India and China: The glass is half full (or at least 10% full)

Because there was a lot of interest in my India and China posts, I thought I would report on 4 articles that I read in The Economist, while flying to Texas.  Recall that last May I argued that the Indian election was good news for neoliberals, as the Communist Party did very poorly.  I don’t claim to understand Indian politics well enough to evaluate the policy implications of elections, but the fact that the stock market soared about 17% the next day was all the confirmation I needed.  On the other hand some commenters suggested that the Congress Party was now hostile to reform, and that the election results were not what I claimed.  But a recent article in The Economist suggests that reports of the death of neoliberalism may have been premature:

HLL Lifecare, which until this year was called Hindustan Latex, is one of 246 enterprises owned by India’s central government. Spanning everything from nuclear energy to artificial limbs, these companies employed almost 1.6m people in 2008 and accounted for 8.3% of the country’s GDP. On November 5th the government expressed a new willingness to reduce its stake in these enterprises. It wants the profitable ones to offer at least 10% of their shares to the public.

I don’t know exactly when the news of this policy leaked out, but note that the Indian stock price trough in this graph occurred on November 3rd.

I think most readers of this article would take away a much more pessimistic view than I did.  Indeed The Economist subtitled the article: “India’s government is privatising companies for the wrong reason.”  But I tend to filter out the fashionable pessimism of serious intellectuals, and try to figure out what is really going on.  In my view the listing of even a small stake of a SOE is a good sign, as that is when the most intense political opposition occurs.  Once you get the first 10% privatized, the next 10% can be sold off much more quietly; the precedence has already been set.  And The Economist points to another benefit of even small listings:

Listing even a small stake helps keep managers on their toes, by subjecting them to the scrutiny of the stockmarket. But the bigger the float, the better. A drop in the government’s shareholding from 100% to 50% raises the return on assets by about 24%, according to a recent study by Saibal Ghosh of the Reserve Bank of India, the country’s central bank.

Part 2.  China’s glass is half empty

The article by The Economist is entitled “Nationalisation Rides Again,” and certainly seems to paint a very bleak picture:

Minmetals has become a target because it is part of what is widely seen as an over-mighty, resurgent state sector. Media reports about abuses by state-controlled and mostly state-owned enterprises are common and often larded with a newly popular, negative-sounding term guojin mintui, meaning the state advances and the private (sector) retreats. The disproportionate largesse received by state firms as a result of China’s 4 trillion yuan ($586 billion) stimulus package and a torrent of lending this year by state-owned banks has fuelled the resentment of liberal economists, whose views are widely and sympathetically quoted in the press.

Stung by the criticism, the head of the government ministry which supervises China’s centrally-owned state firms, Li Rongrong, publicly denied in August that there was a guojin mintui phenomenon. Mr Li said the state sector may have been growing, but so too had the private one. Sceptics reply that evidence of encroachment abounds. One Chinese economist was recently quoted by China Business News, a Shanghai daily, as saying China was undergoing a third wave of nationalisation: the first having occurred in the 1930s and 1940s, and the second in the 1950s under the Communists. The latter all but destroyed private business. It has recovered rapidly in the past 30 years, while the once-dominant state sector has shrivelled. Last year, on official figures, state-controlled firms accounted for 28.4% of output by larger industrial enterprises.

But take a closer look.  One area of the Chinese economy where SOEs are still important is the “larger industrial enterprises.”  And yet if this data is accurate, even in this sector their share is down to 28.4%.   Much more important in my view is the attitude of the (state-owned) media.  I read some of these articles when I was in China, and I can verify The Economist’s assertion that the press is skeptical of SOEs, and tends to favor further liberalization of the economy.  In the long run those attitudes will increasingly shape government policy, especially as the older generati0n dies off and younger officials with more progressive attitudes rise to the top.

Another article in The Economist discussed the public’s attitude toward free markets in many of the major economies.  Where is the public most favorably inclined toward free markets?  India and China.  The two countries where socialism impoverished more people than anywhere else.  Some of my commenters referred to the fashionable socialist attitudes among Indian intellectuals.  Fortunately the “wisdom of crowds” is much greater than the wisdom of intellectuals, as we saw when the Communists suffered a severe setback in the May elections.

Note that as recently as 2002, Americans were more in favor of free markets than either Chinese or Indians.  But no longer.  Another Bush legacy.

There is another interesting piece on total factor productivity growth in various countries.  The Economist has this to say about China:

A recent report by Andrew Cates, an economist at UBS, attempts to estimate TFP growth in emerging economies over the past two decades (see chart). He calculates that China has had by far the fastest annual rate of TFP growth, at around 4%. Probably no other country in history has enjoyed such rapid efficiency gains. India and other Asian emerging economies have also enjoyed faster productivity growth than other developing or developed regions. In contrast, productivity in Brazil and Russia has risen more slowly than in rich economies.

These figures undermine a common claim””that China’s rapid growth has been based solely on overinvestment. Sceptics like to compare China with the Soviet Union, where heavy investment also produced rapid rates of growth for many years before it collapsed. But the big difference is that TFP in the Soviet Union actually fell by an annual average of 1% over 30 years to 1988. In contrast China’s productivity has been lifted by a massive expansion of private enterprise, and a shift of labour out of agricultural work and into more productive jobs in industry. China’s average return on physical capital is now well above the global average, according to Goldman Sachs. A decade ago it was less than half the world average.

Why have the Asian economies led the pack? The most important determinants of longer-term productivity growth are the rate of adoption of existing and new technologies, the pace of domestic scientific innovation and changes in the organisation of production. These, in turn, depend on factors such as the openness of an economy to foreign direct investment and trade, education and the flexibility of labour markets.

Using a composite index of technology penetration and innovation (including, for instance, computers and mobile phones per head), Mr Cates finds a strong link between the rate of increase in an economy’s technological progress and its productivity growth. China’s level of technology is still well behind that in America, but it has seen by far the fastest rate of improvement over the past decade. This is not just because China started from such a low base but also because it is more open to foreign investment than many other emerging economies, including Japan and South Korea when they were at similar stages of development. China’s TFP growth is almost twice as fast as that of Japan and South Korea during their periods of peak economic growth.

But they end with the obligatory note of caution, without which no serious article would be complete:

That said, even if China’s productivity growth remains faster than that of the developed world, it is likely to slow unless the government pushes ahead with bolder reforms. China’s growth is still too capital-intensive. Opening up the service sector to private firms and making it easier for workers to shift from rural to urban areas would result in a better allocation of labour and capital. That would help sustain rapid growth but would also make it more job-intensive. The resulting fall in labour-productivity growth might cause alarm among some analysts, but TFP would remain strong.




7 Responses to “India and China: The glass is half full (or at least 10% full)”

  1. Gravatar of Thorfinn Thorfinn
    27. November 2009 at 22:21

    The subtext here is that India is still facing large deficits and debt load. This is after years of good growth. As the government thinks its populist spending was responsible for their election victory, spending cuts are not a real option.

    But one-time sales used to finance recurrent expenses is crazy, not reform. There are some scheduled financial sector reforms, which could have an impact, but even that will be tough as long as government borrowing takes up such a large portion of lending.

    Communist loses in West Bengal (continuing in assembly by-polls) reflect purely local responses to their China-style program of forced land acquisition and industrialization. That doesn’t work in India, and voters have responded by electing a party–Trinamool Congress–that’s even worse on reform issues.

    From a 100-year perspective you may be right; but I prefer to stay skeptical in the short-term.

    You should look up Gujarat. It’s a real free market paradise, with growth at >10%, and so many services–power, roads, hospitals, water–privatized or outsourced.

  2. Gravatar of Doc Merlin Doc Merlin
    28. November 2009 at 00:27

    “The subtext here is that India is still facing large deficits and debt load. This is after years of good growth. As the government thinks its populist spending was responsible for their election victory, spending cuts are not a real option.”

    Luckily, it seems the republicans here in the US learned, as a result of 2006, and 2008, that their spending plans (including Medicare increases) were not what won them the 2004 election.

    In areas that don’t have heavy reliance on government spending, aren’t heavily unionized and aren’t hideously corrupt, payoffs don’t translate into votes.

  3. Gravatar of ssumner ssumner
    28. November 2009 at 15:08

    Thorfinn, Those are good points, but I contuinue to think privatization is real reform, even if done for the wrong reasons. I also see your state level success stories as good news. The richer states like Gujarat get, the more pressure on other states to reform. Otherwise people will vote with their feet. BTW, what you describe in India is no different from China 15 years ago. Gujarat is Guangdong. Bengal is Manchuria. And now even Manchuria is progressing rapidly. I’ll bet Bengal adopts reforms within 15 years.

    Doc Merlin, Obviously I am not expert, but I would have to think that in the long run democracies will move toward policies that are pro-growth. Of course India is way too big (as is the US) so the long run takes a lot longer there.
    And I don’t mean to minimize the various cultural issues that may affect the willingness of people to adopt pro-growth policies in India and elsewhere in the developing world.

  4. Gravatar of Doc Merlin Doc Merlin
    29. November 2009 at 19:12

    I hope you are correct, Scott. I see a very large contingent in the US and Europe that is anti-growth, and it worries me.

  5. Gravatar of D. Watson D. Watson
    1. December 2009 at 14:22

    I’m a bit confused at the offhanded comment about Bush legacies. Yes, part of the decrease in the US can be attributed to the former POTUS. India and China’s faith in markets has been rising for some time and surpassed the former US level. If their surpassing us is a Bush legacy, you have to argue that faith in markets would have grown another 5% or so. That seems a large move given that the recession would have happened without Bush anyway.

  6. Gravatar of Scott Sumner Scott Sumner
    3. December 2009 at 06:03

    D. Watson. You misunderstood me. The Bush comment was simply in reference to the fall in US support, not the comparison to China and India. In most countries support for free markets was rising.

  7. Gravatar of China economy analytics China economy analytics
    11. June 2010 at 15:49

    Very good blog post! usually I never reply to these thing but this time I will,Thanks for the great info.

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