The Bumpy Road Ahead
Much has been said regarding the bright future of the 2 Asian giants, China and India. Perhaps, the glare of that future has blinded many to the problems and potential pitfalls along the road. This article seeks to highlights the problems that might impede the progress of both countries particularly with regards to the drive to transform their economies to a consumption driven model.
The Western perspective
Mr Mukherjee's series of articles are illuminating with respect to the weaknesses of the banking system and population issues , particularly in relation to the Indian economy. However, there are certain points of contention in his math vs mandarin article. Whilst it's true that China's per capita income probably will not match European or American standards in the next couple of decades, it will be foolhardy to dismiss the power of consumption that even just the wealthiest 10% of the population is capable of. It is precisely this sector that will impact the "higher" value end of the product market (versus the "lower" end products that are often associated with China's manufacturing industry) which is the domain of the USA, Japan and Europe. To dismiss this consumption potential is to buy into the (self-consoling?) belief rife amongst many in the Japanese and American business fraternity that China is nothing more than a huge factory. Trade and presumably the discourse of trade is at least bilateral, if not multilateral, not making the effort to understand and engage the other party on their terms is a potent mix of arrogance and foolhardiness; plainly put, what America can't or won't sell, others may willingly oblige.
Key to Transformation
Presently, both economies are export driven. The drive to liberalise their economies in the modern context means an inevitable transformation to a consumption driven economy, particularly since price and wage advantages don't last forever. Whether the American model is necessarily the right model is highly questionable, consumption, after all, is both an asset and a potential "disease", especially when it is unsustainable.
Though most may expect the key to transformation to be raising per capita income, this article argues otherwise. Though that measure may be important, averages tend to mask wide variations in income patterns, be they regional differences, rural/urban split or differences predicated by the technological divide. The key? "Smoother" , more uniform consumption patterns. Currently, products which "sell" in certain provinces can't "sell" in other provinces. It's not all red tape, but that fickle matter of consumer preferences, branding and income patterns. Except for the largest of brands, there is little uniformity in product standards and marketing efforts . This lack of uniformity means difficulty in exploiting economies of scale be it in marketing or production capacities and hinders branding efforts. Certain "international" brands have even recycled their adverts last seen in Southeast Asia and HongKong a decade ago - a matter of confidence in the superiority of their products or just an inability to market effectively?
Solving this doesn't just mean efforts to "educate" the public about products or brands and standards, but a more fundamental redistribution of wealth, in other words, to narrow the wealth gap
Nasty bumps along the road
That in turn leads us to a very brief overview of the potential bumps along the road for both economies
1. Wealth Gap
It's perhaps an unfortunate irony that there's less dissatisfaction when everyone's poor than when some are becoming richer and others not. The funny mechanism of wealth is that when everyone else is becoming richer and you're not, then you're becoming relatively poorer. In India, the wealth gap manifests itself starkly in the mansions that stand overlooking the slums; in China it's the disconcerting sight of beggars around upclass mall areas and the milling of disaffected unemployed around city parks or squares . These are just the outward symptoms of the potential social unrest that'll grow with a widening wealth gap
2. The Banking System
Whether it's the government squeezing credit from savers to fund budget deficits or inefficient state industries, whatever the semantic differences Mukherjee wishes to establish between the Indian and Chinese political and banking systems, there's a common point that both share - the lack of transparency and financial freedom. This article lacks the capacity to comment on the Indian aspect of the issue, so it shan't. For the Chinese government, it's a matter of time before the Chinese have to accept that the "loans" to ailing state industries are of the "non returnable" type and write them off, that is if they wish to have any semblance of financial health in the banking system before full liberalisation. After all, estimates of bad debts haunting the system vary between billions and trillions . A lot is required for any reform of the state industries, the unfortunate hangover of centrally planned economies, at the very least patience and the courage to face down opposition to reform from regional/provincial officials, the inevitable dissatisfaction of the unemployed , resources to restructure the labour force to resolve problems of unemployment
3. Political Tug of War
A feature of many large countries is the (often) uneasy relationship between state/provincial authorities and central government ; political hegemony and nepotism means corruption and obstacles to reform may be endemic, that could prove a huge problem for both countries. Local authorities who run the area as their private fiefdoms are unlikely to inspire business confidence but as the Chinese saying goes; the mountain is high and the emperor far away
4. Population
Strength in numbers sums up the issue , see Mukherjee for the Indian aspect. The main problem for the Chinese is what many industrialised countries have been facing for years - replacement numbers. Whilst the one-child policy has served the purpose of population control, it may pose problems a few decades down the line in relation to issues of labour force and greying population , recent modifications to the policy have not solve the problem.
To sum it up; the future is bright but watch out for the bumps in the road ahead - nobody wants to shed car parts along the way!
See http://www.bloomberg.com/news/commentary/mukherjee.html/ for Mr Mukherjee's articles
The Western perspective
Mr Mukherjee's series of articles are illuminating with respect to the weaknesses of the banking system and population issues , particularly in relation to the Indian economy. However, there are certain points of contention in his math vs mandarin article. Whilst it's true that China's per capita income probably will not match European or American standards in the next couple of decades, it will be foolhardy to dismiss the power of consumption that even just the wealthiest 10% of the population is capable of. It is precisely this sector that will impact the "higher" value end of the product market (versus the "lower" end products that are often associated with China's manufacturing industry) which is the domain of the USA, Japan and Europe. To dismiss this consumption potential is to buy into the (self-consoling?) belief rife amongst many in the Japanese and American business fraternity that China is nothing more than a huge factory. Trade and presumably the discourse of trade is at least bilateral, if not multilateral, not making the effort to understand and engage the other party on their terms is a potent mix of arrogance and foolhardiness; plainly put, what America can't or won't sell, others may willingly oblige.
Key to Transformation
Presently, both economies are export driven. The drive to liberalise their economies in the modern context means an inevitable transformation to a consumption driven economy, particularly since price and wage advantages don't last forever. Whether the American model is necessarily the right model is highly questionable, consumption, after all, is both an asset and a potential "disease", especially when it is unsustainable.
Though most may expect the key to transformation to be raising per capita income, this article argues otherwise. Though that measure may be important, averages tend to mask wide variations in income patterns, be they regional differences, rural/urban split or differences predicated by the technological divide. The key? "Smoother" , more uniform consumption patterns. Currently, products which "sell" in certain provinces can't "sell" in other provinces. It's not all red tape, but that fickle matter of consumer preferences, branding and income patterns. Except for the largest of brands, there is little uniformity in product standards and marketing efforts . This lack of uniformity means difficulty in exploiting economies of scale be it in marketing or production capacities and hinders branding efforts. Certain "international" brands have even recycled their adverts last seen in Southeast Asia and HongKong a decade ago - a matter of confidence in the superiority of their products or just an inability to market effectively?
Solving this doesn't just mean efforts to "educate" the public about products or brands and standards, but a more fundamental redistribution of wealth, in other words, to narrow the wealth gap
Nasty bumps along the road
That in turn leads us to a very brief overview of the potential bumps along the road for both economies
1. Wealth Gap
It's perhaps an unfortunate irony that there's less dissatisfaction when everyone's poor than when some are becoming richer and others not. The funny mechanism of wealth is that when everyone else is becoming richer and you're not, then you're becoming relatively poorer. In India, the wealth gap manifests itself starkly in the mansions that stand overlooking the slums; in China it's the disconcerting sight of beggars around upclass mall areas and the milling of disaffected unemployed around city parks or squares . These are just the outward symptoms of the potential social unrest that'll grow with a widening wealth gap
2. The Banking System
Whether it's the government squeezing credit from savers to fund budget deficits or inefficient state industries, whatever the semantic differences Mukherjee wishes to establish between the Indian and Chinese political and banking systems, there's a common point that both share - the lack of transparency and financial freedom. This article lacks the capacity to comment on the Indian aspect of the issue, so it shan't. For the Chinese government, it's a matter of time before the Chinese have to accept that the "loans" to ailing state industries are of the "non returnable" type and write them off, that is if they wish to have any semblance of financial health in the banking system before full liberalisation. After all, estimates of bad debts haunting the system vary between billions and trillions . A lot is required for any reform of the state industries, the unfortunate hangover of centrally planned economies, at the very least patience and the courage to face down opposition to reform from regional/provincial officials, the inevitable dissatisfaction of the unemployed , resources to restructure the labour force to resolve problems of unemployment
3. Political Tug of War
A feature of many large countries is the (often) uneasy relationship between state/provincial authorities and central government ; political hegemony and nepotism means corruption and obstacles to reform may be endemic, that could prove a huge problem for both countries. Local authorities who run the area as their private fiefdoms are unlikely to inspire business confidence but as the Chinese saying goes; the mountain is high and the emperor far away
4. Population
Strength in numbers sums up the issue , see Mukherjee for the Indian aspect. The main problem for the Chinese is what many industrialised countries have been facing for years - replacement numbers. Whilst the one-child policy has served the purpose of population control, it may pose problems a few decades down the line in relation to issues of labour force and greying population , recent modifications to the policy have not solve the problem.
To sum it up; the future is bright but watch out for the bumps in the road ahead - nobody wants to shed car parts along the way!
See http://www.bloomberg.com/news/commentary/mukherjee.html/ for Mr Mukherjee's articles
posted by J at 2:33 AM
0 comments
