China-India Relations

Cooperation and conflict

Kanti Bajpai, Jing Huang, Kishore Mahbubani, Kanti Bajpai, Jing Huang, Kishore Mahbubani

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9781138955752
• eBook ISBN: 9781317354109
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The question of whether China and India can cooperate is at the core of global geopolitics. As the two countries grow their economies, the potential for conflict is no longer simply a geopolitical one based on relative power, influence and traditional quarrels over land boundaries.

This book assesses the varying interests of China and India in economics, environment, energy, and water and addresses the possibility of cooperation in these domains. Containing analyses by leading authorities on China and India, it analyses the nature of existing and emerging conflict, describes the extent of cooperation, and suggests possibilities for collaboration in the future. While it is often suggested that conflict between the giants of Asia is the norm, there are a number of opportunities for cooperation in trade, international and regional financial institutions, renewable energy development and climate change, and shared rivers.

This book will be of interest to researchers in the fields of Asian Studies, International Relations, and Asian Politics.

Part I

Economics

1 Convergence and divergence in development

An Indian perspective

Prem Shankar Jha

For more than two decades, China and India have been the fastest growing economies in the world. It is now taken for granted that by the middle of this century, at the latest, these will be the two largest economies in the world. This projection assumes that the growth will not only continue, but also that both countries will remain politically stable. Recent experience shows, however, that this stability cannot be taken for granted because both countries are experiencing deepening currents of social unrest.¹

The root cause of the unrest is that, despite considerable efforts, neither country has been able to reconcile its rapid economic growth with social equity. In both China and India, social discontent has risen because of rising inequalities in income, an increasingly blatant corruption of the elite, and above all the growing insecurity in increasingly market-dominated economies. To understand why even unprecedentedly rapid growth has not delivered political stability, it is necessary to move beyond an analysis of economic performance and examine the interaction, in both countries, between economic growth and political power.

The key to understanding this paradox is that despite very different starting points, both China and India are in the early to middle stages of their transformation into capitalist economies. This is a period in which the income gap between the owners of property and the owners of labour widens rapidly, and the latter are particularly vulnerable to economic fluctuations because they enjoy no social security. In the economic literature of the past two decades, China and India are held up as cases of successful transition from command to market economies. A closer look at their respective trajectories of development shows that this conclusion is misleading. In China, there is virtually no correlation between the progress of reforms and the acceleration of growth. The country’s GDP growth rate jumped to 11 per cent in 1981, within two years of the start of the reforms, when the dismantling of centralised planning and price controls had barely begun and Premier Zhu Rongji’s privatisation drive was more than a decade away.

Clearly, some other force had been unleashed. This, it turned out, was the granting of freedom to invest to the lower rungs of the state. In 1978, at the start of China’s transformation, there were 83,700 state-owned industrial enterprises in the country, employing 31.39 million workers. By 1996, the number had grown to 113,800 industrial SOEs employing 42.77 million workers. This rate of expansion was dwarfed by the growth in the number of enterprises run by local administrations. The number of these ‘non-state’ enterprises, or collectives, grew from 244,700 in 1978 to 7.87 million in 1996.²

India’s development reflects the opposite trend. In 1947, it had a well-integrated national market, a well-developed financial system, a robust private sector, and a sizable industrial base. The First Census of Manufactures, held in 1946, identified 29 sectors in which industrialisation had taken place.³ These included cotton and jute textiles, steel, sugar, vegetable oils, tea, coal, paper and paper pulp, tobacco and matches, and general engineering that produced consumer goods for mass consumption such as bicycles and lamp bulbs. Best of all, these industries had been built by private enterprise, entirely without the benefit of tariff protection, and were therefore highly efficient. Yet in spite of all these advantages, between 1951 and 1981 India recorded one of the slowest growth rates of the world.

Economists have blamed India’s failure to seize its initial advantages on the adoption of a rigid and inefficient model of centrally planned industrialisation. A closer examination shows that while the public sector was indeed inefficient, it made up far too small a proportion of the economy to be held responsible for this abysmal performance.⁴ Therefore, one needs to look for another cause for India’s economic stagnation. That cause was the deliberate adoption of polices that were supposedly pro-poor but whose effect was to strangle growth in the private sector for three decades, from the mid-1950s till the mid-1980s.

This chapter sketches the larger context within which China and India charted their economic development giving rise to high rates of growth in the 1980s and beyond. These high rates of growth were achieved on the back of various economic, political, and social reforms but also by the use of higher levels of natural resources, especially energy. In turn, economic growth spurred a higher demand for energy resources and water. As China and India grew economically and used more resources, they fouled the atmosphere with carbon emissions and polluted the soil and water. Today, their patterns of development and the consequences of this development confront China and India with some difficult choices, internally as well as externally. If the two countries carry on using resources at the current rate, they could well come into conflict. On the other hand, they could search for ways to cooperate in resource use and in dealing with air, soil, and water pollution. The view of this chapter is that patterns of national development will bear upon the chances of both conflict and cooperation.

The chapter is broadly divided into five sections. The first two sections look at the role of the state in driving or impeding economic development in China and India during the initial years. The third section examines the reforms and economic changes that led to a spurt in growth. The fourth analyses the challenges the countries faced in recent years in maintaining growth, particularly with the financial crisis of 2008 and the subsequent global recession. The fifth section attempts briefly to answer the question of whether or not the two countries can learn from each other and how they might cooperate.

Class conflict in early capitalism: China’s intermediate regime

Strange as it may seem at first sight, the completely opposite economic results in China and India spring from the same root cause – namely, in the early stages of capitalism the central line of conflict that defines the struggle for power lies not between capitalists and workers but rather between two emergent strata of the capitalists themselves.⁵ In China, these are the party cadres that man the central government and its state-owned enterprises (SOEs) and those that man five tiers of ‘local’ government and enterprise. In India, the two strata are the bourgeoisie already in place at the time of independence, whose leaders were dubbed the ‘Large Industrial Houses’, and a new ‘intermediate’ stratum of small and medium bourgeoisie that came into being almost overnight in the late 1950s, when an acute foreign exchange crisis forced the government to put a complete ban upon the import of consumer goods imports. This created a vacant space in the market that the former importers of consumer goods and other small investors quickly moved into.

In China, the competition between the central and local cadres of the Communist Party erupted when the winding up of centralised planning and price controls between 1981 and 1984 devolved the power to plan and finance investment, collect taxes, take loans from the banks, and assign land for development projects, by default, to the provincial and local governments. This set off a race between provinces, prefectures, counties, and townships to outdo each other in finding new ways of meeting and exceeding various development targets.⁶ Greater autonomy also increased local cadres’ temptation to use their control of the supply of labour, land, and key raw materials to personally make money out of their deployment. The fusion of the two motives set off an investment spree in provincial and local government agencies that threatened to wrest control of economic resources – notably land, capital, and markets – from the central government. This in turn triggered an unacknowledged struggle for control between the central and local cadres that remains unresolved to this day. The local cadres initially took advantage of four instruments in their battle to control investment. These were their control over taxation, over bank credit, over land, and, as growth slowed down in the mid-1990s, over access to provincial markets. The central government responded with legislative changes, made in the name of reform, which wrested economic control back from the provinces.⁷

The most important of these were the taxation reform of 1994 and the banking reform of 1998. The former was triggered by the central government’s loss of control over its tax revenues, and the latter by its loss of control over lending by the local branches of the giant state-owned banks. Between 1978 and 1993, the buoyancy of central tax revenues fell from 0.78 to 0.53 and the central government’s share of tax revenues from 35 per cent to 11 per cent.⁸ As a result, by 1993 the central government was running an ever-increasing budget deficit. The main purpose of the 1994 tax reforms was therefore to restore the fiscal dominance of the centre. It did so by reducing the provinces’ share of total tax revenues from 78 per cent in 1993 to 44.3 per cent in 1994 and raised those of the centre from 22 to 55.7 per cent.⁹ The result was that the provinces were plunged into a fiscal deficit that was aggravated by the centre’s directive that henceforth local governments would be responsible not for just five but nine years of education.

The central government tried to compensate by devolving a share of its revenues upon the provinces. This only partially ameliorated the local governments’ fiscal crisis because it replaced a bottom-up distribution of tax revenues with a ...

Table of contents

• Cover Page
• Half Title page
• Routledge Contemporary Asia Series
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• List of contributors
• Acknowledgements
• Introduction: The long peace, new areas of competition and opportunities for cooperation in China–India relations
• Part I Economics
• Part II Environment and energy
• Part III Water
• Index