Crouching Dragon, Hidden Tiger

By Prem Shankar Jha, July 6, 2010

Crouching Dragon, Hidden Tiger - Can China and India dominate the West?

Crouching Dragon, Hidden Tiger - Can China and India dominate the West?

Former information advisor to the Prime Minister of India, Prem Shankar Jha has recently been a visiting fellow at the Fairbank Center at Harvard University. Here he discusses his new book “Crouching Dragon, Hidden Tiger - Can China and India dominate the West?"

Where did the initial idea for Crouching Dragon, Hidden Tiger come from?
It came out of reading Goldman Sachs’ “BRICS report”. This report, which came out in 2004, predicted that by 2040 China’s GDP would have overtaken the US’s and that India’s would be far ahead of Japan’s. The sum of the BRIC’s GDPs (including Russia and Brazil) would exceed that of the G6: i.e. that of the US, Japan, Germany, France, Britain and Italy. I was deeply sceptical, not of the data and projections of growth contained in the report, but of its underlying, albeit carefully hedged, assumption that both countries would remain politically stable throughout the 36-year- period that lay ahead. I had read about sporadic outbreaks of peasant discontent and labour unrest in China and I knew, from a lifetime’s experience, how much of a balancing act the central government had to do to maintain political stability in India. It seemed too brave an assumption to make.

My scepticism was reinforced by an earlier study of Globalisation, in which I had sought to understand the crumbling of the Westphalian state system by placing it in the context of the development of capitalism*. Since its inception about 800 years ago, Capitalism has gone through three sudden, explosive expansions, approximately every 100 to 200 years. In each of these it has demolished the institutions and political structures that society had built to serve its needs during the previous epoch. Both within and between nations, the transition from one epoch to the next has always been politically de-stabilising, and often violent. Capitalism was generating new conflicts between the suddenly enriched and the equally suddenly impoverished, before my eyes. I couldn’t see how it could not be happening in China as well.
When an Indian think-tank asked me whether I would like to study the political economy of China’s development, I leapt at the suggestion, but said I would do it if I was allowed to make it a comparative study of China and India.

You say that the challenge of balancing capitalism with social justice is no longer a challenge facing developing nations like India and China but one facing advanced nations as well as a result of the current recession. Is everyone redefining capitalism?
Yes, that is indeed my view. It is not only a challenge that India and China face today as they go down the road to capitalism, but a challenge that the first generation capitalists are facing all over again as globalisation destroys the institutions they built to balance equity with growth in their countries. In the book that I mentioned a moment ago, I had argued that Globalisation was the fifth cycle of Capitalism’s expansion, that there is a ‘contradiction’ in Marx’s sense of the word, between this and the previous epoch, of Nation-State based (national) capitalism, and that to clear the way for its expansion across national boundaries. Globalisation is destroying the institutions that had been built to serve the needs of the nation state. Chief among these, in this order, are collective bargaining, the welfare state and, regrettably, democracy itself. The first generation industrialised countries have therefore been catapulted from the late phase of national Capitalism, into the early phase of global Capitalism. This phase is comparable in global terms to the early ‘robber baron’ phase of national capitalism, which was justified by a similar reification of the market by the Manchester Liberals. It took Europe more than a century to outgrow that phase and humanise national Capitalism. Now it, and the US, face the same task but on a global scale.

Prem Shankar Jha

Prem Shankar Jha

CHINA

You look in detail at both China and India; let us take China first. Very early on in your book you debunk a cliché that capitalism in China is a “socialist market economy with Chinese characteristics” which is being wisely and gently shepherded along by the Chinese government. What is really happening?
The only ‘socialist’ feature of the Chinese economy today is the ownership of capital, which is still overwhelmingly in the hands of the State. But economically the State is no longer a monolith, and is certainly not ‘socialist’. Instead it has fractured into several tiers of decision-makers, all of whom are competing with each other to set up more and more new projects. This frantic, no holds barred, competition to invest, between approximately 70,000 decision-making centres at six levels of government, is the reason for China’s frenetic growth.

You describe in detail the relationship between the central government and the 5 levels of cadres. Why is this so important?
Because understanding this relationship is the key to understanding the anomalies of China’s development. More specifically, it enables us to understand why such rapid economic growth is generating so much discontent, and why China is able to capture world markets (which implies efficiency of production) and be so prodigal in its use of raw materials and energy (which implies inefficiency) both at the same time.

You highlight the difference between resident workers and migrant workers in China. This appears to be a serious problem does it not?
I have highlighted the different living conditions of urban workers, with urban Hukou (residence permits), and those who have migrated from the villages in search of work who do not have the Hukou. I have done so not because the presence of migrant workers in urban centres is unique, (there are 147 million similar workers in the ‘unorganised’ sector in India) but because the Hukou system is unique. It legally prevents migrant workers from ever getting the same rights and aspiring to the same quality of life as urban resident workers. There is no counterpart to this anywhere else in the world. Migrant workers were becoming restive even in the good times before the global recession of 2008. They have become far more so now.

You examine another cliché, that of China being the workshop of the world, this is also inaccurate as China is only specialising in one part of the process, is that true? Are Vietnam and South Korea now part of the picture?
China IS the workshop of the world for low-cost manufacturing, but not for services. That position is currently held by India. Like India, China faces competition from other low income countries like Vietnam, so it is an insecure dominance. But China’s export-to-GDP ratio is two-and-a-half times India’s. So that makes it far more vulnerable to decisions taken in far away boardrooms than India is. This can make it more cooperative, but also more aggressive if its vital interests are threatened.

Chinese investment is still to this day very much State-driven, dwarfing private enterprise. Is this actually stifling the entrepreneurial spirit?
If by entrepreneurial spirit one means the capacity to identify and exploit opportunities arising in the market, then competition amongst each other, and pressure from a fiercely competitive world market, is sufficient to kept it alive. But if by entrepreneurial spirit one means the willingness to take risks, then it has been very badly stunted in the worst possible way: for the Chinese investors are playing with other peoples’ money, mainly the savings of the poor, and they are under no obligation to pay it back. This is risk-free investment. Not letting the capacity to take risks develop has led to wild, often irresponsible investment, huge surges of over-investment and huge overcapacity, that the government is reluctant to acknowledge.

Many people presume that in China there is simply a series of economic reforms taking place. You suggest that there is also political reform being carried out as the CPC is suffering from a crisis of legitimacy.
There has been no real political reform. Many in the higher echelons of the party recognise the need for devolving political power to the people, and want to start down that road. Till 2007 the politburo was in favour of it. Since the onset of global recession, falling employment in the export industries and a consequent rise in discontent, the leadership has reversed direction.

INDIA

You mentioned that there was a tendency to ascribe India’s economic problem to the Indian policy- makers’ decision to adopt Soviet-style centralised planning and to use it to impose curbs on the growth of the Indian private sector – a kind of ‘socialism-lite’. Is this accurate?
Yes, this is accurate. But my entire endeavour in the Indian chapters is to show that this conclusion is both superficial and wrong, and that India was pushed from a very mild form of central planning, somewhat like the South Korean model of the seventies and eighties, into full-scale Soviet-style planning by a huge foreign exchange crisis in 1956-57.

You ask the question of why India from 1947 to 1997 had such a remarkably low growth. Have you discovered why?
It was not because, or not primarily because of the inefficiency of centralised planning. At its height barely 20 percent of the economy came under it. The more important reason for slow growth was a struggle between already established large industry and a new class of small and medium traders-turned-entrepreneurs that came into being when imports of consumer goods were suddenly stopped in 1957 to conserve foreign exchange. This class, aided by rural trader-moneylenders and the richer farmers, captured political power through the ballot box, and created an intermediate, petty bourgeois regime which imposed severe curbs on the growth of large industry in order to create market space for itself. But since the small, technologically primitive, entrepreneurs could not replace the large, especially in the world market, the result was a sharp slowdown of industrial growth and with it the rate of growth of GDP.

Was India held back for some time by its “self reliance” policy which stifled the economy?
Self reliance, meaning the minimisation of imports instead of the maximisation of exports, was forced on the country by the 1957 foreign exchange crisis. This crisis was itself a product of the post-Korean war slump in textiles and primary product prices worldwide, so ‘export pessimism’ was entirely understandable.. But import substitution created the intermediate regime and it took thirty-five more years to break its hold on economic policy.

You describe contemporary political life in India in the same terms one would describe Italian or Russian politics. Have things degenerated so much? Are cronyism and bribery now the norm?
India is nowhere near as corrupt yet as either Russia or, I suspect, Italy. Nor is cronyism particularly evident, because competitive politics which feeds on stories of corruption in high places has forced a large measure of transparency onto the governments’ regulatory mechanisms. But ‘corruption’ has to be differentiated from ‘extortion’. The latter is rampant in India. Nothing gets done without a kickback. The bureaucrats are shielded from prosecution, or even demotion, by an article of the constitution which was originally meant to shield British officers from harassment in the courts by smart Congress party lawyers in the 1930s. This clause was smuggled into the 1948 constitution without anyone realising its implications.

Extortion by the bureaucracy at every level of interface with the public is further aided by Indian law. Since it is based upon English Common Law, there is no way of penalising the government for the work that it does not do. This is because under Common law the relationship between the government and the citizen is not one between equals, and is above all, not a contractual one. This makes extortion by bureaucrats, petty and not-so-petty, fatally easy.

India’s economic boom has triggered social unrest as well, has it not? Is it comparable to China?
Unrest seems far more widespread in China but is, as of now at least, far less organised than it has become in India. In India for decades a disproportionate share of the growth that took place was in Agriculture. As a result it did not create the extreme inequality of incomes we see in China. When industrialisation picked up speed after 1992, it did start creating inequality. But the process has been mild so far. The only exception is the bottom six or seven percent of the population, consisting mostly of tribal people in the mineral-rich central belt of India. These have become the victims of the economy’s hunger for land, minerals and infrastructure. It is these people who are fighting back today and they are being skilfully organised by the Maoists, who are a leftover old guard of communists who have suddenly found their vocation and are gathering huge amounts of support.

You cite another piece of data highlighting the fact that between 1998 and 2003, 100,000 farmers committed suicide, what is going on?
This is the result of a complex interaction between conventional economic growth within the framework of the nation state and Globalisation. Most of the suicides have taken place among cotton farmers. In the pre-liberalisation era cotton prices were set by the government to protect the farmers’ incomes . So they did very well. Since imports of textiles were banned it was easy to pass on the small extra price to the consumer. But after economic liberalisation when textile imports were allowed, tariffs brought very sharply down and restrictions withdrawn on production by large Indian mills, these had to face competition not only in the world market but also, for instance from Chinese textiles, within the domestic market.
They responded by a) switching production to superfine textiles for export; b) importing a large proportion of the long staple cotton they needed for their manufacture; c) lowering import duties to a mere 5 percent against the WTO bound permissible tariff of 90 percent; and d) prevailing upon state governments not to raise support prices any further, even though the cost of farm inputs continued to rise. Within three to four years in the late nineties, cotton farming became a very high risk occupation.
Since there was a simultaneous rise in the unwillingness of the banking system to take on high-risk debt, more and more farmers began to borrow from moneylenders who charged 60 to 70 percent simple rates of interest per annum. Some of the farmers who are unable to pay choose to write off their debt by committing suicide.

Many of the problems you speak of relating to India’s woes, such as party funding and investment holidays, seem to be a criticism of the policies of Indira Gandhi, is that true?
Not specifically. She did mistake populism for leftism and deliver India into the hands of the intermediate regime, but the key decisions that made this happen commanded near-unanimous support within the Congress party. Another prime minister would most probably have done the same things.

It seems curious that India never actually abandoned its failing economic policies but kept tweaking them for 50 years. Is there a reason for that?
The political power of the intermediate class described above. Its members posed as socialists and appropriated Nehru. Any economic liberalisation became anti- Jawaharlal Nehru. No one in the Congress could face up to this criticism. It took five foreign exchange crises to break the hold of the intermediate class.

Map of India (detail) Author R. Castelnuovo from Wikimedia Commons

Map of India (detail) Author R. Castelnuovo from Wikimedia Commons

 

CHINA AND INDIA

You suggest that both the Chinese and Indian governments have become “Predator” states, can you explain this?
Both States are predatory in two ways. First, they use a variety of instruments, such as taxation, fees, penalties, price fixation and land appropriation to capture a share of the savings and assets of the people for ‘development’. The owners however are not given a choice on whether or not they want this development. Nor does the state hold itself accountable to them. The beneficiaries are the cadres of the state, or private investors , for whom the resources have been appropriated. Whatever benefits finally accrue to the public – the real financiers of the development, do so by way of ‘trickle down’. They are a hoped-for consequence, but not the prime goal of the appropriation.

The second form of predation is far simpler. In both countries civil servants and political leaders trade the permission to invest, and to use the sequestered resources of the people, for personal kickbacks from the investors. In both countries this has been made ridiculously easy by creating a state structure in which civil servants are wholly unaccountable to the public for their performance.
The true irony of the situation is that in China people are disempowered by the deliberate abstention from democracy. In India they are disempowered by the working of democracy.

You compare India and China saying that India has an infrastructure deficit and China a management and know-how deficit, but China has an advantage inasmuch as it has a 15-year head-start over India in its progression towards market capitalism.
The fifteen-year head-start explains why China’s GDP caught up with Inda’s in 1981 and is now more than twice as high. In terms of structural change towards market capitalism, China has not even reached the point at which India was in the 1980s.

You mention almost as an aside that relations between the two countries over the last 50 years had been improving but that recently relations had seriously deteriorated due to border disputes. What is happening on this front?
The underlying cause of tension is China’s utter failure to assimilate Tibet after conquering it, and its constant temptation to blame India for thwarting its efforts by providing shelter to the Dalai Lama. Things flared up in March 2008 when there was a wide-spread uprising in Greater Tibet. The two countries have managed to contain the tension which resulted, but it is likely to flare up every time the Chinese suffer a setback in Tibet. Pressure on our border is their way of retaliating for the support we are giving to the Dalai Lama and warning us against going any further.

In the past few decades China has concentrated on manufacturing whereas India has concentrated on global services, is this still true?
Yes

You pinpoint in a an interesting parallel, the capitalist boom in India led to the elimination of the “Intermediate” class but in China capitalism appears to be being carried forward by the equivalent cadres, a sort of Intermediate class too. Capitalism eliminated a problem for India and created one for China. Is this true? And how would you define this Intermediate class?
I have defined the intermediate class and the intermediate regime above. But other definitions can be found in Michal Kalecki’s “The Politics and Economics of Intermediate Regimes”, and in the first few pages of Marx’s Communist Manifesto . In the latter he describes the class of artisan petty bourgeoisie and others as being not progressive but reactionary because their purpose is to ‘hold back the wheel of history’.

Is it true that China is obsessed with social disorder and India with inflation and currency stability, both for historical reasons?
This is absolutely true in the case of China, but India’s allergy to inflation springs from the sensitivity of the electorate to inflation. . It isn’t historical in origin, but relatively recent.

You say that the Chinese government is very aware of the possible social disorder that may be triggered by its economic reforms, you do not say as much for the Indian government, why is that?
The existence of democracy has made Indian policy makers complacent. They believe that new pressures will automatically get reflected in new political demands. That will lead to an accommodation designed to gain an advantage in the next elections. They have not realised that the process of accommodation and cooptation only works between ethnic groups. In short it prevents vertical breaches from growing wider. The same democracy has been insensitive to class struggle, which divides society horizontally. That is beginning to change under the spur of the Maoist uprising in central India.

Finally, did India and China respond differently to the global crisis? Or did they both employ similar stimulus packages?
Both devised very large stimulus packages. But the resemblance ends there. China has spent almost nine tenths of its package on infrastructure and industrial modernisation. India has spent 95 percent on stimulating urban and rural consumption. Both have done the wrong thing. India needs more and better infrastructure and did not get it. China needs higher rural incomes and will not get them because nine-tenths of the additional expenditure is taking place in the urban areas.
But the political impact of these two packages is proving very different. China’s package is widening the urban-rural income gap, which is already colossal. It will therefore feed discontent. India’s is closing, or at least not widening the gap. Its overall political impact is a stabilising one.

*The Twilight of the Nation State: Globalisation, Chaos and War. Pluto Books , London, / University of Michigan Press, Ann Arbour, 2006.

Prem Shankar Jha is a former information advisor to the Prime Minister of India and former Editor of and contributor to Hindu, Hindustan Times, Economic Times and Financial Express. He has recently been a visiting fellow at the Fairbank Center at Harvard University and the visiting chair in India’s Political Economics at the Paris Institute of Political Studies. Among his recently published works are “Kashmir 1947: the Origins of a Dispute” and “The End of Saddam Hussein’s Iraq – History through the Eyes of the Victim”.

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