The Asian Giants – Catatonic Economics

India & China

By Tyler Fredricks.

Chinese ascension has been one of the mainstays of contemporary thought on the future of the international system. Since the end of the Cold War, pundits have looked to the People’s Republic of China as the next major political rival of the United States. Critics undoubtedly interpret the self-proclaimed Middle Kingdom’s booming manufacturing capacity and the rise of megalopolises like Guangzhou, Shanghai, and Chengdu as indicators of economic success and future political dominance. This viewpoint makes two significant blunders. First, it ignores the fragile economic underpinnings of the PRC such as China’s unrelenting need to supply jobs, its debt problem, and a rapidly aging population with few social welfare safety nets in place. The second blunder ignores that lurking just within the shadows of China’s eclipsing rise is India, poised to become Asia’s premier economic powerhouse. Not only does India enjoy democratic transitions of power, but its industrial capacity has rebounded and it will soon enjoy a thriving consumer-oriented middle class. The poor long-term economic viability of China when juxtaposed with that of its close developing neighbor India creates a composite view of the future of both Asia and the world that starkly contrast with many popular lines of thought.

China and India both have GDP’s that are in the top ten in the world. Similarly, they both operated under Socialist-style economics for decades. China had a Soviet-style centrally planned economy well into the 1970’s but more recently has shifted to a market-oriented system with the government controlling much of the heavy industry of the state. India followed protectionist policies and was heavily influenced by Socialist-style economics throughout the Cold War until 1991 when it shifted towards capital markets. The two countries face the same problem of an aggressively expanding population, vast inequality in domestic income, and how to accommodate multitudes of destitute, multiethnic peasants into an operational economy. Despite these similar problems, the two great Asian giants will likely experience opposite trajectories.

Mitt Romney said in the third presidential debate that 20 million is the number that the Chinese have to deal with every year. Twenty million is the number of people migrating from the farms to the cities annually in search of jobs. This onslaught of demand has been a driving force of the manufacturing boom that the People’s Republic of China has recently undergone. With peasants enlarging cities and providing a constant supply of cheap labor, production was able to grow astronomically. Chinese demand for higher wages will put pressure on the industrial sector; wages are predicted to double from what they were in 2011 by 2015 and will go on to triple in 2017. With Chinese economic growth failing to meet the 7.5% GDP growth the government anticipated, the pressures to meet the need for higher wage jobs will put structural strain on the Sino state. Current Chinese infrastructure is completely unprepared to transition into a moderate to high wage economy.

On top of this, the PRC has a debt problem to worry about. The Wall Street Journal reported that outstanding borrowing for businesses and households rose to 170% of the state’s GDP. Interest and principal payments have likewise been predicted to take in one-third of China’s gross domestic product. This undercuts the common misconception that China is debt free and can readily call in loans it has on the United States. The truth of the matter is that the PRC’s own debt problem might very well increase tension in the fabric of the Chinese economy. The banking system in China has become significantly more Western-oriented, but it still is inherently a government owned enterprise. This results in inflexibility, and there are concerns among private investors that this so called “debt trap” could cause firms to borrow money simply to repay loans. Indeed, a large debt will provide a disincentive for the government to invest in infrastructure as it would serve to increase the already considerable outstanding debt.

Arguably the stiffest challenge that the Middle Kingdom will face in the years to come lies in its demographic time bomb. The Chinese challenge is much more severe than its American counterpart caused by the Baby Boom. Thanks to China’s thirty five year old one-child policy, the working population is actually shrinking while the elderly population continues to rapidly grow. This lack of workers will diminish the tax base that China will have to pay back its debts. Concurrently, the lack of efficient social welfare systems and other such safety nets is likely to cause serious problems for China’s more than 400 million residents aged 65 or older.

The Indian subcontinent faces similar problems but without China’s constraints. Foremost among these, India’s continued population explosion keeps wages low and industrial output high. The growing work force there will preclude India from dealing with structural problems that China will face, such as the lack of safety nets. The depression of the Indian rupee, which was caused organically via favorable economics, juxtaposed with the depression of the Chinese Yuan (kept artificially low by the Chinese government) will encourage more foreign investment and allow the industrial sector of India to continue expanding. The rapidly urbanizing population will be welcomed by readily available jobs in industry and manufacturing. While economic growth has slowed slightly in the past several years, India remains a beacon for foreign investors hoping to buy cheap, rupee-backed Indian products and export capital there on the macro level.

The factor perhaps most critical to India’s ascension is the mix of capital and a democratic government which operates under the rule of law. Property rights are well respected and citizens are increasingly claiming ownership of land which had been predominantly ruled by the government. The Indian constitutional system of governance will allow the country to naturally grow in a way that China will be unable to. India, for example, is unhindered by the largest demographic bubble ever seen in human history, artificially incited by Deng Xiaoping’s former policies. Pluralism and inherent checks within the government tend to impede rash actions; political participation incentivizes the South Asian state to invest in infrastructure and much-needed reforms to accommodate situational changes.

The two great economies of Asia are at the crossroads of prosperity and bust. The fragility of the Chinese rise is especially stark in the shadow of India’s untapped potential. The East may soon very well see a rising economic powerhouse in the Indian subcontinent and a catatonic one in the People’s Republic of China.

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