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Can India overtake China to drive global economic growth in the aftermath of the Covid pandemic? This question is at the centre of geostrategic affairs commentator Saurav Jha's new book Negotiating the New Normal: How India Must Grow in a Pandemic-Ridden World.
The answer, as one might imagine, is far from simple.
In the book, Jha delves into the examples of economic growth set by China and Japan, asks difficult questions like can the yuan ever replace the US dollar, and was it right for India to leave the China-led trade bloc RCEP.
While China, and the factors spurring and limiting its growth potential take up several chapters in the book, chapter seven specifically talks about China's phenomenal growth during the "miracle years", and the injustices that made "China Price" possible. Excerpted below is a section from this chapter:
NOT SO CHEAP AFTER ALL
Unfortunately, this very ‘China Price’ turned out to be not so cheap for the country after all. It is now believed that Chinese workers have been paid below their productivity for most of the miracle years, with a sharp increase in wages being seen only recently. And this wouldn’t be particularly surprising, since those tens of millions of workers, who migrated to coastal industrial zones to enable this miracle, wouldn’t have had much bargaining power with their employers anyway. Not only would the constant inflow of unskilled and semi-skilled migrants have put downward pressure on wages, the overall system managing rural–urban migration in China was (and still is) loaded against migrant workers.
The hukou system of land registration practised in China, wherein a person gets residential and other state facilities only in the place where they are registered – usually their place of birth – basically discriminates against migrant workers by denying them the right to public services in the urban areas, where they actually dwell. This system also governs the right to buy property in a particular area, and in 2012, only 35.4 per cent of the population had urban hukou, whereas 52.6 per cent of the population actually lived in urban areas by that year. Migrant workers in urban areas continue to live in either the construction sites where they work or in dormitories provided by sweatshops. Obviously, given the state of affairs, migrant workers with no real local foothold as it were, have been at a disadvantage vis-à -vis their employers in terms of wage bargaining, especially during the period when migrant ranks were swelling rapidly. Census figures released in 2020 showed that 45.4 per cent of the population had urban hukou, while the percentage of those living in urban areas had increased to 63.9 per cent. These figures indicate that the so-called hukou reforms initiated in 2014 with the aim of narrowing the difference between the urban population percentage and the urban hukou percentage to 15 per cent from the 17.2 per cent figure in 2012 had failed. The difference had instead increased to 18.5 per cent with the floating population between rural and urban areas at 376 million as compared to 232.1 million in 2012.
Over the years, local governments in China have also appropriated land in coastal areas and elsewhere by paying farmers less than prevailing market prices. This is in contrast to Japan, where, despite the existence of land expropriation laws, market-based compensation was the norm, which served to boost farmer income. Indeed, one of the other reasons for the ‘China Price’ was that the sites for industrial production came rather cheap. Meanwhile, households also got a lesser share of the profits from increased production than their counterparts in other East Asian countries during their industrialization phase because Chinese SOEs, till very recently, distributed a very low quantum of dividends. Instead, almost all after-tax earnings were retained by SOEs for reinvestment. The sum total of below-productivity compensation, dispossession of land without adequate compensation and an underwhelming share in industrial profits has contributed to keeping the share of household income in national income less than what it could have been.
At the same time, the lack of any social security and the hukou system contributed to increasing precautionary motivations for saving among Chinese households. Also, in the late 1990s, at least 21 million workers were let go by SOEs, and this may have further aggravated the tendency to save in the 2000s. While many of the laid-off workers ultimately died in penury, their sons did manage to find jobs as China was growing at a blistering pace, led by investment, during that period. Overall, though, the chief reason for a high savings rate in China, as it was in Japan and other East Asian tigers, was this: a repressed financial system. Beijing also practised financial repression like its neighbours, which led to a lack of choice in terms of financial investments for households, with bank deposits being the only safe place to hold their savings. With these deposits providing depressed returns for their savings, households looked to save as much as they could to increase the quantum of their future interest earnings. After all, the idea was to ‘tax’ households via low deposit rates for their savings to finance rapid industrialization.
China’s peculiar features have served to create a situation wherein, during its high-growth phase, it has experienced savings and investment rates that are appreciably higher than those of any of its East Asian neighbours. In other words, it managed to squeeze its consumers far more than any of its neighbours in the quest for rapid growth through capital deepening. Topping this bias towards savings and investment was the massive amount of FDI that was allowed into the country for processing trade in which China’s value-added component in export was as low as 20 per cent, with most of the value captured overseas. And while that FDI was enjoying high rates of return on Chinese soil, the country’s own foreign exchange reserves were progressively earning lesser and lesser interest, thanks to the accommodative foreign policies followed by the Fed in the US. Foreigners were clearly gaining more from the Chinese miracle than one would think.
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