Hamish McRae: A lesson in order from the emerging nations

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The Independent Online

How is it that a country that has been struggling to host a competent Commonwealth Games can have become such an economic powerhouse, growing at around 7 per cent a year and set to pass its old colonial master in size in another decade?

There is a short answer and a longer and more interesting one. The short answer is that the Games have been principally a public sector-managed project, whereas India's growth has been driven by its private sector, now free from most of the bureaucratic controls that once held it back. To say that is not to get at India's government, which at a macro-economic level has been a success, more so indeed than our own government here. India is not facing severe public spending cuts. The point is the simpler one: that the closer you get to a commercial activity the less competent the public sector is at getting things done. Look at the contrast between the shambolic opening of the Millennium Dome and the subsequent success of the O2 Arena.

The longer answer concerns the relationship between economic order and economic growth, which is not as close as you might think. India's economic success is beyond dispute, and it is exporting its tremendous business know-how. Did you know that Tata is now Britain's largest manufacturer? But it is also a country with more than its fair share of chaos, and we caught a few glimpses of that with the Games.

Contrast that with Japan, the most orderly of the so-called advanced economies. Everything works in Japan with extraordinary precision. It is not just that the trains run on time or that the country is at the forefront of technical innovation. There is great creative energy; excellent health (Japanese women are the longest-living people in the world); little destitution and little street crime. But the economy has barely grown for 20 years, public debts have mounted inexorably, living standards are stagnant, and the ageing of its population means that there are towns where nearly all the young have left, leaving the old to care for the even older.

Just as India now, eager to widen its global influence and deploy its wealth overseas, is an astounding contrast to the rather staid, inward-looking society of 20 years ago, so too is Japan, but in the opposite direction. Remember when Japan was buying up the prime sites in Manhattan, and America threatened trade barriers against Japanese imports? No echo of that now – except in that it is China that is at present locked in this tense relationship with the US, selling it the goods it wants to buy but generating resentment over its evident success when it does so.

The stark contrast between the economic progress of the emerging world, with China and India at the head, and the stagnation of the developed world is caught by the International Monetary Fund this week in its twice-yearly "Economic Outlook", published just ahead of the IMF/World Bank annual meetings. We don't yet have the full text but the message, from a couple of chapters published ahead is that the emerging world has decoupled from the developed world. The former is racing ahead while the latter is trapped by its huge public-sector debts in a period of slow growth. Eventually cutting the debt will increase growth but in the short term it will hold things back.

For debt is very much a problem of the developed world, not of the emerging economies. If you add together all debt – government debt, company debt, consumer debt, mortgage debt, the whole caboodle – Japan and the UK top the league with debts of around four times GDP. Most other developed countries have debts of three times GDP. But China, India and Brazil have total debts of only one to one-and-a-half times GDP, Russia even less.

Faced with this unpleasant reality, what should we do? Well, I suggest a little less arrogance would be welcome. I don't think we fully appreciate the loss of influence that the West has sustained as a result of the experience of the past three years. I am sure that some of the facilities at the Commonwealth Games are not up to scratch but at least Indian banks have not found themselves in the mess that some of ours have. Do not expect India or China to think they can learn much from us in fiscal policy either.

More substantially I think we need to look in detail at the extent to which we waste resources in trying to create a more closely regulated society. It is as though we are trying to become more like Japan, though given Britons' embedded streak of anarchy I doubt we could ever achieve its levels of order. Do we need to regulate everything? Does that make people happier? And what is the unseen cost? Remember that it was not until India started to dismantle its rafts of business regulation in the early 1990s that it began its present growth run.

I am not saying that you can have order or you can have growth but not both. Rather it is that in trying to impose greater order in an officious and meddling way we are liable to do long-term damage to growth, and that is a choice. In making that choice we should accept that there are things we can learn from India, even if we hope we can make a better fist of the Olympics than it has of the Commonwealth Games.

With patents pending, China can enrich us all

If all this is not depressing enough, consider this: according to a new Thomson Reuters survey yesterday China is set next year to pass the US and Japan as the leading world innovator, taking out more patents than anywhere else. So the age of the rip-off Rolex is truly past. Oh dear.

Before you become too alarmed, consider this. One, the benefits of technological advance accrue to all humankind, not just those who make a particular advance. Two, clever application of known technology is more important in increasing wealth than developing the technology in the first place. Three, given the size of the Chinese university population it would be astounding if it did not generate a lot of patents. Four, it will make it much easier to enforce the West's patents in China now that there are so many home-grown ones. And five, the UK still has a current account surplus on royalties and patents, whereas China for the time being at least is in deficit.


For further reading

World Economic Outlook – Recovery, Risk and Rebalancing. IMF October 2010