Page last updated at 17:22 GMT, Monday, 17 November 2008

China and India and world recession

Kaushik Basu
By Kaushik Basu
Professor of economics, Cornell University

Investors view stock prices at a securities company in Chongqing, China
China-India trade has grown by nearly 50% per annum in recent years

The reason why the recession engulfing Europe and America - and now Japan - is unlikely to be as deep as the Great Depression of the 1930s is China.

China is sufficiently integrated with the industrialised West to be able to provide support, and yet not so integrated to go down with it.

Although China is expected to slow down this year, the most pessimistic growth projection is 8%.

Even for India, the Chinese economy is a bulwark and partly explains why India is expected to grow by around 7% this year, despite the global crisis.

China-India trade has grown by nearly 50% per annum in recent years.

Trading partner

While the US is currently India's largest trading partner, it is expected that China will take that spot within the next two years.

According to Shanghai's China Daily, this has already happened.

How did this change of global scenario come about? For orthodox economists the answer is easy.

China took off in 1978, when it adopted free-market policies. In reality it does not fit any of our textbook models of economics.

Will the global economy be able to rely on China and India to deliver it from recessions in the future?

If China had the political system and governance structure it has, but its economic record happened to be dismal - say, like that of North Korea - the same orthodox economists would tell you how this was entirely predictable.

With so much government intervention, the economy was doomed to fail.

The Chinese government intervenes in the economy as few nations do. CEO appointments are vetted by the Communist Party; top corporate heads can be overruled by party functionaries strategically placed in firms.

Writing about Huawei, one of China's biggest telecom companies, The Economist in early October observed, "its structure and links to the state are so convoluted that the most diligent China watchers have little idea if it is a private or a state firm".

The fraction of GDP that comes out of state-owned firms in most market-based developing countries, such as South Korea, India, and Thailand, is between 5% and 15%; for China it is nearly 50%.

So much centralised control, most textbooks will tell you, is a recipe for economic failure. Why then is China the biggest success story?

Foreign reserves

Two explanations stand out. First, since 1978 it has had some of the most intelligent people at the helm.

The political leaders have used their enormous power with skill and shrewdness.

Consider China's exchange rate policy. By keeping control over this and by subtly utilising the profit-maximising zeal of American corporations, China has amassed a foreign exchange reserve never seen before in history.

The result is that the US relies as much on China to keep the value of the dollar within tolerable range as on its own Fed.

A recycling worker rides his tricycle near an property development in Beijing
China is expected to be India's largest trading partner by 2010

Second, there is the priming effect of the 'deep Communist' period, 1949-1978.

China can transfer large amounts of land from farmers to the manufacturing sector without causing agrarian revolt; it can hold industrial wages down without spurring trade union action.

Earlier this year, in order to improve China's 'civic index', the government launched initiatives like "Queuing Day", which requires that on the 11th day of every month government officials will go out all over the city to tell citizens "it is civilised to queue, glorious to be polite", and "seat giving day" once a month when the young and fit are encouraged to give up their seats in buses to the old and infirm.

There is also effort to discourage "belching at tables" and "slurping soup", according to Daniel Gardner from the International Herald Tribune.

Clearly, the Chinese state feels able to influence the nation in matters that, in most societies, are left to parents to try (usually with futility) in their homes.

It is arguable that it is the history of oppressive Communism that primed the population into being pliable, and it is the lack of such history that makes policy management such a hard task in India and many other democracies.

Civil society

India won her Independence not through war or revolution but non-cooperation, street protests and the art of quietly subverting the economy.

There should be no surprise that the civil society of India, having ushered out the then most-powerful nation in the world by these techniques, has acquired an unrivalled mastery of these techniques.

Indian investors watch share prices outside the Bombay Stock Exchange building in Mumbai
India is expected to grow by around 7% this year

What does this tell us about the future? Will the global economy be able to rely on China and India to deliver it from recessions in the future?

The big uncertainty is the one China faces. Since so much of its growth has been a top down initiative, if its future leaders do not have the level of sagacity that the current leaders show, China could spiral into chaos.

If, for instance, a Somoza or a Marcos comes to the helm, given the vast power that is vested in the government, this could quickly blight the future of the nation.

India does not have that risk, since there is no comparable centralisation of authority.

For India the risk is that, if the growth continues without making a larger dent into poverty, it will soon begin to look like two nations, of which the poorer segment will feel effectively disenfranchised.

This could spawn insurgencies and rebellion but, more importantly, resurrect the marginalised citizen's skill in the quiet art of subversion.

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