FDI REVISIONISM - A Chinese-American academic is a Sino-sceptic but an Indo-bull

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  • Published 21.08.03

Yasheng Huang, a Chinese-American and an associate professor at the Harvard Business School, is fast becoming a favourite of Indians — both here and abroad. This is because of his recent publications that assert that China’s achievements are exaggerated, while India’s advances have not received due recognition. He has co-authored, along with his colleague Tarun Khanna, an article called “Can India Overtake China?” that appeared in the July/August issue of the prestigious magazine, Foreign Policy. The dons argue that “China and India have pursued radically different development strategies. India is not outperforming China overall but it is doing better in certain key areas. That success may enable it to catch up and perhaps even overtake China”.

Now Huang’s more detailed book, Selling China: Foreign Direct Investment During the Reform Era, is also out. In this, Huang explains that the massive foreign investment inflows into China are actually a sign of structural weakness in the Chinese domestic economy and do not in any way reflect a “boom”. These inflows are, no doubt, helping to make the economy more efficient. But they have been a pervasive phenomenon in China because domestic private firms have been deliberately stifled and are simply too uncompetitive to respond to new business opportunities. According to Huang, foreigners are investing more in China while domestic firms are investing less, although the distinction is blurred because of “round tripping” (the flight of resident capital and its return as foreign investment) via Hong Kong.

China has had a spectacular performance since 1978 when reforms were first introduced. In about a quarter of a century, gross domestic product is estimated to have zoomed by an astronomical 8-9 per cent compound annual average growth rate — translating to a doubling in less than 10 years. But these numbers are being challenged. Thomas Rawski, a professor of economics at the University of Pittsburgh in the United States of America, has concluded that Chinese GDP figures could be puffed up by at least 2-3 percentage points. Rawski’s analysis, however, has been questioned by other eminent economists, like Nicholas Lardy, now at the Washington-based Institute of International Economics and author of a number of acclaimed works on the Chinese economy.

Then there is the American lawyer of Chinese descent, Gordon Chang, who hit the headlines two years ago with his The Coming Collapse of China. Chang argued that the Peoples Republic has at most a decade before it crumbles. The trigger is the accession to the World Trade Organization that happened in December 2001 but there are other pressure points — a banking system that has all but failed, state-owned enterprises that are visibly dying, the Internet that is proliferating in spite of efforts to control it, a private sector that is strangulated, a society being wrecked by corruption and a state that is simply unable to accommodate the growing aspirations for freedom. Chang observes that China’s economic success is built on very shaky and precarious political foundations and it is this that is causing growing unrest in that country.

It is not as if private Chinese companies do not exist. The top ten companies (groups) are Legend, Wanxiang, Hengdian, Chint, Delixi, Guanghui, Fosun, Xingaochao, China Orient and Tengen. However, the total turnover of these top ten is about half the turnover of the top ten Indian private companies. Huang talks of Indian private companies like Infosys and Wipro, Cipla, Ranbaxy and Biocon, and the Tata group as world-class firms owned and managed by Indians themselves. Since China has become the manufacturing platform for the world, a very large number of “Chinese” companies that are successful are actually affiliates or subsidiaries of companies from the US, Japan, Germany and other countries. The Chinese corporate scene, however, is not entirely blank. Companies like Legend Computer, Haier, Kelon and Huawei — some of whom are coming to India as well — have emerged as global players. The Shanghai stock exchange is being engineered to be a global bourse in five years time (if only the Indian government has been more proactive, Tata Consultancy Services may well have won the contract for its computerization that was awarded recently to American firms).

One of the reasons why China has attracted more foreign investment than India is because in India, there has an influential business lobby against foreign investment, a lobby that has powerful political backers as well. This lobby is not as vociferous as it used to be but there are still a number of Indian companies which refuse to have anything to do with foreign investment. Sundram Fasteners, for example, has become a global supplier of radiator caps to General Motors and its success has not come out of any foreign investment inflow. Reliance is another example of such a company which has achieved global scale and standards without foreign investment. But there are other companies like Hindustan Lever that depend on foreign investment. Companies like Infosys and Housing Development Financing Corporation, of course, do not depend on foreign direct investment but more on foreign institutional investors who invest for returns and not for management control.

Huang has certainly dealt a blow to the large tribe of Indo-critics and Indo-pessimists even though his sample of “successful” Indian companies is limited mainly to a couple of software and pharmaceutical firms. Sure, India has had a long tradition of private enterprise and pre-1991 policies may have created the platform for entrepreneurial take-off. But there were many elements of the ancient regime that, ironically, helped Indian enterprise. The public sector, for example, has fostered entrepreneurship — the growth of Bangalore and Hyderabad has been heavily dependent on public investment in high-tech areas of defence, space and engineering.

Huang is right to focus on the domestic economy. Sure, entrepreneurial drive and dynamism in India is greater, reflecting the vastly more political and social freedoms here. But the businesslike manner in which the Chinese are moving, using the WTO as a pretext to carry out sweeping reforms, is striking. This is in stark contrast to India, where reforms of domestic taxation particularly have been stalled, as evidenced from what has happened to value added tax. In addition, structural change in India has been skewed. Agriculture’s share of GDP has fallen, as it should. The share of services has risen disproportionately to over 50 per cent of GDP at the cost of industry, especially manufacturing. At less than a fifth, India has lowest share of manufacturing in GDP among all major countries. Manufacturing has staged a revival in recent years but there is still a very long way to go. Further, the share of agricultural employment has remained more or less unchanged because of rigid labour laws and small-scale reservations.

Huang raises an ever more fundamental issue. How is it that while India’s growth is 80 per cent that of China between 1997 and 1999 (actually, about two-thirds if a longer 1980-2000 period is taken), India achieved this on the basis of about half of China’s savings and investment rate and less than 10 per cent of China’s foreign investment inflows? Does this mean that capital utilization in India is more efficient than in China?

Foreign investment has made China the sixth largest trading nation in the world in a span of just over a decade. It is galloping foreign trade, fuelled by “foreign” investment, that has transformed China in recent times. Huang’s radical work cannot detract from that reality.