Thursday 10 July 2008

Ideal growth?

The Dragon and the Elephant: China, India an the New World Order, by David Smith (Profile) and Adam Smith in Beijing: Lineages of the 21st Century, by Giovanni Arrighi (Verso)

Frightened focus on the fabricated ‘war on terror’ is twisting into talk about globalisation, obsessed over throughout the 1990s. Today though, the debate is the rise of China and, to a lesser extent, India. Politicians deliver speeches reminding us about the ‘realities’ of global competition and corresponding need to ‘tighten our belts’; businessmen drool over potential profits or worry about being undercut; environmentalists react with horror to the cheap Tata car in India or weekly construction of two coal-fired power stations in China. There is an expanding literature on the phenomenon, some of it fear-hyping about rising economic competition. These two more sober analyses give an account of this historical phenomenon, and the ways it is, and isn’t, changing the world.

David Smith’s The Dragon and the Elephant is an accessible, even-handed and unsensationalised account of the two countries’ rise. His ideological commitment to neoliberalism, however, leads him seriously astray. Smith presents a familiar story, dogmatically reiterated by bodies like the International Monetary Fund and World Bank: for decades both countries were mired in poverty and under-development because they foolishly adopted socialist policies, finally they saw the light and adopted market-friendly reforms and thus began their spectacular rise. Though this is not the full tale: many developing countries adopted market-friendly reforms in the 1980s (at the behest of the aforementioned institutions), and hardly any had significant success. In the case of Russia, Eastern Europe and Sub-Saharan Africa, economies actually severely contracted. What Smith overlooks is the crucial role of the state, something his later analysis is forced to concede.

The state of things

In India’s case, Smith points out the 1991 financial crisis usually given as the starting point of the country’s economic ascent, was preceded by market-friendly reforms which themselves caused economic growth to slow (pp 82ff). India didn’t benefit until the end of the Cold War, with the huge capital flows that made the 1990s synonymous with ‘globalisation’. Yet crucially, and in contrast to other developing countries, domestic political contestation led successive Indian governments to moderate reforms to protect their citizens from the icy blast of globalised competition. Smith seems to think this irrational, but direct state intervention part-explains India’s current position. He tries to explain India’s blossoming IT industry, for instance, by claiming Indians are ‘unusually good at IT’ and enjoy a ‘comparative advantage’, but is forced to admit this was artificially created by the state via attracting foreign investment and establishing a ‘National Venture Fund’. He also notes the industry sprang up around Bangalore because it was home to India’s space programme, though unsurprisingly he neglects to emphasise the programme was directed by the state – and supported by the Soviet Union (pp 135-8). Likewise, India’s most successful corporations today, like Tata, which form the backbone of the modern economy, were built and nurtured under the much-derided pre-reform ‘Hindu period of growth’ (pp 157-60). And yet of course the same old advice of deregulation and privatisation is trotted out by the IMF (p167).

Tata’s car is currently the cheapest in the world

Similar points can be made in relation to China, whose most successful corporations remain state-owned enterprises (p188). Having earlier sneered at Mao, Smith is forced to concede that growth rates of 9-10% were in fact achieved under the Chairman, whose social policies in healthcare and education also laid the ground for China’s current human resources: a broadly healthy, highly literate society well beyond levels typical of countries at China’s state of development (pp45, 100). Even something as apparently market-driven as capital flows are mediated by non-market relations: just as India’s diaspora is crucial in funneling investment to India’s IT industry, so four-fifths of investment flows to China come from the Chinese diaspora, sometimes acting as middle-men (pp137-8, 60). China has ultimately done better than India because of the power of its state to marshal resources (pp174-5).

Arrighi, as an historical sociologist, provides a much more nuanced account of China’s development, in a highly sophisticated analysis that combines insights from political theory and political economy. For Arrighi, China’s development follows the model described in Adam Smith’s Wealth of Nations more closely: it focuses first on agriculture and the domestic market before turning to trade, and developing far more advanced market relations than Western Europe by the eighteenth century (hence Adam Smith is ‘in Beijing’). In contrast, the West leap-frogged, jumping straight to rent-seeking trade, money-lending and, eventually, imperialism, to acquire capital. Despite this, China’s ‘industrious revolution’, a labour-intensive, household-based mode of production, yielded living standards far in excess of Europe’s and was only eclipsed by the second industrial revolution, with its emphasis on high energy and capital inputs. This peaked in the 1950s and is now, Arrighi argues, being combined with the Asian model to produce China’s rise.

Adam Smith in Beijing is ultimately a story about the historical development of the world’s capitalist system and China’s place in it. For Arrighi, the Western mode of development has produced ‘hegemonic’ leading state-business nexuses,  initially Genoa, then the Netherlands, followed by Britain and the US, whose power rests initially on their trading and productive potential, before being ‘financialised’ in a post-productive belle époque period where the hegemon’s capital flows out to finance development elsewhere.

Arrighi’s argument resists easy summation but is essentially that America’s crisis of hegemony in the 1970s saw its economic financialised and power begin to wane; it now increasingly operates a protection racket, sucking in foreign capital to finance its debt-driven consumption (to the tune of $2bn a day) and its wars, which are understood both as attempts to extract rent from America’s partners and as desperate attempts at ‘spatio-temporal fixes’ to grab control of resources and restore failing profitability. The main beneficiary from such attempts is China.

This is bold, but over-stated. Analysing events like the Iraq War with a logic of capitalist power fails to acknowledge attempts to vanquish the ‘Vietnam syndrome’ (pp221, 226). Evidence suggests US power has waned, especially in the Middle East, but despite differences over Iraq, core US allies in Europe and Asia have still backed US agendas. Arrighi doesn’t substantiate his bald assertions that a new administration could not mend America’s fences, or that the underlying economic pattern of dependence on foreign capital is not sustainable: it might make ‘no sense’, yet everyone does keep lending to the US (pp200-1).

The evidence for China’s growing dominance is thin. The supposed ‘leverage’ Beijing has gained as a result of purchasing US bonds is again asserted, not proven (p195). Certainly, while America blunders around the Middle East, China is quietly signing deals to purchase resources from states like Venezuela and Iran (pp207-8). But to suggest China is now the ‘regional hegemon’ in Southeast Asia (pp205-6) ignores its neighbours’ hedging strategies and China’s equivocal impact on their economies: a mixture of boosting and undercutting. In fact, the region remains heavily dependent on Western and Japanese investment and markets (1). The trends Arrighi points to are important yet incipient. Much of Arrighi’s analysis of China’s rise is based on hyperbolic newspaper reports, and is correspondingly inflated.

Dealing with growing pains

This is where The Dragon and the Elephant comes into its own, providing three vital insights on what the rise of the Asian giants means for the environment, themselves, and world order.

On the environment, Smith gives a wonderful riposte to the Malthusian garbage peddled by many so-called experts, namely that India and China’s development is a profound threat since we would need three planets if all their people wanted to enjoy Western lifestyles. Most important is his insights into population and agriculture. First, despite what its contemporary advocates at the Optimum Population Trust preach, population control has historically failed, both in India despite cruel, authoritarian enforcement, and in China, where it has produced a prematurely aged population with a potentially dangerous surplus of males (pp77, 181). Second, India and China, despite their burgeoning populations, can and will continue to be able to feed their people. Rising food prices, like booming oil prices, are often blamed on demand from India and China, but this is misleading. The 1950s ‘Green Revolution’, which introduced higher-yield crops and mechanised farming, aided growth (2), yet India still has shocking levels of malnutrition (the highest absolute numbers in the world) but in all cases this is not due to lack of food but poor infrastructure (food being wasted before it can be transported) or corruption and misgovernance (pp151-2).

Smith leaves us in no doubt as to the often horrific environmental consequences of rapid development for local populations (pp194-203). But as he points out, fear of India and China is based ‘on a static analysis’. Their current phase of development is both resource intensive and using poor technology. Historically, as technology has improved, the importance of oil in development declines (3). As China and India develop, fewer resources will be needed since infrastructure will have been completed, and less resource-intensive technologies will be deployed. Moreover, both countries have already recognized the costs of ecological damage and the benefits of more efficient development. China’s solar power industry is already world-leading, providing water heating for 35m buildings, and China also leads the world in manufacturing and installing energy-saving light bulbs; this trend is set to continue (p219). Smith’s faith in market mechanisms may be naïve, but coupled with the adaptability and power of the state in driving these developments (which he again overlooks), he gives good reason for optimism.

However, even if China and India are able to maintain their breakneck rates of growth, because they begin from such a low level, they will remain relatively poor. Despite China accounting for essentially all global poverty reduction (read it and weep, World Bank), hundreds of millions are likely to remain poor farmers as Beijing struggles to generalise enclave capitalism to its broader population. India has appalling rates of rural poverty, and its inability to attract sufficient capital means the manufacturing sector that would turn subsistence farmers into better-paid workers is too small. The spectre of jobless growth is real. As Smith puts it, the main problem with Indian manufacturing is ‘there is not enough of it’ (p150). India’s fabled IT industry, which with other ‘offshoring’ draws in 95% of the country’s foreign exchange and accounts for 35% of exports, directly employs less than 1% of the total workforce; it is not only subject to potential competition from other low-wage economies or a Western backlash against outsourcing, as Smith mentions, but is extremely dependent on economic activity elsewhere (pp138ff). India emerges as a dynamic, ambitious, but ultimately fragile success story.

Chinese commodity market

China does much better, with a third of its exports ranked ‘high-tech’, overtaking the US in terms of Information and Communications Technology (p112). Yet despite its manufacturing boom, it is still not developing fast enough to provide jobs for all its educated youths (p115), historically a recipe for social instability. Moreover, its performance, however impressive, provides lower yields on capital than Indian companies (p191), which suggests to me the China craze is driven by subjective factors. The similarities to Southeast Asia before the 1997-98 Asian financial crisis multiply when we learn that 40-50% of Chinese banks’ loans could be bad (p189). Smith’s claim that Western investment will bring greater financial probity is historically ignorant; a re-run of 1997 cannot be discounted. The basic point to take away is that the economic challenges facing the Asian ‘giants’ (if India can really be counted as an economic giant) are overwhelming. Even their low-wage advantage will dissipate over time. Factor in the difficulty of maintaining order in rapidly developing societies and the future is far from certain.

Economic growth without ideological development?

The same, of course, is true of these countries’ broader impact, which amongst their fellows is equivocal. Their growing demand for commodities is a positive boon to many other countries, and the accompanying investment (mostly Chinese) has, for instance, doubled sub-Saharan African growth in the last five years. China, of course, stands accused of propping up wicked regimes like that in Sudan in its lust for black gold; less commented upon is India’s deal with Iran (pp126-7, 198). This is, of course, laughably hypocritical when voiced by the West. Whether resource-rich countries will benefit from the present commodity price boom will depend very much on how the dividends are distributed domestically. This is ultimately a matter for the people of those societies to determine, but the boom will undoubtedly affect the balance of forces in those societies. Closer to home, China, and to a lesser extent India, are stimulating their neighbours’ economies through the creation of production chains, but elsewhere their impact is more limited, perhaps being limited to undercutting fragile economic progress in some cases (p234).

This is not the only reason, however, to doubt Arrighi’s claim that the stage is set for a ‘second Bandung’ where developing countries, with China in the vanguard, might harness ‘the global market as an instrument of equalization of South-North power relations’ (pp384-5). Perhaps more important is that, despite some talk of a so-called ‘Beijing consensus’, neither China nor India possess the ideological resources to provide an alternative to the US; the post-colonial solidarity that animated Bandung cannot simply be conjured into being. As Smith notes, they are likely to ‘flex their diplomatic and military muscles’ in pursuit of their growth goals, but ‘the great unknown… is how Beijing and New Delhi will use their power’ (p219, 221). It is of course this ‘known unknown’ that is causing the US to dangerously construct a chain of alliances around China. Yet if the Group of 20 developing economies’ inability to do more than merely stymie a new trade World Trade Organisation agreement is anything to go by, economic might shorn of political purpose is oddly impotent.

There is no reason to assume this ideological vacuity will last: if nothing else, the class struggle that economic development will produce means that history is not yet dead. But for the time being, as Smith points out, China and India will be largely status quo powers; they have no interest in creating instability or changing the rules of the game (p224). Historically speaking, a strong China has made for a stable Asia. Sino-Indian support for non-interference might irritate Western liberals, but is far more conducive for international order than Western interventionism. American hypocritical innuendo about China’s military spending is just that – hypocritical innuendo. China will act to maintain its territorial integrity, which from its perspective means preventing the emergence of Taiwan as an independent state, but there is no evidence of aggressive intent and no reason that flashpoints cannot continue to be handled sensibly. What the future holds seems to hinge on two things. First, the maintenance of social order in China, which currently depends on sustained economic growth and nationalism; second, our reactions to the rise of the Asian giants. The two are clearly inter-related: a backlash against their rise, through closing markets or blocking access to resources could endanger development and provoke a nationalist backlash as the same manoeuvre accomplished against Japan in the 1930s. As Smith concludes, ‘What every business and every individual should be most worried about… is that their rise elicit the wrong response… to try to and deny China and India their rightful place in the global economy – a place that looked secure two centuries ago – would be a huge betrayal’ (p238).


(1) For instance, in 2004, Chinese investment constituted just 1% of total, compared with America’s 20%
(2) The Green Revolution increased yields 60% by 2000; by 2026, India expects cereal output to rise 45% on its 1990s level, with fruit and vegetables up 150 and 70% respectively
(3) a 1% rise in GDP growth stimulates a 0.5% rise in demand for oil in developed countries (where energy intensiveness has fallen by 40% since 1973), but a 1.2% rise in China (pp41, 216-7)


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