The Hindu Business Line : Is China worth emulating?

China has not been successful in attracting "huge" amounts of foreign investment as is being claimed. The real growth rate may be less than India's. Poverty and unemployment are rising again after some initial improvement. It appears the Chinese government has created a façade of high foreign investment and growth rates in order to attract the limited amount of foreign investment that it is getting. China may be behind India in each of the indicators if the whole country is compared. The façade will fall away if the Chinese government admits this reality and this limited inflow of foreign resources too will be cancelled.

THE Finance Minister, Mr P. Chidambaram, has quoted the example of China in defence of his move to open up the aviation, insurance and telecom sectors to higher levels of foreign direct investment.

He said, "Signals must go to the world that India is open to investment... If we do not follow China on foreign direct investment, we will be left behind in economic growth." Such indeed appears to be the case.

According to World Bank data, China received private capital of $47 billion in 2002 against India's $5 billion. And, China's growth rate was 9.7 per cent per year during 1990-2002 against India's 5.7 per cent. But can we believe these figures? After all, the World Bank only reports the figures provided by the member governments.

Mr Guy Pfeffermann, chief economist of International Finance Corporation, has argued that China's FDI was actually half of the reported levels of $40 billion, while India's may be as much as $8 billion rather than $2-3 billion. China's FDI numbers include a substantial amount of round-tripping: A large amount of Chinese black-money is recycled via Hong Kong and sent back to the mainland as FDI.

Round-tripping, in fact, accounts for one-half of China's FDI inflows which, thus, reduces the reported level from $40 billion to $20 billion in 2000.

In contrast, India's figures of $2-3 billion do not conform to the standards of the International Monetary Fund as they exclude reinvested earnings, subordinated debt and overseas commercial borrowings which are included in the FDI numbers of other countries.

Accordingly, as a share of their respective economies, FDI levels are roughly on a par in both countries. Mr Pfeffermann's calculations, thus, suggest that there is not actually such a huge difference in the relative importance of the FDI between the two countries as is popularly believed.

If China's growth rate is higher than India's then it has to be attributed to higher rate of domestic savings, tougher anti-corruption rules, and so on, and not to higher foreign investment.

The allegedly higher growth rates are also suspect. According to an article in the The Economist titled, "China — How Cooked Are the Books?" in 1995, "the GDP growth rate suggested by provincial data was three percentage points higher than the figure of 10.5 per cent produced by sample surveys."

Thomas G. Rawski, Professor of Economics at the University of Pittsburgh, has estimated growth rates in China using alternative data. He points out that energy consumption was down by 4.3 per cent in 1997-98. And, despite the impact of price wars, which routinely slashed ticket prices by 30-40 per cent during 1998, passenger miles grew by only 2.2 per cent on domestic routes. "It is difficult to imagine that GDP could have grown faster," he says.

His guess would be to place real GDP growth for 1997/98 between -2 per cent and +2 per cent against 7.8 per cent claimed by the Chinese Government.

The situation regarding poverty is no better. According to an article in China Daily in July though China lifted more than 200 million people out of poverty since the late 1970s, "the speed of poverty reduction has seen a slowdown, and last year the number of people living in poverty rose by a surprising 800,000."

The World Bank recently sanctioned a five-year, $247-million South West China Poverty Reduction Project. The project aims to benefit 635,000 households in the poorest communities of 35 remote counties in Guangxi, Guizhou and Yunnan provinces. In the project villages less than half the population grows enough food to meet basic nutritional requirements.

Entire households typically have cash incomes of only $15-35 per year, says the appraisal report. That would be about Rs 700 to Rs 1,600 per year. One daresay even people of the poorest districts in India would have higher incomes.

In an article titled "The Political Economy of China's Declining Growth," Prof Rawski estimates the "annual increment to formal employment plunged from 13.7 million in 1994-95 to 8.6 (million) and 1.4 million in 1995-96 and 1996-97, and then into negative territory in 1998."

These data present an altogether different picture of China. China has not been successful in attracting "huge" amounts of foreign investment as is being claimed. The real growth rate may be less than India's. Poverty and unemployment are rising again after some initial improvement. It appears the Chinese government has created a façade of high foreign investment and growth rates in order to attract the limited amount of foreign investment that it is getting.

Beijing has pushed all the country's resources into select areas which are showcased to foreign investors. China may be behind India in each of the indicators if the whole country is compared. The façade will fall away if the Chinese government admits this reality and this limited inflow of foreign resources too will be cancelled.

The true condition is that the Chinese domestic savings rate is about 45 per cent which is nearly double India's 23 per cent. But China's growth rate may be less than India's because foreign investment is eating away half of China's savings.

The Chinese are depositing their huge savings in government banks. The Chinese government is pushing this money into investments in select areas. The foreign investors are being assured by this investment-led growth and they too are coming in some measure.

Focus on foreign investors is debilitating domestic businesses. There is less domestic demand what with the low purchasing power of the people. The growth of China is like that of the former princely States in India.

The Maharajas created huge palaces and beautiful fountains while the people suffered. The capital cities grew while villages became impoverished. Similarly, some economic growth appears to be taking place in select areas while China remains impoverished.

Mr Chidambaram should perhaps set up a commission to study the growth model adopted by China. India has largely moved in the right direction due to the opposition of the Swadeshi lobby earlier and that of the Left now. The Finance Minister should not push the country into a Chinese sinkhole unthinkingly.

(The author, a freelance writer, can be contacted at bharatj@nda.vsnl.net.in)

More Stories on : Economy | Foreign Direct Investment

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Going beyond MSP

Is China worth emulating?

Yearning for authentic governance

Inflation is all gas

Forex market intervention for transition economies

Fund of funds for efficient asset allocation

New sovereigntism

Pakistan plots return of Taliban

PF rate