The coming century is supposed to be that of Asia, with China virtually a superpower-in-waiting. Japan may be eclipsed but surely the sun has not set there. The Tigers of South-East Asia are beginning to roar. And the Indian elephant is beginning to stir. These countries are also beginning to engage one another more seriously, and perhaps therein lie the seeds of world powers, independently or together. Dr Mukul G. Asher, Professor in Public Policy Programme at the National University of Singapore, replying to a set of questions, provides some answers to enigma of Asia.
Educated in India and the US, Dr Asher specialises in public finances of developing countries, and is an authority on social security arrangements in South-East Asia. He was a Visiting Professor at the Fiscal Affairs Department of the IMF from July to December 1997, and at the ADB Institute in Tokyo from September 2001 to December 2001.
Dr Asher recently completed a manuscript on social security reforms in India. A guest editor for the special issue (October 2002) of the International Social Security Review on “Recent Social Security Developments in Asia and Pacific”, he has authored and edited several books, and published numerous articles in national and international journals. A consultant on tax reforms and social security issues to the World Bank, the IMF, the ADB, the OECD, UN-ESCAP, and Oxford Analytica, Dr Asher was a member of the Working Group 3 on Financing Health Care of the World Health Organisation’s Commission on Macroeconomics and Health chaired by Prof Jeffrey Sachs.
Excerpts from the interview:
New Delhi is looking East, but do you think there are complementarities between India and Asean considering the vast divide in terms of work and business ethos? Perhaps, Asean and China have more commonalities…
In general, the economies of India and Asean have a much greater degree of complementarity than between China and Asean. This is because, one, both Asean and China are highly dependent on FDI flows for their exports and growth dynamics. In contrast, while India has begun to achieve a degree of success in attracting FDI, neither its exports nor its growth dynamics are highly dependent on FDI; they are more domestically driven. This essentially, reflects India’s stronger institutional and microeconomic base than is the case in Asean and China.
Two, Asean’s major manufactured exports have been electronics and in labour-intensive parts of the production value chain. China is very competitive in these areas, and is increasingly attracting investments in the middle- to high-end electronics sector.
The Asean countries have been quite seriously impacted by the 1997 crisis, and are finding restructuring of their manufacturing sector a major challenge. Asean’s resource based industries are, however, already benefiting from China’s growth. Over time, tourism industry may also benefit; and FDI from China to Asean may also become significant.
Do you think Asean is looking at India for its market, what with the recession-hit Western markets no longer the buyers they used to be?
India’s GDP on Purchasing Power Parity (PPP) basis is already about one and half times that of Asean; while at the current exchange rates, India’s GDP is nearly 90 per cent of Asean’s. With the expansion of Asean, the economic, and technological and institutional capacity gap among Asean members is too wide for it to be perceived to be one unified market, though as a political entity it remains as an important organisation. This implies that while India’s diplomatic engagement is with Asean as a whole, it should find economic opportunities on a bilateral or sub-regional basis.
Since 1997, India has been growing on average at a faster rate than Asean, and as India implements its plans to bring its tariffs to the levels prevailing in Asean over the next three-five years, India’s attractiveness as a source for exports and for imports will grow for each Asean member- country. India is already a substantial supplier of tourists to the Asean countries, and contributes significantly to Asean’s tourism receipts.
Asean’s much higher per capita income provides continuing opportunities for Indian businesses.
The focus, therefore, should be on win-win opportunities. These opportunities will be in goods, services, manpower, and technology. It is, however, important to recognise that for both India and Asean, the Western markets remain of prime importance. There is no substitute for them. But what both can offer each other is a modest diversification of their economic relations.
What do you think of the school of thought that Asean is wooing India seeing in it a military counter-poise to China?
Asean has traditionally pursued a policy of engaging all the major countries and groups which could impact on its strategic and economic position. India is seen to be making progress in pursuing economic reforms, and in addressing many challenges that it is facing.
So long as India continues to make substantive progress in these areas, it will increasingly be seen as a desirable partner in economic and other spheres.
Is the Chinese miracle for real? Is it really growing at the pace it is claiming to be? How does Asean perceive China?
China has made impressive progress in recent decades. Its major strengths are in macroeconomic performance, particularly sustained high rate of economic growth, and in the external sector particularly in exports, foreign direct investment (FDI), and substantial foreign exchange reserves.
It also has been able to leverage its undeniable market potential into obtaining significant concessions form the foreign investors.
China’s main challenges lie in microeconomic areas and in strengthening market-enabling institutions. The statistical system of China does face many challenges, but even if the corrections are made, there will be little impact on China’s strengths and challenges noted above. Asean perceives the need to accommodate China which is a formidable competitor and also a rising economic and military power. Since China can impact significantly on Asean, its strategy is to engage China.
With growing bilateral relationships — as between India and China or India and Japan — is developing an entente with the Asean bloc still relevant for New Delhi? Has the idea of a pan-East Asian bloc arrived?
The bilateral relationship between India and China, India and Japan, as well as India and South Korea is indeed growing, and this trend is likely to continue. Asean is an important institution and has significant geo-strategic value for it to be an entity with which all the major powers could interact.
This has given Asean an important position of influence, particularly in Asia. Currently, Asean holds separate annual summit meetings with China, Japan and Korea (Asean plus 3); and with India (Asean plus 1). It would be useful if these two summits are merged to create an annual summit of Asean plus 4.
In such a multilateral setting, Asia as a continent could interact with others with greater effectiveness. The significant heterogeneity of Asian countries would however suggest that any Asia-wide cooperation would be a substantial challenge. Nevertheless, it is important to initiate a dialogue through Asean plus 4 forum.
How does the region perceive the sub-continent, especially the disturbed Indo-Pak relations? Would Asean members want to invest in India?
In East Asia there are substantial information and perception gaps concerning the subcontinent, particularly with respect to India. India should continue to pursue its relations with Asean and other Asian countries without reference to its relations with Pakistan.
If India continues on it path of economic reforms and increases its integration with the world economy, the other issues will become increasingly peripheral. India should welcome investments from all Asean countries just as it welcomes them from the rest of the world.
MNCs, and financial institutions based in Asean have the potential to be an important source of investments. But these should be pursued quietly after considerable homework. General road shows are less effective.
Do you think SAARC can be revived? Should it be?
SAARC remains a relevant and important forum. Given the current realities, India is appropriately pursuing deepening economic relations with those SAAARC members who are interested in focussing on economic growth and realising mutually beneficial opportunities.
The India-Sri Lanka free trade agreement is one such example. India is also pursuing sub-regional cooperation that involves some members in SAAARC and some members in Asean, such as in BIMSTEC and Mekong-Ganga group. On a people-to-people level, SAARC has made substantial impact, and in the context of the region that is indeed quite helpful.
How will the economic eclipse of Japan impact the Asean region? Will China occupy the space vacated by Japan?
Japan has many important strengths and its decade-old very slow growth should not be regarded as permanent. Japan will remain the richest country in Asia on per capita basis for a considerable period. Japan has invested substantially in South-East Asia, particularly since the Plaza Accord in1985. However, globalisation and the end of the Cold War have opened up new investment opportunities for Japan elsewhere, including in China and India.
Moreover, since the 1997 crisis the competitive position of Asean as a region has declined, with several members experiencing declining FDI flows. This will put their future export growth at some risk. China will play a larger role in Asean than now, but it is unlikely to be able to take Japan’s place.
This is because it does not have the same necessity to invest abroad as Japan did after the 1985 Plaza Accord. A revaluation of the Chinese yuan upwards may assist Asean regain some competitiveness, but could adversely impact on China’s domestic challenges.
Asean is mainly an exporting bloc with low domestic consumption (at least compared to India and China). Don’t you think India should think in terms of exporting services/manpower rather than manufactured items/commodities? Rather, what can India sell to Asean?
India now has the capability to cooperate with Asean member-countries not just on food security by exporting (and importing) wide variety of food products such as rice and wheat, but also be a partner in agricultural research and technology, and machinery. India can also cooperate in addressing the digital divide, and partner Asean in media and entertainment industry. Indian technical and professional manpower is competitive and culturally compatible with Asean.
As India develops its educational and health sectors, it can selectively cooperate and compete with Asean in some of the activities in these sectors; besides cooperating in pharmaceuticals. India’s experience in generic drugs may provide another area of mutual benefit. India is increasingly open to cooperation in defence and space sectors with Asean countries.
India has substantially liberalised its regulations concerning outward flow of investments. The Indian FDI in Asean now is more due to pull rather than push factors, and the quality of investments is better. As MNCs expand in India, their activities in India will be integrated into wider Asia and Pacific network. So, opportunities abound in goods, services, manpower, and technology. In each case, Indian businesses need to ask how they can obtain benefits a part of the value chain in which they can excel.
Why is the region’s diaspora, unlike India’s, overkeen to invest back home? In general, what factors drive foreign investments to the region, in particular China which suffers many of the infirmities as India, such as corruption, and a slow and old legal system?
There are several aspects to this question. The Chinese diaspora in South-East Asia is mainly from business class and is much larger and much more affluent than the Indian diaspora. So, its abilty to invest in China has been greater.
Even then it is the businesses from Hong Kong and Taiwan that have been the main elements of the overseas Chinese FDI into China.
China is over-dependent on FDI, in part due to its unwillingness to let domestically-owned efficient companies to get investment privileges, more secure property rights, and control of SOEs (state-owned enterprises, equivalent to PSUs). So some of them have taken their capital out and have brought it back as FDI to gain those advantages. The World bank estimates this round-tripping to be as high as around half of China’s total FDI receipts.
India, on the other hand, has been under-reporting its FDI, as the Reserve Bank of India noted recently. Some estimates suggest net FDI, after corrections, in China to be around $20 billion annually, and in India around $8 billion. As India increases its capacity and willingness to accept FDI, and since on a five-seven-year horizon India is very competitive with China as an FDI destination, the gap between the two could well narrow. Indeed, as a percentage of GDP, China is receiving around 2, and India around 1.7.
So, India simply needs to focus on its internal reforms, particularly on achieving fiscal consolidation, and infrastructure; and in understanding the importance of impacting on perceptions through effective branding of India as a place to do business. India and the Indians need to convey more confident, result oriented, and positive attitude, and learn how to strategically pursue economic diplomacy.