Perspectives on China and India: Audience Q&A, Part 3

November 12, 2012

Cletus Coughlin, YiLi Chien and B. Ravikumar extend the question-and-answer session to accommodate all audience questions.


Cletus Coughlin: Okay, let's continue on for a few more minutes. And we can start back there.

Q: Dr. Ravi, in the United States no one wants a Walmart in their backyard until it gets there, and then it saves the average family over $1,000. I understand that Walmart tried to open in India but there was such turmoil. And they're a very, very efficient raise of productivity, although they do put less efficient shop owners out of work. What are your thoughts about big conglomerates that have much more efficient, much more total productivity factor, but yet threaten the local economy like it does here?

B. Ravikumar: So this goes to the labor regulation point that I was trying to pick up on. What I said about manufacturing is in some ways also true of retail trade, like Walmart for instance. So the idea that it will displace local labor is sort of part of the equation. But the gain that comes from productivity, if the local labor could be absorbed in other activities as opposed to just a specific industry like retail trade, then I think this wouldn't be a problem. So the removal of the distortion not only helps Walmart kind of come in and improve the retail productivity, but at the same time it opens up avenues for the displaced workers in other industries that could be potentially beneficial for the economy as a whole and definitely for them. So it's come to a stage, the blocking is happening as a result of justifying one distortion by pointing to another distortion. So both of them should be eliminated.

Cletus Coughlin: Okay, back there?

Q: My question is for YiLi. During your presentation you showed a slide that showed the extremely high rates of investment and exports as relative to the GDP, which are both unsustainable in a growing economy. But which of the two in your opinion do you think is the less sustainable one? In other words, in the next five to 10 years, which do you think is going to experience the greater decline relative to the growing GDP?

YiLi Chien: Well, so it's actually difficult to say. If you force me to bet, I would bet on the exporting sector. So given the fact that the U.S. and the European market is not doing so well after the financial crisis, and the figure I showed you actually, the export has been declining. So before the financial crisis, it's almost 40 percent. Right now it's 29, so it has been declining quite a lot. But I would like you to keep in mind that a lot of investment is not purely from the private sector. So a lot of the investment is from the government. So it's very dependent upon what the Chinese government would like to do. So once you start to see the Chinese economy start to decline, it could be the case that the Chinese government tries to start to build more roads, more highways, or et cetera. So not onlyeconomics as well is a political issue always.

Cletus Coughlin: Yeah. And I think the other part to the question, if I might add maybe something positive is that most of the economic development in China has been on the coastal regions. And now I know that there's much more of an emphasis on expanding economic activity in the interior of the country. So there are still tremendous investment opportunities I would argue in those other less-developed areas of China. And there's a desire to not continue to move more and more people into the coastal regions just because of the congestion itself. So there are going to be significant economic opportunities in the interior part of the country that could be well served by investment, whether it be private sector or public sector investment. Okay. Yes?

Q: This is actually for both. I was wondering about the wages, the increase in wages, is that included in the GDP? If not, what is the percentage of rise from the 80s to present time? Does it correlate with GDP as far as the percentage goes in both countries?

B. Ravikumar: Yes, it is included in the GDP.

Q: It is included.

B. Ravikumar: So typically you can measure it in lots of ways. Instead of picking up income per capita we can pick up income per worker to give you an idea what's happening to the average wage rate. So the productivity growth rate or the income per worker growth rate is almost roughly paralleling what's happening to income per capita in India, and I think the same is true of China as well.

YiLi Chien: Right, exactly. A tiny issue is that mostly you see the wage rate growth and the GDP growth rate is line-up. And actually they do line up in Chinese data. But there some people try to argue that the total amount paid to the capital is a little bit higher compared to just a little amount paid to the labor. But that amount is not that significant. So the growth rate of the wage rate in China is probably on the growth rate of GDP, so the same as in India.

Q: Thank you both.

YiLi Chien: Thank you.

Cletus Coughlin: Okay?

Q: Kind of related to that. You painted a good picture of kind of how the per capita income has changed over the last 20 or 30 years in both countries. Can you comment on how the distribution of that income has changed or contrasted with the United States? You know, there's been a lot of talk over this political season about our top 1 percent. Has that changed in those countries? Do they have a top 1 percent that's similar? Or has it gotten better or worse or whatever?

YiLi Chien: Obviously in China there's income inequality and the worse inequality is dramatic change. In China one of the big problems is that the data is not that reliable and there's a lack of very detailed data. And a lot of people try to guess that the income inequality or worse inequality could be even more severe compared to United States. And creates a lot of unfairness in the society because once you get a little bit power in terms of political, we cannot allow the high return in some sense. So in that sense that there's income and the worse inequality, I would say probably the problem is more severe compared to United States.

B. Ravikumar: That's true in India too. But in some sense the current U.S. changes in inequality is not a good comparison. So the changes in U.S. inequality are small compared to what you observe in a country like India. That's because in the natural path of transition when I showed you numbers like if you can sustain 6 percent growth rate in per capita income, then the next generation is making eight times as much as the current generation. So the changes in inequality are just phenomenally high, but that's almost natural in the transition path of economic development. So your typical economic development involves everybody being poor to inequality increasing and then everybody kind of catching up to becoming rich. So the trend that you see in U.S. is very minor compared to the sort of trends that you would see in India. But that's almost natural for all paths of development.

Q: Well, I guess I was kind of getting to the—I know you're not going to comment on the political side of it—but there's been a lot of talk about China that the political pressures of the rich getting richer and a lot of people still not getting rich. So I just wondered if that was true, if the distribution is getting worse than it was before and that's going to create some political problems for those countries?

B. Ravikumar: Well, in India it's definitely going to be always part of the political discussion because redistribution and how to make poorer people richer whether through direct transfers or other opportunity is always going to be part of a political discussion. Much the same way in the U.S. you can talk about improving the wealth of the lower end of the income distribution by policies X, Y or Z, similar things are going to happen pretty much in every election in India. So that's unavoidable but that's not new. This has been the discussion since independence. So I don't think the discourse has changed any worse or any better now because of the improvement in standards of living than what I remember seeing when I was growing up.

YiLi Chien: So in China, so if you watch the news, currently China is in the process of having a new leader. And it's obvious that the first priority of Chinese government is always to keep the society stable. And on top of that they have tried to have a political and economic reform to bring down the inequality of society. But how much they can do about it, the determination of this new leader remains to be seen. Because there's a huge group mostly from the political as well as those large state-owned enterprises is very difficult and resists for this kind of reform.

Cletus Coughlin: All right, we've got one more.

Q: One more India question. Where is India sitting—I imagine it's running a trade surplus as an exporting country, but how about the government's ability to pay its bills? There seems to be a lot of us are looking at fiscal cliffs. Is this an issue in India?

B. Ravikumar: It's actually currently running a trade deficit. So it used to be a surplus but it's now a deficit. But in some sense, that problem in the India case can be easily solved by allowing for strategies that kind of reduce the barriers on trade some more. So essentially ownership transferred over on the basis of foreign investment and exports would automatically solve that particular problem. So India is nowhere near anything like a fiscal cliff. But there is some concern about inflation that might hit double digits, so the Reserve Bank of India is trying to do something about it. But it's not a question of too much debt, too little taxes, too much spending. I don't think that's the current concern. It's mostly a concern of, where can we remove the distortion so that this problem automatically kind of goes away? Okay? That's more of the concern.

Cletus Coughlin: Okay. Well, once again, thank you very much for coming, and we hope to see you back again. And here are the stars.

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