The Myth of Chindia

Rising regional tensions undermine a new book’s rosy forecast for Asia.

Whether or not China and India succeed in the arduous task of strengthening national unity, the development of Asia’s two giants will do much to determine the world’s outlook in this century. In Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the Twenty-First Century, University of Toronto economist Wendy Dobson argues that both giants still face difficult reforms, despite double-digit growth. In the case of China, the growth miracle of the last decades, mainly the result of injecting foreign capital into the cheap domestic labour market, was the easy part. The country will now have to make its growth more balanced and sustainable. As if this were not enough, India is just starting its industrialization process and might soon turn into a formidable competitor. But India faces severe tests of its own, with continued population growth and dominance of an unproductive agricultural sector being two of the most glaring.

Dobson summarizes the challenges facing both countries as each continues its economic transition, enriching her discussion by clarifying the role of institutions. She gives a very transparent overview of the differences between the two nations’ economies in terms of governance. China excels in stability, regulatory capacity and effectiveness, while India leads in accountability and the rule of law. Her analysis is embedded in a rich social and historical context that focuses on the imperial bureaucracy in China, the caste system in India and the colonial legacies in both countries.

The People’s Republic has still not relieved itself entirely of ancient bureaucratic traditions. As Dobson puts it, “the Chinese Communist Party’s pragmatism and focus have delivered economic growth, but its determination to retain its grip on power could yet make it a victim of its own success.” Meanwhile, India is struggling with political inertia that is partially nourished by antipathy toward the West. “India’s disconnect is between the wealth of political freedom and the poverty of economic opportunity for Second India,” Dobson points out, referring to the huge portion of Indian society that has so far failed to see the benefits of economic reform. In both countries, she posits, further reform is only possible when leaders assert their authority, but the reform outlook in each is entangled in an impenetrable thicket of competing interests.

China and India both face enormous demographic challenges. In China’s case, while population is projected to begin shrinking after 2030, thanks in large part to the one-child policy of previous decades, the ongoing migration from rural to urban areas will continue, bringing with it a need for rapid job growth. For India, the demographic imperatives are even more glaring, with its total population projected to continue growing for the next four decades (overtaking China’s by 2030, if current estimates are correct), while the growth of its working-age population rises at an even faster pace.

Given these challenges, how will each country generate sufficient new jobs? The transformation of labour market institutions could provide part of the solution, Dobson observes. In China, labour contract law in combination with a growing demand for skilled workers mitigates the negative consequences of the aging population. India’s industrialization can be triggered by lowering labour barriers between agriculture and other sectors. Education, mobility, empowerment and gender equality will therefore be preconditions.

Dobson also rightly highlights the importance of restructuring financial institutions. Chinese mercantilist policies still impede the development of a healthy banking sector and distort monetary policies. She points out that liberalization could allow smaller companies to boost their production by as much as 13 percent. But in India, too, the effectiveness of the financial sector is undermined because banks are forced to invest in unprofitable niches.

Dobson presents a balanced assessment of another interesting dimension, that of innovation. The opening of China’s economy has permitted major foreign companies to gain experience in China’s distinctively structured markets, and now domestic firms gradually start to compete with foreign suppliers, especially in the production of high-tech goods. Despite stories about India as an info-tech miracle, the reality is less shining. Apart from some “enclaves of excellence,” the country has not taken advantage of international know-how or benefited from its public research institutions even in this most pivotal of growth sectors. And its general education system still exhibits significant failings that mean illiteracy rates are shockingly high. “The constitution was amended in 2002 to mandate free and compulsory schooling for all 6- to 14-year-olds,” Dobson writes, “90 percent of whom now go to school … Still, the dropout rate is high, and parental choice and social barriers inhibit educational access for many.”

All these observations add to an insightful and realistic account, but Dobson then makes a leap that is less easy to understand. She concludes her analysis with the prediction that the vast bulk of the institutional, social and economic problems faced by both countries will likely be overcome. “Economic cooperation is gaining momentum—a joint working group already oversees the bureaucratic planning and implementation of closer cooperation,” she enthuses. China and India, she suggests, will probably even side with the United States to lead the new world order. “The gravity shift is well underway.”

The question is, of course, whether and how China and India will pull themselves out of their vast socioeconomic and political problems. Dobson rightly suggests that more reforms are necessary, but how realistic is it to expect they will occur? Take the recent record of India’s national government as an example. Despite a stronger mandate after last year’s election, Prime Minister Manmohan Singh is still struggling to translate his bold economic rejuvenation strategies from paper into practice. Even optimists have to strain to discern substantial progress in reducing red tape or in opening up the domestic market to foreign investors. Yes, reforms in a vast country like India take time, but does India have that time? As Dobson herself explains, the informal economy in the large cities is no longer able to absorb the influx of new migrants. Neither is the agricultural sector making a difference. Singh clearly has a mandate to reform, but if he fails to make tangible progress, the small window of opportunity will soon close.

For China there is no guarantee that the process toward a harmonious society will be completed. Not that there have not been significant accomplishments. The fourth post-revolution generation under President Hu Jintao has shown great effort in making growth more inclusive. Large infrastructure programs are drawing wealth to previously overlooked regions in the interior, while new subsidies are expected to increase the purchasing power of poor peasants. China’s progress in research is remarkable too, as shown by its emerging reputation in the engineering of green technologies.

But without significant further development in its domestic markets, the People’s Republic will continue to be prone to setbacks and social instability. Most of its export earnings have ended up in war chests of large companies. Rather than letting workers benefit by increasing wages, China’s new capitalists prefer to speculate on the stock market, take advantage of soaring real estate prices or buy assets abroad. And if wages were to increase, companies would simply relocate to cheaper countries.

The only way to escape this predicament, as Dobson indicates, is to increase the added value of production gradually by raising the quality of labour. But this will be a long-term process and, in the meantime, young educated Chinese might not have much patience. Moreover, if the People’s Republic manages to set this process in motion, it remains to be seen whether the industrialized countries will allow China to catch up. The growing high-tech content in Chinese exports has already triggered suspicion in Europe, Japan and the United States.

For these reasons, it will be more tempting for Indian and Chinese politicians to resort to populist policies rather than aim at what looks increasingly impossible. In a desperate attempt to slow down political fragmentation, India will slide once more into a new downward spiral of protectionism and nationalism. In Beijing the dark red will continue making a comeback. Already, invigorated by the global economic crisis, socialist nationalists are lambasting the neo-Keynesian policies of Hu while arguing that the state should re-exert its grip on the Chinese market. Compared to the previous governing generation under Jiang Zemin, the current leadership has been cautious in initiating new experiments with political democratization. If the next generation has the slightest fear that economic progress is at risk, it will back down from promoting policies such as grassroots elections or intra-party democracy.

The main danger for the transitions in both China and India is the growing cleavage between expectations and the ability of the state to meet them—a trend that will also have an important impact on the foreign policies of both countries. At international forums state leaders give enthusiastic speeches about multilateral cooperation, free trade and enhanced regional integration in Asia. They highlight the optimistic prospects of creating a new international division of labour in which each country can strengthen its comparative advantages. But in private, Indian and Chinese decision makers increasingly acknowledge that this win-win politics is elusive.

Especially with regard to their bilateral relations, pessimism has been on the rise. First and foremost, the economic division of labour that is expected to underpin cooperation will probably never materialize. True, bilateral trade is growing spectacularly, but for Delhi it is hard to accept the soaring trade deficit that exists between the two countries and the fact that exports are largely limited to raw materials. Of equal concern for Indian observers is that China is increasingly eating into India’s traditional strongholds such as outsourcing or informatics. The Indian government has announced a goal to boost its own manufacturing sector, and it has set high targets for sectors such as the car industry, electronics and chemicals. Should India succeed in achieving these objectives, it would then vie with China as a formidable competitor in key foreign markets, exacerbating bilateral tensions. The fact that domestic demand in both countries will continue its modest growth will by no means ease this competition, because industrial production is growing much faster than consumption, and labour intensity is decreasing. As a result, more gross domestic product will be needed to create the same number of jobs.

The prospects of deepened economic cooperation are thus dim, and any touted benefits of this cooperation are certainly not convincing enough to reverse negative perceptions that have long clouded relations between the two countries. Ever since the Sino-Indian War of 1962, Indians have looked at the People’s Republic of China with suspicion. Despite the optimism of India’s political elite, popular views of China have deteriorated dramatically in the last few years. The recent fuss about the disputed border has added to this distrust. As a consequence, the Indian government has virtually no manoeuvrability to make concessions to Beijing in negotiations for settling their historical border dispute. The Chinese too are starting to fret about India’s ambitions as a great power. In recent months, for example, the Chinese media have criticized, in unusually sharp wording, India’s alleged hegemonism in South Asia and the country’s aggressive diplomatic posture.

It would be sanguine to assume that improving trade prospects can mitigate these diplomatic contests. Dobson appears to think this will happen when she writes that “one of the most interesting future economic possibilities is a bilateral free trade agreement—indeed, the two countries have been studying the possibility since 2005.” While it is true that India and China have expanded their bilateral dialogue and signed an impressive number of joint statements in the last few years, the undercurrent remains one of distrust. China wants to keep India out of the United Nations Security Council and the East Asian community. India is selectively siding with the United States and Japan to counterbalance China. They both pursue competitive regionalism, which implies the promotion of new exclusive regional organizations as channels for projecting influence.

Nationalism is an important factor that affects all these layers of rivalry. The main objective of recent nationalism within both countries has been to aim for national greatness via integration into the world economy. But this constructive variant is not strong enough to neutralize zero-sum games. The progress that one country makes in improving its global status is seen as coming at the expense of the other. This means constructive nationalism cannot be taken for granted. As India struggles to turn itself into an open trading nation, economic reforms seem too little too late for the 300 million new citizens who will join its labour force by 2040. In China, too, expectations are growing faster than the capacity to meet them. All this could lead to a relapse into negative nationalism and the search for external scapegoats to divert attention from internal problems.

This has serious repercussions for regional security issues. While Beijing and Delhi have stressed the need to jointly tackle regional security problems, both countries are locked in severe security dilemmas. This is certainly the case in states such as Myanmar and Nepal. China and India are aware that their blind support for these countries is not conducive to stability. But each fears that if it in some way criticizes one of these regimes, the other will benefit in terms of diplomatic and economic influence. Moreover, India is deeply concerned that China will become dominant in their shared backyard. On its side, Beijing has not forgotten how India quickly hammered out important defence and trade agreements when China was under huge pressure from the West during its crackdown on Buddhist monks in 2007.

From a military perspective, the two giants have agreed to reduce their military presence along the border, but they are both refurbishing their troop numbers in nearby border regions. India has responded to alleged Chinese incursions in Arunachal Pradesh by building new air force bases and deploying more soldiers in the vicinity of the strategic Siliguri corridor. It has also positioned its navy as a gatekeeper in the Indian Ocean and recently tested a new intermediate nuclear missile that has as its sole purpose the military deterrence of China. Beijing has thus far not taken India’s military prowess very seriously, but Chinese strategists are sure to figure out a strategic response. However surreal and irrelevant these recent tussles might appear in the West, the underlying tensions between the two juggernauts should not be underestimated. India and China will likely set the tone for a new era of harsh great power politics in Asia and beyond. If so, Dobson’s breezy predictions of a largely benign gravity shift that will accompany China’s and India’s emergence on the world stage could be a good deal more problematic than she leads readers to believe.