China, India and the United States at the End of 2007

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Appearances are deceptive.  The report put out by the 17th national congress of the Communist Party of China indicating its resolve to pursue a policy of “comprehensive and balanced development, combining growth with social justice and environmental sustainability in order to build a harmonious society” reads as if lifted from one of India’s Planning Commission documents.  This overlap in literary style is totally misleading.  The two countries are, in terms of economic indicators, widely apart.

Facts, however unpalatable, need to be faced.  China has maintained for nearly a decade-and-half a steady rate of growth of gross domestic product at around 10 per cent per annum, a rate we, in India, are now claiming to have reached.  But while our GDP is currently estimated to be close to $1,000 billion, China, with a population only 20 per cent higher than ours, has a GDP three times higher.  And, with a markedly less skewed income distribution than ours, a much greater proportion of the population in China gets the benefits of high GDP growth than in India.

Now consider the external accounts of the two countries.  China has left behind both the United States of America and Germany in the race for the sobriquet of the world’s leading exporter of merchandise.  Its merchandise exports are likely to touch $1,200 billion this year, more than 8 per cent of the aggregate global exports.  China’s net earnings from export of services are plus-minus $90 billion, thus still lagging behind the performance of the US, the United Kingdom, Germany, France and Japan.  The situation could however change rapidly once China expands its activities in international banking and makes further strides in information technology.  Besides, the momentum in merchandise export growth acts as a natural accelerator of service exports: circa 2015, China may well emerge as the undisputed global leader in both forms of exports.

Of immensely greater significance, China spends only about 30 per cent of the GDP on imports while earning the equivalent of more than 40 per cent of it through exports.  The outcome is a huge accumulation of foreign exchange assets.  For instance, China’s total export earning this year is expected to reach $1,200 billion, while imports will amount to at most $900 billion, thereby yielding a trade surplus of over $300 billion.  Should the trend persist, the staggering size of China’s foreign exchange holdings would be a living nightmare for the US.

It will be instructive to study the corresponding facts concerning India.  Our merchandise exports in the current year will perhaps wobble at around $130 billion; net earnings from service exports may bring in another $60 billion.  Total exports are therefore barely one-seventh of China’s.  What is of far greater significance, our imports during the year — expected to be roughly $200 billion — will gobble up our entire export earnings.  China’s kitty of foreign exchange reserves too is ten times greater than ours; the distance in the performances of the two countries in this regard can only grow in the coming years.  Unlike China, foreign exchange accumulation in our case is precariously dependent on contributions made by speculating foreign investors, who choose to park their hedge funds with our stock exchanges.  Were they to change their mind, it would be swansong for our exchange holdings.

The breathtaking progress China has made in merchandise exports is admittedly the result of competitive efficiency and has nothing to do with such hanky-panky as ‘dumping’.  This competitive edge will continue to be the mainspring of its export performance in the coming years too.  It is not perversity that propels millions of buyers in both the US and western Europe to make a beeline for Chinese products: these score on grounds of both price and quality.  The magnitude of success China has attained in its export efforts is surely a major factor underlying the crisis of existence the World Trade Organization, an out-and-out Western baby, is already facing.  ‘Free’ trade, the signs are evident, will mean further inroads by Chinese products into Western markets.  The corresponding development — the increasing stockpile of foreign exchange reserves in the command of the Chinese authorities — is likely to have an equally ominous impact on Western interests: China will use its huge dollar holdings in multiple ways: import equipment and other matériel to accelerate the pace of domestic growth, strengthen its defence build-up and, finally, hold them as a Damocles’ sword for threatening the ruin of the American economic system.  India, in contrast, will be unable to avail itself of its foreign balances for any effective purpose; these belong to foreigners.

To counter China, the economic demon looming ever larger with every day, the US is desperately looking for strategic partners in Asia.  With Pakistan a burnt-out case, India is being regarded as indispensable for them.  In this situation, even if the 123 Agreement cannot be immediately pushed through, the post-Bush administration, whatever its party insignia, would, in all probability, refuse to give up on India.  If not in 2008, fresh elections for the Lok Sabha are in any case due in early 2009, that is to say, closely following the swearing-in of the new president in the US.  Were there to be an ebbing of strength of the Indian National Congress in that poll, the Americans would have little reason to feel diffident.  The Bharatiya Janata Party could be only too willing to form a common cause with the US administration to give a bloody nose to the global Islamic uprising.  If that comes to that, Americans would be delighted to broker a deal between the BJP and the Congress, with a bleary-eyed Left looking on.

It is still hardly going to be hunky-dory.  The Chinese leadership is a hard-boiled lot. What it means by “harmonious development” is both a narrowing of the economic disparities between the coastal and western provinces and taking care of the skewed income distributions the special economic zone type of development has brought about.  Such will be the agenda in China for the next few years.  Despite lip service to what is curtly described as ‘inclusive growth’, the turn of events in India is likely to be far different.  The rulers of a fractious India, it appears altogether possible, are going to fritter away the country’s economic resources, in part, to satisfy the hankering of the upper strata for the good things in life and, in part, to further strengthen State power with the object of suppressing social forces emerging in different parts to avenge inequities perpetrated by the system.  The Dalits, the tribal masses divested of their land, the victims of the phenomenon of jobless growth and assorted radical groups establishment circles love to club together as Maoists could, jointly as well as severally, create enough of a domestic mess, so much so that India might turn out to be a no more worthwhile strategic ally of the US than Pakistan.  A thousand rebellions would be the daily menu, and attempts to subdue them through additional spending on defence and security measures could, by drawing away resources from crucial growth-inducing sectors, actually lead to further economic enfeeblement of the nation.  The Americans, honestly, do not know what they are about to land up with.

Ashok Mitra, first Finance Minister of the Left Front Government in West Bengal in 1977, and a former member of the Rajya Sabha, the upper house of the Indian Parliament, has been a close friend to Monthly Review from Paul Sweezy and Harry Magdoff to the present editorial committee.  This essay appeared originally in the Telegraph of Calcutta, India on November 26, 2007.

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