Economic war footing

Constant theorising notwithstanding, at the moment no one has a clear understanding of when the current global economic meltdown will pass, or what the landscape will look like when it is done. One survey of economists, released by the Wall Street Journal during the first week of April, suggests that the US recession will end in September. As for the rest of the world, who knows? But there is also looming apprehension for the period beyond this timeframe, that the end result could be a situation worse than the Great Depression of the 1930s. Already there are clear signs of this, with manufacturing sectors around the globe collapsing, spectres of protectionism reappearing, layoffs becoming rampant, economic nationalism re-emerging, and social tensions and instabilities adding to the mix. In this part of the world, China and India, the two giants, despite showing some resilience, have suffered tremendously.

In India, there were 670,000 job losses in 2008-09 compared to 970,000 jobs generated the previous year. With the informal sector unaccounted for, some suggest that the actual number could be as high as two million jobs lost. China, with its economy much more integrated with the global market in terms of trade, technology transfer, investment and even economic assistance, has found itself doubly vulnerable. The ongoing recession has affected China in three major ways. First, its exports have sunk, with the demand for Chinese goods in the international market having decreased dramatically. As a result, factories are closing down and construction activities have slowed considerably. Places such as Xinji, in northern Hebei province, famous for textile and leather exports, grew by more than 13 percent in 2007; today, it is striving to maintain half that rate. Second, there has been a steady withdrawal of foreign investment further affecting economic activity. According to figures released in mid-April, at just over six percent the growth rate in China has now hit its lowest point since 1992.

Third, the dramatic shrinking of both exports and foreign investment has severely affected the working population. Starting with shrinking bonuses and frozen wages, there is now massive displacement, with anywhere from 20 to 50 million migrant workers within China being forced back to their homes in far-flung provinces. In addition to curbing domestic consumption (which does not help the economy), this has raised apprehension about socio-political unrest. China witnessed similar labour displacement during the massive restructuring of state-owned enterprises in the late 1990s, with over 40 million people losing their jobs. This time, the number of displaced migrants is more than those made redundant during the 1997 financial crisis, the SARS epidemic of 2003 and last year's closing down of polluting factories ahead of the Olympics – all combined.

To counteract the negative implications of such a serious downturn, and of an unemployment rate that has already crossed four percent, Beijing has made some aggressive interventions. These include a USD 586 billion stimulus package announced last November; efforts to boost housing markets in second-tier cities and coastal provinces, which are more vulnerable to the collapse in exports; consumption-stimulation efforts such as subsidising the purchase of home appliances and cars in rural areas; free job and capacity-building trainings, to encourage returning migrants to engage in entrepreneurial activities; new rural healthcare schemes; and huge increases in agricultural subsidies.

China's state-owned banks have also been forced to play a major stabilising role, with significant increase in lending. During the first quarter of 2009, new loans totalled more than USD 800 billion, or 85 percent of the total lending in 2008. This credit explosion is made possible by Beijing's mobilisation of the central and local governments, as well as the entire banking system, onto a war footing, primarily to boost government investments. Beijing has even deployed the armed forces to oversee development activities.

New Asianism
As serious as Beijing has been about countering the consequences of the recessions, China is currently facing at least five serious challenges, which will test both the political system and the ramifications of large-scale reforms undertaken in the last three decades. First, if the displaced migrant workers are not properly absorbed in the transforming economy, it could trigger a range of conflicts that are currently incipient. Most of these rural dwellers used to have some access to land as a result of the country's Maoist legacy, but have in recent years lost all of these lands to relentless urban expansion. Today, they have nowhere to go. Furthermore, these aggressive stimulus measures can have a strong counter-cyclical effect: the credit boom could inflate asset prices, potentially leading to uncontrollable inflation – and eventually to social unrest, threatening the Communist Party's monopoly of power. Beijing is obviously aware of this, as can be implicitly understood in Premier Wen Jiabao's statement, during the recently concluded parliamentary session, that he would speed up reforms, opening up the country to market forces, in order to counter the crisis.

Second, how China plays its cards in the global economic system is another crucial issue. Since the ills have emanated from the West and the befitting cure is likely to come only from the Global East, the emergence of a new 'Asianism', with China leading the way, may be imminent. On the other hand, if things do not go well, the confidence bestowed on China at the last G20 meeting in London in early April could soon rupture. Related to the issue of China's global role is the question of how Beijing is going to leverage its foreign-exchange reserves of USD 1.3 trillion (now surpassing Japan as the world's largest holder of such reserves) and the United States' heavy dependence on it in terms of government debt and other financial instruments. Analysts are wondering how much China may be able to influence the US as it continues to meet Washington's huge international financial imbalances. In the current situation, another question is whether Beijing can make space at the decision-making table at the International Monetary Fund (IMF) through unprecedented contribution to the Fund's financial health. If Beijing handles the situation correctly, could China's plea to review the role of the US dollar as the most credible and acceptable global hard currency be taken seriously by the IMF and its fraternity?

Third, there exists a significant challenge in terms of growing unemployment among the educated Chinese youth. A record 5.6 million students entered the workforce in 2008, with the number growing to 6.5 million this year. Students have always remained a force to be reckoned with in China, playing a significant role in landmark political upheavals such as the Tiananmen Square protests in 1989 and the Cultural Revolution in the late 1960s. At this point, following in the footsteps of Japanese Prime Minister Taro Aso's recent Inaka-de-hatarakitai policy may be helpful. Under this programme, coming from another hard-hit developed Asian market economy, aimed both at giving employment to educated urban youth and at boosting agricultural production, 2400 so-called rural labour squads have been formed and dispatched to the countryside to till farms. To date, Beijing has taken a somewhat different tack, choosing to provide loans to graduates to help them start businesses, and giving companies money to hire new employees.

Fourth, will China reduce the reach and size of its tentacles on the mineral and forest resources of Africa, as well as Southeast and Central Asia? Beijing's investment in Africa, primarily on natural resources, increased from USD 1.8 billion in 2003 to a hefty USD 16.1 billion in 2006. The numbers are similar in the other two regions. These countries would likely be very unhappy should China consider decreasing the amount of money it has been pumping in over the last half-decade.

Finally, there is the matter of how China's relative financial strength could affect the Southasian region. There are two recent examples of Beijing's diplomatic assertiveness that are worth considering. The first, of course, is Great Britain changing its traditional stance on the Tibet issue last year, with some suggesting that the trigger was Chinese financial support to its economy. The second is China's recent veto of India's loan request to the Asian Development Bank for a purely internal, run-of-the-mill watershed-development project in Arunachal Pradesh – territory that Beijing claims as Chinese.

Like India, today's China confronts inequality at three very distinct levels: the income inequality at the national level, geographical disparity and finally a bourgeoning rural-urban divide. For instance, just how uneven the development process has been in terms of geography is partly indicated by the contributions made to national trade by administrative divisions other than those located in the western region. Guangdong alone, for example, accounted for about 40 percent of China's total exports and imports. This, along with Fujian, Zhejiang, Shanghai, Jiangsu, Shandong and Liaoning, China's seven coastal divisions, handled 75 percent of national exports, more than 90 percent of all processing exports and 67 percent of imports. Tibet and Gansu not only have the lowest per-capita rural consumption in the country (RMB 710 and RMB 939, respectively), but also have just half of the national average of RMB 1590. Similarly, out of the total foreign direct investment, the inland provinces hardly received 10-15 percent, as against the overwhelming proportion of the coastal provinces. It is from these politically volatile provinces and regions that a large proportion of rural folks have in the past migrated to the cities to eke out their living.

Are these seemingly unrelated events a harbinger of things to come? It is a time to be extremely careful, to prevent a fraying of the relationship of Asia's two giants. It is significant that India is proving surprisingly strong in the context of the global meltdown. Thus far, New Delhi's resilience, its increasing assertiveness at the IMF and other global institutions, and its unparalleled institutional strength and ability to absorb both socio-economic and political shocks have made it the only Asian force able to partially balance Beijing's increasing global influence. This will not have gone unnoticed in every world capital of note. But in these difficult times, the only way forward for both India and China will be through adherence to the traditional principles of cooperation, forbearance and multilateralism.

~ Mahendra P Lama is India-China Fellow at New School University, New York. He is presently the founding Vice-Chancellor of the Central University in Sikkim.