a huge burden on the financial system, which it may not be able to carry for long. To add to the problem, China has one of the highest fiscal deficits in the world, a fact that is not much known outside. Also not much known to the rest of the world is that China is facing a property bubble that could burst at any time. There may also be a foodgrains deficit of up to 30 million tonnes by 2007, which would necessitate massive imports.

The financial crisis in India, according to Swamy, is likely to come from its not being able to contain the fiscal deficit, which has led to an internal debt-trap situation. To get out of it, the author suggests a new generation of fiscal reforms. He is of the view that if the new reforms remove the barriers to growth it is within India's reach to close the gap with China and, indeed, to get ahead by 2020.

Swamy is a market and reform enthusiast who claims that as Minister for Commerce in Morarji Desai's Union Cabinet in the late 1970s he was responsible for opening up the Indian economy and thus ushering in what a little over a decade later became the era of reforms. His reform bias prevents him from making a proper appraisal of the achievement of the "real economy" in both countries in the nearly three decades from 1950 on the basis of which the subsequent reforms became possible. But his exposition of the kind of dangers that India and China could run into must be taken note of.