Sunday, November 20, 2011

Strong Government or Strong Society?

Whenever one wants to compare the two emerging powers of Asia the most usual place that they start at is the difference between the 2008 Beijing Olympics and the 2010 Commonwealth Games in New Delhi.

The Games in Beijing was superbly organised. The Chinese government knew that world would be focused on Beijing and it wanted to put on a show. Beijing's normally toxic areas were made green, slums and the beggars were removed. Residents were given a crash course in English so that they could be more helpful to international visitors.

By contrast the games in New Delhi could only be charitably described as a mess. Corruption reached such a ridiculous level that toilet paper supplied to the organisers ended costing as much as a bar of gold. Conditions in the village where the athletes were staying looked like some Delhi's slums and instead of removing the existing slums from public eye – the slums grew worse.

Simply put – China has a government that knows what needs to be done and does it while India has a government that does everything wrong. As the head honcho of an Indian multinational in Singapore once said, “You come to India with US$10million promising to create several hundred jobs and the Indian investment authorities will snarl and ask you 'why?' So you go to China and the Chinese have a grin on their face and say 'when!?' ” When you have this comparison you cannot help but feel that China's rise to the top is inevitable while India will somehow remain swimming in the shit despite its vast source of talent.

Democracy is blamed for this disparity. The Indians will point out that China is a Communist State where the government will simply bulldoze its way to get things done. If you need roads and railway tracks built it will be done with a blink of an eye. The Indian Government by contrast has to contend with democracy and a population used to things like human rights. You cannot bulldoze people out of their homes just like that in the name of economic development. As far as many well to do Indians are concerned, India needs a government like China's to grab the nation by the scruff of its neck pull it, kicking an screaming into the prosperous age.

However, there is a counter point that both Fareed Zakharia and Guruchandran Das have pointed to. Both men have argued while China has a far stronger government than India – India has a “strong society.” While the Indian government is helplessly inefficient, India has certain infrastructure advantages that China and other authoritarian states lack. These advantages are found mainly in the “soft” skills of its people. Places with “strong government” have superb physical infrastructure. However, places that have a “strong society” have people who are creative and resilient and will succeed and create the solutions that the governments aren't able to. I think of one of the opening lines of “The White Tiger” by Aravind Adiga - “Apparently, you Chinese are ahead of us in every way except you don't have entrepreneurs.”

There is a certain truism in this. India for its lack of physical infrastructure has a system that has allowed brilliant individuals to come up and somehow create fortunes out of nothing. While India has lost the race for foreign investment to China, India has been breeding small successful enterprises that have succeeded in spite of the Indian State. The most famous example is in IT. I'll always remember Arun Jain, Polaris's CEO telling CNBC Asia in 2004 - “Indian IT has succeeded because the Indian Government has stayed out of it and as long as it leaves us alone we shall be fine.” Funnily enough IT is only one area that has thrived in spite of the Indian government. India has also produced top quality bio-tech firms and let's not forget Bollywood too. If you look at the areas where India excels, you'll find that they're in the same areas where America excels. The USA is like India – a strong society rather than a strong government.

Not only does India produce world-class firms in high end industries, India has also provided the people to run corporations from the developed world. The prime-example that comes to mind is Citigroup which is Vikram Pandit as its CEO and Deepak Sharma as Chairman of its Private Bank. Singapore's DBS bank which is consciously trying to model itself on Citibank hired Piyush Gupta another Indian National as its CEO.

Let's face it – the Indian government may have bungled organising the Commonwealth Games but India is not just providing the people to do cheap things for Western firms – it's providing the people to run those firms too. Just think about it – the FDA is approving an increasing number of drugs based on research and clinical trials done in India.

How is India, the land of dreadful infrastructure producing world-class firms in high tech industries as well as corporate CEOs while China is not?

One argument is that India's physical infrastructure and government system is SO BAD that all the Indians with brains leave. The Chinese with brains and drive are too busy milking the opportunities in China to think of leaving. If you look at Singapore as an example, you'll see that there's a certain truism to this. The Indian Nationals who come to Singapore are highly educated while the Chinese are peasants.

However, let's not ignore other factors too. English speakers has been one major language that India has. India is the second largest English speaking nation after the USA (and given the influx of Hispanic Immigration into the USA let's not rule out the possibility that India may well become the world's largest English speaking nation one day). India's advantage with the English Language is that multinationals find it easier to get the right people from India than they do from China.

There's also a case to be made for India's democracy as well its legal system. While the Indian Legal system is mired in corruption and notoriously slow it has a legal system based on the rule of law. By contrast China has a system based on the rule of personality. As bad as the practice of law may be in India, there are rules to settle commercial disputes as well as to protect intellectual rights. In China things work like clock work as long as you keep the right fractions happy. Intellectual rights don't exist in China.

It's not just “fluffy” artist who get uptight over copyright. If you were in software or anything involving scientific research, you will also need your intangibles protected if you want to commercialise things.

China is thriving on a “brawn” economy while India has a “brain” economy. While Chinese “Brawn” is ahead in the development race the argument is that India's “brain” economy will be more enduring. In a way China is lucky in that its only used a small percentage of its “brawn” and it can tap on a vast source of “brawn” in the way that the Arabian Gulf States can tap on their oil for years to come. However, cheap brawn becomes less cheap and other cheaper places rise up. Vietnam comes to mind as a place that is grabbing the “cheap labour” work from China. Brain economies by contrast can last longer and command a higher price. Getting the right idea and the right execution takes brain and you can't do it on the cheap.

Strong societies can survive with awful government. It's questionable whether weak societies with strong governments can hold if that government ever becomes weak. One only needs to look at places like the former Yugoslavia or Saddam's Iraq to see what happens when you remove the strong man.

Both Tito and Saddam held their respective nations together. They were simply more powerful than everyone else in their own countries and so everyone else was united in fear and hatred for them. Once they left the scene the various ethnic groups realised that they hated each other as much as they hated the strong man so they ended up killing each other.

India is as if not more culturally diverse than Yugoslavia or Iraq were. Yet India has held together for over 50-years. Say what you like but India could only have done this by keeping its democracy. New Delhi sets the tone for certain things like defense and foreign affairs. Outside those broad perimeters the Tamil Speakers of Tamil Nadu can live their own separate lives from the Hindi Speakers in the north. English has helped provide the necessary glue whenever the different people have needed to come together. If you look at Indian IT companies, you'll find that they're usually based in Bangalore (Southern Indians are traditionally good at numbers) but run by Hindi or Gujurati entrepreneurs (Northern India produces the business people)

Can China last without the Communist Party? As far as the Communist Party is concerned the answer would be no. However, the party has been on a desperate quest to find a reason for continued success. Since China has long ceased to be a Communist Country in all but name, they need something else to hold the nation together. The alternate answer seems to be drawn from Singapore – the ability to deliver high rates of economic growth. So far so good. However, what happens when the party can no longer deliver the growth? Tienanmen in 1989 was incidentally a time of rampant inflation. Back then the army was willing to shoot. Its questionable whether today's PLA will follow the order to shoot its own people.

In a way, that's a sign for optimism. It shows that people have become so used to certain things that it will be impossible to put a lid on certain desires. While the economic boom has yet to hit the vast majority of Chinese, the Communist Party will simply never be able to revert things to be the way they were during the days of Mao. There are far too many people in China who have tasted the “good life” and had international exposure to accept the country living under a system where all but one percent are eeking a living.

The Communist Party has the luxury of playing the growth card for a while. There's also Nationalism, though one would argue that this may eventually lost credibility as politics gives way to economics (to all intents and purposes China and Taiwan have been unified by economics).

However, the party, if it wants to maintain stability will eventually have to consider devolving power to regions in the way that reduces Beijing's role to that of New Delhi or Washington DC.

If you look at development theories, you can draw a comparison with growing up. “Strong Government” is like coming from a family that can provide you with contacts and education. It gives you a good start in life. “Strong Society” is rather like self-reliance. Ultimately you need self-reliance to endure. In an ideal world one will have both or at least you start with one that leads to another.

There is a case for optimism in both China and India. If you look at both Asian Giants, they're strengths and weaknesses mirror each other. On the economic front the popular image is that China does manufacturing while India does software. However, not only is Sino-Indian trade increasing there's been “cross-pollination.” The Indians are getting manufacturing and the Chinese do get software and services.

On the social front things have the potential to get interesting. Both nations are resurgent. For Indians who see their nation as a “great power,” it is no longer acceptable to have incompetent and blatantly corrupt government. The comparison with China is galling and Indian governments will have to contend with an insistence by the up and coming class to get its act together.

For China there is a growing realisation of how the rest of the world works. The nation has understood that isolation doesn’t work. A growing number of people have seen how the rest of the world works and will not accept anything else. This won't necessarily lead to Western style two-party democracy. There is a chance that the Chinese Communist Party will evolve into something like Japan's Liberal Democratic Party (which was as liberal and democratic as China's Communist are Communist.)

What will be interesting for China will be how returning Chinese workers will shape Chinese society. Chinese workers outside of China have found an ability to develop habits of cooperation in order to survive. I think of the way Chinese workers grouped together and sat outside Singapore's Ministry of Manpower when they got cheated. They're ability to get together and stick together was admirable – it was the stuff that builds societies. It will be a blessing if this spirit of cooperation continues.......

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