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Event
May 11, 2010

Can China and India dominate the West?

with
Prem Shankar Jha

Hosted by the Henry Jackson Society, the renowned Indian journalist and author, Prem Shankar Jha, came to the National Liberal Club to deliver an exceptional talk on his groundbreaking book – Crouching Dragon, Hidden Tiger: Can China and India dominate the West?, where he offered his analysis on this most important of issues.

Transcript

We have an international world order, which is in a state of gentle meltdown.  In the sense that, everything we live with, right through for 300 years, to the end of the Cold War, is changing, and we really do not quite know how it is going to all come together again.  Above all, the rise of two huge countries, particularly China, but to a lesser extent India, in the last 20 years has thrown a whole new set of variables into the equation. The role players have, all the sudden, become a great deal more important after the onset of the recession, and again the global financial meltdown for obvious reasons, the least of which is the fact that by the time industrialized countries get out of this recession, India will have increased its GDP by about 50%, in about 4-5 years. China is managing 9% quite comfortably, whether it is sustainable or not, and I have reasons for believing that it might not be, India is doing 8%, it could go to 8.5%.  Clearly this kind of economic weight implies political responsibility that every country that has experienced a similar growth and found itself a new place in the international stage, has been through – the question is what role is it going to play? In this particular case, I will talk about both China and India, but in a somewhat different context.  It is in the context of the roles that they cannot play, that you cannot really expect them to play, and the reasons why.

I think both China and India are going to be driven, in their international relations, in the next 6-10 years, primarily by domestic compassions and constraints. The reason is, both countries are undergoing, China much more than India, a drastic change both to their political and economic system, both countries are going through a very rapid change into ‘capitalist societies’ essentially, from completely different points/starting positions.  But the main characteristic of this transition is that it creates large numbers of new winners and losers.  It totally turns social, wealth, and status-power relationships in society, upside down.  It has done so in the West, and you have spent 200 years getting on top of the conflicts it let loose. The sustainability of this kind of growth, or even a more moderate growth – I think that if you look at all the projections of China and India, it is expected to moderate in 10-15 years, sooner for China, later for India.  The point is, even moderate growth, 5-6% over the next 40 years, pre-supposes political stability.  All the projections that you see, whether it is Goldman-Sachs or the US National Intelligence Estimate, they all suppose political stability and the continuation of ‘open market trading policies.’  I am not at all sure that this would happen.  I think this is a huge assumption and because, we are somehow used to the conflicts that capitalism will generate, and is generating in China and India, it will be overcome, and overcome in such a way that it does not even disturb economic growth.  That is an Empire biased belief and assumption.

What I have tried to point out in this book, and I do it very briefly because we can talk, is the reason for my scepticism on this is that, neither China nor India have the political institutions in place, both the political and social institutions, which will automatically reconcile the conflict between winners and losers.  In the West, the three institutions that developed gradually, and sometimes at great cost, were Democracy, which gave political power gradually to the masses, Trade Unionism and the Welfare State.  All three interacted to create a harmonious society within the framework of Nation-State capitalism.  We (India) are going through Nation-State Capitalism, China does not have any of these institutions, and India – which started with a democratic political system, which was actually very good at adjusting to conflicts between ethnic groups and religious groups, between cast groups.  To our (India’s) horror we are finding that it has not been able to cope with the strictly economic rooted class conflict that is now emerging, as a result of a very rapid economic growth over the last twenty years.  There has been an assumption in the case of China, that growth will give rise to political stability in the form of democracy – growth means affluence, growth is privatisation, privatisation -> affluence, affluence -> democracy.  This was a strong assumption some time ago, and it is now weakening, as people are finding.

It somehow got stuck, when a very good book came out about two years ago, Attract Transition, which was a subtitle of the book, and I think that is exactly what is happening there, but this transition in China has not taken place. The reason is that the basic understanding of how China has developed, understanding in the West is wrong. It is a product of market economics, it is a product of greater competition, it is not a product of privatisation. Between 1978-1996, the number of state enterprises, large and medium, went up by 30,000, and the number of people employed by them, more than 7 million. The number of local government enterprises, all the way from prefectural and county down to the village level, went up from 247,000 to 7.87 million.  These are not private enterprises, they had all kinds of nomenclature, but essentially, they were all started by various levels of the state government. This huge expansion, which of course is reflected in equally expansive growth rates, but many ask, what was the driving force behind it? The interesting thing is the driving force behind it was competition between two strata of the cadres of the Communist Party. The central strata, which is at the Beijing level, and actually what are genetically called ‘local cadres’, which are actually 5 tiered, from the Province, down to the Village.

The way this competition began was when China wound up its centralised planning system between 1981-83. You then found, for all kinds of reasons, everyone wanted to develop; development was the mantra of what everyone had to do anyway. Also, control of all the resources associated with development: land, capital, particularly capital, mint, and of course, permissions. Simultaneously, as everyone knows, there was a great increase in corruption. There was considerable discontent initially in the 80s, caused by the destruction of the whole idea of egalitarianism that had existed before. For better or for worse, however much it was abused, it was very much there.  Now, the result and economy of this massive ‘cadre beast’ expansion was that the investment was zero risk. Basically at every level until 1998, the Secretary of the Party Committee, would pick up the phone or send a note to the bank manager – banking was entirely state owned at that point – and say ‘can you provide the following amount of money for the following project?’ Because he was a member of the Communist Party, and far out ranked by the Secretary of the Communist Party, he could not say no. Attempts were made from 1998 onward to curb this by a succession of banking reforms. They were only partially successful to date. The other thing was that the tax collection system was one that was weighted heavily at that point in time, before 1994, in favour of local governments who kept what they wanted and gave the rest to the Centre. So they kept 78%, and they used a good bit of this for the seat capital for this investment, so you had this colossal increase.  What it did to the economy was, because there was no market mediation, there was no demand and supply equation, there was no risk, people were not looking around to see who was still investing, going ‘where is the demand?’ There were no demand projections; you just had massive industrial duplication.

There is an OECD study, which has detailed figures for this, but I do not have time to explain them all, so I will give a few examples. One example, in 1999 there were 97 automobile plants in China, 15 of them produced 87% of all the automobiles. Between 1990-2001, if you look at the investment patterns of each province, in between 20-28 Provinces at this time, it was identical to the investment pattern to the country as a whole. So everyone was building the same things. The end product by 1995-96 was a huge excess capacity for industry.  The growth was actually fuel for the beast – so long as you were investing, investing, investing, money was going out, income was going up, but at the end of it, you could not sell what you had.  So there was a huge recession that hit China, which even today they have not recognized. They massaged the growth rate to show they had 8% growth rate, which is absolute nonsense. On the other hand, in that period from 1996-2002, several things happened: There was a tax reform in 1994, local government lost half their money and suddenly, they had a 25% deficit, between expenditure and income. The going was good, the township and enterprising profits were making good the deficit, then in 1996, as the recession came, they went belly up, millions went belly up. So what they did was they began forced privatisation, about 3 million of these enterprises were privatised over the next two years, forcibly in-fact. OECD has some good data on this.

The other thing was instead of giving money; they became sort of, heavy things around their neck.  The only way they could raise the money to meet their administrative obligations, which had actually increased even while the tax revenue was reduced, was by levying local taxes and fees, ad hoc local taxes and fees, fines and levies and all kinds of things. ‘We want to fix that bridge’, therefore everyone has to contribute, ‘we have to improve the party building’ therefore everybody has to contribute, it does not matter, you have to give it, you do not have a say. This was the main cause of discontent at that point in time, and between 1993-2005, the number of demonstrations against the state, against cadres, rose from 8,700, to 87,000. The number of people involved rose actually by 60 times. At that point in time, then President Hu Jintao said ‘this has gone far enough, we have to abolish all the ad hoc taxes and fees’, and for good measure, he abolished the agricultural tax and the fee on local governments, the Centre and provincial governments will make good the deficits. Which is all fine, but the problem is between 2002-2008 with the onset of growth, you would have thought that maybe discontent would have gone down, but it did not because this hectic development required land and land was being taken over left, right and centre.  There is not that much arable land in China I’m afraid. The end product of this was that 60%, the number of demonstrations kept rising, they had become more intense, more violent, the numbers involved now are 10-20,000 at some of the bigger ones, and there are more than 90,000 demonstrations each year. This is an estimate, as the exact numbers are not publicised, by the Chairman of the Social Issues Research Centre of the Rural Development Institute of the Chinese Academy of Social Sciences, in a formal lecture in Beijing last December. There have been more than 90,00 of these demonstrations and protests, every year for the last four years.

This situation has gotten terribly worse, and the recession has finally made it worse still, because it has really hit the labour intensive sectors of the Chinese economy. About 80% of the employment since 1997 has been in the export sector, which has boomed and boomed and boomed, that is where the 3 trillion dollars of resources comes from, but they lost jobs, and I made a calculation that from 1997-2002, 73 million people lost their jobs and became ‘casualised’.  They were not migrant workers, they were not in towns for the more than 6 months required to be registered as migrant workers or to be calculated.  They were truly ‘casual’ labour, 73 million people.  Now what happened in this period is land has became the central issue, and mining concessions have become a major bone of contention with things going on. The end product is that you really have got a steadily rising level of social discontent in China.  The worst attempts of the 17th Party Conference to start a process of democratisation, elections – just the beginnings of the talks to separate the judiciary, with the onset of recession and the loss of jobs, 25 million over 3 months in four western provinces, the government has clamped down again, they have gone into reverse gear. So the question is, how long is this going to go on?

China has tried to overcome the global recession by investing 4 trillion Yuan in two years.  In reality what they did is they took off the restraints on the local governments, and the actual investment had been 10 trillion Yuan in the first year.  The number of proposals for investment that came in within six weeks after announcing the special package, added up to 25 trillion Yuan.  Centre’s capacity to control the provincial governments and other sectors of government, is limited.  The trouble is 80% of investment is still going into infrastructure, and into steel and cement and heavy machinery, this is coming at a time when at the end of 2007, China had again reached the situation they were in 1996-7, which is of huge access capacity. Just a couple of figures: by December of 2005, there was 100-480 million tons excess capacity in steel and there was 150 million tons of capacity being built, constructed or already planned and ready to go. For aluminium, the figure was 3.62 million tons of excess capacity and 10.3 million tons, with 25 new plants coming up.  For the automobiles, 2.3 million tons excess capacity with another 8 million planned. This was the situation for 2005, much of it came into being, and you already had huge excess capacity.

Now, what is happening in China is they are investing in the most heavy industry possible, which means since all this comes from big oil or big industrial centres, 90% of this investment has taken place in urban areas. The people who have lost their jobs are in the rural areas, so the urban-rural income gap is increasing even more. At the same time, the business statistics on which the local governments depend for their mean income has shrunk because of the recession.  Here again you have a fiscal crisis, you have a fair number of unemployed people who are back home and staying home because there is nothing they can do about it for the time being, because the kind of jobs being created are not the kind of jobs being lost.  The investment being done is creating a bigger bubble of excess capacity, and we do not know where it is going to go.  One result of this, in a sense how to cope with this, one of the things the Chinese government is relying on is the nationalism of the new middle class. There is an element of hyper-nationalism developing in China, which is visible in a number of events that have happened and in reaction to some events that have happened, like what happened in Tibet in 2008. There are other reactions, and the strength of the opposition of Obama or Sarkozy meeting the Dali Lama etc, there is a hardening all around, journalists have been told there are 18 subjects on which they cannot report and the Chinese attempt to take control of the internet. These are both going in the wrong direction, the idea of controlling a population that is more and more aware and capable of making lateral connections, and taking up issues with the government and by more and more control, this is not a long-term solution. Yet, the kind of economic development, the bigger and bigger bubble in infrastructure capacity is one that cannot be sustained forever, and I really do not know the solution to this. I do not underestimate the control and ingenuity of the Chinese government, but in any other country, this would be a huge bubble that would one day explode.

Now the problem is, we come to India. India is very simple, actually, because what has happened is the democratic system with federal democracy, with ethnicity at the base, has actually given us great stability over the last 60 years and in fact, we have been able to combine democracy with growth. Our system is exceptionally well geared towards bringing together ethnic groups, which actually divide society vertically. The divisions run vertically, each of them has an elite and an impoverished element at the bottom, some more, some less. So the technique is to go off of the aid, by getting political concessions. The conflict that is now developing, and which is visible in festering insurgencies in the northeast of India, is this new development of Maoist insurgence in central India, which is very serious because it affects 10% of the districts.  Government almost lost control of those districts. Police cannot go, it is not safe, they get ambushed and just cannot go in. This is the beginning of classic class conflict, which is horizontal conflict.  The bottom 10%, particularly in the central belt, have picked up arms.  Why has this happened? It is because of a perception that the saints take us all up, regardless. This is not new, because the Indian democracy is a vastly expensive exercise, and there is no state funding of relations.  It has been one or the other form of funding by some strata of people who have money.

Until 1991 the political strata had made an alliance with small and medium entrepreneurs and intermediate strata consisting of small and medium enterprises create and returns, and co-opting the bureaucracy. This intermediate strata, in the rural areas – the same area as the Maoist areas – are effectively ruled by contractor, policeman, and local party bosses.  It led to a steady encroachment on their land, on their rights, on the forests in which they lived, etc, for which they in fact, under an 1894 law passed by British India, have no rights to at all. The rights of traditional communities were not recognised in India. We continue to work with that type of law in place. What happened after liberalisation was that the link between the administrative and political system was replaced, the administrative disappeared with the disappearance of all the kind of restrictive legislation against large-scale enterprises, which had maintained an anti-military regime in the past, and which in fact had given us a 3.6% growth rate for 40 years, one of the five or six lowest in the world. When this finally broke down, and with liberalising and modern reforms in 1991, Indian capital came into its own. One of the things it did was it replaced this group and became the financier of all the political parties. One of the results, in Tajiskar, which is in the core of the disaffected areas, the government gave out 159 mining licences in 8 years. It is also equally interesting that not one has been implemented. This is the problem we are facing. We have not been able to make the democratic system that worked beautifully in reconciling vertical differences, work in reconciling differences between economic strata.  Until we do that, we too are going to be completely absorbed internally. What does that mean for international affairs?

I think both in India and China, key international affairs initiatives and positions and reactions will be determined by internal compulsions. In China, it is the compulsion of the leadership to retain the Mandate of Heaven, in an increasingly difficult situation. In India, it is the opinion and beliefs of a new, very powerful, very aggressive, capitalist middle class that has come into being, since 1991 and which truly controls the government, and which actually has no checks on it. Our trade union system has collapsed, we do have democracy but it is not working – these people have bought the state. We do not have a welfare state – so we have none of the humanising elements Western capitalism requires, and therefore the conflict between rich and poor is becoming more drastic every day. As the fear rules in the subconscious, in the new capitalist middle class of India, so does the aggression. This aggression is coming out towards Pakistan, Nepal, towards Bangladesh, it even came out in the standoff with China that took place last October-November. I wrote an article saying, ‘please understand, this is not a border dispute, the real issue is that you cannot allow the Dali Lama to go to a very sensitive area which is part of a disputed border area with the entire international press behind him.’ If you do, frankly what has happened is the Chinese have given us a completely unambiguous warning that it will lead to war and we better listen. I got 208 emails in 18 hours, actually 207, one guy agreed with me.

With regard to China and their sense of nationalism, despite a recession, why has it not been quelled? The actions they have had to take to fight the global recession were not actually fighting the global recession. They were fighting an internal recession that was about to set-in, in the way it had in 1996, because of a glut of investment and that investment that has taken place is the wrong kind. It is all centred in the urban areas, whereas the people who have lost jobs have gone back to the rural areas. It is also the local government that has lost their income streams or the income streams have been thinned down, and will still have to make good the money they need for administrative expenses and will have to levy taxes and fees, no matter what the Centre says. The degree of control of the Centre over the local governments has never been anything close to perfect in China. Predatory behaviour by the state is increasing, as a result the insecurity of the ruling elite is also increasing because they are more afraid of losing the Mandate of Heaven, so they are using nationalist sentiment as a way of establishing and maintaining that Mandate of Heaven. The worse the situation becomes, the more aggressive they will become nationally.

If investments would have gone to rural areas, would they still have been radicalised? The radicalisation has taken place because migrant workers after 30-60 years of reform still have no place in China, the right of residence is not given to them. They work 50% more hours at 1/3rd to ½ the rate of the resident Chinese. They pay full market rates for renting the hunts and slums in which they live, they pay full rates of their children go to school, all of which is subsidized for the urban workers, and yes they are very radicalised.  Now what is happening is they are loosing their jobs and going home, and the danger is they will spread this new radicalisation, with the capacity to organise, on top of the discontent that already exists in the rural areas.

The stability of the Russia- China border is not something I can say much on, but the problems that occur on the border are in the religious parts of China, if you go westwards and north-westwards, you find there is greater poverty and greater disaffection. There are large areas, very sparsely populated, but with deeply disaffected ethnic minorities, and that is another problem over and above the problem in the core areas, the Han areas themselves. If the Han areas are in a situation like this, you can imagine what is happening in the rest of the country. The problems are mounting in China, and they are not difficult to solve, but they are not doing it just now.

What kind of institutions could China build that would be compatible with its traditions and which could, in a sense, create the institutions for self-regulation of discontent? I think the most important thing to remember is that they must be compatible with the Confucian tradition, and the Confucian tradition really is one in which the ruling class, or elite, or Imperial class, whatever you want to call it, must rule through virtue. The ideal, the Confucian ideal, is that the perfectly virtuous ruler does not need a police force because everyone in their own best interests will listen to what the ruler, him or her, asks them to do. This is of course the ideal naturally, and does not get achieved, but what it translates into is a constant self-reflection within in the ruling elite in China, whenever it faces generalised discontent, the reaction goes somewhat as follows: How could this content come up? First you try to isolate them and deal with them locally. If you find that so many of these same issues are coming up, and they have similar characteristics, then start examining yourself and say ‘what is it we are doing wrong?’ This has worked in the heyday of every Empire in China, it is also precisely the way that Hu Jintao approached this question when they began to feel, after some surveys in 2000, that the ‘growth will solve all of our problems’ strategy was not working. This processes strategy has actually broken down because of the insertion of individual greed into the situation.

Allowing the individual acquisition of capital and not strongly questioning where it comes from, has created a vested interest in something called the ‘right of rightful resistance’, which the people enjoyed against the administrators of the Confucian order – the right to appeal to one higher. Saying, ‘look, these are your rules, and they are not being obeyed by your own administrators, they are flouting it, do something about it.’ That right, the rightful resistance, this is breaking down, because within the Party there are all these networks, huge networks of corruption, and the fact that the moment that corruption comes in the Confucian system breaks down. Therefore, you have got to start moving towards a system in which you empower the people to present their own cases, to take these people to task within a political-legal framework. The two most positive things in this are one, the separation and creation of an independent judiciary, very, very important, and second you must start allowing genuine elections, at least at the county level, no monopoly of the Party. I do not believe that this is incompatible with the continuation of the Congress Party dominance provided the Communist Party then says ‘look we will watch these people, and the best guys at the county level, we are going to invite them to become members of the Communist Party, if they are not already members’, because otherwise they will not be able to go any further up. These are the two things that are absolutely imperative. The movement began in this direction, then came the recession, Tibet and so on, and there has been a kind of drawing back, that does not mean it will not start again, because the forces within the Communist Party that want these changes are very strong, they have not changed either.

The McKenzie Report came out recently with some figures on the investments China had made with regard to its infrastructure and attempts at advancing its society technologically within its bloated cities. The issue is not that one-day these 200, massively populated, cities in China will be filled, but it is everything – money has a cost. This kind of investment presupposes that money has no cost. The payback period on the Maglev train in Shanghai is 167 years, that is the kind of investment that is being made today.  No question of ‘how do you get the money back?’ At this moment, why are we talking about the future when a huge percent, 50-70%, of the real estate that has been created in the big cities is not occupied. The cost of real estate is rising, but the capacity to pay is not there. So you build 200 more cities, sure you build them and they will be there, but they will be empty.  This is the choice they make. In 1997 there was a 70% lack of occupancy in the real estate that had been built in the last 10-12 years. The price was brought down, and some of it was given away for almost nothing, the same bubble has come up again. Therefore, real estate is the most obvious investment bubble, but you can have an investment bubble in anything. Before the global recession, 90 million tons of iron ore was sitting in the ports of China because the steel plants would not take them, there was no demand. The intentions maybe right, but it somehow presupposes that the demand will rise out of the necessity to meet the supply. It presupposes there is no such thing as trade cycles, and that you do not get such things as a glut of investment and a glut of capacity, none of which I believe, I think McKenzie is wrong, but we will see.

The Chinese relationship with Iran over Central Asia is not intended to undercut the West, there is no Imperial design behind it. China is a voracious consumer of all raw materials. Just to give you one example, they consume 3 times as many raw materials and a little over 2 times as much energy per dollar of GDP as India does. The figure in the case of the US and Japan is 6 and 7 times as much per dollar GDP, and the reason is of course that so much of it has been wasted in surplus capacity that 15 out of 97 automobile plants were producing 87% of the automobiles in China ten years ago. This kind of excess capacity also eats up raw materials, it eats up everything, and the Chinese are just trying to feed their economy – this is not an aggressive move, this is being miss-interpreted. I happen to agree with the Chinese on Iran, you do not isolate Iran, by isolating Iran you make it more dangerous. Not everything being done is by any means threatening, but at the Beijing level, there is immense pragmatism, but that does not change the fact that there are the absolute no-no’s of the Western void, you do not make China revalue the Yuan. The trade theory, the economic theory, on which this is based, ceased to exist with the rise of globalisation. It is based on Draconian international theory, which presupposes complete units, national units, collected to each other to trade alone, not even capital movements.

Today China is connected to ASEAN, Korea, Japan and Taiwan for imports, and the US and the EU for exports, it is the middle man if you like. It cannot afford to raise the value of the Yuan with an aging and growing population and this huge debt of investment. The real wages are rising very rapidly in China – there has been a 16% rise in the last 6 months to one year. When there are shortages of labour because the population is aging faster than anyone had anticipated and I therefore think you do not want to put pressure on China. If there is something that can make China do something it would regret afterwards, it would be this kind of pressure. What it brings to mind is the kind of pressure that was brought to bear on Japan, which was in very similar circumstances in the early 1930s, a long period of strong growth and a Confucian Structure with no safety valves, no trade unionism, and no welfare state, relying almost entirely on its legitimacy from the continued growth and therefore, you know what happened after that, all kinds of pressures, oil embargo and war. I do not think this is a direction we should go, this is one thing I think we should be very careful of, the other one is trying to put a carbon tax on China, absolutely the wrong things to do.

India is an easy problem, we have an internal problem, we do not have an external problem. Dealing with our own new stupid, aggressive capitalist class, unfortunately we have a very strong civil society in India, which controls opinion making the media, etc. I do not feel that India’s problem is in the future, everything it does, is based upon, for a long time, the assessment of internal repercussions, which means India will not be able to play the kind of dramatic decisive role that the rest of the world would like it to play. One reason for this is that we have countries with immense problems all around us in South Asia and we have to deal with that first, and in dealing with that we have an aggressive middle class that says bomb them, bang them, shoot them, declare war, etc, all these jihadist’s from Pakistan, let’s go pummel them, lets attack. We have our problems too, we can also be aggressive.