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Comparative advantage: India vs China

Chinese strongman Li Peng's visit to India will have the usual suspects in ecstasy: the fellow-travellers of the Jawaharlal Nehru University, the gerontocracies of West Bengal and Kerala, and the Nehruvian Stalinists of the media, especially those who publish verbatim propaganda from Xinhua under the bylines of their stringers. We can expect hosannas and hallelujahs aplenty.

But I expect nobody will do a serious analysis comparing us with them objectively. The majority of the media coverage will, starry-eyed, hark back to the allegedly wonderful days of Hindi-Chini bhai bhai; or it will be filled with tales of China's glorious revolutionary success in the fields of manufacturing trinkets, toys, garments and small electrical goods. I had the dubious pleasure recently of hearing a famous comrade hold forth on how "in the next few months" China was going to become a major power in information technology, too! I wait with bated breath.

While admitting that there is no room for complacency, given our own incompetent bureaucracy and pathetic politicians, I am of the opinion that le defi Chinois, the Chinese challenge, is grossly overestimated. See my previous column China doesn't matter. While there is the possibility that like Japan, China may also march rapidly up the value-added chain, I think there are fundamental reasons that they will not necessarily outrun us. I will consider this later in this column.

We had already received advance notice of the arrival of the great man, in the form of Maoist-inspired rioting in Nepal targeting Indians, based on rumour-mongering by Leftist students. It so happened that it was convenient for both China and ally Pakistan to create some fuss in Nepal to bother the Indians. Not surprising, since as was reported widely in the US, Li Peng was the butcher of Tiananmen Square, and he knows democracies are far less willing to shoot students than totalitarian states are. The man has done his sums, and so have his mandarins.

From China's point of view, this is a handy demonstration that the buffer state is no longer Tibet, but Nepal. Instead of the huge land-mass of Tibet (this constitutes fully one third of the land area of China today, even though they have carved up the original Tibet into several provinces) we have relatively small Nepal as the only thing standing between us and the People's Liberation Army.

Maoism is dead in China, but Maoists, no doubt sustained by Chinese money, are vocal and visible in Nepal. And they want, naturally, to make Nepal a Chinese satellite. A simmering Maoist insurrection in Nepal has the potential to cause the country to fall headlong into Chinese hands, a very grave danger to Indian geo-strategic interests.

Nepal has already become a conduit for Chinese goods to be brought into India surreptitiously, by pretending there is high value-add in Nepal whereas they are merely being trans-shipped using the Indian duty-free regime for Nepali goods.

From Pakistan's point of view, this is a handy demonstration of the extent to which their ISI has been able to infiltrate Nepal, 'the world's only Hindu kingdom.' They calculate, I suppose, that it must be galling to Hindus to see the kingdom turn into a hotbed of Islamic terrorism. Furthermore, I am sure Pakistanis have been fuming at the recent anti-Pakistani demonstrations in Bangladesh: what better than to foment anti-Indian rioting in Nepal?

The other issue is that of economic warfare. There has been a spate of alarming articles in the Indian media about how high-quality, low-priced Chinese goods are invading the Indian market, and how these will drive Indian producers into bankruptcy. There are allegations of Chinese dumping or predatory pricing (that is, selling products in India at prices below actual cost, tariffs and shipment included). Other reports have suggested that this is good for the Indian consumer, even if it is bad for the Indian manufacturer.

While I am a free marketer in general, there are some obvious problems here. For the Indian consumer is also the Indian manufacturer: obviously if all the profits, and the jobs, related to manufacturing migrate to China, eventually there may not be that many Indian consumers either because the earning, and therefore purchasing, power is diminished.

There are interesting ideas for tariff and non-tariff barriers intended to discourage over-enthusiastic exporters. There is nothing morally or practically wrong in erecting stiff barriers. Why, even those ardent purveyors of free trade, the Americans, do this all the time. Why do they not allow the free movement of labour, abolishing visas and the like, they who are so dogmatic about the free movement of capital? Because they have a comparative advantage in capital, and don't really want all those foreigners showing up in their country.

The Americans and the Europeans also build huge barriers to protect their inefficient farmers (who are very good lobbyists, however). This has led to the "wine lakes" and "butter mountains" that are monuments to improper subsidies. Americans pay their farmers to let their land lie fallow, not to produce crops. There are also insane policies that encourage the over-use of water, as exemplified by the cultivation of rice in semi-desert California due to the pricing of water at zero cost to the farmer.

And, of course, the Americans have been quick to take unilateral action with their Super 301 provisions, which I think violate their WTO commitments. This has led to the infamous Helms-Burton law (yes, Pakistan's good friend, Dan Burton) and to the "banana war" with Europe. Americans think nothing of pursuing national economic interests, other issues be damned.

My favourite non-tariff barrier was the 1980's French decision to route all video-cassette recorders coming into the country through the tiny customs facility at land-locked Poitiers. Result? The import of Japanese VCRs slowed to a trickle, as they had to be shipped from some far-off port and then laboriously checked by the small staff at Poitiers. Mission accomplished.

So I think there is a legitimate case for pursuing certain sensible policies intended to slow down the alleged Chinese onslaught on India. We should do what any self-respecting economic power should do: look after our own interests. This may take the form of shielding domestic manufacturers behind tariff and non-tariff barriers. China getting into the WTO will make this a little more difficult, but not impossible: there are creative ways.

One of these creative ways is to insist that all goods being imported into India have to be certified by the Bureau of Indian Standards, have to have their specifications printed in English and two regional Indian languages, and have the price marked in rupees. I am sure this can cause sufficient delays to make the proposition unattractive to the importer.

However, there is more to it. China may actually be genuinely more competitive in manufacturing. For instance, their factories may be more productive than India's and may enjoy economies of scale. Their infrastructure being better, they may be able to get goods to market faster. They also have the advantage of free slave labour in some cases: can't beat the cost when political prisoners are forced to be factory labourers. Even when it is paid labour, because of universal primary education, the workforce is likely to be fully literate unlike in India.

But they may not be using proper accounting practices and so in fact may be underestimating their costs: after all, many of the SOEs (State-owned enterprises) in China are, just like our Nehruvian albatrosses, huge money-losers that have lost their capital base many times over. It is entirely possible that some of these products are genuine money-losers, but that it is all being absorbed by the state-owned banks. The banks may come crashing down one of these days; after all they currently have non-performing assets at alarming fractions of their assets.

Today it is true that cheap Chinese products at the low end consumer market have flooded the market around the world, not only in India. It is practically impossible today to buy a stuffed animal or a small alarm clock or myriad other things in any US department store without its having been made in China. The US has a huge trade deficit with China based on this.

There are two future paths for China. One is that it can follow in the footsteps of Japan and move up the value chain. After all, Japan also once produced low-end, unimaginative products, and look where they are now, the masters of well-designed products. It is an intriguing tale as to how Honda brought its small motorcycles to Los Angeles and created a niche market; and the entire Japanese automotive industry has never looked back. Okay, China may be able to do this too.

The other possibility is that China will remain the coolie of the world: stuck in the rut of making low-value-added manufactured products for the rich world. This has happened to Mexico: as far as I can tell, the NAFTA has ended up just dumping dangerous and dirty work into Mexico in the maquiladoras.

So what is the future for China? Is it Japan, or is it Mexico? More importantly, what is India's future? Japan or Mexico?

I am of the opinion that these analogies may not be particularly valid for either China or India. For, both have a history of producing high-value goods. Samuel P Huntington in The Clash of Civilizations quotes data as to how, as late as 1700 CE, China accounted for some 33 per cent of all world trade, and India for 25 per cent.

But where are they heading? The answer to this lies, I believe, in the nature of the future of industry. I wrote an article several years ago called, 'The Zero, the Great Wall, and Hollywood: How the Silicon Valley was built.' My thesis was that the three largest groups in the Valley, Americans, ethnic Indians and Chinese, brought their peculiar national strengths together to create the Valley's ethos.

The Indians brought their characteristic strength: abstract ideas, such as the zero, the astonishing Paninian concept that the infinite variety of expression in a language could be modeled concisely in a small set of rules, Hindu and Buddhist philosophy, yoga, quadratic equations, infinity itself.

The Chinese brought their strength: concrete implementation, such as the Great Wall, the printing press, the magnetic compass, paper, gunpowder.

The Americans brought their strength: the selling of dreams, and the marshaling of large groups of people and large amounts of money for massive projects. Essentially what Hollywood does, or venture capitalists do or McDonald's does.

In the first twenty-five years of the Valley's history, when hardware was king, it was the Chinese who prospered as compared to the Indians. Chinese entrepreneurs made fortunes on the PC boom, partly by shifting manufacturing overseas to Taiwan, Malaysia, etc. They have proven to be adept at large-scale manufacturing. In fact, I think most PCs in the world are now made in East and Southeast Asia.

However, the situation changed when the realm of discourse went from hardware to software. As the Internet boom took off, we started hearing more and more about Indian entrepreneurs; hardly a handful of Chinese have made a big impact in this area. This leads to an interesting conjecture: Chinese are, and will be, stuck in the low-value-added task of building the hardware.

The real intellectual property and creativity are in software, the realm of pure ideas, where Indians excel. That which will grease the wheels of industry in the future is abstraction. Therefore, I see a triad emerging in the computer industry: design and marketing in the US, software and intellectual property in India, hardware in greater China.

In this scenario, India's facility with intellectual property -- and the success in software is certain to spill over into other areas -- will mean that it will be the one that leads in the sunrise industries. While the sunset industries, like shipbuilding, bulk chemicals, heavy industry, and so forth will migrate to China. This is as per the theory of comparative advantage, where a nation that is good at building x will sell x to another nation which makes y and needs x.

If this is the case, we should be happy to leave the sunset industries to China. Let them make the dry cells today and the gas turbines tomorrow; fans with built-in inverters today and aircraft engines tomorrow. But none of this will be as exciting as bio-informatics, nanotechnology, genetic engineering, etc where India will excel.

I believe this is likely to be the case, and I blame the language for it. The Chinese language is well-suited for creating pattern-matching circuits in the brain. That is, from childhood what you are looking for is patterns in the written pictograph. But it becomes very cumbersome to express new ideas in this kind of a language, because you have to invent a new picture to convey the idea. And get lots of people to agree on the meaning of that picture.

This is why the Japanese too, despite their simplified pictographs, have seldom been able to come up with fundamentally new concepts. They have used their traditional strengths, the ability to package and present, their ability to focus minutely, to become the world's most innovative users of new ideas created elsewhere. It remains to be seen if the Chinese will be able to do this as well. Their current output is much more crude, although it is true that in the past they have created ceramics and art of great beauty.

In contrast, alphabetical languages are much easier to handle: they are inherently more suited for abstract thinking. Indian languages are all alphabetical, and it is possible that the alphabet itself was invented in India. If my hypothesis is correct, then it all comes back to language. And remarkably, in the Vedic tradition, the Word, Vak, was the second creation, after Agni, Fire. The second most useful invention or discovery made by humans: communication.

So I think India's fate is neither Japan's nor Mexico's. Her future is brighter. As for China, I think its future is more likely to be Mexico than Japan. This is why I am not quite as worried about China as a lot of Indians seem to be.

Postscript

The long and detailed postscript to my previous column got buried under a little-noticed link by the rediff folks, so I urge readers who missed it to go there. It had a lot of information about Pat Robertson, a scary man who a few years ago was a serious contender for the US presidency. He is a dangerous fundamentalist whose fulminations against Hinduism are symptomatic of what has led to Christian attacks on Hindus and Buddhists in the northeast.

There is also the incomprehensible attempt by TiE (The Indus Entrepreneur) to open branches in Pakistan. Yes, it is true that there are Pakistani members of TiE, but let's have a little decorum, shall we? After all, the two countries are practically at war. I mean, for heaven's sake, the cricket series between them has been cancelled!

Clearly TiE is trying to be idealistic. But I am really unsure that it should be indulging in "IT diplomacy" that may hurt India in the long run. For, after all, the vast majority of TiE members gained their education at the expense of the Indian taxpayer. TiE and others need to be engaging in building their lobbying power. They, and Indian groups in general, have no clout still in Foggy Bottom.

Instead of figuring out how to support Pakistani IT, TiE should be spending their time lobbying against the possible appointment of Shirin Tahir-Kheli as the US assistant secretary of state for the sub-continent (or a similar post in the National Security Council). This woman's appointment would be disastrous for India, as she has demonstrated her total partisanship: I read a US report that said she has called the BJP "a bunch of Hindu fanatics." How the Indian-American community failed to foresee this threat is unclear: maybe many were busy reciting Urdu poetry in get-togethers with Pakistanis.

She's a Mohajir migrant to Pakistan (let's note that the dictator Pervez Musharraf is another such), and her father is a nuclear scientist in Pakistan (I think). She's married to an Afghan. Fine credentials indeed for an unbiased bureaucrat. If appointed, she would be Robin Raphel and Barbara Crossette combined. The Pakistanis are whooping up this possibility, figuring they have stolen a march over the Indians, and that the famous Nixonian tilt against India can be replicated in Bush II. They may not be wrong. The NRIs have to rally around and nix this particular appointment.

Rajeev Srinivasan