Time to stop obsessing with China and FDI

MIT professor says potential for disruption of reforms is high

Seetha

New Delhi

http://digital.dnaindia.com/

Is China vulnerable to an East Asian kind of crisis? It could, given the combination of high financial inefficiency and declining productivity. That was the combination in East Asia, right before the financial crisis, says Yasheng Huang, professor at the MITs Sloan Institute of Management.

Huang, who co-authored the definitive paper "Can India overtake China" along with Harvard Business Schools Tarun Khanna, was in India to deliver lectures on "Policy framework and development strategies: India and China" organised by the Confederation of Indian Industry.

Improvement in Chinas financial sector has been very modest compared with the Indian reforms in the 1990s. "The potential for disruption is and remains high. Though whether or not there will be an actual crisis will depend on other things we cant foresee," he warned, speaking to DNA Money.

Huang, who has been a trenchant critic of the development model followed by China in the 1990s, had one message for India: dont be obsessed with China or foreign direct investment (FDI). Ascribing Chinas success to its world-class infrastructure or its huge FDI inflows is an incorrect, misleading and harmful way of understanding the Chinese phenomenon, was Huangs simple point. "India is achieving 8% growth with 50% of Chinas investments and 10% of its FDI. To me this is a picture of more sustainable growth.

Chinas FDI inflows, Huang argues, reflect the systemic weaknesses in the economy. The financial system heavily supported the state-owned enterprises (SOEs) and actively discriminated against domestic private sector firms, which, then had no choice but to turn to foreign investors for equity capital.

A vibrant domestic private sector, Huang argues, can pull in high quality, technologically intensive FDI. Suppressing it, he warns, will bring in only low quality FDI, as it is in China. Huang questions the popular notion in India that FDI is needed to bring in technology. Korean firms, he points out, obtained technology by getting technical designs and information from the companies they supplied to, as also by exporting capital and acquiring firms in Silicon Valley and elsewhere. Much of Indian investments abroad too, he notes, are for acquiring technology, mentioning Ranbaxy as just one example.

Provinces like Zhejiang following an Indian growth model tend to get more technologically intensive FDI. They may have poor infrastructure but fairly liberal financial policies that support the domestic private sector. Zhejiang is home to a lot of the Indian IT firms. "India has the best of both worlds because it can get FDI as well as the benefits of domestic private sector growth."

Nor has Chinas growth to do with its huge infrastructure build up. The huge investments happened in the 1990s, his presentation showed, while the growth preceded it. China, in fact, may have over-invested in infrastructure, since the actual usage of expressways and some other hard infrastructure is very low. Not for him arguments that usage volumes will increase ten years down the line. "

Why? The volume is a function of growth and the growth is a function of education, health." Putting huge amounts of capital in physical infrastructure, will pull away resources from the health and education systems, which are equally, if not more, important for growth. Most business analysts underestimated India because they only looked at the lack of airports and hotels, he rued, ignoring its soft infrastructure. "Economic growth is a function of soft infrastructure, property rights and a relatively efficient financial system."

Though China is on a course correction of sorts, this, says Huang, is yet to show up in increased domestic consumption, another factor that economists like Morgan Stanleys Stephen Roach have identified as a factor behind Indias more sustainable growth. The government has started waiving rural education fees, reducing rural taxation. All this, Huang believes, will increase the consumption to GDP ratio over time.

Though attempts are being made to address the problem of lack of local entrepreneurship (which Huang and Khanna had identified as a major weakness in the Chinese growth model), Huang isnt sure the government is going about it in the right way.

"They think the lack of innovation is because of too much FDI. Its not because you have very liberal FDI policy. It is because you have very illiberal domestic investment policies." The government is beginning to look into the domestic business environment but not as drastically as Huang thinks they should.

India must invest in basic education'

Yasheng Huang says in the long run, the Indian growth story is far more sustainable than China's

http://digital.dnaindia.com/epapermain.aspx?queryed=20&eddate=7/30/2006

India's economic growth has prompted many to suggest that it will eventually compete with the other Asian economic giant, China. The numbers of course tell another story. On most counts, foreign investment, infrastructure and sheer economic strength, China is way ahead. Yet, there are sceptics about China. One of them is Yasheng Huang, MIT Sloan Institute of Management professor, whose paper, Can India Overtake China, co-authored with Tarun Khanna, has become a must read on the India-China race. He thinks India's economic model has several positive aspects that Indians themselves tend to dismiss. In an interview, Huang tells Seetha where he thinks China has gone wrong and why India is a better bet.

The Indian development model is seen as more sustainable than the Chinese one. But India is now pursuing the Chinese pattern of export-led, FDI-driven growth.

Indians are enamoured of China when the Chinese themselves increasingly recognise the shortcomings of their development model. I am not criticising the Chinese model as a whole. I am criticising the 1990s model, which is more investment driven. The current central leadership is more concerned about the aftermath of the huge investment programmes, about social issues, of the crowding out effect of FDI. They are increasing investments in agriculture and rural areas. But they cannot change policies drastically, because a lot of them have strong local support base. Besides, it will take some time for the changes to filter through the system.

You have argued that it is not FDI that propels growth but growth that pulls in FDI.

Over the last decade in India, FDI increased but only very moderately, but the growth pick-up was substantial. It's incorrect to say that China's economic miracle was created by FDI. It was created in the 1980s by rural entrepreneurs and economic liberalisation. Worldwide, FDI has played a relatively insignificant role in economic development. Why do we expect large countries like China and India, with huge entrepreneurial bases and domestic markets, to depend so heavily on FDI as a way to grow? I'm not against FDI; I'm FDI neutral. I am also not for protectionism. But the obsession with FDI in China has created huge distortions in the economy, with foreign investors being favoured and domestic ones being discriminated against.

The conmon argument is that FDI provides technology. That is just patently not true. In China we are talking about FDI in textile factories, shoe factories, garment factories. India has the best of both worlds. It can get FDI as well as the benefits of domestic private sector growth. This is what makes the Indian growth story superior and far more sustainable.

You argue that China's infrastructure hasn't been responsible for its growth. But can a country grow if it has an infrastructure deficit?

I didn't say infrastructure is not important for growth. My point is that poor countries struggle without infrastructure and they do something else right that promoted growth. Once you have the growth, you have the resources to invest in infrastructure. A lot of the Indian obsession with China is with Shanghai, with high rises and skyscrapers. That is wrong. I distinguish between business necessary infrastructure like power and roads and business unnecessary infrastructure, like government buildings. Much of the perception of China in India is shaped by business unnecessary infrastructure.

You identify China's lack of democracy as a weakness. But India's democratic advantage is seen as being overestimated.

High quality democracy should not slow down decision-making excessively. If there are problems with political interest groups in the Indian system, the first thing to look at is the quality of democracy. I think democracy is used in India very often as an excuse for not getting things done. It could be a reflection of poor leadership. In a democracy you need leadership, management. Rather than saying it is the problem of democracy, let's ask: do we have the necessary leadership?

Indians lament that our politicians have only a five year vision, while China's policy makers have a longer term vision.

What if that long-term vision is wrong? There is no free lunch. In a democracy, just as in a one party system, you come with certain liabilities. But they are of different kinds. Indians must make up their minds about what kind of liabilities they like and don't like. Land seizures, corruption are big problems in China. And it's all because China doesn't have democracy.

Wage costs in are rising faster in China than in India while productivity is rising slower. Could that be another reason why India will overtake China?

That's a big factor. Whether India is actually going to overtake China or not depends on what China is going to do. They need to reform their financial system, their legal system.

And what does India need to do?

For India to transform itself from a poor struggling developing country into a middle income prosperous one, it needs to have broad success in the manufacturing industry - labour-intensive low-end industries. For that, it has to invest massively in basic education. It should do everything possible not to divert resources that would have gone to the social sector. Indians are so creative, they can think of clever ways of managing this trade-off between physical and social infrastructure. We should never lose sight of the fact that basic education should take priority over all these things.

Apart from posting two more pieces on the blog - the interview with Dalit activist Chandrabhan Prasad is particularly interesting, even if I say so myself - I have a bit of good news to share. My book has been published by Penguin and it's out in the bookstores. It felt good to see it there. It's called The Backroom Brigade: How a few intrepid entrepreneurs brought the world to India.
It basically tells the story of how the BPO industry started and grew to where it is today. It's not a management tome nor a how-to kind of a book, but more like a current history story told in a chatty style.

We do want that education

Seetha

It is perhaps a measure of the myopia that marks policy-making in India, that a controversy has brought to the fore an issue that the country should have been grappling with anyway. The issue of higher education infrastructure, for instance, is being talked about now only because of the decision to reserve 27.5 per cent seats in all Central higher education institutions for other backward classes (OBCs). The number of seats are to be increased so that no one loses out.

That's easier said than done, as the government itself is realising. The Delhi University vice-chancellor has said that it will take three years for the University to expand the infrastructure to cope with the increased load. So now, the oversight committee headed by Veerappa Moily will study the situation and work out a roadmap for doing this.

But why have we reached such a situation in the first place? The strain on the higher education infrastructure would have come regardless of caste-based quotas. Why didn't we prepare for it?

India's access ratio in higher education (the number of students as a proportion of population in the eligible age group of 18-23) is a laughable eight per cent, against 35-55 per cent in most developed countries. India plans to dominate the world economic stage with these kind of numbers?

The University Grants Commission's Tenth Five Year Plan in 2002 had planned to increase the access ratio to double digits-10 per cent-by 2007. That, the then UGC vice-chairman Arun Nigavekar had estimated, would have meant bringing in 14 million students into the higher education stream. This newspaper has reported that there is a 15 per cent increase in students passing out of school every 10 years and that the Human Resource Development ministry expects this to double in the next decade. The financial implications of this are enormous-close to Rs 12,000 crore, Nigavekar had estimated in 2002.

Can the public sector education system alone do this? Certainly not on its own.

Sure, no country has expanded its higher education infrastructure at the pace India has. Much of it has happened in the public sector, but the private sector has also played a significant role. Unfortunately, successive governments have done little to actively encourage private initiatives in education or let a vibrant market develop in that sector. If it had allowed that it is likely that the issue of lack of access of disadvantaged groups to education would not have come up at all. The current problem (and resistance to quotas) is as much a demand-supply mismatch one as it is a social one.

It's now time to start fashioning an environment that will encourage and facilitate the development of a vibrant market in education, which will supplement government efforts in primary, secondary and higher levels.

Why not revive the lapsed Private Universities Bill (introduced in the mid-1990s), which enabled registered societies, public trusts and companies to set up self-financing universities with their own curriculum, fee structure and degrees, under the benign supervision of the UGC? That's the kind of system the country needs.

It doesn't mean that the state withdraws from the field-why, even an ardent open economy advocate like Montek Singh Ahluwalia wants a hike in public spending on higher education -but rather, expands the market to increase supply.

Increasing the role of the private sector will also ensure that the curriculum is more in tune with what the job market requires; something that is not easily done in the government system. The problem of the lack of employability of our youth-regardless of caste-is a result of this.

It's not that the private sector is always more efficient. For all those private institutions that are doing sterling work, there are equal numbers which are extortionist and exploitative. The quality of education in quite a few leaves much to be desired. And there are several fly-by-night operators.

Unfortunately, attempts to regulate it only seem to foster a licence and inspector raj that encourages corruption even as it remains ineffective. The line between regulation and intervention is very fine but it is one that will have to be drawn.

Will creating a market solve the problem of access overnight? It won't. The problem is too huge and complex. It will take years -maybe even a decade-for a robust, fair market to develop.

But one thing is clear-education cannot be a public sector monopoly. The country and the economy have too much at stake to let this happen. Too much time has already been lost and since the benefits won't be immediate, the time to move in the right direction is right now.

http://digital.dnaindia.com/epapermain.aspx?queryed=9&eddate=6/1/2006

"Pvt sector should integrate Dalits in the supply chain"

http://digital.dnaindia.com/epapermain.aspx?queryed=9&eddate=5/29/2006

As India Inc grapples with the sceptre of job quotas for backward classes, some activists are trying to change the paradigm of the debate. Dalits should become entrepreneurs, Dalit scholar Chandrabhan Prasad tells Seetha, and the private sector can lend a helping hand by giving them preference in the supply chain.

# Do job reservations in the private sector have any relevance?

Dalits as a community should start thinking beyond working for others and start thinking of becoming businessmen and hiring others.

# Do they have a tradition of entrepreneurship?

There are many entrepreneurs, but they are small players. The only traditional business activity was leather processing. Most of those working in this area are in Agra and some have large companies. They prospered during World War Two, but post independence, the bania lobby took over the trade and Dalits have become sub-suppliers to them.

# How can Dalit entrepreneurship be fostered?

By integrating them in the supply chain. If the private sector has a problem with job reservations, why don't they start by making Dalits partners in the business by seeking supplies from them. Keep 5% or 10% outsourced services for Dalits. Hindustan Lever has 43,000 employees and two lakh dealers. Obviously, the latter is a larger pool and will create less displacement. Then there won't be so much social polarisation. It won't become an emotive issue.

I know someone working in a small factory making gear stick covers for Eicher tractors. This is sold to a wholesale dealer for Rs 5 a piece. He sells it to Eicher for Rs 10. If Eicher buys directly from a Dalit manufacturer, without compromising on quality, it can buy it for Rs 7.50. Both gain Rs 2.50.

Assuming a HLL dealer get a 1% commission, he can earn a minimum of over Rs 60 lakh a year. A Dalit can take up this dealership, taking less commission than others. Don't replace existing dealers, but when new dealerships are given out, reserve some for Dalits.

# So, they will need special privileges even here?

Yes, because the system of enterprise and trade requires traditional social networking. Dalits are not in the social loop. So industry has to make a conscious effort to bring them into the supply chain.

The American experience is so inspiring. Now, what 33 million Blacks spend annually in the market is equal to what 1 billion Indians produce annually. People say that affirmative action has saved the American economy because it has created a new class of aggressive consumers.

Similarly, if a Dalit is linked with HLL and Eicher, he will prosper and buy - not a Mercedes immediately - but a Maruti 800, a Videocon television and will build a house in his village. Whatever every empowered Dalit earns will go back to the market.

# Do Dalit entrepreneurs face discrimination in the market?

People may not practise untouchability. But if there is a manufacturer named C B Ram and another named C B Aggarwal, I will unconsciously start wondering and may opt for Aggarwal. It may not be deliberate. Many try to keep their identity hidden because of fear. The fear may be wrong but the very fact that it is there means there is some social basis for that.

# Dalit activists argue that the condition of Dalits has worsened post liberalisation.

They are right. Government downsizing after 1991 has hit Dalits very hard. With job reservations, they were assured of employment. That has stopped.

But instead of fighting liberalisation, Dalits must use it to their benefit. The fittest vehicle to get into mainstream society is the Indian rupee. Society will accept only empowered Dalits - wearing good clothes, living in good houses, exuding confidence.

# To become entrepreneurs, Dalits will need education, training which many of them don't have.

Lets start with areas where no formal education or complex skills are required. Dalits can start with this, earn enough to educate their children who will then not need reservations.

Coming together through business is much more reliable than any social reform law. The Dalit bourgeoisie will eliminate all social tensions. If the big industrialists understand this, it will be good.

Middle class angst

Seetha

http://digital.dnaindia.com/epapermain.aspx?queryed=9&eddate=4/19/2006

Tuesday, April 18, 2006 21.45 IST

When Salman Khan was jailed in the black buck killing case, it was seen as a demonstration that the rich cannot get away with crimes. There were an equal number of people who felt that he went to jail only because he was rich. It's an endless, inconclusive debate.

Those who lit candles in Delhi to protest the acquittal of Jessica Lal's murderers and in Lucknow to protest the lack of action on Meher Bhargava's murder and those who sent angry SMSs from across the country felt vindicated in a way (never mind that their vigil didn't influence the Salman case verdict).

The two vigils have won a lot of kudos. They are seen as a sign that the middle class is shaking off its apathy and taking a stand, saying they will not take injustice any more. For a Delhi whose overarching philosophy is sannu ki (what's it to me), this was certainly a change. But let's take a good, hard, dispassionate look at those protests. Was the outrage anything more than skin deep? A cynical question, yes, but one that needs to be asked.

The protests were about the rich and the influential getting away with serious crimes. The system, everyone said, was to blame. What a clear distancing of oneself from the system and the actions of the rich.

But isn't the system made up of individuals? And is the middle class less prone than the rich to use money to escape penalties? Can all those who agonised about money power and influence legitimately claim that they have never paid a bribe to avoid a challan for jumping a red light? Why is a Rs 100 bribe more acceptable than a Rs 1 lakh one? Can they say they never used the network of friends, relatives and classmates to tweak the system for one's own selfish benefit at someone else's cost?

What's worrying is how quick the middle class is to point fingers at people, without stopping to think what they would have done if placed in the same situation.

Take the case of the anger against Shayan Munshi for retracting his initial statement in the Jessica Lal case. Without condoning what he did, let's look at it in a more detached manner. He was just another middle class boy trying to get a break into a career. Could he really have afforded to keep appearing for police questioning and court hearings? He may not have been bribed or threatened (maybe he was), but he may have just decided that building his career must be his priority.

Is that any different from how each one of us would have behaved had we been in his place? Why, many of us won't even stop to help an accident victim for fear of 'getting involved'.

Over 20 years back, a former colleague's brother-in-law died of electrocution because he stepped on a naked wire jutting out from an electricity pole. The next day the photographer of a newspaper took a photograph of the wire, which was published.

During the court hearing, there was a request for the original photograph. The photographer refused to give it because he didn't want to make repeated visits to the court. Fortunately the case against the then Delhi Electricity Supply Undertaking didn't fall through, but what if that photograph had been the only clinching evidence?

Let's not kid ourselves. There is a Shayan Munshi in each of us.

How many of those who lit candles in Delhi and Lucknow intervened when they saw a wrong being done, instead of just turning their faces away? How many of us would intercede when we see a lout harassing a woman in a bus or train? Are we even prepared to go for the social boycott of a criminal? The man who raped and murdered Priyadarshini Mattoo in Delhi and got away scot-free is now a lawyer who's not exactly wanting for business. Jessica's murderer was running a hip and happening pub in Chanidgarh. Were the clients of both these gentlemen completely unaware of their backgrounds? These are hard questions the middle class will have to answer.

Salman got convicted because of the dogged perseverance by a group of people. The urban middle class, mired in its energy-sapping daily grind, doesn't have the bandwidth for that kind of persistence or any form of active citizenship. It's so much easier to light candles and send outraged SMSs. That's a quick salve for our collective guilty conscience.

Perhaps this is an extremely pessimistic view of things. Perhaps those gestures are the first, faint stirrings of active citizenship among the middle class. But that's not enough. Middle class angst has to go beyond that.

For the system to change, we have to change our individual behaviour. There's no getting away from it.

The numbers game

Seetha

http://www.dnaindia.com/report.asp?NewsID=1020426&CatID=19

Monday, March 27, 2006 21:45 IST

So, India's much-feared population boom is actually turning out to be a boon, not a bane. A report by Pricewaterhouse Coopers (PwC), The World in 2050, says that India can be the world's fastest-growing large economy between now and 2050, thanks mainly to its demographic profile.

Understandably, those opposing any form of population control are rejoicing. They have been making this point for long, taking strength from American economist Julian Simon's famous "population is the ultimate resource" theory. "The most important economic effect of population size and growth is the contribution of additional people to our stock of useful knowledge," Simon argued.

But merely gloating over the fact that India is going to have the world's youngest population isn't enough. Are we doing enough to nurture and capitalise on that dividend? The answer may just be not enough. Consider some facts.

Over 66 per cent of children in the 0-6 age group are undernourished, the District Level Rapid Household Survey, 2002-05 shows. Over 90 per cent of pre-school children are anaemic. The incidence of anaemia in pregnant women is also 90 per cent. This is hardly the foundation of a productive workforce. The chances of an unhealthy child growing up into a healthy and fit adult are somewhat dim. Not only will such a child not be able to make use of the opportunities that will available to it; it cannot contribute to the economy in any way. On the contrary, it may well be a burden on the economy. Take the case of tuberculosis, which affects 1.8 million people a year. It is estimated that three to four months of work is lost per patient. Mortality rates may have come down in India, but morbidity due to various illnesses is still high. There's little to indicate that out of the box solutions to the problem of public health are being experimented with.

Then there's the question of equipping the future generation with the right skills that the global marketplace needs. Here, too, the figures don't look good. Only 64 per cent of India's population is literate. And the literacy rate in the 15-24 age group is only 73 per cent. That's just not good enough. In any case, this is just basic literacy. Tapping global job opportunities will require far more than that.

There are still some eight million children out of school. Drop out rates are high and learning achievements low. Right now, primary education is on top of the agenda, but one needs to start planning for the stages that will follow. The Mid-term Appraisal of the Tenth Plan points out that if the SSA achieves the goal of universal enrolment in the primary stage, then secondary enrolment is likely to touch nearly 50 million by 2011. Our current secondary school system cannot cope with this load, either in terms of numbers or quality. But secondary education is one area where even a start has not been made.

The same is true of higher education. Currently, only about 6-7 per cent of the relevant age group goes into higher education. A well functioning developing country needs to hike that to 25 per cent. Our higher education system, still largely public funded just cannot cope with the load. But not enough is being done to encourage private participation in this area. Some measures have only resulted in the mushrooming of unscrupulous teaching shops.

What's more, the education system is still designed to get people into government service. That's not going to be the source of employment growth. There's been no significant progress on vocational courses in secondary and higher education. Vocational training in Industrial Training Institutes (ITIs) is just not in sync with the needs of the domestic market, let alone the global market. Inclusion of new trades into the curriculum takes so long that they get outdated within no time. Attempts to involve industry in setting the curriculum have been patchy at best.

If basic human development issues aren't addressed with urgency, the demographic dividend could well turn into a burden. But it's not enough to open more schools and hospitals or train more teachers and doctors and nurses. Piecemeal and business as usual approaches to issues won't work. Illnesses can be reduced with better sanitation and safe drinking water. Roads and proper transportation are needed to get children to school. India has to fire on all cylinders simultaneously.

One of the reasons India will be the fastest growing economy is that the Chinese economy will slow down because of the drag caused by its ageing population. But the Indian growth story cannot be left to depend on the slackening of others. Our inherent advantages have to be nurtured and promoted. Without losing any time.