The China Syndrome

Discussion in 'China' started by Yusuf, May 13, 2009.

  1. Yusuf

    Yusuf GUARDIAN Administrator

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    The pendulum of global economic power started swinging back from West to East during the latter half of the 20th century, reversing a westward shift starting way back in the 18th century. It started with post-war Japan's re-emergence in the 1960s, then the emergence of the `miracle economies' of East and South East Asia, followed by the rise of China and, finally, growth acceleration in India during the final years of the 20th century. Such historic shifts in relative economic power get reflected in the formal architecture of international economic relations with a significant lag since the declining powers are naturally resistant to change.

    However, the swing in Asia's favour has been underway for several decades now, buffeted from time to time by negative and positive shocks. While it was slowed down by the Asian financial crisis of 1997, it has been accelerated by the current economic meltdown. The present crisis has adversely affected all countries, but its impact in Asia has been much less severe than in the West and Japan. Within G20, it has significantly strengthened the relative positions of emerging Asian economies like India and especially China. Accordingly, China decided to use last months G20 summit to launch its bid for a leading role in the global financial architecture.

    That architecture is now archaic, reflecting the relative economic strength of countries that existed at the end of World War II rather than those that obtain today. Aware of this imbalance, G7 countries have started giving a few scraps to countries like China and India. Both are now members of the Financial Stability Board, the apex institution established to monitor global risks of financial crisis. Their voting shares in the International Monetary Fund (IMF) will also be slightly increased through an accelerated quota reform process.

    However, post-reform the US will retain its de facto veto power with a 17 per cent share and the US, EU and Japan will together still control 53 per cent of IMF shares. Individually, the shares of US, Japan, UK and France will still be larger than China's share of under 4 per cent. Impatient with these little handouts, China has launched a multi-pronged campaign to claim a seat at the head of the table.

    Shortly before the G20 summit, Zhou Xiaochuan, governor of the Chinese central bank, suggested that the dollar should be replaced by SDRs as the new reserve currency. The huge dollar reserves held by central banks and other global investors would be severely eroded if the dollar were to suddenly depreciate. Yet, these investors cannot easily diversify away from the dollar since this itself would trigger dollar depreciation. The Chinese are particularly concerned: an estimated $1 trillion out of their total reserves of around $2 trillion are held in dollar assets. The SDR exchange rate is a weighted average of exchange rates of the major convertible currencies. Accordingly, under Zhou's proposal, China and other countries could convert their reserves from dollars to SDRs at current exchange rates without any erosion in their value.

    Implementing such a proposal would also mark the end of the dollar as a reserve currency. The US would no longer be able to finance its huge current account deficit by massive capital receipts from the rest of the world. Nor could it simply print dollars to finance its deficit. Like any country facing a reserves crunch, it too would have to go seeking loans from the IMF or other surplus countries (read China). Such a tectonic shift in global power relations was almost unimaginable until recently. Zhou's proposal did not get much attention in the G20 summit, but President Hu Jintao also announced there that China had firmed up currency swap arrangements totalling about $95 billion with several countries.

    In a third move the ASEAN+3 (China, Japan, South Korea) have now created an Asian version of the IMF. Euphemistically called the Chiang Mai Initiative, the fund was launched on May 3 at the Asian Development Banks annual meeting in Bali with an initial capital of $120 billion.

    The history of this initiative is interesting. When the idea of an Asian Monetary Fund was first mooted by Japan in 1998 at the height of the Asian financial crisis, it was firmly rejected by the IMF, the US Treasury and other western powers. In typical Asian style, the proposal was humbly withdrawn, but quietly refloated as a modified initiative the following year at an ADB annual meeting in Chiang Mai. Ten years later the fund has become a reality, but Japan now has to contend with China for leading it.

    The relative roles of different Asian currencies in this fund are yet to be determined, but clearly the Chinese yuan has arrived and the meltdown of the dollar as a reserve currency has begun. The US-led western alliance has two options before it. It can give China a leading role in the G7-dominated financial architecture or face an alternative architecture led by China. Heads i win, tails you lose. Meanwhile, India is yet to find a role for itself in this new great game.

    http://timesofindia.indiatimes.com/Editorial/COMMENT-The-China-Syndrome/articleshow/4521424.cms
     
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  3. Yusuf

    Yusuf GUARDIAN Administrator

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    Why the future belongs to India

    In preparing for a much publicised debate in London on the motion 'The future belongs to India, not China', I was reminded of a conversation with my mother. She had asked, what is the difference between China growing at a rate of 10% and India at 8%? I replied that the difference was, indeed, very significant. If we were to grow at 10% we could save twenty years. This is almost a generation. We could lift a whole generation into the middle class twenty years sooner. She thought for a while and then said gently, "We have waited 3,000 years for this moment. Why don't we wait another twenty and do it the Indian way?"

    She had understood that the cost of democracy is the price the poor pay in the delay of their entry into the middle class. She did not elaborate the 'Indian way' but it must include taking a holiday on half a dozen New Year's Days! It is easy to get mesmerized by China's amazing progress and feel frustrated by India's chaotic democracy, but I think she had expressed the sentiments of most Indians who will not trade off democracy for two per cent higher growth.

    In referring to the 'Indian way', my mother meant that a nation must be true to itself. Democracy comes easily to us because India has historically 'accumulated' its diverse groups who retain their distinctiveness while identifying themselves as Indian. China has 'assimilated' its people into a common, homogeneous Confucian society. China is a melting pot in which differences disappear while India is a salad bowl in which the constituents retain their identity. Hence, China has always been governed by a hierarchical, centralized state - a tradition that has carried into the present era of reform communism. China resembles a business corporation today. Each mayor and party secretary has objectives relating to investment, output and growth, which are aligned to national goals. Those who exceed their goals rise quickly. The main problem in running a country as a business is that many people get left out.

    India, on the other hand, can only manage itself by accommodating vocal and varied interest groups in its salad bowl. This leads to a million negotiations daily and we call this system 'democracy'. It slows us down - we take five years to build a highway versus one in China. Those who are disgruntled go to court. But our politicians are forced to worry about abuses of human rights, whereas my search on Google on 'human rights abuses in China' yielded 47.8 million entries in 13 seconds! Democracies have a safety valve - it allows the disgruntled to let off steam before slowly co-opting them.

    Both India and China have accepted the capitalist road to prosperity. But capitalism is more comfortable in a democracy, which fosters entrepreneurs naturally. A state enterprise can never be as innovative or nimble and this is why the Chinese envy some of our private companies. Democracy respects property rights. As both nations urbanize, peasants in India are able to sell or borrow against their land, but the Chinese peasants are at the mercy of local party bosses. Because India has the rule of law, entrepreneurs can enforce contracts. If someone takes away your property in China, you have no recourse. Hence, it is the party bosses who are accumulating wealth in China. The rule of law slows us down but it also protects us (and our environment, as the NGOs have discovered).

    We take freedom for granted in India but it was not always so. When General Reginald Dyer opened fire in 1919 in Jallianwala Bagh, killing 379 people, Indians realised they could only have dignity when they were free from British rule. The massacre at Tiananmen Square in 1989, where 300 students were killed, was China's Jallianwala Bagh. China today may have become richer than India but the poorest Chinese yearns for the same freedom.

    Because the Indian state is inefficient, millions of entrepreneurs have stepped into the vacuum. When government schools fail, people start private schools in the slums, and the result is millions of 'slumdog millionaires'. You cannot do this in China. Our free society forces us to solve our own problems, making us self-reliant. Hence, the Indian way is likely to be more enduring because the people have scripted India's success while China's state has crafted its success. This worries China's leaders who ask, if India can become the world's second fastest economy despite the state, what will happen when the Indian state begins to perform? India's path may be slower but it is surer, and the Indian way of life is also more likely to survive. This is why when I am reborn I would prefer it to be in India.

    Why the future belongs to India - MEN & IDEAS - Gurcharan Das - Columnists - Opinion - The Times of India
     
  4. Singh

    Singh Phat Cat Administrator

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  5. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    i have been a great fan of the thought of economic power moving from the west to east and i would support even the prc for that. it is high time that a region where around 37% of the world population resides gets its dues first in terms of the economic power shift and then the real balance of power, military power included to the region it all belonged centuries ago. US and europe have had their days and the sooner this transformation were to happen the better it would be, as a matter of fact the way i see it is that both prc and india have an behind the scene understanding from where we are both able to extract the max out of the US, europe and russia and then when we are done with them then form an alliance known as an asian alliance which takes the center stage, but for the moment this looks like a dream that might never see the light of the day.


    in the second post i cant not understand how and why would the author correlate a 10% growth rate with an authoritarian rule and 8% with democracy, as a matter of fact if facts were to be properly checked then the answer one would get is that it has certainly nothing to do with the said reason but all to do with the numerous bottle necks we have in terms of infrastructure, getting is less fdi, not able to attract enough investments something various state governments have been able to do over the past few years and if they can do 10(+)% figures then i have no reason to believe that we can not replicate the same at the national level, the only thing required is to have more efficiency by making the whole bureaucracy more accountable and responsible who work on deadlines, transparency and incentives for states that are able to achieve certain targets and when the central government can get strict on these parameters then i cant understand how we can not surge at 10(+)% growth rate figures, and mind you that difference between one generation as stated in that article makes a difference between 2 meals a day to no meal, shelter on your head, some decent earnings with improving lifestyles, many saved lives which would have other wise been lost due to poor health programs run by the state and certainly again more lives saved as one would expect no or very few communal, caste, regional violent clashes. the mistakes that have been made for 3000 yrs should be no excuse to let them repeat themselves for another generation or it would certainly be a case of another generation lost. human life should certainly not come so cheap hope its their aspirations of excelling that come cheap.
     
  6. Known_Unknown

    Known_Unknown Devil's Advocate Stars and Ambassadors

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    Gurcharan Das's article seems to be high on rhetoric, and low on substance. Not that I'd prefer to live under a dictatorship in China, but he seems to reach wild generalized conclusions from small incidents. Just a "feel-good" article, IMO. I'm just nitpicking though.
     

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