China

Unlikely Winners : When Doing Nothing Is Better Than Doing It Wrong

Sanjeev

Sanjeev

So onto China, which is much easier to deal with. It is just a larger version of Japan. If Greece could be ignored, simply because it was 2.6% of European GDP, Japan can be ignored in tomorrow’s developing picture of the world economy, simply because their remaining 90 mn population will be just 1% of the world’s 8 billion people. So whether Japan sorts itself out or not, will not matter by 2050.

Declaimer: This article written was originally in October 2010, and some of the data points may be outdated.

China has everything that Japan has, but king-size. In Dollar terms, its economy has just beaten Japan to become No.2 in the world. Its huge pool of savings (55% savings rate compared to Japan’s peak of 32%) has already created enough trouble around the world; its Fixed Asset formation has swamped the world with excess capacity, and its trillion-dollar surpluses will create tsunamis when they come onto the currency markets. It is aging prematurely, although thankfully, without the welfare state entitlements of the West. The problems it has created are not too old, but it can just look at Japan to see how it will all end if it continues with its current trajectory. It has to get its domestic consumption up because there are simply not enough people in the rest of the world to consume what it can produce.

Just think of what would happen if we take current trends to their logical conclusion. Suppose all of China’s people, 14% of the world population, were to shift into manufacturing. With manufacturing set to go below 15% of world economic output, and assuming that Chinese productivity is at the world average, we would have a world swamped permanently with Chinese goods. Now just assume a doubling of Chinese productivity (which is not very far away), and we have the same situation as I have outlined above. So if Chinese consumption does not pick up, the country most hit will be China itself. That is just Japanese history repeated with bigger consequences.

To promote a consumption-oriented economy, China will have to first build its services sector, which calls for a cultural change. Remember, these services will have to be non-tradeable, otherwise, we will end up with the same glut in worldwide (service) output that we have in manufacturing. But non-tradeable services cannot be increased by Govt fiat, which is what China has traditionally been doing.

The roadside entrepreneurship that you see in India, where every new colony in Delhi already has a milk supply, an electrician/ plumber, and a quack doctor before anybody has even started living there, is completely missing in China. There is no concept of ownership of assets, and private ‘enterprise’ at the lowest level is missing. This is what shows up in the GDP numbers. The momentum that Indian growth has is internally driven and funded, with Udupi restaurants providing employment, income, and a self-generating savings rate, enough to take care of capital costs. In a village economy, a single Udupi restaurant will multiply itself every 5 years, thereby generating a 20% growth rate after depreciation and notional interest.

Chinese investment is mostly state-funded and ‘mandated’. That is why its growing parts look so good, while India’s growing parts look so chaotic. On every office block in Shanghai, there is no defacing paint that shows you how much of the building has been built by adding to banking NPAs; in India, you see entrepreneurial ‘jugaad’ everywhere, which must be done to keep the cost of assets within the purchasing power of people; there is no Bank NPA to fund the difference.

India will never see a Xanadu come out of the wilderness like you see Chinese cities come up in the provinces for no apparent logical reason. There is an ‘evolutionary’ process to India’s development: a Lavassa can only come up in Maharashtra, not in Bihar. At the same time, there will always be many Indias, but there may only be 2 Chinas: the one we see and the one we can’t.

In this worldwide scan. I am going to ignore the resource economies (Russia, Australia, Canada, Brazil, Chile, and South Africa) because their fundamentals are dependent on the growth and stability of India and China. Governance does matter, especially in Russia, Brazil, and Chile, where improvements (in governance) will telescope economic growth coming from new resource finds and better exploitation of old ones. I fear that these economies will be prone to sudden bouts of volatility coming from the pulls and pressures of commodity price movements, which will exacerbate the movement of gold prices. Even if they do well, it will be with very high volatility, making the ride no fun at all.

This brings me to the last and most important region: Asia. I have already mentioned that I am looking for the next Indonesia, so it is obvious that (Indonesia) qualifies. Singapore is just a ‘broker’ to Asia’s trade and investment flows vis-à-vis the rest of the world. The Middle East will be rendered irrelevant because of Clean Tech, which has already become an inexorable ‘big trend’ that will destroy anybody who tries to resist. The cost of energy will go to zero; any country that has not prepared for that will see its economy marginalized. The survivors will be those who have the people to build on free, clean energy, and use it to build a 21st-century economy.  That is one of the reasons why I have ignored any economy that is entirely dependent on non-renewable resources, e.g. Chile and Russia. With zero-cost energy, recycling will become so viable that commodity prices of virgin resources will be capped.

God is probably Indian, he just got lost in the melee of the Kumbh Mela. With the background of the Commonwealth Games, it might sound ironic to talk about Indian Governance improving. But just think about it: about Rs.10,000 cr wasted on the Games (out of about Rs.30,000 cr spent) is very quickly recovered by the Govt cutting down on Energy Subsidies of Rs.30,000 cr per annum. Diesel and LPG will contribute another Rs.20,000 cr, besides the Rs.100,000 cr ‘windfall’ from Telecom.

The Govt has got out of a range of (economic) activities that used to contribute to leakages back in the bad old days: how much money used to leak in the building of an airport/ port/ road, etc. Today, a chunk of this is in private hands. Can you imagine a world-class airport like the Delhi/ Mumbai/ Bangalore airports, ever being built by the Govt? If you thought the Govt did a good job with the Delhi Metro, watch what Mumbai is doing with its JV in the Mumbai Metro with Reliance ADAG…

The RTI has ensured that numbers are real, otherwise, there used to be the hyperbole that political parties would mouth about the country being taken to the cleaners: hypothetical numbers, like the estimated Rs.20,000- 70,000 cr of ‘revenues’ lost because of 2G, as if that is the amount of money given as bribes.

The important ‘big trend’ is: that the Govt is getting out of business. From an Indira Gandhi Govt that wanted to get into banking, to a Sonia Gandhi Govt that is getting out of even the provision of basic infrastructure and city building, we’ve come a long way, haven’t we?!  Rural Telecom infrastructure is now in the hands of the new private telcos, and the public sector telcos are going bankrupt, have you noticed? Agricultural markets are now impacted by grain trading models run by private companies, not the Food Corp. Believe it or not, I dream that Govt corruption will be marginalized if we get 2 generations of good governance.

The UID Project will reduce corruption and leakages, cleaning up the food subsidy model that we have been following. Next will follow the Fertiliser Subsidies, and we are on our way. Govt will not get smaller, but it will do other things: provide regulation, for example. Individuals will still make their money, but the wastage embedded in the Govt actually ‘doing’ things rather than regulating them, will be reduced.

And growth will take care of the rest….

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