China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

India’s attempt to escape from corruption and low taxation ethics

November 21, 2016

What a surprise to the Indian people when Prime Minister Modi two weeks ago without notice banned people from using the most popular 500- and 1000-rupee notes, making these notes worthless on the spot in retail trade, services etc. Some GDP damage – probably short-term – cannot be ruled out. A distorting shortage of cash showed up immediately in this gigantic cash-using country. The total enforced withdrawing of 84 percent of India’s cash currency created directly a severe chaos, despite the still existing possibility of changing the old notes into new ones by year-end and/or of opening deposit accounts, based on the currently commercially invalid bank notes.

Two – on the paper plausible – reasons led to this drastic decision by the Indian government. First, it is regarded as an important step against India’s enormous corruption. Second, the attempt to move more and more financial transactions to credit cards and bank accounts is aiming at improving tax-paying honesty which really is extremely low in India (i.e. in a country where only 3 percent of the population prepare tax bills and just 1 percent is paying taxes in reality). The institutional shortcomings of corruption and the black economy are really severe.

The main question, however, remains: to what extent can the recently taken measures contribute to fundamental institutional improvements? I see these note eliminations rather as symptomatic steps. History from the 1970s reminds us that similar steps at the time definitely were not successful.

However, the world has received a reminder by the Modi government of the major need to improve India’s fundamental institutional conditions – one of the major assumptions for sustained high growth rates. The globalized world is changing continuously in many respects. But many or most principles of economics are still in place – institutional economics most certainly included.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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China: Politics increasingly important for economic analysis*

November 15, 2016

I have been writing many times before that China is an extremely interesting country for interdisciplinary research. Pure business-cycle analysis is not enough, also due to all the statistical shortcomings.

In addition, China is one of the best examples underlining the need of ample interdisciplinary research: of course, mostly for long-term analysis but many times also for shorter perspectives. Economics has clearly important links to politics, social needs and developments, psychology, health, the environment, urbanization and, of course, demography. This is especially true of China.

So far, Chinese politics has not been a closely watched indicator by economists in our part of the world, neither for short-term nor for long-term economic analysis. Politics has rather been bundled in the basket of “ceteris paribus” conditions. In my view, this analytical neglect should not be applied anymore, not even when just looking at 2017.

Next year will be a very important political year when (most probably) five of the currently seven members of the Politburo’s Standing Committee have to enter this most important decision forum as new members. Only the CP’s Chairman Xi Jinping (no1 in the Standing Committee) and Prime Minister Li Keqiang (no 2) will keep their positions if current party age limits will remain valid (which is probable but not quite sure according to latest indications). Consequently, the big question is, which factions of the Communist Party the (probably) five new top politicians will belong to. To Xi’s or to some of the still existing older ones?

Current President and Chairman Xi Jinping– who ambitiously has been centralizing and amplifying his own political position in the past few years – wants surely to gather loyal followers of his ideas and visions in the next Standing Committee. Will he succeed? I think so, particularly since Xi Jinping at the end of October was “appointed” informally as the “core” leader of China. Currently, there seems to be a concentration of power to one single leader in a way China has not watched for years. This concentration to one person may theoretically give more strength to economic reforms than the current collective leadership – but reveals also new risks if Xi wants to change the reform course of economic policy in a more conservative way or if opposition within the Communist Party should increase because of insufficient economic and social progress. Anyway, we still have not seen the outcome of the decisions of the 19th National Congress of the Communist Party in fall 2017.

The big question remains in place: What will the next top leadership – headed by the new “core” leader – mean to economic reforms in this balancing act between shaping a more modern Chinese economic system in line with the ambitious and reasonable plans from the Third Plenum in 2013 and the obvious difficulties to keep economic development on the track of (officially) reasonable growth?

In reality, this conflict is very much about long-term oriented supply-side policy versus more short-term oriented demand-side policy.

In other words: 2017 may – or will – be the year that starts to reveal more about the quality of future economic growth in China. The analysis of China’s economic future has to be widened and will remain complicated, also for the new “core” leader and the other members of the Standing Committee – much more complicated than the rapid interpretations of Chinese GDP and PMI numbers by financial markets and major parts of the Western press usually seem to indicate.

*Some views on the future political relations between China and the U.S. after Donald Trump’s victory can be found in my previous blog.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Trump and China

November 9, 2016

The United States is a global power. So is China. Two global powerhouses should get along. Will this be the case with president Trump? This is an important question,

It is a clear matter of fact that the political relations between the U.S. and China were in the worst shape for several decades already before the American presidential election. Thus, it seems to be hard to predict improved political relations between Washington D.C. and Beijing any time soon. The question seems to be rather how much these sensitive political relations can deteriorate further if Trump’s heavy protectionist threats against China come true.

Brexit, the possible or probable death of TTIP, increasing American protectionism against China, a possible future populist president in France, etc ., are challenges that can/will contribute to increasing protectionism in the world. Such a development is never positive and would certainly affect China negatively, particularly since China so far has been the main beneficiary from the past few decades of globalization and trade liberalization.

Conclusion: China has no choice but to conduct a pragmatic political course vis-à-vis the United States.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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