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Monday, October 20, 2003

China-India Differences as Seen At the Asia Summit of the World Economic Forum

Going back to Vivek and the differences between India and China, Andy Xie was at the WEF meeting in Singapore. He was most impressed with the mayor of Wushi:

I attended the Asia Summit held in Singapore on October 13-14 organized by the World Economic Forum. Most participants were from Southeast Asia. A number of national leaders from Southeast and South Asian countries also attended. The conference mostly focused on microeconomic issues ranging from corporate governance to trade integration. Geopolitical issues attracted most attention, I thought, with China and India looming large over this ASEAN-centered conference.

I noted how few participants at the conference were from China compared to India or Southeast Asia. It reflects how differently China is organized, I thought. India has an established English-speaking wealthy class. So does Southeast Asia. Both have long histories of private sector-driven economies and, less appealingly, regulation-driven profits.

China is quite different from either in two respects. Its development model is about cutthroat competition. When one company becomes profitable in a business, thousands follow. Such a model maximizes GDP but may not be the best for profitability. Because it is so difficult to make profits, riches are often achieved using illegitimate means, usually through defrauding banks.

I was on the same panel as the mayor of Wushi in the session on China. What he said tells much about why China is so different from Southeast Asia or India. In his speech, he talked about nothing but the advantages of investing in Wushi and explained how he could help foreign investors. When the gong sounded that his time was up, he carried on for another five minutes extolling the virtues of Wushi.

Wushi is situated 200 kilometers to the northwest of Shanghai with a population of 4.4 million. Its GDP has increased tenfold since 1990 and its per capita income is four times the national average. Its economic success has been driven by trade. Multinational companies have turned it into a major production center for electronics and other consumer goods. The city has achieved so much because its government is 100% focused on economic development.

The ruling elite in China are bureaucrats who are both salesmen and decision-makers. While the system lacks checks and balances, which could pose problems in the long term, it is extremely efficient at fostering economic development. The mayor of Wushi, for example, promotes Wushi as an investment destination and can make decisions that meet any interested investor's demands. The ruling elite in other Asian countries tend to be rich businessmen or politicians from the same class. They have to balance between protecting their profits and encouraging economic growth. This handicap makes them uncompetitive against China.

The Chinese do not realize how competitive they are in the world today. Chinese workers are becoming as productive as those in middle-income countries, yet because there are so many of them, their wages are similar to workers in poor countries. The difference is the reason for the current global attention on the Chinese currency. As long as there are hundreds of millions of people looking for work, the Chinese government will not push up its labor costs artificially through appreciating the currency. This would only cause wage deflation.

There are hundreds of cities like Wushi in China. They are learning from the success of cities on the coast and are going all out to develop infrastructure and attract investment. While China will likely experience high volatility, its competitiveness will keep pulling ahead of others, in my view. The tension between China and other competing economies is thus likely to grow, and will only disappear if the Chinese slow down or others step up the pace. I don't see either as possible.
Source: Morgan Stanley Global Economic Forum

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