On February 16, President George W. Bush assembled a small group of congressional Republicans for a briefing on Iraq. Vice President Dick Cheney and National Security Adviser Stephen Hadley were there, and U.S. Ambassador to Iraq Zalmay Khalilzad participated via teleconference from Baghdad. As the meeting was beginning, Mike Pence spoke up. The Indiana Republican, a leader of conservatives in the House, was seated next to Bush.
"Yesterday, Mr. President, the war had its best night on the network news since the war ended," Pence said.
"Is this the tapes thing?" Bush asked, referring to two ABC News reports that included excerpts of recordings Saddam Hussein made of meetings with his war cabinet in the years before the U.S. invasion. Bush had not seen the newscasts but had been briefed on them.
Pence framed his response as a question, quoting Abraham Lincoln: "One of your Republican predecessors said, 'Give the people the facts and the Republic will be saved.' There are 3,000 hours of Saddam tapes and millions of pages of other documents that we captured after the war. When will the American public get to see this information?"
Bush replied that he wanted the documents released. He turned to Hadley and asked for an update. Hadley explained that John Negroponte, Bush's Director of National Intelligence, "owns the documents" and that DNI lawyers were deciding how they might be handled.
Bush extended his arms in exasperation and worried aloud that people who see the documents in 10 years will wonder why they weren't released sooner. "If I knew then what I know now," Bush said in the voice of a war skeptic, "I would have been more supportive of the war."
Bush told Hadley to expedite the release of the Iraq documents. "This stuff ought to be out. Put this stuff out." The president would reiterate this point before the meeting adjourned. And as the briefing ended, he approached Pence, poked a finger in the congressman's chest, and thanked him for raising the issue. When Pence began to restate his view that the documents should be released, Bush put his hand up, as if to say, "I hear you. It will be taken care of."
It was not the first time Bush has made clear his desire to see the Iraq documents released. On November 30, 2005, he gave a speech at the U.S. Naval Academy. Four members of Congress attended: Rep. Pete Hoekstra, the Michigan Republican who chairs the House Intelligence Committee; Sen. John Warner, the Virginia Republican who chairs the Senate Armed Services Committee; Rep. John Shadegg of Arizona; and Pence. After his speech, Bush visited with the lawmakers for 10 minutes in a holding room to the side of the stage. Hoekstra asked Bush about the documents and the president said he was pressing to have them released.
Says Pence: "I left both meetings with the unambiguous impression that the president of the United States wants these documents to reach the American people."
Negroponte never got the message. Or he is choosing to ignore it. He has done nothing to expedite the exploitation of the documents. And he continues to block the growing congressional effort, led by Hoekstra, to have the documents released.
For months, Negroponte has argued privately that while the documents may be of historical interest, they are not particularly valuable as intelligence product. A statement by his office in response to the recordings aired by ABC said, "Analysts from the CIA and the DIA reviewed the translations and found that, while fascinating from a historical perspective, the tapes do not reveal anything that changes their postwar analysis of Iraq's weapons programs."
Left unanswered was what the analysts made of the Iraqi official who reported to Saddam that components of the regime's nuclear program had been "transported out of Iraq." Who gave this report to Saddam and when did he give it? How were the materials "transported out of Iraq"? Where did they go? Where are they now? And what, if anything, does this tell us about Saddam's nuclear program? It may be that the intelligence community has answers to these questions. If so, they have not shared them. If not, the tapes are far more than "fascinating from a historical perspective."
Officials involved with DOCEX--as the U.S. government's document exploitation project is known to insiders--tell The Weekly Standard that only some 3 percent of the 2 million captured documents have been fully translated and analyzed. No one familiar with the project argues that exploiting these documents has been a priority of the U.S. intelligence community.
Negroponte's argument rests on the assumption that the history captured in these documents would not be important to those officials--elected and unelected, executive branch and legislative--whose job it is to craft U.S. foreign and national security policy. He's mistaken.
An example: On April 13, 2003, the San Francisco Chronicle published an exhaustive article based on documents reporter Robert Collier unearthed in an Iraqi Intelligence safehouse in Baghdad. The claims were stunning.
The documents found Thursday and Friday in a Baghdad office of the Mukhabarat, the Iraqi secret police, indicate that at least five agents graduated Sept. 15 from a two--week course in surveillance and eavesdropping techniques, according to certificates issued to the Iraqi agents by the "Special Training Center" in Moscow . . .
Details about the Mukhabarat's Russian spy training emerged from some Iraqi agents' personnel folders, hidden in a back closet in a center for electronic surveillance located in a four-story mansion in the Mesbah district, Baghdad's wealthiest neighborhood. . . .
Three of the five Iraqi agents graduated late last year from a two-week course in "Phototechnical and Optical Means," given by the Special Training Center in Moscow, while two graduated from the center's two-week course in "Acoustic Surveillance Means."
One of the graduating officers, identified in his personnel file as Sami Rakhi Mohammad Jasim al-Mansouri, 46, is described as being connected to "the general management of counterintelligence" in the south of the country. . . .
His certificate, which bears the double-eagle symbol of the Russian Federation and a stylized star symbol that resembles the seal of the Russian Foreign Intelligence Service, uses a shortened version of al-Mansouri's name.
It says he entered the Moscow-based Special Training Center's "advanced" course in "acoustic surveillance means" on Sept. 2, 2002, and graduated on Sept. 15.
Four days later, the Chronicle reported that the "Moscow-based Special Training Center," was the Russian foreign intelligence service, known as SVR, and the SVR confirmed the training:
A spokesman for the Russian Foreign Intelligence Service (SVR), Boris Labusov, acknowledged that Iraqi secret police agents had been trained by his agency but said the training was for nonmilitary purposes, such as fighting crime and terrorism.
Yet documents discovered in Baghdad by The Chronicle last week suggest that the spying techniques the Iraqi agents learned in Russia may have been used against foreign diplomats and civilians, raising doubt about the accuracy of Labusov's characterization.
Labusov, the press officer for the Russian Foreign Intelligence Service, confirmed that the certificates discovered by The Chronicle were genuine and that the Iraqis had received the training the documents described.
The Russians declared early in the U.N. process that they preferred inspections to war. Perhaps we now know why. Still, it is notable that at precisely the same time Russian intelligence was training Iraqi operatives, senior Russian government officials were touting their alliance with the United States. Russian foreign minister Boris Malakhov proclaimed that the two countries were "partners in the anti-terror coalition" and Putin spokesman Sergei Prikhodko declared, "Russia and the United States have a common goal regarding the Iraqi issue." (Of course, these men may have been in the dark on what their intelligence service was up to.) On November 8, 2002, six weeks after the Iraqis completed their Russian training, Russia voted in favor of U.N. Resolution 1441, which threatened "serious consequences" for continued Iraqi defiance on its weapons programs.
Maybe this is mere history to Negroponte. But it has practical implications for policymakers assessing Russia's role as go-between in the ongoing nuclear negotiations with Iran.
Perhaps anticipating the weakness of his "mere history" argument, Negroponte abruptly shifted his position last week. He still opposes releasing the documents, only now he claims that the information in these documents is so valuable that it cannot be made public. Negroponte gave a statement to Fox News responding to Hoekstra's call to release the captured documents. "These documents have provided, and continue to provide, actionable intelligence to ongoing operations. . . . It would be ill-advised to release these materials without careful screening because the material includes sensitive and potentially harmful information."
This new position raises two obvious questions: If the documents have provided actionable intelligence, why has the intelligence community exploited so few of them? And why hasn't Negroponte demanded more money and manpower for the DOCEX program?
Sadly, these obvious questions have an obvious answer. The intelligence community is not interested in releasing documents captured in postwar Afghanistan and Iraq. Why this is we can't be sure. But Pete Hoekstra offers one distinct possibility.
"They are State Department people who want to make no waves and don't want to do anything that would upset anyone," he says.
This is not idle speculation. In meetings with Hoekstra, Negroponte and his staff have repeatedly expressed concern that releasing this information might embarrass our allies. Who does Negroponte have in mind?
Allies like Russia?
Hoekstra says Negroponte's intransigence is forcing him to get the documents out "the hard way." The House Intelligence chairman has introduced a bill (H.R. 4869) that would require the DNI to begin releasing the captured documents. Although Negroponte continues to argue against releasing the documents in internal discussions, on March 9, he approached Hoekstra with a counterproposal. Negroponte offered to release some documents labeled "No Intelligence Value," and indicated his willingness to review other documents for potential release, subject to a scrub for sensitive material.
And there, of course, is the potential problem. Negroponte could have been releasing this information all along, but chose not to. So, in a way, nothing really changes. Still, for Hoekstra, this is the first sign of any willingness to release the documents.
"I'm encouraged that John is taking another look at it," Hoekstra said last Thursday. "But I want a system that is biased in favor of declassification. I want some assurance that they aren't just picking the stuff that's garbage and releasing that. If we're only declassifying maps of Baghdad, I'm not going to be happy."
He continued: "There may be many documents that relate to Iraqi WMD programs. Those should be released. Same thing with documents that show links to terrorism. They have to release documents on topics of interest to the American people and they have to give me some kind of schedule. What's the time frame? I don't have any idea."
Hoekstra is not going away. "We're going to ride herd on this. This is a step in the right direction, but I am in no way claiming victory. I want these documents out."
So does President Bush. You'd think that would settle it.
What do good businessmen know? Sound deals are mutually beneficial.
If the idea is that by keeping the docs secret, America is protecting Russia, what are we getting from Russia for this protection? Occasional solidarity in the WoT? A mirage of intermediation in the Iran standoff? Not good enough-not a good bargain.
These docs alone aren't going to sway the public; we need to release the evidence of Saddam and Co.'s violent crimes AS THEY WERE COMMITTED. Now THAT would be the most compelling night "on the network" ever.
There is no need for a U.S. military presence in the Gulf regardless of the amount of oil we import.
It's certainly true that a disruption of the oil supply from the Middle East would increase the price of crude oil everywhere in the world. But just because the security of Middle Eastern oil has the characteristics of a public good for all consumers in the world does not imply that the United States has to provide that security. Oil producers will provide for their own security needs as long as the cost of doing so is less than the profit they gain from the oil trade. Given that their economies are so heavily dependent upon oil revenues, they have even more incentive than we do to worry about the security of production facilities, ports, and sea lanes. And if producing countries provide inadequate security in the eyes of consuming countries, consuming countries can pay producers to augment it.
In short, whatever security our presence provides (and many analysts think that our presence actually reduces security) could be provided by other parties were the U.S. to withdraw. The fact that Saudi Arabia and Kuwait paid for 55 percent of the cost of Operation Dessert Storm suggests that keeping the Straights of Hormuz free of trouble is certainly within their means. The same argument applies to al Qaeda threats to oil production facilities.
It's no surprise that the political class has convinced itself that bigger handouts to farmers and more automobile regulation constitute a "secret weapon" in the war against bin Laden. It is a surprise, however, that so many otherwise serious people are willing to believe them.
This is goofy tripe. No only is the full article very thin in facts, large sweeping assertions are made sans any proof, it is logically inconsistent - using the same fact to make conflicting points. In other words, they have a conclusion they want to sell and the facts do not get in the way. Cato Institute. A dishonor to the man.
According to the World Economic Forums Global Competitiveness Report (GCR) 2005-06, released last September, China ranks 46th on the Growth Competitiveness Index and India 55th.
Its a pity that the GCR is often cited but seldom read. Beyond the table on overall rankings of country competitiveness, the report contains a wealth of valuable information and insights. In particular, a measure designed to capture the microeconomic foundation of economic growth, the business competitiveness index (BCI), adds significantly to the China-India comparison debate.
China dominates India on almost every macroeconomic indicator. In the 2003-04 GCR, China was ranked at 25th place on the macroeconomic environment index, compared with Indias 52nd place. Newspaper headlines reveal the same story: China has had a faster GDP growth, and its per capita income is twice that of India. Chinas exports have been growing faster and are substantially larger in terms of volume. It produces more steel, builds more roads, highways and skyscrapers faster than Indians can build slums. For foreign analysts, the most favored measure of economic success is the level of foreign direct investment (FDI). And almost every comparison of China and India will tell you that China attracts 10 times the amount of FDI as India.
Looking at microeconomic indicators, however, a far more complicated picture emerges. In 2004, India ranked 30th in the BCI, far ahead of Chinas 47th place ranking. On other components of microeconomic competitivenesscompany operations and strategy, and quality of the national business environmentthe Indians (30th and 32nd) were similarly ahead of the Chinese (39th and 47th). Yet perhaps the most stunning revelation is that since 1998the first year this microeconomic ranking was producedChinas standing has declined, whereas Indias has improved substantially.
Despite a sharp increase in FDI amidst a growth rate of nearly 10% a year, Chinas microeconomic foundations for growth since joining the WTO have deteriorated. India, in contrast, has quietly and solidly improved its microeconomic competitiveness. In terms of BCI, China was ahead of India by two places in 1998; in 2004, it was behind India by a yawning gap of 17 places.
The most important thing to note in any China-India comparison is that there is a substantial difference between the macroeconomic measures and microeconomic measures of these two countries. Chinas GDP growth is faster, as widely acknowledged, but its corporate performance has been very poor. The index of Shanghai Stock Exchange has declined by 50% since 2001. Based on Standard & Poors Compustat data for 346 top-listed companies in both countries, BusinessWeek calculated that the average Indian firm posted a 16.7% return on capital in 2004 versus 12.8% in China. This performance gap between Indian and Chinese firms has long persisted. According to a UBS report, during the 1998-2003 period, the average return on capital employed (ROCE) for an Indian firm was about 17%. For Chinese firms the figure was only 11%. If anything, these numbers may overstate Chinese performance. Many of the performance indicators do not take into account the fact that the cost of capital is heavily subsidized for state-owned firms in China. BusinessWeek quotes Chen Xiaoyue, president of Beijing National Accounting Institute, as saying that two-thirds of 1,300 listed Chinese firms fail to earn back their true cost of capital. This implies that return on capital might have been negative if capital were appropriately priced in China.
This growing gap between macroeconomic and microeconomic performances has several serious implications. That India came from behind China provides the single best proof that Indias achievements are due to its longer history of capitalism. The fact is that China was significantly ahead of India in economic liberalization in the 1980s and for the first half of the 1990s. My view is that economic reforms began to stall in China since the late 1990s, but in India they have continually moved forward, however gingerly.
The performance gap also raises some serious questions about the state of the Chinese economy. As Michael Porter of Harvard Business School, author of the microeconomic competitiveness study, pointed out: Wealth is actually created in the microeconomic foundations of the economy. GDP is an output measure, and the idea of economic growth is not so much to increase output but to create wealth. That the Chinese firms are making lowerand potentially negativereturns on their investments suggests that value is not being created. Indeed, there is now evidence that the Chinese economy is less impressive in wealth creation compared to the Indian economy. The World Bank has just released a report that provides some measurements on wealth creation (based on 2000 data). Chinas per capita income is about twice that of India, but by wealth measures, China is only 37.6% wealthier than India. China looks especially poor in the area of intangible capitalwhich is a function of education, rule of law and other intangible characteristics of an economic system. China has an intangible capital of $4,208 per capita as compared with Indias $3,738.
Journalist Simon Long duly noted in a survey article in the Economist that China produced more, but India was more efficient in the long-run. Yet his conclusion seemed to proclaim: But who cares? This obsession with output measuresapparently shared by Brezhnev and Western observers alikeis extremely damaging. For one thing, this obsession overstates Chinese achievements and understates those of India. The outputs China produces are visible, especially in the form of skyscrapers in metropolises, but to appreciate Indian strengths one has to interact with Indian entrepreneurs and managers in order to understand their impressive visions and capabilities.
Output obsession has also led to a wrong policy model. The idea that building skyscrapers, airports, highways and power stations is equivalent to economic growth has done the biggest damage to Chinas microeconomic competitiveness. In China, this idea has led to massive and forcible seizures of land, the destruction of perfectly functional housing structures and a reduction of arable lands. These actions are terribly destructive in their economic effects, one of which is that the sense of property rights securityso fragilely maintained since the end of the Cultural Revolutionis undermined. The damage is especially extensive in rural China. My own research shows that rural entrepreneurship flourished in some of the poorest regions of China in the 1980s, but in the 1990s, financing became more difficult and, according to Chinese education researchers, rural basic education suffered.
A country cannot stray from its microeconomic fundamentals forever. At some point, Chinas macroeconomic performance will have to converge to a level compatible with its microeconomic conditions. Growth will slow down unless the Chinese leadership begins to proactively correct the deep institutional distortions in the Chinese economy by immediately banning all forcible land grabs and creating market-based land transactions, launching privatization programs, drastically improving both political and corporate governance and accountability, and opening up Chinas financial sector to both domestic and foreign competition. Given Chinas deep advantages in basic education, its formidable technical and scientific prowess, and its long and successful tradition of entrepreneurship, there is not a single good reason why China should lag behind India on microeconomic competitiveness.
Mr. Huang is an associate professor in international management at the MIT Sloan School of Management and the author of Selling China (Cambridge, 2003). He is working on a book about the domestic private sector in China, entitled Capitalism with Chinese Characteristics.
China's already facing a worker shortage for their industries at current wages. As soon as they try to mimic the model of running factories in less well-developed countries they are going to come smack up against their lack of management structures, accountability measures and incentives.
I just hope they do it slowly so that WalMart has time to source elsewhere. ;-)
Article: According to a UBS report, during the 1998-2003 period, the average return on capital employed (ROCE) for an Indian firm was about 17%. For Chinese firms the figure was only 11%.
The writer uses these number to suggest that Chinese state subsidies promote the inefficient use of capital. However, another reason for the lower returns might be that it is more difficult to start up a company in India, and easier to start one up in China. Competition could simply be more brutal in China. Note that there is lots of foreign investment in China. This means a lot of foreign firms are producing for the Chinese market, reducing returns for Chinese firms. There is little foreign direct investment in India, which means little competition for India firms producing the same thing. Could this be why Indian firms are making more money?
The one thing Yasheng Huang doesn't seem to understand is that companies in closed economies are hugely profitable. This is because the state makes it difficult for competitors to enter their markets. In closed economies, it's the *people* who make no money.
The key metric is the return on capital. Investors have been pouring money into China despite the fact, they aren't getting the return they could get elsewhere. The reason is that the investors believe that sometime in the future the payback (from investing in China) will warrant the poor returns they are currently recieving. "We can't afford not to be there, even if we aren't making any money from being there." If this sounds reminiscent of the Internet bubble, its because the thinking is the same. Will it end in a similar bust? I'd say the chnaces are a lot higher than many think.
phil_b: The key metric is the return on capital.
Return on capital has been very high in India even before the recent opening of its economy. It's when return on capital starts to head south that we will know that India's economy has truly opened up. Efficient use of capital doesn't mean returns are high - it means that capital is allocated where returns are the highest - it's a relative kind of thing. Returns in China are low because the Chinese savings rate is high, meaning capital is cheap and domestic competition is therefore ferocious. Returns in India are low because the Indian savings rate is low, meaning capital is expensive and domestic competition is therefore tame. The treatment of foreign investors in India is also atrocious - this is why most of them avoid India despite over a decade of hype. Note that Enron walked away from a billion dollar power plant investment in India - that's $1b hard-earned simoleons it had to write off. Companies like Enron invest in India. Companies like Intel invest in China.
phil_b: The reason is that the investors believe that sometime in the future the payback (from investing in China) will warrant the poor returns they are currently recieving. "We can't afford not to be there, even if we aren't making any money from being there." If this sounds reminiscent of the Internet bubble, its because the thinking is the same. Will it end in a similar bust? I'd say the chnaces are a lot higher than many think.
The Internet bubble involved handing out free goods and services in return for mouse-clicks. The China phenomenon is part of a well-trodden path first explored by other East Asian countries. In fact, many of the major foreign investors in China are the ex-tiger economies - they are there because it is cheaper to manufacture in China. Japan used to manufacture in Southeast Asia. As did Korea. As did Taiwan. As did a host of American and European companies. They have moved some of their facilities to China.
The Internet, in contrast, was pure hype. Advertising revenues will pay companies to hand out free goods and services. Consumers will start spending a much bigger chunk of their household income on telecom-related services.
By contrast, the China story isn't even particularly Chinese - it's a story of manufacturing being moved to a poor country because of it opens up its economy. In effect, it's a rerun of what the tiger economies experienced in the 70's, 80's and 90's, except China has a deeper pool of cheap labor. India hasn't opened up its economy. That's why the profit margins of domestic firms is high. Once foreign companies are allowed in, Indian companies are going to get crushed, and returns will plummet, as they have for Chinese firms.
...Mittal Steel. I don't think you can discount the experience some of these companies gain in the global market.
Posted by: Rafael ||
03/11/2006 21:29 Comments ||
It seems Intel has announced investments of 1 billion in India
Nokia has just opened a plant
"Built up in 23 weeks, the plant commenced commercial production from January 2 this year and has already made over one million handsets. The facility currently has around 1100 employees."
John, a Honda Accord costs $40,000 in India. It costs about $28,000 at worst stateside. Tariffs are involved. Honda isn't competing on a level playing field with Tata.
Note also that Honda lost US$30m in a single strike at its Indian operations. You don't get that kind of thing in China:
Labor dispute at Honda Motor Co's motorcycle factory in India that developed into clashes between workers and police on Monday is hurting production, with the company incurring a loss of 3 bln yen to date, the Nihon Keizai Shimbun reported without citing sources.
The dispute was triggered by the dismissal of four and the suspension of 50 employees for stopping production lines, with workers going on strike at the end of May, the business daily said.
The average production units at the factory dropped to 400 motorcycles a day in June, although production has gradually recovered to 1,000 units, the Nikkei said.
Honda Motorcycle and Scooter India Pvt, a wholly-owned subsidiary of Honda, account for 25 pct of Honda's global motorcycle output.
Honda said the company is investigating the link between the labor dispute and the demonstration.
Mittal is a peculiar case hard to ategorize it as an Indian company - it is only now building a plant in India. A lot of top management is poached from the state owned Steel Authorty of India though...
John: Do you know what was behind these series of strikes against Japanese plants? Response to a Japanese minister suggesting that companies investing in China should hedge their bets and invest in India also. Karat - the leader of the CPI(M) Communist Party of India (Marxist) paid a visit to Beijing. When he returned (with his orders), the unions launched their attacks.
A Honda Accord costs $30,000 in China (China charges a 20% tariff on the auto parts imported for assembly by Honda, but Chinese auto assembly wages are $2 per hour). Vs $40,000 in India. And $28,000 in the US. Not real surprising why profits for Tata are high - it's sitting behind high tariff barriers, as India's state-approved national champion.
Note that Enron walked away from a billion dollar power plant investment in India - that's $1b hard-earned simoleons it had to write off. Companies like Enron invest in India. Companies like Intel invest in China.
I could mention Motorola's huge investment in semiconductor plants in China. The same semiconductor division that later went on to take a big nosedive.
Phil: I could mention Motorola's huge investment in semiconductor plants in China. The same semiconductor division that later went on to take a big nosedive. Anecdotes are not data.
Actually, they are points of data. Motorola's semiconductor division was losing money and is an also-ran - that is why it was spun off. Enron's power plant division was perhaps the only money-making division at the company. So Motorola lost money in semiconductors in China - heck, it lost money in semiconductors worldwide. Enron made money with power plants, but lost money in India.
Motorola has other investments in China - notably in cell-phones. It made huge amounts of money there, and is now reclaiming the top spot it once had in China - from Nokia.
Zhang, I was specifically referring to FDI, which by definition can choose any country to enter. FDI should flow to where it generates the highest returns (discounting risk). We both agree that in the case of China it doesn't. So either economic theory is wrong or FDI flows to China for reasons other than return on capital in the normal timeframe of.
I still maintain the comparison with the dotcom bubble applies.
Speaking of data - savings rates are much lower in India, and investment returns are higher. This should mean that India's population buys more stuff. Let's look at auto sales in 2004. Chinese consumers bought 5m cars in that year. India's number was 1m.
This suggests one thing to me - the Chinese are under-reporting, not over-reporting growth rates. There's a rational reason for this - during the ideological era of the Great Leap forward, the incentive was to over-report, because the alternative - accurate reports about the dismal failures of collectivism - was being executed as a capitalist roader for sabotaging the Chairman's great plans.* Today, reporting high provincial growth rates means bigger demands from the central government for taxes, which are collected by the provinces (unlike in the US, where they are handed directly to the respective levels of government - city, county, state, federal). All of the provinces are sandbagging to evade central government demands for tax revenues.
But doesn't lackadaisical reported economic performance pose a threat to the jobs of government officials? No - because (1) they get and keep their jobs not for performance reasons, but because of favors rendered to specific higher-ups and (2) high single-digit percentage growth is nothing to sniff at. And if they're fired, there's lots of favors they can call in - lots of ex-officials have turned successful private businessmen. Note that Deng Xiaoping had no official position immediately prior to becoming China's top leader - all he had were scads and scads of favors rendered while coming up through the ranks before becoming the commander of the Chinese military. But just prior to becoming China's top leader, he had been purged (dismissed) from his official positions for years.
* Many provincial officials would have liked to report the correct (but dismal) numbers during the great disasters of that period. But they would have been shot, and new officials instituted to report the sparkling numbers the Great Helmsman (Mao) expected to see. So they provided falsely optimistic numbers, confiscated entire harvests for central government coffers and left tens of millions to starve.
phil_b: Zhang, I was specifically referring to FDI, which by definition can choose any country to enter. FDI should flow to where it generates the highest returns (discounting risk). We both agree that in the case of China it doesn't. So either economic theory is wrong or FDI flows to China for reasons other than return on capital in the normal timeframe of. I still maintain the comparison with the dotcom bubble applies.
Actually, I wouldn't agree that FDI doesn't flow to where it achieves the highest return in China. It's not a mania. SC Johnson, Procter and Gamble and other consumer goods companies have plants in China not because they are blinded by a myth, but because they are competitive against Chinese manufacturers, who sell products for about the same prices as they do. A bottle of body wash (which the Chinese seem to prefer to bars of soap) sells like hot cakes despite its sticker price of 30RMB, half-a-day's pay in the wealthier cities. I can't imagine the average American paying $4 for a bar of soap. But the average Chinese will pay 30RMB for a bottle of body wash. The Chinese market is a gold mine for foreign companies currently, and is likely to become a much bigger factor in years to come.
Why do foreign companies invest in China? Because of China's liberal investment policies, as well as its low costs. Goods from China are cheap because Chinese land and labor are cheap, and because China has fewer investment restrictions than countries like India, Korea and perhaps even Thailand. Returns on domestic Chinese investments are low because China is awash in capital, not because of inefficient allocation of capital. But foreigners make good money in China because the opportunity is large, and they invest only in those sectors where they can make money.
Economic comparisons of India and China inevitably start with the two nations obvious strengths. India punches above its weight in the service sector, particularly information technology and it-enabled services. China is the undisputed leader in attracting foreign direct investment, and it is remarkably open to trade for a large developing country, with imports and exports accounting for more than 50% of GDP. With these starting points, both countries appear to have bright futures.
But in fact their strengths are symptoms of underlying weaknesses. Indian capital and talent is drawn to the IT sector largely because it is one of the few new fields which has not yet been stifled by government regulation. Service companies, especially in fields that export their product over a fiber-optic line, also stand out because they are less vulnerable to the countrys infrastructure bottlenecks.
Likewise, Chinas dependence on FDI stems from the weakness of the countrys banks and capital markets. With a savings rate of more than 40% of GDP, there is plenty of capital around, but few domestic institutions to allocate it efficiently. Moreover, high trade figures are symptomatic of a shortage of innovative companies able to create new products and build global brands. So far, China is stuck as the worlds low-cost workshop, importing components, snapping them together and shipping them out again, adding little value.
This analysis means that it would be foolish to extrapolate the future of these two giants from the consensus view of their strengths. Rather, both are going to change dramatically as they address these weaknesses. That will take them in new directions with new growth trajectories.
Today India and China are racing at breakneck speed, with as little as one percentage point difference in their growth rates, and in theory they could sustain this pace for decades. Because China embarked on its economic reform program 13 years before India, it currently enjoys a healthy lead in per capita GDP. But Indias challenges are more conventional for a developing country, and more easily addressed. China, by contrast, faces several perilous transitions which will slow its growth. As a result, India is set to steal the spotlight as leader of the developing world.
Miracle or Mirage
Lets stipulate that China is not willfully fooling the world with outrageously inflated statistics as it did during Mao Zedongs time. But some part of its latest economic miracle will also turn out to be a mirage. This growth is driven by levels of savings and investment the world has never seen in a market economy. Even though China has largely abandoned state planning, it still resembles Stalinist Russia in this one respect: Mobilization of capital, labor and raw materials provides the bulk of its growth, not productivity gains.
In fact, given the amount of investment, the biggest surprise of Chinas growth is how slow it remains. As a recent World Bank study said, [T]he growth outcome, while high in comparison with other countries, is not commensurate with the input of resources. During their high growth phases, both Japan and Korea grew faster than China today, with a lower level of investment.
All this makes many economists nervous about the quality and sustainability of Chinas growth. Before the 1997 Asian financial crisis, East Asias fastest growing economies were dependent on this kind of mobilization of resources rather than productivity growth. The result was that when faced with overcapacity, companies could not make the profits necessary to service the debts they had incurred in order to build their factories.
Chinas squandering of capital will have long-term consequences. While some believe that future growth in demand will take care of overcapacity problems, it is more likely that Chinese companies will have to export their way out of trouble. Given that trade tensions with the U.S. and Europe are already running high, this sets the stage for a crisis in the global trading system.
Moreover, the banking systems nonperforming loans are officially estimated at about 25% of total loans, but most experts put the real figure at around 40%. At that level, they are bankrupt. Because of the high savings rate, new deposits continue to flow in, keeping the banks liquid and allowing them to go on lending. But when the flow of savings slows, as it must some day, the government will have to recapitalize the banks and add their losses to the national debt. At current levels that is still manageable, but for how much longer nobody knows. Occasionally there are small bank runs in China, but so far the government has been able to maintain confidence by standing behind the banks.
Chinas incremental capital-output ratio, a measure of the amount of investment needed to create a given amount of GDP, is high and rising. According to the World Bank, the ratio has steadily risen to 5.4 in 2002 from 3.96 in the first half of the 1980s. The crisis in 1997 was preceded by a similar phenomenon in East Asian countries.
The FDI Champion
Much attention is paid to the fact that China pulled in some $60 billion of FDI last year, while India attracted an estimated $5 billion. In part this is due to measurement problems. If India used the standard definition of the International Monetary Fund, its FDI figure would be closer to $10 billion. And a large portion of Chinas FDI, perhaps one-third, is really domestic capital leaving and then re-entering the country, so-called round-tripping, in order to receive the preferential treatment given to foreign-invested enterprises.
Even so, China remains a bigger destination for investments by multinational companies. But is this a sign of strength or weakness? Many argue the latter.
Despite its abundant savings, Chinas most dynamic companies often struggle to get funding. Thats because the banking system is almost entirely state-owned, and the banks are reluctant to lend to private companies. As Yasheng Huang and others have written, entrepreneurs access finance by partnering with foreign companies. The more entrepreneurial state companies which want to escape government interference also sell stakes to foreign firms. Since foreign-invested firms get all sorts of preferential treatment compared to locals, such as tax holidays and exemption from troublesome regulations, the incentive is all the greater to find a foreign partner.
Why does China treat foreign businessmen better than its own people? One answer is politics. The Communist Party is afraid of nurturing a class of local entrepreneurs which could form an independent power base. It is more comfortable with foreigners, especially overseas Chinese, because they generally have no interest in challenging the power of the party.
This explains why the foreign-invested sector of Chinas economy accounts for most of its productivity gains and about half of its exports. These companies have brought in management and production techniques perfected elsewhere and combined them with cheap Chinese labor. But there is little local innovation in such enterprisesresearch and development, design, branding and other such high value-added activities have up until now been kept in the headquarters abroad.
Truly private businesses have contributed to Chinas growth, but they have to keep a low profile. The typical entrepreneur raises his start-up capital from friends, family and underground banking institutions. He reinvests his profits, and when his business reaches a moderate size, he stops growing that enterprise and uses his profits to start from scratch in other industries, creating a mini-conglomerate. Therefore private enterprises, while very entrepreneurial, never have a chance to achieve real efficiency through economies of scale and concentration on a core business.
So what Chinese companies do get loans from the banks? Mostly state-owned enterprises, which are protected by officials at various levels of government. They account for only 25% of output, yet they receive 65% of lending.
True, state companies are not as hopeless as a decade ago. Between 1998 and 2003, the government undertook massive lay-offs of 50 million workers, or more than one-third of the state-sector workforce. It also sold off most of the small- and medium-sized SOEs. Today we are told that the remaining large SOEs are profitable on the whole.
But there is good reason to be skeptical. Reforming SOEs without changing ownership makes little difference in their performance. We know that these companies do not face a hard budget constraint, meaning it is possible for them to use new borrowing to cover up past losses.
Incredibly, Beijing harbors dreams of creating state-owned conglomerates that will become world-class like Japans keiretsu or Koreas chaebol. Conveniently ignored is the fact that these companies, while receiving much government support, remained private. While it dithers over privatization, vested interests that will resist future reforms are becoming more entrenched.
Together these phenomena explain why there is so little total factor productivity growth in China, so little innovation. China is not developing world-famous brands because its big companies are not nimble or savvy enough. By handicapping its own entrepreneurs, China has so far largely confined itself to being an assembly center for the worlds multinationals.
Indias approach has been almost exactly the opposite of Chinasit nurtured its own entrepreneurs and held multinationals at arms length. Its largest private firms are about 10 times the size of Chinas. The problem was that they were sheltered behind a high wall of protectionism until a decade ago, so they didnt have to compete with world-class companies. In a hangover from colonialism, Indians worried that if multinationals were allowed in, they would exploit Indian workers and consumers, strip the country of profits, and drive local companies out of business.
That attitude is largely history, although vestiges persist. Indias trade barriers are still high, with peak tariff levels at 20%, compared to Chinas 10.4% and a developing country average of 13.4%. Nevertheless, it has been gradually opening and finding that its companies not only cope with competition, they thrive. Success in the IT sector has been the catalyst, showing Indians that they can be world-beaters.
India has a huge advantage in its financial institutions and capital markets. Its banks are largely privately owned, and while their levels of nonperforming loans are relatively high at around 15%, they conduct credit risk analysis on their borrowers and are run along commercial lines, in contrast to China. India also has a functioning stock market.
As a result, Indian companies use capital more efficiently. The countrys incremental capital-output ratio is generally lower than Chinas, and in recent years it has actually been falling. As is normal for a developing country, its savings rate, currently around 25% of GDP, is not sufficient to finance its investment. This reflected in higher interest rates: Indias prime lending rate is consistently over 12%, compared to 8% in China. But now the vast pool of global capital is discovering India. The country is set to reap the benefits of higher levels of investment as FDI and portfolio investment increases in the coming years.
That will be combined with a huge wave of new and trainable workers. Demographically, India is a young country, with more than 40% of the population under the age of 20thats 450 million people, as compared to 400 million in China. More important than their ability to work is their ability to think: The generational divide in India is pronounced, with the young by and large uninterested in the zero-sum socialist ideas of their elders. Its also revealing that they are pursuing advanced education with a zeal that was formerly thought of as a Confucian traitAmerican universities enroll 80,000 Indian students, compared to 62,000 Chinese.
Finally, India is attractive to multinationals because it has a commitment to the rule of law and protecting intellectual property. Not that either is always well implemented, but the contrast with China, headquarters of the worlds IP pirates, is striking. This explains why India has home-grown, innovative companies, and is becoming a base for multinationals to conduct research in high-tech fields. Many came initially to arbitrage lower wages on routine work, but are now pressing into cutting edge fields.
Even the notion that business gets done more quickly in China needs to be re-examined. Narayana Murthy, founder of Infosys, was shocked it took months just to conclude a land agreement for a 15,000-employee facility in Hangzhou. Of Chinese officials, he complains, Sometimes you can get confusing signals. Getting money out of Chinese clients is not easy either; Infosys gets paid in 56 days on average in India, but in China it must wait 120 days.
Politics in Command
To Chinas credit, it is addressing many of its problems. But here is where the contrast between Indian democracy and Chinese authoritarianism really comes into play. China has done well by picking the low-hanging fruit, the easy reforms in which there were many winners and few losers. For instance, by freeing farmers to produce their own crops 25 years ago, rural incomes rose and the supply of food in the city improved. Allowing prices to fluctuate with supply and demand corrected gross misallocations of resources. But more recently reforms have required difficult choices, such as laying off state workers.
So far, Beijing has continued to press ahead. But it is facing a rising tide of discontent, with about 75,000 public demonstrations a year. The benefit of authoritarianism was supposedly that China could make decisions for the greater good without being stymied by the objections of a minority. Yet it is becoming increasingly unclear whether the Chinese government can retain the consent of its people.
Chinas embrace of globalization was never built on a solid foundation, and thus a public backlash against the government could bring the whole edifice down. Andy Xie, Morgan Stanleys chief Asian economist, recently released a report entitled Time to Change, which concluded: Rising internal tension over inequality and external friction over Chinas trade success suggest that Chinas government-led and export/investment-driven development model may be reaching its limits.
Meanwhile, Indias politics are as tumultuous as ever, but the caravan of reform moves on, regardless of changes of government. Thats because under its strong democracy, India has worked through dissent rather than sweeping it under the carpet. Now the country is finally getting a fillip from the phenomenon that has kept China afloat all these years: When a rising tide is lifting most boats, disputes over necessary reforms become less acrimonious. At or above the current level of 8% growth, some believe, India is able to pursue reform and use its increased revenues to compensate sectors of the population who are temporarily left behind.
So can India learn anything from China? Certainly China has done better at providing necessary infrastructure, but that is already well understood. More critical is the problem of excessive labor regulations, which China eliminated first in special economic zones and then nationwide. In Chennai, the editor-in-chief of the Hindu, N. Ram, borrows the old Chinese term iron rice bowl to describe jobs at his newspapernobody can be fired, no matter how little work they do. Its better than a government job, he says.
This especially hurts Indias ability to attract investment in manufacturing. And it is manufacturing, not services, that can provide employment for the hundreds of millions of low-skilled farmers who will leave the land. This is also the key to raising productivity and incomesat present, the roughly 60% of the population engaged in agriculture produces just 22% of GDP output is growing at less than 2%.
Yet so far, parliamentarians are reacting to a spate of farmers suicides by approving money for make-work schemes in the countryside, instead of clearing the way for a manufacturing boom that could offer life-saving opportunity. Changes in labor regulations are the No. 1 policy change that could unlock faster growth.
A close second is opening up the retail sector fully to foreign competition, and here again India could learn from its neighbor. By allowing in firms like Wal-Mart and Carrefour, China has benefited consumers, stimulated demand, helped to develop a host of other industries and fostered the creation of distribution networks. Until now, both moves have been blocked by left-wing parties in the ruling coalition.
Nevertheless, the incremental steps being made show that these changes are within reach. For more than a decade, China has been the darling of the global business community, which fawns over its miraculous growth. Now India is poised not only to shine, but even to eclipse China.
Mr. Restall is the editor of the Far Eastern Economic Review.
Hugo Restall is guilty of wishful thinking here. He is basically saying that even though China is far ahead of India in terms of economic growth, India will pull ahead because India's government will make the necessary market-opening changes to India's laws to get this to happen. But these changes haven't happened yet, and it's not clear they ever will.
Inside every Indian isn't an American trying to get out. Indians have a bigger superiority complex than the Chinese - their view is that Indian civilization is so superior that they shouldn't have to appropriate the white man's way of doing things. The Chinese, on the other hand, have a less damaging version of this superiority complex, which simply adopts everything Western, yet continues to claim that the 0.001% of their culture that remains Chinese is responsible for their success.
This openness to Western practices is why a trip to China can be disorienting - a lot of its cities look like brand-spanking new, but more crowded versions of American cities, whereas Indian cities are hard to mistake for anything other than Indian cities. When you go to India, you will see plenty of men and women wearing traditional Indian clothing. You will see no one wearing traditional Chinese clothing in China.
Commentators like Restall don't understand that China is privatizing state-owned companies as fast as it can. The companies still owned by the government are being run as profit-making operations. The reason they haven't been totally privatized is because there are a lot of welfare obligations attached to them - and the government wants these obligations to vanish instead of taking them on as the companies are privatized. But from a political standpoint it would be risky to throw tens of millions of workers off the social safety net provided by their employers. What Restall takes to be political unrest is really fallout from the government gradually privatizing state-owned companies. Those demonstrations are a sign that privatizations are occurring on a gradual but steady basis.
As to why Chinese brands are not busting out into the global marketplace, this is a pretty nutty question. How many Malaysian, Hong Kong, Singaporean, Taiwanese or Korean brands do you know of? And these were the fastest-growing East Asian (and world) economies during the 70's, 80's and the 90's. In fact, how many Indian brands do you know of? Are India's Mittal Steel or Wipro household names in America? Japan is the big megillah - it is the one Asian country whose brands have penetrated markets around the world to the same extent that the big Western countries have. There is only one Japan. China isn't Japan. But if China (or any of the East Asian tigers) isn't going to be the next Japan, India isn't remotely in the running.
This sudden surge of affection for India is, in my view, nuts. India sided with the Japanese war criminals during the Japanese war crimes trials. It sided with the North Koreans and the Chinese during the Korean War. It sided with the Soviets during the Soviet invasion of Afghanistan. India will never become as loyal an ally as even France. The fact is that there are lots of democracies that will not become our friends. India is one. Russia is one. I don't think we should kid ourselves about the value of a good relationship with India - it is at best, a borderline hostile neutral.
Korean brands are quite plentiful and well known. Hyundai, anyone? Samsung? to name only the first two that come to mind.
Electrical engineers are quite familiar with Taiwanese brands for components and board assemblies, among other things. You aren't buying in that market so you may not be aware of Taiwan's large position there or the reputation of various Taiwanese mfgrs.
Singapore? Let's see ... according to the CIA Factbook, their famous financial services sector represents about 1/2 their economy. Their 'brand names' are the names of the world financial services firms, all of whom have major activities in that small country.
Restall is right to point to the relative maturity and transparency of India's financial markets as an important factor in projecting growth there. And while I have personal experience with the arrogance of some in the Brahmin caste, I also have plenty of experience with immigrants from India who have displayed great energy, focus and flexibility in settling here and building small businesses. Some of the most successful are investing profits back in India.
We'll have to wait and see how things work out, but it's not at all clear to me that China will out perform India economically over the next generation.
lotp: Hyundai, anyone? Samsung? to name only the first two that come to mind.
Those are the *only* two. And one of them is still vaguely thought of as the Korean Yugo. Name me *one* Indian (and any non-Japanese and non-Korean East Asian) brand known to the average consumer. Bottom line is you cannot, and have written several paragraphs showing that you can't.
Well, in my modest way I am an investor and my money is NOT in China, for good reason. I don't claim to be a market whiz, and lately I've been focused on technical research rather than the markets. But my MBA *is* in finance and operations from a top-10 B-school.
It's true that India's exports are not as far advanced, or as consumer-oriented, as China's. But this issue is not where they are right now -- it's where things are headed. And to this MBA China carries a lot more risk than many seem to think.
BTW, my step-father was Chinese, from Beijing. This isn't an issue of cultural chauvanism, it's a recognition of structural issues in economic, legal and social systems.
And, I'm a bit puzzled by your insistence on brand names as a measure of economic output. The big 5 Korean conglomerates are vertically integrated, but do sell the raw inputs to others (as with, for instance, steel). Your metric is unconvincing to me.
And ... do I really have to list all the other Korean brands sold here in the US? A quick google of several consumer electronics categories brings up more than a few additional Korean brands, if you insist that only consumer goods 'count'.
ZF, this is silly. For Taiwan brands, you ignore companies like Acer, which just displaced Toshiba as the 3rd largest brand of notebook computers in the world:
Acer has unseated Toshiba as the world's No. 3 notebook brand in Q4 2005, with 66.7% year-on-year growth -- highest among the top-five notebook vendors, according to preliminary data from Gartner Dataquest. Acer notebooks ranked No. 1 in EMEA (Europe, Middle East and Africa), and No. 3 in Asia Pacific with 117.1% growth, the highest among the top-ten vendors.
No well-known Taiwanese brands, my foot.
Note that, unlike the Chinese purchase of IBM's line, Acer's is engineered by THEM. Human capital matters.
China has potential, but it also has many many potential pitfalls going forward.
lotp: ZF, this is silly. For Taiwan brands, you ignore companies like Acer, which just displaced Toshiba as the 3rd largest seller of laptop computers in the world. No well-known Taiwanese brands, my foot. Note that, unlike the Chinese purchase of IBM's line, Acer's is engineered by THEM. Human capital matters. China has potential, but it also has many many potential pitfalls going forward.
Acer sells the vast majority of these laptops under somebody else's label. Acer doesn't have a brand name - it has manufacturing facilities.
I think there is a strange underlying assumption here. And this assumption is that China and India are going to catch up to the United States. That is the underlying premise for the assumption that China and India should have well-established brands overseas. The fact of the matter is that China and India have a glide-path towards catching up with Thailand. The brutal reality is that they will probably never catch up to Malaysia, let alone South Korea. China and India should not even be mentioned in the same breath as these United States. China will outpace India. It will not outpace Thailand. And India will never catch up to Thailand.
NS: Interesting forecast of 17 largest economies in 2050 and winners and losers in that economy.
Interesting survey. Kind of weird, in the sense that it projects higher per capita GDP growth rates for India than China over 45 years, yet comes out with a higher 2050 total GDP for China, in spite of the fact that China has a smaller population than India. What I found weird was its projection of 2.4% GDP growth for the US. I think we'll do better than that. Much better.
Nonetheless, these projections are like the weather forecast - partly in the sense that they are garbage - and partly in the sense that they rely on too many political and technological changes that are unknowable at this stage. Besides, if auditors can't even report the past accurately (re Enron), how can they predict the future?
NS: TSMC. UMI. Ever heard of them? Is BASF a well known brand in America? Daewoo is probably better known. ZF's one point that is well taken is that both these countries performance will be determined by domestic constraints more than anything else.
Apples and oranges. Everybody's heard of BMW, Mercedes, Porsche, Volkwagen and Audi. Hyundai is an also-ran - Daewoo isn't even an also-ran. Dow Chemicals is a lot like BASF, but nobody's heard of a lot of its brand names.
Besides, this is getting silly. Comparing the East Asian tigers to China and India is like comparing a guy in a bespoke suit to hoboes in rags. Korean autoworkers make $10 an hour. Chinese autoworkers make $2 an hour. Chinese wages can grow 10% a year for decades and never match the Korean ones. China and India are decades behind the East Asian tigers. And they will remain far behind for next few decades. The question here is whether China's rags will be better-looking than India's rags. Based on current Indian economic policies, I have little doubt that this will continue to be the case.
I am pretty inept along the axes of things financial or business. Yet even I have heard of Acer, LG and BASF. I don't know if that helps any of you who actually understand the arguments in this thread. ;-)
A multi-volume chronology and reference guide set detailing three years of the Mexican Drug War between 2010 and 2012.
Rantburg.com and borderlandbeat.com correspondent and author Chris Covert presents his first non-fiction work detailing
the drug and gang related violence in Mexico.
Chris gives us Mexican press dispatches of drug and gang war violence
over three years, presented in a multi volume set intended to chronicle the death, violence and mayhem which has
dominated Mexico for six years.