FöreningsSparbanken Analys Nr 34 y 28 november 2005
There is a need of an expanding Indian manufacturing sector – and it will never be simple to invest in China Föreningssparbanken fick nyligen träffa två av USA:s främsta Indien- respektive Kinaexperter, professorerna Pranab Bardhan (Berkeley) och Barry Naughton (University of California, San Diego). Nedan återges i korthet några centrala erfarenheter och forskningsresultat av dessa välrenommerade experter. Tillsammans svarar Indien och Kina för närmare 40 % av världens befolkning.
Bardhan hävdar att Kina i många avseenden kommit klart längre än Indien – men också att Indien kommer att knappa in inom många områden under det närmaste årtiondet. Samtidigt som både Indien och Kina för närvarande bedöms i en alltför positiv analytisk dager.
Naughton å andra sidan anser – vi frågade honom enbart om Kina – att utsikterna för Kinas ekonomi måste ses med realistisk optimism. Han menar att investeringar i Kina alltid måste vara strategiskt genomtänkta och varnar för allmän flockmentalitet.
Hubert Fromlet
Ekonomiska sekretariatet, FöreningsSparbanken AB (publ), 105 34 Stockholm, tel 08-58 59 10 28 E-post:
[email protected] Internet: www.foreningssparbanken.se Ansvarig utgivare: Hubert Fromlet, 08-58 59 10 31. Cecilia Hermansson, 08-58 59 15 88, Jörgen Kennemar, 08-58 59 14 78, ISSN 1103-4897
Pranab Bardhan (Berkeley) on India:
In which areas do you see major progress in recent years?
Considerable progress has been achieved particularly in software and IT-related services. This is quite well-known. It is an important development, but it will not solve the big unemployment and poverty problems. Thus, the whole IT sector employs somewhat more than 1 million people, which should be related to the total labor force of around 400 million people. Consequently, a significant expansion is needed in other sectors.
Which sectors are you talking about?
60 per cent of the labor force is in the agricultural sector, where productivity has not been improving. Moves to higher valued agricultural production would be positive. But this requires a lot of marketing resources which India has not yet gained access to. Furthermore, manufacturing needs to become much more important in the long run, i.e. consisting of labor-intensive production and marketing.
In other words, there is a long way to go?
Yes. But Indian companies are already competing well in pharmaceutical and biotechnical products, and recently also in car components and certain steel qualities. However, these products are not labor-intensive. We find the production of this kind of goods, for example, in China and Vietnam. It will take a long time for India to become a major player in global manufacturing.
What's the reason for this lagging development?
One could mention inadequate conditions for financing small firms. Apart from that, negative institutional conditions for the corporate sector can be singled out as competitive disadvantages. More than 600 products are only allowed to be produced by small companies. Thus is a major impediment to mergers in these product areas. This also implies that more effective large-scale production cannot be achieved for these 600 products given the current regulations.
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FöreningsSparbanken Analys Nr 34 y 28 november 2005
What about conditions for the Indian labor market?
There is still a rigid labor law. Companies with more than 100 employees cannot lay off anyone without the permission of the government. However, in the more liberal Indian states, this law typically is violated by a more modern application. It is a microeconomic impediment to growth all the same. There is not enough flexibility in hiring and firing. This leads to an insufficient increase of new jobs. Consequently, India today will not benefit automatically from its demographic advantage, compared to China in the next two or three decades. Many more jobs have to be offered to young Indians. In past decades, job expansion has been quite bleak.
Are there other impediments to growth?
Major inadequacies in infrastructure – including roads, railways, ports, power generation and communication – should not be forgotten. In these fields, India is much weaker than China – despite visible Indian improvements in national highways and telecommunications. Power generation is clearly insufficient. Progress in basic education is still very poor which should not be forgotten when reading about the big absolute number of Indian engineers. Adult literacy in China is much higher than in India. Indian problems in health care are probably even worse than problems in education. Improving basic health care is limited not only by big public deficits and short financial resources, but also by lagging incentives within the health care sector. Infant mortality in India is 6 per cent compared to 3 per cent in China. On the other hand, India's financial infrastructure is much more advanced than China's.
What about the future?
The environment will remain a big problem for both countries. Ten years from now, Indian and Chinese growth rates should be much closer to each other. Both countries will have institutional shortages for a long time. Infrastructure will improve in India. China will have to solve its big problems in the financial sector. At present, Indian growth potential seems to be overestimated and Chinese risks underestimated. However, it should be added that India is far superior to China in handling political conflicts.
FöreningsSparbanken Analys Nr 34 y 28 november 2005
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Barry Naughton, (University of California, San Diego) on China:
Do you see sustainable growth in China?
There is good reason to be optimistic about China in more general terms. At the most fundamental level, real improvements are going on and should do so in the future. However, the current economic conditions contain some risk factors. The investment ratio is by far too high – without knowing when a turning point may show up. It cannot be ruled out that such a development may come as soon as next year, with a spillover to the banking sector. However, I have been worrying about such a development for quite some time, and I still worry despite some improvements in the banking sector.
Institutional reforms are particularly important in emerging countries. What can be said about this issue in China?
So far, institutional progress has been disappointing. Necessary steps are not taken despite all those intelligent people. This is the conclusion on a more general level. In the late 1990's, institutional ambitions were higher. Things are less impressive now.
Do you see China now as a market economy?
The answer is yes. Of course, China is a distorted market economy. The government intervenes a lot.
What about future political and market-induced conflicts?
There is no way to return to a less market-oriented system, even if the communist party obstructs certain developments. But it seems impossible to give a clear answer to your question. We do not know much either about the future of exogenous distortions or their probabilities.
Should strong Chinese growth rather been seen as an opportunity or an increasing risk for the rest of the world?
There will be threats but also large opportunities. However, I think that the world economy as a whole will adjust. On a corporate level, it never will be simple to invest in China. Investors should be strategic and careful.
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FöreningsSparbanken Analys Nr 34 y 28 november 2005
Aktuell litteratur: Bardhan, Pranab. “Awaking Giants, Feet of Clay: A Comparative Assesment of the Rise of China and India.” Forthcoming in: Journal of South Asian Development, April 2006. Fromlet, Hubert. “India Versus China – Who Will Be the Winner in the Long Run?” Economic & Financial Review, EEFC, Autumn 2005. Ho, Takatoshi / Rose, Andrew K. International Trade in East Asia. The University of Chicago Press. 2005. Prestowitz, Clyde. Three Billion New Capitalists: The Great Shift of Wealth and Power to the East. Basic Books, New York. 2005. Milken Institute. Best Markets for Entrepreneurial Finance (Capital Access Index 2005). October 2005.
Ekonomiska sekretariatet 105 34 Stockholm, tel 08-5859 1031
[email protected] www.foreningssparbanken.se Ansvarig utgivare Hubert Fromlet, 08-5859 1031. Cecilia Hermansson, 08-5859 1588 Jörgen Kennemar, 08-5859 1478 ISSN 1103-4897
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FöreningsSparbanken Analys Nr 34 y 28 november 2005
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