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".

India and China also share a geographical water tower that feeds their rivers. The high-altitude glaciers of the Himalayas birth India’s Ganga, Indus and Brahmaputra, and China’s Mekong, Yellow and Yangtze. Together, these rivers cradle nearly 3 billion people, or half the world's population. Alarmingly, a fifth of these glaciers have been destroyed in the last 50 years. The Earth Policy Institute calls 'the melting of these glaciers the most massive threat to food security that we have ever projected'. This has made China and India co-victims of a life-threatening ecological crisis. Will they co-operate to solve the problem, or go to war over food and water? Early signals are unclear. India is suspicious that China could be building dams to disrupt flows to downstream countries. Chinese researchers are not allowed to visit India's glaciers, and China is sensitive about allowing outsiders into Tibet. But if there's one area in which the two adversaries have sheathed their daggers, it's over the environment: Witness their near-perfect understanding and bonhomie at Copenhagen, as they closed ranks against the developed countries.

The India-China love-hate equation spills over into bidding for energy assets around the globe. See the way China outwitted India in Myanmar's Shwe gas project. In 2004, India's gas authority won the bid; but China leaned hard on the military junta to change the parameters, and wrested the deal. But of late, both countries are seeing plenty of merit in cartelising their purchases. China did not bid against India for Britain's Imperial Energy, and India returned the favour by staying away from Syria's Tanganyika Oil. Since China and India import 40 percent and 70 percent of their oil, respectively, the next step could be to pool their bids to maximise bargaining clout. Both would also like to join hands to kill the extra charge of $1-2 per barrel of oil, called the 'Asian Premium'. India has dangled a $7 billion bait of power equipment buys from Chinese companies to meet its stretch generation targets. Yet these are slivers of co-operation in an otherwise strained engagement; despite low-key promises of support, China is known to have thrown several last-minute spanners into India's exceptional civil nuclear treaty with America. Today, China is cocking a snook at India by giving Pakistan two nuclear reactors - a straight, uncomplicated tit-for-tat of the Indian-American deal.

A new theatre of competition for resources and markets is opening up in Africa and East Asia. China's state corporations are thrusting deep into Sudan, Nigeria, Zimbabwe and other African territories. While the Indian government is somewhat diffident, private companies are launching equally audacious bids from their relatively meagre balance sheets - just one Bharti Airtel has splurged $10 billion in buying Zain Telecom. Even as China wants a piece of the action in South Asia (with Afghanistan, Pakistan, Bangladesh and Myanmar), India is 'looking east' at the ASEAN +3 (i.e. Japan, China and South Korea) countries - it has already concluded free trade agreements with ASEAN and South Korea. India would like the grouping extended into East Asian Summit (EAS); to balance China's influence, India would not mind including the US and Russia. China, of course, would like the ASEAN +3 group to retain its primacy. While it's early days to see how this alphabet soup of emerging Asia-Pacific alignments will play out, it's just one more face-off that China and India have to deal with.

Perhaps the most perceptive commentary has come from Stephen Cohen, author of The Idea of Pakistan. According to him, "India-China relations are greatly affected by China's generally dismissive views of India." China regards India as a soft power which can be made to fall in line, if not totally dominated. China is convinced that "its civilization is older and greater than India's". India, with its "modest accomplishments should behave in a suitably modest fashion; Indian assertiveness, the Chinese believe, does not seem to be justified; given New Delhi's feeble economic and strategic record". Indians respond to this with "intrigue and fright". The perceptions at both ends are "mired in stereotypes", and awareness about each other is "abysmal". Many Indians suffer from a siege mentality, believing that China is out to encircle it by building alliances with Pakistan and Nepal. India is also hopelessly outflanked in the arms race - India's $30 billion defence budget is puny compared to China's official allocation of $70 billion (research group Rand Corporation estimates China's actual spend at about $200 billion).

So will this love-hate equation lead to collaboration or conflict? The answer lies in how each country ends up handling its politics and economics. If China clamps down on its quasi-openness, its politicians may be forced to ratchet up militant nationalism to try and deflect the upsurge in popular unrest. If India fails to harness its runaway democracy and create jobs, foodstocks and literacy on a massive scale, its politicians may be tempted to cloak their failures in jingoism. Ironically then, both countries will have to "control" their wildly opposing democratic urges to save the world from a ticking, epic conflict.

Yasheng Huang:

[Yasheng Huang is the professor of political economy and international management and holds the international program professorship in Chinese economy and business at Sloan School of Management, Massachusetts Institute of Technology (MIT). At MIT Sloan School, Professor Huang founded and runs China Lab and India Lab, which aim to help entrepreneurs in China and India improve their management skills.]

The economic re-emergence of China and India has created a virtual cottage industry of comparing, contrasting, and critiquing these two Asian giants. One of the most memorable products of this cottage industry is the phrase Chindia. The credit for this vivid coinage goes to Jairam Ramesh, currently the Indian Minister of State for Environment and Forests.

Chindia conjures up the image of two fast-growing Asian giants united by their common challenges and their recent success of managing growth and stability, by their — at least partially — shared history in religion and culture, and by their struggles in achieving national independence. Yes, the two countries have had their patches of difficulties, most notably the border conflict in 1962. But it is time to move on rather than dwell obsessively on that unpleasant phase of history.

Ramesh is optimistic about the future of the two countries but he is also balanced about the enormous potential that will be unleashed by their economic integration as well as many perils that may derail the future of two countries developing peacefully. But this sense of balance is entirely missing among the general economic and business chattering class. There the idea of Chindia is blown out of proportion. Chindia, according to one popular rendition, means that the two countries are fundamentally complimentary. One has the hardware; the other, software. One excels in manufacturing; the other in service industries. One is a textbook case of the wisdom of state capitalism; the other, a textbook case of triumph of market and private sector. One often hears the lament — tinged with envy for the other country — that China needs a stronger private sector and India needs a stronger state to build on its existing strengths.

It is time to douse some cold water on the exaggerated version of the Chindia idea. No amount of hype on the supposed Chinese and Indian complementarities can change the fact that the two countries basically have a similar factor endowment. Both have a huge population base. Relative to that population base, both have a shortage of knowledge and financial capital. (The fact that China exports a massive amount of capital is not a function of its factor endowment but of many distortions in its economic policies.) Poor and rich countries have different factor endowments and their economies complement each other. But poor countries compete with each other, for business opportunities, for capital and, increasingly, for energy and natural resources.

The fundamental characteristic of Chinese and Indian relationships is one of competition rather than cooperation. Consider the view that Chinese manufacturing and Indian service industries complement each other. However, the so-called complementarities are a problem to be solved rather than an achievement to be celebrated. The true Indian miracle will not occur unless the country begins to become competitive in its manufacturing, especially the labour-intensive manufacturing at which China currently excels. One of the most important success stories of China is the one least known and least emulated - its success in ramping up manufacturing in the rural area, drawing in hundreds of millions of Chinese into a globalised production supply chain.

India needs to do more to ramp up its labour-intensive manufacturing. For employment and income generation, China needs to retain its manufacturing edge. The absolute level of Indian consumption and the relative level of Chinese consumption are too low to absorb all the production. Th is means that the competition for export-oriented manufacturing FDI will intensify sharply in the foreseeable future.

Few Chinese agree with the Chindia view that their low service sector to GDP ratio is a badge of honour. In fact, they are alarmed by it. Chinese service sector to GDP now stands at 40 percent, one of the lowest in the world. This low ratio means that the onus of job creation is now placed disproportionately on export-oriented manufacturing, exacerbating global imbalances in the process. It also means that China is missing out many of the benefits that come from high-end service industries. Software industry puts Indian firms at the forefront of the global business developments. Firms such as Infosys and Wipro are now emerging global brands. China is eager to grab a share of the soft - ware business. It still has some distance to go before directly challenging its Indian peers. But it would be a mistake to assume the Chinese complacency about their manufacturing prowess.

Economic competition does not have to lead to overt conflicts. But here realities of Chindia are less reassuring. For one, despite the growing trade and investment flows between the two countries, the Chinese-Indian relationship is remarkably thin. That is to say, it is a relationship that does not transcend much beyond diplomats, business people and a tiny group of academic specialists. One reason why China and the United States have managed to survive a multitude of adversities is because their relationship is multi-pronged.

China and the US not only have a vibrant economic relationship but also a deep political exchange even among national and local politicians and educational and cultural programmes that acclimatise Chinese and Americans to each other. Not so in the case of Chindia. The average people on the street are hardly aware that the other country exists. The facade of Chindia may collapse like a house of cards should a minor clash occur on their problematic border. This is a high-maintenance relationship that requires a lot of attention and care.

Despite market reforms, the economic competition between the two countries is still substantially that of two states rather than one between two firms guided by a commonly agreed-upon legal and economic framework. Witness the travails of Huawei in India, which has been frustrated in many of its attempts to foray into India's booming telecom sector. Many in China complain bitterly about the dark conspiracy of Indian government to keep out Chinese firms and I have to gently remind them of trying to imagine a hypothetical example of Bharti Airtel trying to grab businesses away from China Mobile - in China. The point is that the two countries are now competing most fiercely precisely in those areas that are fraught with security concerns and nationalistic paranoia (such as having a common political and economic system). Many of the Chindia advocates may wish the 1962 conflict to go away as the two countries develop deeper in their economic ties. Economic ties have never erased their memory of the bitter history for China and Japan. Are there any rational grounds to believe that they will do so in the case of China and India?

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