WITH the economic rise of India and China, a new question has entered the international public sphere: How will the polities of India and China be shaped by their continuing economic march over the next decade or so? More specifically, will politics get in the way of their steady economic rise, or will political liberalization continue as the market forces are embraced ever more vigorously? This question is more relevant to China, less to India, where economic liberalization has been pursued within the framework of a long-established democracy. Democratic politics may slow down India’s economic reforms; it will not derail them. But on China, as they say, all bets are off, and prediction is much harder.

Partly because of these uncertainties, corporate headquarters, diplomatic capitals, and journalistic circles are now buzzing with India-China comparisons. Between them, India and China have almost 37-38% of the world’s population. A great domestic economic transformation of these two countries, thus, has major international implications. The political evolution of the two countries will continue to be hugely domestically driven, but it will also be partly – and perhaps significantly – affected by international politics. As I will ague below, foreign and domestic policies may well get tied up in important respects. The United States, the only superpower today, will almost certainly be a factor in how India and China evolve in the next 10-15 years.

Let us begin with a brief survey of economic developments in the two countries. There is a consensus now in economic circles that both India and China have turned a corner. China since the early 1980s and India since 1991 have been shedding regulatory controls and embracing international openness. Both successfully weathered the Asian financial crisis in 1997-98.¹ On the whole, for the last twenty five years, India has been growing at roughly 6% per annum and China at 8-9% per annum. In corporate circles, China is now viewed as a capital of the world’s manufacturing, and India, with the development of an internationally competitive information technology (IT) industry, as a service capital of the world.

Although there are criticisms in India that the pace of reforms could be quicker and the growth rate higher, approximating China’s, it is now firmly believed that reforms are irreversible, India’s economic environment has qualitatively changed, and a considerable economic momentum has been generated, which one should in any case expect from a roughly 6 per cent annual growth rate maintained over two decades. Of the 133 countries for which the World Bank provides statistics, eleven economies registered a growth rate of over 6% per annum during 1990-2000.² India and China were the only two with a massive economic size, making a 6% growth rate highly significant in relative terms. Since 2000, India’s growth rate has, of course, gone up further, though it is not yet close to China’s and may not be in the foreseeable future unless, of course, Chinese growth rate begins seriously to decelerate.

All short-run economic indicators currently put China decisively ahead of India: a huge inflow of foreign direct investment; a greater privatization of the state sector; investment rates at about 44-45% of GDP versus India’s 23-24%; trade/GDP ratio of 70% versus India’s 25%. The serious issues for the long-term future, however, are partly institutional, and partly to do with how the larger world would react to the rise of the two countries. They require careful futuristic analysis and thinking.

 

On the institutional side, let us first look at some key economic institutions. Two differences, though they are by no means the only ones, stand out: India has developed world-class corporations, whereas China has not, and India’s capital markets are significantly more developed.³ This institutional map of the economy has a clear history behind it. Post-independence India overregulated entrepreneurs, but a private sector was always allowed to exist. Business houses such as the Tatas are over a hundred years old. Communist China did not allow private companies between 1949 and 1978, so those private firms that now exist are no more than 20-25 years old. The same is true of the capital markets. This institutional divergence goes a long way toward explaining why China’s growth is widely viewed as resource-driven, based on the mobilization of capital and labour, not efficiency-driven. India may have a considerably lower investment rate, but its incremental capital output ratios, compared to China’s, are lower too, suggesting greater efficiency in resource use.

Will China have to worry about economic efficiency at some point? Will the relative underdevelopment of firms and capital markets seriously constrain its economic march? It has been argued that lack of world-class firms might well constitute a significant problem for China in the coming years, slowing it down seriously,⁴ but looking deeper, it seems unlikely that economic institutions will be the biggest hurdle for China’s progress. The reasons are not hard to identify. While the house of the Tatas may be over a hundred years old, several world-class companies in India, especially those in the IT sector, are not more than 25-30 years old. Infosys, widely viewed as a symbol of the new India in international circles, was born in 1981 with a few hundred dollars of initial capital. In 1998 it was the first Indian company to be listed on Nasdaq and now has market capitalization of about $20 billion. Such cases of quick learning and achievement are not uncommon in the world. Similarly, capital markets can also be significantly improved reasonably quickly.

 

The greatest institutional hurdles for China’s future are political. China may have undergone increasing economic liberalization, but its polity continues to be marked by a Communist monopoly over political power. Local-level elections have been allowed, but only between candidates chosen by the Communists. Being a democracy for over fifty years, India has an institutionalized system for letting political power change hands. Indeed, incumbency has become a disadvantage in Indian democracy, as Laloo Yadav learned recently and the BJP did in May 2004. Three out of four governments have been voted out in the last twenty years at the federal and state levels. Elections have become India’s institutionalized political common sense, and transfer of power between different political parties or alliances is a regular political occurrence.

 

Will the Communist power monopoly be challenged in China? This is one of the most critical questions about China’s future. It is highly probable that government will face a serious challenge in the next decade or so. Two sources are easy to identify: rising inequalities, especially between the urban and rural parts; and a substantially richer and huge middle class that the most remarkable economic transformation of our times is giving birth to. A tipping point may be triggered by an exogenous shock: a banking crisis, an environmental disaster, a serious local-centre clash, an act of egregious brutality or corruption by the Communist party. These events by themselves may not lead to a political crisis, unless accompanied by the party’s split, but the greater the disaffection, the higher the odds that a split in the Communist party will take place.

Rural protests in China against the local government machinery are now regularly reported in the Chinese official press and statistics. A society that grew on the idea of equality has been asked to believe over the last three decades that inequalities are acceptable so long as the nation as a whole is rising. Such ideological changes are not easy to institutionalize in mass consciousness. However, we know from comparative literature that rural protests, in and of themselves, do not pose insurmountable obstacle for governments, and may not in China. China’s massive economic resources can be deployed to deal with possible large-scale rural unrest. Moreover, as is well known, due to inherent collective action problems, rural unrest tends not to become organized nationwide. Rural protests become potent if combined with a split within the ruling party or the state. That is why the key question is whether rural unrest, rising no doubt, will lead to a split in the Communist party.

 

The urban middle class may well turn out be equally important. All societies that have gone through a market-based growth rate of 7-8% per annum for nearly three decades witness the emergence of a strong middle class. China’s Communists have begun to absorb some of the newly rich in the party purely on grounds of pragmatism. While such a strategy can work in a city-state like Singapore, a country 400 times as large as Singapore cannot possibly achieve a Singapore-style politics of middle class containment. Is a quiescent 500 million strong middle class, whose incomes are based increasingly on private sector activity, possible?

All theories and previous experiences tell us that over time the middle classes begin to look for political freedoms, often to protect recently acquired private property from unpredictable state behaviour, and sometimes because people who have money begin to yearn for more than economic satisfaction. Urban disaffection has been going up in China.⁵ Sooner or later, China’s rulers will have to face the prospect of middle class unrest. Yet again, the critical issue will be whether such unrest is accompanied by a party split.

 

In the presence of rising unrest and a party split, there will be two options for Chinese rulers: refashion the Communist party à la Hungary and Poland;⁶ or crush the unrest à la Tiananmen Square. A democratic transformation is not the route China’s Communists are likely to take, though that is what would be most agreeable to the international system, and would arguably also benefit the majority of Chinese. The Communist parties in East and Central Europe had failed both economically and politically, losing legitimacy comprehensively. In comparison, China’s economic success, under the tutelage of the Communists, is beyond doubt. Despite rising protests, this phenomenon continues to give the Communist party considerable legitimacy in many quarters, and the party is unlikely to give in the same way as the Communist parties of Europe did.⁷ China’s Communist party is not a clay-footed colossus, even though it is to be expected that it will lose legitimacy among important sections of the rising middle class and rural citizens.

In short, a Tiananmen Square-like dénouement is more plausible. Making it equally likely is also the external situation. The unresolved status of Taiwan and China’s historical animosity with Japan had no parallels in the post-1989 East and Central Europe. Should internal unrest mount explosively, China’s rulers are quite likely to use the external threat – Japanese and American designs on Taiwan – for internal legitimation and for an excuse not to make a democratic transformation. They will ask citizens a standard political question often used by ruling parties in such situations: What is more important, the nation or political liberalism? Liberalism rarely wins a clash with ferocious nationalism.

However tempting a Tiananmen Square-like response may be for the Chinese rulers, it will not be as easy to discipline the nation that way. It may well unleash forces that cannot be controlled. China had a very small middle class sixteen years ago, when the Tiananmen Square rebellion was suppressed. The middle class is much larger now – and much richer. Rural disaffection too is wider and more intense. In India, because of free elections and freedom of expression, disaffection gets a normal and periodic outlet for release. Democracy thus acts as a buffer. This buffer does not ensure that the quality of democracy will remain high, but it does prevent a disintegration of the system. Lacking democracy, China does not have such buffers.

 

A final consideration, complicating the long-term scenario for China but going in favour of India, is worth noting. Two different discourses are emerging in the US about China: the economic discourse and the security discourse. These discourses are not speaking with the same voice. The more well-known economic discourse is associated with the billions of dollars US corporations are pouring into China. Much of what the largest American supermarket chain, Wal-Mart, sells today – from small appliances to refrigerators – is made in China. Dell, among the largest producers of personal computers, assembles its laptops and desktops in China. The toys for American children are manufactured in China.

 

The economic discourse says that Americans will buy cheaper and save a lot, if more and more goods are produced in China, and only the high-tech manufactures and non-tradable goods need be produced in the US. According to this discourse, what America loses by way of jobs it gains by way of cheaper goods, and jobs will eventually come as America adjusts its economy to the new realities of the global division of labour, as it did against Japan two decades ago.

The security community is, however, increasingly wary of China. It sees China as an adversary. To the security community, China’s rising economic power is not simply an economic matter, confined to cheaper toys and computers. Rather, the more Chinese economy grows and expands, the more resources China will have for military modernization and for ‘broadcasting’ its power in the world. China’s Asian neighbours may be wary of China’s power, but Africa and Latin America are increasingly receptive to Chinese overtures. An ambitious Chinese foreign policy seems to be in the offing.

The intentions of the security community became loud and clear in 2005. In the summer, a quite hostile United States Congress blocked a Chinese government-owned company, Cnooc, from buying Unocal, an American oil company, on grounds that oil was not just an economic, but also a security, issue – more so if the company trying to buy out an American company happens to be government-owned in China, as Cnooc was. Several times in 2005, Donald Rumsfeld, US Defence Secretary, publicly criticized China’s military build-up, starting with a remarkably blunt keynote speech in Singapore in June, and repeating much of that even during his visit to China in October.⁸ A new initiative by the US Commerce department is all set to propose rules that would restrict the access of Chinese students and scholars to high-level research in American universities and corporate labs. ‘The Chinese...,’ says the US Counter-Intelligence chief, ‘take advantage of our open…system to advance China’s technical modernization, reduce the US military advantage and undermine our economic competitiveness.’⁹

 

On India, the two American discourses are not in conflict. That is partly due to the enduring logic of international political realism. When the first- and second-ranked powers fight, the first often ardently courts the third. It is straightforward realism, often the driver of foreign policies of great powers. The US, China and India are being increasingly viewed as the three most important powers of the 21st century. Though India and China are still relatively poor, strategic calculations are being made on the basis of the long-run trajectories, not current economic incomes. The size of India and China being what it is, these two countries will be significant powers at middle levels of income, even before they achieve European levels of living.

How will the clash between the security and economic discourses be resolved for China? Will it be? One might say that this clash is a product of Republican politics, which has historically been muscular on national security, and that if a Democratic administration took power in 2008, the economic discourse would triumph.

To be sure, the Democrats have historically been less aggressive in their national security doctrines and a Democratic President would almost certainly not have gone for a preventive war in Iraq, but American security concerns about China have nothing to do with such extreme scenarios. They are more in the nature of buying insurance against a possible serious threat. On such minimal security concerns, there is no fundamental difference between the Democrats and Republicans. China’s flourishing economy, combined with a closed polity and a lack of openness about defence expenditures, concerns the Democrats as much.

 

One thing is clear. The more China resists democracy, the more it will strengthen the hands of the security community against it, and the stronger will be the US move towards India. India needs to decide how it will play the game in the changing international power structure: should it go along with the US and contain China? Or, should it play an equiproximity game, maintaining closeness both with the US and China? Is the latter option practical? Where do India’s national interests lie?

Be that as it may, the India-China-US triangle will be among the most interesting to watch in world politics in the next decade or so. International politics have some new actors, and dramatic possibilities.

 

* Some of the arguments made here appeared, in an earlier version, in the Fall 2005 issue of Perspectives on Politics, a journal of the American Political Science Association.

 

Footnotes:

1. Primarily because capital accounts were not fully liberalized, only current accounts were.

2. World Bank, World Development Report 2002.

3. Other critical issues include the more solvent commercial banks and the greater legal sanctity of private property in India. In China, farms still cannot be owned privately. They can be leased from the state, which is legally the owner of all farming land.

4. Yasheng Huang and Tarun Khanna, ‘Can India overtake China?’ Foreign Policy (137), 74-81, 2003.

5. Mary Gallagher, ‘China in 2004’, Asian Survey (35:1), 21-32, January-February 2005.

6. Anna Grzymala-Busse, Redeeming the Communist past: The regeneration of Communist parties in East Central Europe. Cambridge University Press, New York, 2002.

7. For more on the legitimacy of the Chinese Communist party in the post-Mao era and its implications for foreign policy and democratization, see Kishore Mahbubani, ‘Understanding China’, Foreign Affairs, September/October 2005.

8. Thom Shanker, ‘Rumsfeld issues a sharp rebuke to China on arms’, The New York Times, 4 June 2005; and Thom Shanker, ‘Rumsfeld tells China its military build-up worried neighbors’, The New York Times, 21 October 2005.

9. Edward Alden and Stephanie Kirchgaessner, ‘Universities object to "licensing" research’, Financial Times, 25 November 2005.