Tuesday, August 31, 2010

Chinese Capitalism is State Control Dressed Up in Pin Stripes

Until 1978, private ownership of any kind was banned in China. But today, Chinese citizens can own property, businesses and shares. Thousands of state-owned companies were sold quite frenetically in the early years. Most were cornered by party officials or state governments via thinly concealed indirect structures. This created an illusion of entrepreneurship in China. Such a 'privatization' was quite unfair. Unlike genuine entrepreneurs these cadres took no risk, which devolved on taxpaying town residents. But now that these businesses were classified as 'private', they were free of all obligations towards the state. Bank credit was as easy as transferring cash from one pocket to another, since the same bunch of officials who now controlled the enterprise also ran the local bank. Minxin Pei has called this the 'decentralized predatory state', one where the exploitative actions of a market economy are layered over the excesses of state control. It's possibly the most accomplished model of 'state capitalism' in the modern world; even where the state is a minority shareholder, it often ends up controlling the board. The influence of politics is all-pervasive with half the entrepreneurs being members of the Communist Party, the so called 'red capitalists'. A survey found that 90 per cent of all the wealthy people (with personal assets of more than $14 million) were children of high-ranking party officials.

Friday, August 27, 2010

India's Thrifty Hares and the Profligate Tortoise

There is now a subdued acknowledgement of the superior quality of India's growth when compared to the quantity juggernaut unleashed by China. Both save around 40 percent of their GDP, but in India it is households that save,unlike Chinese corporations, whose accounting practices are questionable, and who are subject to market ups and downs. India's growth is also much less debt-financed. Even the usually condemned rural sector is buzzing.  Indian entrepreneurs and consumers are managing to buy and produce at much higher rates of interest, which means they are generating a much better return on investment. Also, India's share of consumption at 55 percent of GDP is much higher than that of China; which means it is not as dependent on external markets.  India higher share of services in the economy makes its growth less polluting and energy-intensive.

Monday, August 23, 2010

The Tao Of Economics: Wave And Velocity

China has woken up-as predicted its economic growth has shocked and awed the world. There is a saying in the Red Army that quantity has a quality all its own. China today is investing nearly half its GDP, something that is simply unprecedented. Over 200 years of economic experience tells us that hyper-investment creates a bubble and ends in a dreadful collapse. But China has consistently defied all such prophesies of doom. True, there have been bumps along the road: China has weathered a few storms and some small bubbles have been pricked, but nothing that can be called an epic disaster caused by an epic spree of hyper-investing. Actually, the time has come to acknowledge a truth: either conventional economic theory will have to be rewritten, or China will eventually collapse. The two cannot coexist. I would venture a 50 per cent wager on China actually trumping conventional theory. Why do I say that? Because by investing on a scale hitherto unknown and untested, China may have defined a new 'escape velocity' of capital spending. By putting so much capital, not in factories, but in infrastructure, China may have escaped the 'gravitational pull of low thresholds'. Big factories create waste, while big infrastructure, especially life-enhancing social assets, empowers people. The sheer scale of your activities could end up swelling the tide in which everybody and everything rises together; a new model of 'tidal wave investing' could buoy the whole ocean to a much higher watermark.

Wednesday, August 18, 2010

War, Love... And Now What?

This article appeared in the August 13, 2010 issue of Forbes India.

Miracle nations. Economic powerhouses. Asian giants... words the world uses to describe India and China today. But can they become collaborators to unleash an even bigger economic potential, or will their rivalry only intensify? Two views...

Raghav Bahl:

China and India lived together as peaceful, populous and prosperous neighbours until the 18th Century. Then colonial powers took control and enervated their prosperity. In 1914, the British drew the McMahon Line and ruptured their peace. China believes nearly 150,000 sq km of its territory was fraudulently transferred to India. Both countries went to war in 1962; a militarily under-prepared India was thrashed, opening up deep psychological scars which have not been repaired to this day. Then both got absorbed in fixing their damaged economies; China dazzled the world with its $5 trillion prowess, and India attracted attention with its $1.25 trillion play. Today, the world’s fastest and second fastest growing economies are locked in an uneasy clasp.

A United Nations intelligence report titled Mapping the Global Future by 2020 has "likened the emergence of China and India in the early twenty-fi rst century to the rise of Germany in the nineteenth and America in the twentieth, with impacts potentially as dramatic". Chinese Premier Wen Jiabao echoed this to his Indian counterpart: "When we shake hands, the whole world will be watching." John Garver, Professor, Sam Nunn School of International Affairs, Georgia Institute of Technology, calls them natural rivals with their "decades-long, multilayered, and frequently sharp conflict over the lands and peoples lying around and between them". Ashley Tellis, senior associate at the Carnegie Endowment for International Peace, calls it a structural conflict between two natural competitors who are seeking to increase their infl uence in the world. While it may not become a malignant rivalry, he believes that if the two countries continue to gather economic and military muscle at the current rate, "there is a likelihood of this relationship turning into a dyadic rivalry".

How They Did Not 'Get' India But Got A Book Instead

Ever since I began my entrepreneurial life in the early 1990s, I have dealt, rather pleasantly, with foreign investors of all hues, shapes and sizes. One foreign investor or the other sits atop every key milestone. In the early days, I was, in their lingo, a person with 'promising intellectual capital' in a 'virgin consumer-focused business' which was likely to witness 'explosive growth'. So if they gave me $5 million in cash and a chunk in equity, I could build a company which could become a leader in 'India's nascent media industry'. That's the first kind of foreign investor I encountered way back in 1993.

As our operations grew, we took bigger bets The early-stage venture capitalist gave way to the late-stage private equity chap, who now gave us $20 million, but took a smaller chunk of equity, simply because 'start-up risks had been mitigated, and proof of concept was visible in our growing operations'. Their excitement about India was always subdued, tinged with an edge of scepticism, if not outright disbelief.

Every conversation would end with some variant of the same observation: 'You know what, it's not like that in China-or Korea, or Thailand, or Dubai.' As we acquired commercial muscle, we moved 'up the value chain' to do deals with 'foreign strategic players'. Our first joint venture was with CNBC to launch a twenty-four-hour business news channel in India. We made all the investments, took all the risks, and paid them a royalty. We followed through with another deal with CNN, to launch a twenty-four-hour general news channel in India. We then bought 50 per cent of Viacom's India operations, including such iconic brands as MTV India, Nickelodeon India and VH1 India. Next on our roll call was Forbes India. The colour of money changed from 'financial' to 'strategic', but the scepticism never ceased.

Friday, August 13, 2010

2050, An Economic Odyssey

Napolean once said, "Let China sleep, for when China wakes up, she will shake the world."

China has woken up. It is investing nearly half its GDP — that's simply unprecedented. No other economy, at no other time in history, has invested capital on that scale. To call this "hyper"-investment is like comparing the Sun's luminosity to a street-lamp. At the peak of its economic miracle, Japan was investing only 30 percent plus of its GDP — but China is doing 50 percent!

Over 200 years of economic experience tells us that hyper-debt-fuelled-investment creates a bubble and ends in a dreadful collapse. But China has consistently defied all such prophesies of doom. Frankly, it may not be too bizarre to believe that China could be scripting a new economic logic. Traditional theory says that investment should be "sustainable", that is, it should be "matched" by rising consumption. But what if you pump so much capital into your economy — similar to putting extra fuel into a rocket — that you "escape" the gravitational pull of low thresholds? Especially if the bulk of your capital is spent on infrastructure (roads, railways, schools, irrigation canals, dams, hospitals, ports), as against factories which produce toys and televisions? This could be the Chinese masterstroke, the single discontinuity which could defeat 200 years of economic wisdom. Ultra-big manufacturing factories may create waste and over-capacity, but mammoth infrastructure could trigger higher productivity and the ability to create wealth. So it may be a fatal mistake to look at China's investment spree in a single lump of factories-plus-infrastructure. Huge capital spending on life-enhancing social assets, like schools, research labs and hospitals, may actually empower people. By rapidly educating its workforce, by brilliantly executing immensely large projects, by importing expertise and dollars in a shrinking world, China could be creating a "shower of wealth and productivity" such that consumption eventually "trickles through" into the bubble.