Friday 1 October 2010

India-Pak, learn from China’s economy (PO)

M D Nalapat

When Bill Clinton fought against George Bush Senior in the 1992 US Presidential elections, he kept the focus on the economy, going so far as to get coined a motto: “It’s the economy, stupid”, thereby ensuring that his entire team focused on bread and butter issues. Clinton understood that voters vote with their wallets, rewarding those who are seen as promoting prosperity, and punishing candidates whose policies may perpetuate poverty. If Barack Obama got elected as US

President two years ago, a large part of the explanation may lie in the fact that his Republican Party predecessor, George W Bush, created an economic slowdown by going along with policies that promoted uncontrolled speculation and greed in business and banking circles. Even more devastating to US prosperity, Bush Junior ran two wars in the most expensive way possible, funneling contracts to high-cost US suppliers (many close to Vice-President Dick Cheney and other key supporters of his) rather than source materiel from the most cost-effective source, the way the US military operated during the Vietnam war.

Barack Obama’s obsession for more than two years prior to the 2008 elections was to get elected, and these days, his sole passion seems to be to get re-elected. In order to ensure this, he is willing to adopt policies that appeal to the voters, but which can destroy the long-term health of the US economy. An example is outsourcing. There is no way that he can expand the coverage of healthcare and other services without relying on low-cost providers such as India. However, in order to win a few extra votes, he has followed Bush-Cheney in seeking to steer procurement only to US companies, in violation of WTO commitments and the rules of sound economics. The consequence is likely to be a ballooning of costs that may wreck his programs, most of which are very sound and indeed admirable, such as universal healthcare to US citizens. Each vote that he gains through preferring expensive service providers in the US rather than cheaper - and equally good quality - ones in India will cost him five votes as citizens digest the higher costs and lower coverage of Obama’s protectionist option .

Watching the diplomatic dance between India and Pakistan, such as at the UN General Assembly between the two Foreign Ministers, what emerges is the fact that the India-Pakistan interaction almost totally avoids any serious discussion of economic issues. There are many ways in which the two countries can benefit from each other, thereby raising living standards. In both countries, several tens of millions of citizens are living in poverty, thereby making it desirable for efforts to be made that can reduce this percentage, the way it has happened in East Asia. However, unlike East Asians - who are smart enough to keep the or focus on the economy - we South Asians concentrate on other issues, thereby losing the chance for mutual prosperity. Both India and Pakistan need to pay attention to a common friend of both, China, which under the leadership of Hu Jintao is concentrating on economics and in the process, improving the lives of hundreds of millions of ordinary Chinese.

Consider the facts. By 2008,the Peoples Republic of China had overtaken the UK in the economic rankings, and in the next year, beaten Germany. This year, the PRC became the world’s second-largest economy, displacing Japan, and is on track to become the globe’s biggest economy within two decades. Indeed, this year the manufacturing sector of the Chinese economy has surpassed that of the US, a country where a careful assessment of its finances would show that it has a debt of more than $70 trillion dollars, or five times more than the Gross Domestic Product (GDP). Such a high level of debt would indicate that the US economy is in fact overvalued, the way several European economies are, and that the actual GDP may be closer to $10 trillion rather than $13 trillion. In a few years time, the biggest component of the US budget will be interest payment on the debt earned by foreign countries, especially China. Interestingly, the Peoples Liberation Army (PLA) of China can fund a lot of its expansion from the interest payments received from the US!.

Even during the time when Mao Zedong was in charge, China was careful not to overstep its reach. Intervention in the Korean War came only after General MacArthur foolishly decided to go upto the Yalu River and privately boast that he could take over China by the use of nuclear weapons. In the case of the 1962 border clash with India, the PLA withdrew from all the territories that it had taken over from the Indian army, in a clear sign that Beijing wanted a peaceful relationship with India. Since then, there has not been any other conflict, even during 1965 ,when India and Pakistan were at war, or during 1971,when several Indian divisions crossed into what was then East Pakistan. During the 1999 Kargil hostilities, sparked off by the strategic thinking of General Pervez Musharraf, undoubtedly a good tactician, China kept aloof, even though it reinforced its troops across the border, in order to be ready for any eventuality.

It is no accident that China has climbed so rapidly in the economic sphere. Since Hu Jintao took over as General Secretary eight years ago, he has concentrated resources on the western provinces, so that these days, they have become important sources of employment. No longer do people from faraway provinces need to come to the east coast of China to find work. They can find jobs close to their own homes. This decentralisation of economic growth to the hinterland has been a major achievement of Hu Jintao, as has been his policy of encouraging domestic R & D as well as a domestic market for Chinese companies. The wise policy of Deng Xiaoping - of “Economics in Command” - is being continued by Hu Jintao, who has broadened his vision beyond the east coast that was the focus of state attention during the decade when Jiang Zemin was in charge of the country. Interestingly, over the past year, the Chinese monetary authorities have sought to move away from US dollars and even the Euro, buying instead Japanese Yen, Korean Won and even commodities, so as to protect the economy against a sudden crash in the value of the dollar or the euro. Clearly, the bulk of attention being paid by Chinese policymakers is going to economic issues, unlike Pakistan and - to a lesser extent - India, where there is an obsession with matters other than “Roti, Kapda aur Makan”. If China is succeeding in challenging the US, it is not because of its military but because of its economy. These days, Hong Kong is becoming a financial hub that is the equal of New York, London, Zurich and Frankfurt. One of the main reasons is the fact that China is the only country in the world powerful enough to ignore US demands that it reveal the bank accounts of people on Washington’s radar. Swiss bank scurry to comply with such requests, as do those of every country other than China, where deposits in Hong Kong and Macau are safe from intrusive searches. Small wonder than hundreds of millions of dollars is flowing to these two financial centres from traditional ones in Europe. Had the Indian government got the commensense to set up offshore banking havens (such as in the Lakshwadeep Islands) or annouce an amnesty for Indian deposits in Swiss banks, several hundred billion euro may have returned to this impoverished country. 

However, so strong is the stranglehold of foreign financial institutions on the Reserve Bank of India and the Union Finance Ministry that such a proposal would never get implemented. Why? Because it would hurt the interests of the foreign financialinstititions where so many sons and daughters of VVIPs work, and where so many powerful people in india have secret bank accounts When will India and Pakistan learn that the economy is at the core of national resilience and power? That unless a country has a strong conomy, it cannot have a strong military? Both India and Pakistan are pathetically dependent on foreign countries for the supply of crucial weapons systems and for spares and maintenance. India has in effect barred the private sector from Defense production, so that those taking bribes for making decisions can maximise their illegal gains. Delhi has also prevented the export of Indian-made defense items, so as to avoid hurting the interests of the foreign armaments manufacturers who pump huge bribes into the Indian political and bureaucratic class each year. Small wonder that a situation similar to 1962 is emerging, in which the military power of India is woefully lower than that of the emerging superpower, China. The only way a country can have a strong defense is to have a strong economy. When will decision-makers in India and Pakistan accept this reality, and focus their energies on growth rather than on scoring inane points against each other? While the diplomats bluster and the militaries swagger, the people weep with hunger.

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