China is just a larger version of Japan. If Greece could be ignored simply because it was 2.6 per cent of European GDP, Japan can be ignored in tomorrow's developing picture of the world economy simply because its remaining 90 million population will be just 1 per cent of the world's 8 billion people. So whether Japan sorts itself out or not, it will not matter by 2050.
China has everything that Japan has, but king-size. In dollar terms, its economy has just beaten Japan to become number two in the world. Its huge pool of savings (55 per cent savings rate compared to Japan's peak of 32 per cent) has already created enough trouble around the world; its fixed-asset formation has swamped the world with excess capacity, and its trillion-dollar surpluses will create tsunamis when they come onto the currency markets. It is ageing prematurely, although thankfully, without the welfare-state entitlements of the West. The problems it has created are not too old, but it can just look at Japan to see how it will all end, if it continues along its current trajectory. It has to get its domestic consumption up, because there are simply not enough people in the rest of the world to consume what it can produce.
What lies ahead
Just think of what would happen if we take current trends to their logical conclusion. Suppose all of China's people, 14 per cent of world population, were to shift into manufacturing. With manufacturing set to go below 15 per cent of world economic output, and assuming that Chinese productivity is at the world average, we would have a world swamped permanently with Chinese goods. Now just assume a doubling of Chinese productivity (which is not very far away), and we have the same situation as I have outlined above. So if Chinese consumption does not pick up, the country most hit will be China itself. That is just Japanese history repeated with bigger consequences.
To promote a consumption-oriented economy, China will have to first build its services sector, which calls for a cultural change. Remember, these services will have to be non-tradeable services, otherwise we will end up with the same glut in worldwide (service) output that we have in manufacturing. But non-tradeable services cannot be increased by government fiat, which is what China has traditionally been doing.
The roadside entrepreneurship that you see in India, where every new colony in Delhi already has a milk supplier, an electrician, a plumber and a quack doctor before anybody has even started living there is completely missing in China. There is no concept of ownership of assets, and private enterprise at the lowest level is missing. This is what shows up in the GDP numbers. The momentum that Indian growth has is internally driven and funded, with Udupi restaurants providing employment, income and a self-generating savings rate, enough to take care of capital costs.
Chinese investment is mostly state-funded and 'mandated'. That is why its growing parts look so good, while India's growing parts look so chaotic. On every office block in Shanghai, there is no defacing paint that shows you how much of the building has been built by adding to banking NPAs; in India, you see entrepreneurial jugaad everywhere, which must be done to keep the cost of assets within the purchasing power of people; there is no bank NPA to fund the difference.
India will never see a Xanadu come out of the wilderness, like you see Chinese cities come up in the provinces for no apparent logical reason. There is an 'evolutionary' process to India's development: a Lavassa can only come up in Maharashtra, not in Bihar. At the same time, there will always be many Indias, but there may only be two Chinas: the one we see and the one we can't.
Volatile growth for commodity producers
In this worldwide scan I am going to ignore the resource economies (Russia, Australia, Canada, Brazil, Chile, South Africa), because their fundamentals are dependent on the growth and stability of India and China. Governance does matter, especially in Russia, Brazil and Chile, where improvements (in governance) will telescope economic growth coming from new resource finds and better exploitation of old ones. I fear that these economies will be prone to sudden bouts of volatility coming from the pulls and pressures of commodity price movements, which will exacerbate the movement of gold prices. Even if they do well, it will be with very high volatility, making the ride no fun at all.
Clean Tech: a major trend
Which brings me to the last and most important region: Asia. I have already mentioned that I am looking for the next Indonesia, so it is obvious that it (Indonesia) qualifies. Singapore is just a 'broker' to Asia's trade and investment flows vis-à-vis the rest of the world. The Middle East will be rendered irrelevant because of Clean Tech, which has already become an inexorable 'big trend' that will destroy anybody who tries to resist it. The cost of energy will decline; any country that has not prepared for it will see its economy marginalised. The survivors will be those who have the people to build on free, clean energy, and use it to build a 21st century economy. That is one of the reasons why I have ignored any economy that is entirely dependent on non-renewable resources, for instance, Chile and Russia. With low cost of energy, recycling will become so viable that commodity prices of virgin resources will be capped.
India: government exiting business
God is probably Indian, he just got lost in the melee of the Kumbh Mela. With the background of the Commonwealth Games, it might sound ironical to talk about Indian governance actually improving. But just think about it: about Rs10,000 crore wasted on the Games (out of about Rs30,000 crore actually spent) is actually very quickly recovered by the government cutting down on energy subsidies of Rs30,000 crore per annum. Diesel and LPG will contribute another Rs20,000 crore, besides the Rs100,000 crore 'windfall' from telecom.
The government has got out of a range of (economic) activities that used to contribute to leakages back in the bad old days: how much money used to leak in the building of an airport, port, road, etc? Today, a chunk of this is in private hands. Can you imagine world-class airports like the ones in Delhi, Mumbai or Bangalore ever being built by the government? If you thought the government did a good job with the Delhi Metro, watch what Mumbai is doing with its joint venture for the Mumbai Metro with Reliance ADAG.
The Right to Information (RTI) Act has ensured that the numbers are real, otherwise there used to be the hyperbole that political parties would mouth about the country being taken to the cleaners: hypothetical numbers, like the estimated Rs20,000-70,000 crore of 'revenues' lost because of 2G, as if that is the amount of money given as bribes.
The important 'big trend' is that the government is getting out of business. From an Indira Gandhi government that wanted to get into banking to a Sonia Gandhi government that is getting out of even the provision of basic infrastructure and city building, we have come a long way, haven't we? Rural telecom infrastructure is now in the hands of the new private telcos, and the public sector telcos are going bankrupt, have you noticed? Agricultural markets are now impacted by grain trading models run by private companies, not the Food Corporation of India. Believe it or not, I dream that government corruption will actually be marginalised if we get two generations of good governance.
The UID project will further reduce corruption and leakages, cleaning up the food subsidy model that we have been following. Next will follow the fertiliser subsidies, and we are on our way. Government will not get smaller, but it will do other things: provide regulation, for example. Individuals will still make their money, but the wastage embedded in the government actually 'doing' things rather than regulating them, will be reduced.
And growth will take care of the rest…
This article was originally published on December 10, 2010.
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