The Hindu Business Line : OECD's survey of China — Lessons from the Middle Kingdom

In its first country survey of China, OECD says that the Middle Kingdom's economic impact on the world has been accentuated by its rapidly increasing openness to trade. Free play of market forces, opening up more and more sectors to foreign investments and readiness to change laws, including on property rights, have helped China's rapid global integration. Can India, especially the political class, learn from all this, wonders G. Srinivasan.

FEW neighbours of India have been a source of such envy as China has been. The late Murasoli Maran, during his first visit to China as Commerce and Industry Minister in 2002, was captivated by the Special Economic Zones. The Finance Minister, Mr P. Chidambaram, on arecent visit to Shanghai, also extolled the Middle Kingdom's excellent economic performance. The fact remains that India is obsessed with how the Chinese have converted their quest for progress into a conquest of constraints.

If manufacturing excellence and massive infrastructure are keys to success, India is way behind — currently it is the services sector alone that is powering India, though agriculture and manufacturing are its traditional activities. That is why Mr Chidambaram said in Shanghai, after inaugurating the `Made-in-India' show, that more than what India can teach the Chinese, it is up to the Indians to learn from China.

The Finance Minister, at his address at the Assocham annual general meeting in the Capital recently, said: "China is clearly at least ten years ahead of us in infrastructure and manufacturing. They are growing at a furious pace. We are growing at a satisfactory pace. If we don't do more, and that too in double quick time, I am afraid the gap between China and India will increase." The point Mr Chidambaram made to captains of industry is an admission of the stark reality of the difference between the economic performance of India and China.

The United Progressive Alliance (UPA) Government would do well to remind its allies of how ideological rigidities can impede second-generation reforms. It would also be instructive to look at the Organisation for Economic Cooperation and Development's first country survey of China.

What is admirable about the OECD survey is that it readily concedes that "it documents the encouraging extent to which structural reforms in China have triggered a durable process of economic development, at a time when there are many signs that, over the past two decades, this process of economic convergence has stalled or even backtracked in OECD countries".

Extremely bold changes have been introduced in the past five years in China, it says, adding that "few OECD member governments have embarked on reforms that have restructured or closed hundreds of state enterprises every month over a five-year period — a development that is still continuing — or have ended life-time employment practices and, in the process, stimulated a nation-wide reallocation of resources".

Stating that the pace of economic change in China has been extremely rapid since the start of economic reforms just over 25 years ago, the OECD report says economic growth has averaged 9.5 per cent over the past two decades and appears set to continue at that pace for quite some time.

While average incomes are still below those in other middle-income countries, large parts of China have reached the income levels seen in some developed East Asian countries just one generation ago and are proceeding along a similar swift catch-up path.

Many Chinese industries have become completely integrated into the global supply chain. Here, the OECD makes no bones about the fact that China's impact on the world economy has been accentuated by a high and rapidly increasing degree of openness to trade, with the average of imports and exports signifying 35 per cent of GDP in 2004.

With such a high degree of openness, OECD's medium-term baseline for the evolution of the world economy suggests that exports from China would overtake those from Germany in 2008 and by the beginning of the next decade, push ahead of the US and might represent 10 per cent of world trade in goods and services at that point. Contrast China's feverish trade growth with India's goal of achieving one per cent share of the world trade by 2007, and one can see the miles India needs to traverse, despite the much-acclaimed superiority in the knowledge economy and information technology.

Even as the debate rages on about opening up more sectors to foreign direct investment in India — be it retail, civil aviation or financial services — with political compulsions dictating the Government effort, it is well-known that the rapid integration of China into the world economy has largely been the result of foreign companies establishing a manufacturing base in China.

As the OECD report puts it, foreign-controlled companies dominate exports, accounting for over half of all overseas sales. Foreign firms also serve the Chinese domestic market, though their share of that market, at 13 per cent, is much less than that of the export market (55 per cent).

It is also instructive to note that the presence of foreign companies in the domestic market appears to enhance competition. "It is in the industries where foreign competition is the greatest that domestic companies have increased the share of sales revenue devoted to research and development the most," the OECD survey says.

According to the OECD report, the extraordinary growth story of China has been driven by changes in government economic policy that have progressively given great reins to market forces. The momentum towards a freer economy has continued into this decade with membership of the World Trade Organisation resulting in the standardisation of a large number of its laws and regulations and the prospect of further tariff cuts.

This year, regulations that prevented privately owned companies entering a number of sectors of the economy, such as infrastructure, public utilities and financial services, were abolished. As the growing clout of the private sector in bolstering the economy makes it all the more crucial to further modernise the legal framework for business, the Chinese government is preparing legislation in three vital areas: Bankruptcy law, company law and the implementation of the constitutional amendment on property rights.

While Chinese banks accumulated bad debt of 4 trillion yuan, mostly as a result of loans disbursed before 1999, the OECD report says that with a reform of the banking sector infrastructure in place, the Government has embarked on a strategy of re-capitalising the major banks and preparing to list them in the stock market.

Alongside, the Government is also moving in the direction of liberalising the capital market by easing restrictions on the sale of the state's shares in quoted companies. A point to ponder is that the number of state-controlled companies in China has halved over the past decade, from a high of over 3,00,000 in 1995 (the first year state "control" was assessed) to less than 1,50,000 in 2005.

Though the drop reflects a mix of closure, sale and consolidation — offset, in some cases, by new entries — the withdrawal of the state is substantial, by any measure. Employment in state-controlled industrial companies fell by 40 per cent from 1998 to 2003 as 16 million workers were laid off. Increasingly hard budgets, in the face of worsening financial performance, became the spur for restructuring and privatisation. India started disinvestment post 1991 reforms, with the actual process beginning in the late 1990s. The exercise has all but been abandoned since 2004.

There is little mystery about China's success. Its continued evolution of economic policies in the areas of the allocation of capital, labour mobility, urbanisation and the creation of an improved framework for the development of the private sector should ensure that this development momentum is sustained. This is the broad message of the OECD survey. It is time China-admirers in India imbibed some of this urgency and efficiency.

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