World - Interdependency Theory: China, India and the West

Interdependency Theory: China, India and the West
Simon Tay

In the aftermath of the global financial crisis, the economies of North America and Europe remain fragile while those of Asia continue to grow. This is especially true in the cases of China and India, which both boast near double-digit rates of growth and have therefore inspired confidence around the region. But too many commentators discuss China and India with breathless admiration -- extrapolating, for example, that growth will continue at a breakneck pace for decades. In doing so, they treat emerging economies as if they were already world powers, echoing the hubris that preceded the Asian currency crisis of 1997-98.

Pranab Bardhan's Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India is a welcome corrective to that view. It succinctly summarizes the challenges facing China and India, including environmental degradation, unfavorable demographics, poor infrastructure, and social inequality -- threats that the leaders of China and India understand. Even as others have lavished praise on China, and Chinese citizens have grown stridently nationalistic, Chinese President Hu Jintao and others in the current leadership have been cautionary. As Chinese Premier Wen Jiabao said in 2007, the country's development is "unsteady, unbalanced, uncoordinated, and unsustainable." In India, meanwhile, although the government has orchestrated campaigns to highlight the country's growth and reform, its plans to develop roads and other infrastructure are a prominent and expensive recognition of the country's enduring gaps.

A more contentious claim offered by Bardhan is that internal reform -- not the global market -- has been the key driver of both countries' growth. Rather than focusing on India's information technology sector or China's export-led industrialization, Bardhan highlights less glamorous domestic sectors. Examining the rural economy -- in which a majority of Chinese and Indians work -- he concludes that growth is driven from below. He shows, for example, how China's steepest reductions in poverty had already happened by the mid-1980s, before the country began attracting sizable foreign trade and investment. The main causes of China's decline in poverty, Bardhan argues, were investments in infrastructure and reforms to town and village enterprises, which are predominantly agricultural.

The book thus suggests that the fates of China and India are in their own hands -- and do not depend on the West, as many assume. If that is correct, then these giants can continue to grow despite the global economic crisis, towing much of Asia along with them. This would have great implications for geopolitics and economics. To the contrary, however, neither China nor India can ignore external conditions.

GIANT FEUDS

One of the external circumstances affecting both China and India is their bilateral relationship -- and whether it will develop in a healthy or an antagonistic way. Although China and India cooperate in various intergovernmental bodies and trade more than ever -- Chinese-Indian trade increased from $3 billion in 2001 to $40 billion in 2007 -- there are various ways in which Asia's awakening giants might step on each other's feet of clay. Bardhan's book does not address this topic.

The nadir of Chinese-Indian relations was the brief, one-sided war between the two countries in 1962, which resulted in a humiliating defeat (and the loss of more than 3,000 troops) for India. Relations have improved since then, but elements of cooperation coexist with competition and suspicion. Various geostrategic disputes separate Beijing and New Delhi, including a number of sensitive disagreements about areas along their 2,200-mile border. Tibet shares a long border with India, and when the region is restive, as it has been in recent years, China suspects Indian instigation. This makes disputes over remote Himalayan points -- such as Arunachal Pradesh, an Indian state claimed by Beijing -- loom large, as does China's recently intensified criticism of Indian actions in and around Kashmir.

There are also newer sources of tension, including competition over Indian Ocean sea-lanes and the exploration of outer space. There is even tension over the very trade ties that increasingly link the two countries economically. In 2009, India hiked tariffs on telecommunications imports from China by as much as 200 percent in order to limit the flow of Chinese goods into that sector, which New Delhi considers both economically and strategically important.

Underlying these tensions is a power gap. Rising simultaneously, the two Asian giants compete for markets, natural resources, commercial investment, and political influence in Asia and worldwide. Depending on how one measures, China's economy is three or four times as large as India's. And whereas China is India's largest trading partner, India ranks only tenth among China's trading partners. Yet in government ministries in New Delhi and corporate towers in Mumbai, Indian elites typically refuse to concede India's status as number two.

Of course, there are forces -- especially the Association of Southeast Asian Nations -- that seek to promote Asian regional cooperation and weaken the appeal of competition between Asian states. But although it hosts regional summits that include officials from China and India as well as officials from its member states, ASEAN is an association of only small and medium-sized economies, so it lacks the economic heft to direct regional integration. Therefore, although China and India may make shows of solidarity in the ASEAN forum and elsewhere, they will continue to compete economically, politically, and otherwise.

ASIAN LODESTAR

A major factor in the Chinese-Indian competition -- and in its perceived significance for the wider world -- is that the two countries have such different political systems. Their trajectories, therefore, offer insights into the prospects for development under authoritarianism and under democracy. In addressing this point, Bardhan rightly cautions against the simplistic conclusion that authoritarianism is superior to democracy with regard to growth. Yet he echoes simplistic characterizations of the subject, writing, for example, "India's experience suggests that democracy can also hinder development in a number of ways" and "in China, there is more decisive policy initiative and execution than in India." The real debate, especially in the wake of the recent crisis, is over what mix of democratic jockeying and authoritarian decisiveness makes economies most robust.

The challenge for Beijing and New Delhi is to combine power and legitimacy. Only then can the Chinese and Indian governments take measures that may be unpopular in the short run or damaging to some politically connected sectors but necessary for long-term progress: stimulating job growth, alleviating poverty, protecting the environment, or other vital tasks.

One hears often of a "Beijing consensus" but rarely, if ever, of any Indian model of governance. Indeed, India's case appears to be sui generis, especially since the modern Indian state was born a democracy -- unlike other postcolonial states, such as South Korea, which were or remain autocratic. Moreover, New Delhi has not traditionally sought to influence the political practices of other Asian states (lest its own domestic issues become vulnerable to intervention by foreigners). Asia therefore lacks a strong homegrown exemplar of successful economic development under democracy. Indonesia might become such a model, as it has been transitioning to democracy since Suharto's fall in 1998 and now has annual growth rates of four to six percent. But, for now, autocratic China remains Asia's lodestar.

This concerns many in the West who warn against China's model of state capitalism, criticize its human rights abuses and censorship, suspect Beijing of pursuing a manipulative currency policy, and generally see China as a risen dragon seeking domination. According to this view, China's economy has opened and globalized but its politics remain frozen around the Communist Party. This, in turn, suggests that the Chinese state will remain radically different from, and even opposed to, the liberal states of the West.

WESTERN RULES

Edward Steinfeld's book Playing Our Game: Why China's Rise Doesn't Threaten the West offers a different perspective on China's rise. The changes in China's economic and political systems are not contradictory, Steinfeld argues, but are more or less in sync. This, he argues, is because of "institutional outsourcing" from the global system: globalization brings with it commercial discipline and requires states to institute rules in order to foster change and anchor progress.

Having been influenced by foreign investors and experts, the Chinese government and business community have deliberately altered China's commercial environment, especially with regard to legal institutions and industrial-labor relations. For example, in 2007, the National People's Congress enacted a labor contract law that provides individual workers with far more job security than they had under the preexisting laws, which dated back to 1994. China remains a far cry from having the sort of labor unions and collective bargaining that are taken for granted elsewhere, but, as Steinfeld correctly argues, Chinese labor practices are moving away from their revolutionary roots and are increasingly consonant with Western standards.

Meanwhile, argues Steinfeld, the role of the Communist Party within China's political system has changed radically in recent decades. Today, politics are primarily determined not by contests for power between the party and different segments of society but by partnerships between government forces and reform elements outside the party. Ordinary Chinese people, Steinfeld argues, have gone from being mere subjects to being citizens. Because of this, the Chinese government has to proceed cautiously: to preserve the party's central role, officials must find allies outside the party, including among activists and civil-society elements, that could otherwise threaten the party's monopoly on official power. To Steinfeld, this means that China is evolving in much the same way that other modernizing nations did, including not just South Korea and Taiwan but also the United Kingdom and the United States. Increasingly liberal politics are ahead, he argues, even if the Communist Party will remain central and there will be ebbs and flows along the way.

"China today is growing not by writing its own rules. . . . It is playing our game," Steinfeld writes. That game is globalization, and its dominant rules are set predominately by the West. If this is correct, China will increasingly become a responsible stakeholder in the existing global order. The country, then, does not need to be contained; globalization will take care of that.

Such analysis may breed complacency. First, China may not follow established rules. Beijing has had high-profile difficulties with Google over the past months, and the CEO of General Electric, Jeffrey Immelt, recently commented that although his company had ramped up investments in China, he was not sure that Chinese officials "want any of us to win or any of us to be successful." Furthermore, established rules might be unable to accommodate some of the unprecedented issues raised by Chinese growth. Take monetary policy: What China has done in accumulating massive financial reserves is similar to what other Asian states did during their development, but those states had far smaller economies. China's accumulation of reserves might threaten the crisis-plagued global financial system, especially given the complex matter of whether Beijing sets policy based on political reasons as much as economic ones.

The state's decisive role in the Chinese economy allowed it to respond bluntly and effectively to the recent global financial crisis. But, as the financier George Soros and others have rightly warned, there are substantial dangers that China's brand of state capitalism may give too little regard to the market and to humanistic values. Steinfeld regards such concerns as throwbacks to a past era, before China began acting as an authoritarian liberalizer in the mold of other East Asian states. He argues, for example, that the attempt of the China National Offshore Oil Corporation to purchase U.S.-based Unocal in 2005 -- which some critics in the United States argued was motivated by a strategic effort to secure Chinese access to energy -- was merely a corporate decision aimed at modernizing a major business. CNOOC, he points out, was publicly listed in Hong Kong and had been working with Western consultants to achieve global scale and standing.

These insights are useful, but perceptions matter, and many U.S. policymakers viewed CNOOC's actions as a case of Chinese leaders using corporate cover for their pursuit of national security goals. This is one reason why China's rise continues to trigger suspicion in Asia, the United States, and elsewhere.

THE INDISPENSABLE NATION

Many Americans are concerned that in a "post-American world," as the Newsweek editor Fareed Zakaria put it, a rising Asia and a worried and weary United States will ignore each other or interact acrimoniously. But, as Steinfeld argues, Asia's fate is tied by globalization to the West.

Before the economic crisis, there seemed a reasonable case to be made that Asia could decouple from the West -- that increased economic integration among Asian states could keep the region growing even if U.S. consumers stopped buying Asian goods. As the crisis mounted in 2008, however, it became clear that Asia and the West are not decoupling: when U.S. demand fell sharply, it immediately hurt production across Asia, especially in China.

But some efforts are already under way to limit Asian economies' reliance on U.S. markets by increasing Asian states' own domestic consumption and developing new financial mechanisms to keep Asian savings in Asia and away from the U.S. Treasury. For example, under the recently enacted Chiang Mai Initiative, Asian governments (including the members of ASEAN, plus China, Japan, and South Korea) pledged over $120 billion for currency swaps aimed at ensuring currency stability across the continent. And as of this year, ASEAN and China are united in a free-trade zone that is the world's largest combined market, with over 1.8 billion people. (In addition, various bilateral trade agreements have crisscrossed Asia for years.)

Steinfeld's book explains why even such reforms separate Asian economies from Western ones only marginally. As China has captured the central role in global production networks, Steinfeld points out, its economic growth has unleashed great innovative capacity in U.S. companies. To be sure, the economic crisis has made some U.S. actors, such as labor unions, increasingly critical of globalization, but major U.S. companies have long recognized that trade and investment in Asia are essential to their ability to innovate and stay ahead.

There are many additional factors outside the scope of Steinfeld's book that also demonstrate the interdependence of Asia and the West -- especially in terms of regional security. The United States remains essential to a range of issues in the region, including the stability of the Korean Peninsula and the Taiwan Strait, disputes over control of the South China Sea and over human rights in countries such as Myanmar (also known as Burma), and the future of Afghanistan and Pakistan. Asia currently has no local substitute for U.S. influence, and indeed, old and unsettled Asian rivalries could reignite if any one power tried to assert itself too forcefully. The rise of Asia is far from a truly continental affair; the region is not united. Policymakers in Washington and across Asia, therefore, should continue to welcome strong U.S. influence in the region.