Looking east for reform agendas
Jul 01 2014
Interestingly, the Chinese are not chilling their bottles of champagne (or mou tai) to celebrate the toppling of the US as the king of the hill. Why? Because they know that focusing on GDP alone can lead to grandeurs of delusion. The report also says, “China should stress key reforms to improve quality of growth, rather than emphasising GDP alone.”
“Quality of growth” is a Chinese euphemism for equity and inclusion. Remember, the per capita GDP of China is still one-eighth of the US. The economic Long March in China has just only begun. While India is trying to scale up its manufacturing capacity and build its infrastructure, the Chinese are trying to modernise and become more productive by reducing overcapacity. The Chinese government aims to reduce outdated production capacity by 27 million tonnes of steel, 42 million tonnes of cement and 35 million standard containers of plate glass. They know that the US will be leaders for a long time in innovation, efficiency and productivity.
There are a number of red flags (no pun intended) in the horizon. First is a fear of a real- estate bubble. Cassandras are saying that a burst would lead to a western-style credit crisis. The Chinese government and regulators claim that they are reforming their financial system to ensure this does not happen. Secondly, the size of corporate debt of China has surpassed that of the US. According to a report by S&P published in mid-June, China’s nonfinancial companies had outstanding bank loans and bonds worth $14.2 trillion at the end of last year, compared with $13.1 trillion in the US. S&P expects China’s corporate debt levels to top more than $20 trillion by the end of 2018. What is more alarming — S&P estimates that one-quarter to one-third of China’s corporate debt is sourced from the country’s shadow banking sector, an opaque world of nonbank lending that serves borrowers who would otherwise find it difficult to secure financing. Last, but certainly not the least, the underdevelopment of China’s western provinces and the poverty amongst its rural, underemployed youth are major worries of China’s policy pundits. The Chinese government has realised that growth in GDP alone does not make ‘China shining’. They have a long way to go before they can celebrate for reform is a marathon which must be run with robustness, stamina and consistency.
While China is a middle-income country, Japan is truly a developed country. It is the home to sophisticated global companies that rival and often beat global MNCs in the US. What has been their recent experience in economic reforms? In 2012, prime minister Shinzo Abe kicked off a bunch of reforms that has come to be known as Abenomics. In fact, he took “two arrows”, as be called them, from his economic reforms quiver and shot them. The first arrow consisted of a large fiscal stimulus. The second arrow comprised monetary easing. Both were political sweet pills. He swept through the Diet (Upper House) elections. His approval ratings went up. The third arrow of structural reforms will be the real test. When you begin to reform laws, bureaucracy, regulation, labour, immigration, farm protection, pension and healthcare in an increasingly greying nation, you have backlashes. Let us hope his third arrow hits the bull’s eye.
India’s new government has come to power with a massive mandate. The Sensex has soared and business sentiments are high. But they do not constitute a barometer of the real Bharat. The FIIs that fuel stock market booms are essentially party-hoppers. If they find a better party in a new town, they will go there. The decline of Sensex will then be blamed on Iraq, the price of oil or an inadequate monsoon. The real Bharat is still grappling with ‘roti, kapda, makan’ along with ‘bijli, sadak, pani’ and not with Nifty Fifty. Generating growth with equity in a vast and diverse country like India is not an easy task. From China, we ought to learn the lesson of “quality of growth”, that is, balanced development across regions, particularly the northeastern states. It also implies growth with equity. As we build infrastructure and new manufacturing capacity, we must embrace innovation and technologies of the future. We ought to strengthen our regulatory framework, especially in financial services and keep our banks healthy and robust. We have a large pool of young people in our rural areas that must be imparted skills so that they can be absorbed gainfully in industrial and manufacturing activities and services.
From the Japanese experience, our learning is simple. Easing monetary policies and tweaking with fiscal measures are relatively easy. When you embark on structural and fundamental reforms, the rubber meets the road. The hard nuts to crack are the dismantling of bureaucratic logjams and red tape to ensure fast and transparent decision-making. Modernising labour laws, pension schemes and healthcare are difficult reforms. The daunting reforms lie in thoughtfully and confidently opening India up to foreign direct investments that will bring in technology and generate employment much the way China has done. Making agriculture more productive and releasing surplus rural labour for modern manufacturing is an area of challenging reform. They are all tough reform measures. But the new government has the mandate to grasp the nettle. Let us hope it does so with both hands.
(The writer is managing director of Deloitte Consulting, India. These are his personal views)