Transcript

Transcript of a Press Briefing on the Launch of IMF books: "China and India: Learning from Each Other" and "India Goes Global"

September 19, 2006

Presenters:
Mr. Steve Dunaway, Deputy Director, Asia and Pacific Department, IMF
Ms. Wanda Tseng, Deputy Director, Asia and Pacific Department, IMF

MR. DUNAWAY: Thanks for coming for this launch of these two books, one on "China and India: Learning From Each Other" and the other on India--"India Goes Global." On the China and India book, I will just speak for a couple of minutes to give you an introduction of why we did this book.

The book comes out of a conference that we put on last year in Beijing, and our intention was--this was a second of two conferences that we ran on China and India, and our attention was to bring people from India and China together to talk about their experiences in various aspects of reform, because in some aspects, India has been more successful than China, particularly in terms of financial market banking reform. The Indians have progressed further. And the Chinese are probably done a better job in terms of fiscal policy, also in labor market development.

So, by talking to each other, we thought that there might be some lessons that came out of that, that they would learn from each other, hence the title of the book, and I guess an appropriate subtitle of the book would be--and they could teach the IMF because one of the big advantages, I guess, that we have is that we can draw on the experiences of our membership in helping individual countries, and particularly in terms of the reform process, and that was the motivating factor behind putting--pulling together the papers at the conference and putting this book out, that we wanted to help inform the policy debate in both India and China on those issues, and we also thought, well, maybe some other countries might benefit as well.

Now, one of the unique aspects of the book is what we did was, we invited market participants for the conference, not academics, so--and we mixed it up. It's a combination. For example, in terms of banking reform, where we had the head of one of the largest Indian banks to talk about bank reform in India. On the Chinese side we brought in one of the senior people from the Chinese Bank Regulatory Commission to talk about it from the regulatory--reform from the regulatory side. On the securities market, the equities market, we had one of the leading people in India who was working on reform--who had worked on reform of the stock market in India, and we had the head of the Shanghai Stock Exchange exchanging views on it.

So, we thought in that way this would be much more practical in the advice, and people could gain more from the experiences, particularly focusing on such key reforms as financial markets, integration on a global sense, and other policies supporting growth.

So, let me stop there and turn it over to my colleague, Wanda Tseng.

MS. TSENG: Thank you, Steve, and thank you all for coming to our book launch.

I just want to say that we at the IMF actually have been doing a lot of work looking at the experiences and the challenges facing these two very dynamic economies in the Asian region, and Steve mentioned his book, which is the conference volume on China and India. We had actually an earlier conference which was held in Delhi, and that book is available, I saw, in the book area on the third floor.

What I'm going to be telling you a little bit about is this book on "India Going Global," its expanding role in the world economy.

As you all know, in the last several years, India has emerged as a global economic power. It is one of the world's fastest growing economies with real GDP rising by over 8 percent per year, and it is a leading source of outsourcing and a favorite for international investors.

However, even with these recent achievements, you know that India remains a relatively poor country, and it faces considerable challenges that it looks forward to sustaining its rapid growth over the next decade and to extend the benefits of growth to all of its citizens. And I think one indicator of the size of that challenge is that India needs to generate jobs for more than 100 million people over the next decade simply to ensure that employment for the new entrants--simply to provide the opportunities to the new entrants to the labor force.

So, this book on "India Going Global" examines in detail India's emergence as a dynamic economic power which is becoming increasingly integrated into the world economy, as well as the steps that it needs to take to help move that process along. First, the book underlines India's recent success and the fact that it reflects really the culmination of a decade and more of reforms. As you know, tariffs have come down quite substantially. Capital account restrictions have been steadily eased, and broad structural reforms have implemented to increase the flexibility of the economy. Indian exports are booming not only in the IT sector that you all are probably familiar with, but also in the manufacturing sector.

And moreover, there are signs that Indian companies are becoming increasingly integrated into the global and regional production chains, and international investors helping to drive India's stock market to new highs driven by improved economic fundamentals. Further, the book makes the case that continued success will depend on India embracing even more the opportunities presented into the Indian economy by the global environment. Despite large gains made since the early 1990s, India remains a relatively closed economy, especially compared with China, and so there are much more work to do in terms of trade liberalization, and also liberalizing the environment for foreign direct investment. In fact, I think liberalizing foreign direct investment will be a key to driving India's economic performance in the future.

But this increased opening will also place a premium on continued efforts to improve India's competitiveness, and here one of the most challenging tasks is to improve India's business climate, including by eliminating the bureaucratic bottlenecks and maybe making labor markets more flexible.

A second important task is to improve India's economic infrastructure. The rapid growth of recent years have been increasingly hit with the constraint of the infrastructure bottlenecks.

And as Steve mentioned, in comparison to China, India has a large fiscal deficit, and that really constrains the government's ability to make fiscal space for the much needed infrastructure spending and also for social spending.

So, the book further presents two case studies about the challenges for India. First, it looks at India as a booming sector, and it looks at the fact that this sector has been able to do so well is that the Indian Government and the regulatory framework has stepped back and let the private enterprise really flourish in this sector, and I think that showed that it has benefited tremendously from the business-friendly environment for this sector.

And we also looked at the challenges for India in the textile sector because, you know, with the elimination of the global quotas, India stands to benefit from its traditional strength both in terms of the supply, and also in terms of the manufacturing capacity for the textile sector. So, this is another potential area of growth for India.

India policy makers are well aware of these challenges; and, in fact, the book is really a combination of several years of work in terms of our dialogue with many stakeholders in India, the private sector, banks, Chambers of Commerce, as well as the government. So, I just would stop here, and maybe we can hope open the floor to any questions or comments that you may have.

QUESTION: Thanks for your presentation. I haven't, of course, read the books, but I just flipped through some of the essays and looked to the titles, and--but it seems to me that it does not quite answer the question posed of--promised tantalizingly in the subhead, "Learning From Each Other." I don't know if you can tell us, what can India learn from China and what can China learn from India, both in terms of what to do and what not to do?

MR. DUNAWAY: Let's take the area of bank reform. The Indians ran into a crisis in the banking system, particularly the state-owned banks at a much earlier stage than the Chinese, and they have done a very successful job of reforming those banks and getting them to perform like a normal commercial bank, removing political influence from them, revamping the internal controls within the banks. Now, this is what the Chinese have just embarked on with reform of three of the large state banks, and it's a longer term process.

So, some of the things that are discussed in that particular essay and the problems that were encountered by the Indian authorities and, in this case, the gentleman who is the President of a state-owned Bank in dealing with reform process, there are some lessons there that can help the Chinese banks themselves in terms of this process because part of what they're looking at now is looking at international best practice in terms of trying to reform their internal controls and their governance mechanisms, and probably the hardest thing for a bank to do, particularly a state-owned bank, is learn how to price risk to make loans at a proper interest rate. So, that's one good example.

The stock market reforms in India is another one where the Chinese have gone through a long period where the stock market in China has not done well because of a major overhang of state-owned shares and the risk that at some point those state-owned shares would be sold and that would depress prices. Well, they managed to undertake a reform to make those state-owned shares marketable. That's pulled this cloud off from over the market, and what we have seen in the last six months is a big pickup in the market there. So, again, the experience from India can help the Chinese regulators, the Chinese practitioners in terms of developing their market.

The Chinese have more work to do in particular with regard to the securities firms themselves, that they have been through a period where they have had considerable difficulties with failure in some of the securities firms, so just in terms of the regulatory frameworks that you can put in place.

On the Indian side from China in terms of the fiscal in part is kind of a joint learning experience, I guess, for both of them because what one key problem is in both countries is that you have--you have expenditure assignments, responsibility for covering certain spending, particularly with respect to certain social services, for example, in health and education which are assigned at the local level. But across the country, different localities have different ability to generate sufficient revenue to meet those responsibilities, so in both countries they are struggling with how they can put together an efficient transfer program to ensure that all local governments have sufficient resources to meet their responsibilities. That is a critical part in both countries in terms of foster a stable and rapid development.

MS. TSENG:Maybe I can just add a little bit to that. First of all, I think from India's perspective, India's economy is still relatively closed compared to China's. Tariff rates are much higher in India than in China, and India's share of world trade is much lower. It is less than 1 percent of world trade. So, I think trade liberalization is an area that India could move further on. Also, the regime for FDI. You know, India receives a fraction of the FDI of China, even though there is some data problems and so forth. Even if you strip out the effects of the so-called round tripping, India could benefit, I think, tremendously from FDI.

Another part is the focus on agriculture. Both India and China has a large part of the population still in the rural areas relying on agriculture, but India's agricultural productivity has been declining and is very low, and it's a very major obstacle to poverty reduction. China, on the other hand, moved in terms of reforms in the agriculture sector in the first phase of its development process, so I think paying attention to agriculture, as the current government is doing, is another area.

And the third, I think, is the development strategy. India has relied on the services sector, and that services sector, as dynamic as it is, only accounts for a small part of the labor force, and one, I think, important challenge is for India to develop also its manufacturing sector and agro processing sector that would be better able to create the jobs that India needs in the coming years.

QUESTION: Why is there this comparison between India and China? They are completely different, isn't it?

MR. DUNAWAY: They're completely different, but to some extent they are undergoing similar types of reforms in some key aspects of their economies, and that's what we focused on, some of these areas, particularly where we have a heavy--in the book we concentrate very heavily on financial markets and integration into the global financial markets. So, that was a commonality that we saw, and as I said, it was an area where we thought that from the experiences of the two countries that there would be benefits drawn from both.

QUESTION: But policies that would be implemented in China and India are completely different, a democratic system which might work differently because of coalition politics, and it will be difficult to implement to reforms. It's not the same as China.

MS. TSENG:You are absolutely right, I think. Obviously the policies that need to be implemented in two countries depend very much on local conditions and local circumstances, so you are absolutely right. I think the reason we looked at India and China is that these are two the largest and most dynamic emerging market economies in Asia, so it is natural to see, you know, what lessons in both countries' development experience that offers for each other and also for the rest of Asia and the world economy.

MR. DUNAWAY: The other thing is, although there may be differences in the way in which the end-of-the-day policy decisions are taken, but basic economic policy decisions are roughly the same in terms of the kinds of policies that need to be put in place to spur development. And one other thing I would add is that if you spend any time working on China at all, you find that it's much more of a consensual process in reaching decisions than you would have ever thought. When I first--many, many years ago, in the late eighties when I first came to start working on China, I was very surprised to find out that it was not the kind of monolithic structure that I had been led to believe, that decisions are made in Beijing and they are quickly implemented throughout the country.

QUESTION: Just another question to ask. You see the books basically talk about a lot of the reforms which are needed in India, like this is a reform needed, like labor reform, judicial reforms, FDI, but these have been talked for the last so many years, and in what sense are you expecting all this to be implemented? Like there is no talk about whether these will be implemented. Like FDI liberalization, I don't think it's ever going to get liberalized more than what it is now because the current state of the government doesn't believe in opening up too much, and that's where we are seeing strikes and so on and so forth. So, these reforms, implementation which you seek, are you talking about whether they can be actually implemented, and if they are not implemented, what will be the effect on the Indian economy? Are you talking about that, how growth will falter or is there a certain kind of conclusion you're coming up with?

MS. TSENG: Well, you know, you are absolutely right, that reforms is a difficult process in a democratic country like India which has to bring in so many different coalitions and interest groups. But I think I'm quite optimistic about the future for India because if you look at the process of reforms that has begun in 1990, you know, it has been a forward momentum. I don't think there is any backtracking on reforms, and I don't think that there is any doubt about the fact that India needs to further integrate with the world economy in order to continue on its rapid growth path.

Of course, specific areas of reforms may be difficult at different points in the political process, but I think that what we have tried to point out is those areas which we think are quite important, and I think it is up to the policy makers in India to develop the necessary consensus to move the reform process forward.

MR. DUNAWAY: Hopefully the process will enlighten the debate on the issue.

QUESTION: So, just to probe you a little before on this whole issue of FDI. I know it's the natural thing to suggest that the more the better, but there are some differences of view on this and what kind of models the two countries have chosen. We had Mr. Ali Wallia (phonetic) here from India just a few weeks ago, and he said one of the things that we are not going to do in India is to give special preference to foreign investors, vis-à-vis domestic investors, which China has done. If do you that, yes, you will get a lot of FDI, but is that the kind of business climate you want to create? We also had studies by academics I'm sure you are familiar with from Harvard who found that development, the very generous development of FDI in China has hampered the development of local companies, with the result that China does not have as dynamic a domestic enterprise sector as India. So, should we not have a little more nuanced view on FDI and its role in these countries? Could you elaborate?

MS. TSENG: I agree with you. You know, in fact, this is quite, as you know, is a quite controversial issue in India right now with this push on the special economic zones, and my personal view is that China, where all these tax incentives are given, India can hardly afford that, given its fiscal situation. So, when we are referring to liberalizing FDI, we are basically talking about providing the regulatory environment that is equal for both domestic and foreign investors, but a transparent framework, providing the supportive infrastructure for FDI. And in that sense, the SEZs, which, if they create an enclave where they can clear ports very quickly and there is a good transport structure, you know, that there is some scope there, but certainly in terms of tax incentives, I think that that's not an area that India needs to follow the Chinese example.

And as you know, the government is pushing very hard on PPPs, especially in the infrastructure sector; and again when we talk to businessmen and bankers, people say that there is lots of funding available. It's just that in terms of the regulatory environment, the cost sharing, the revenue sharing, are not clear, and this is why they are not coming in. So, providing the environment for both foreign and domestic environment I think is what is important.

MR. DUNAWAY: The only thing I would add is the difference may be the initial conditions as well; that in China there may have, at least the Chinese may have perceived a need to overcome some of the shortcomings in the regulatory and legal framework, if nothing else, because in the early days of the reforms, you didn't have a very solid legal system, and still there is basic questions in terms of how well-defined the legal system is, so maybe some of these incentives--and didn't have the infrastructure you have today. You're not talking about--if you talk about China looking at it back in the 1980s when a lot of these incentives were first put in, that they may have overcome some barriers and encouraged firms to come in. The problem now is the Chinese are having is getting rid of the incentives; that last year they wanted to unify their corporate income tax, and they ran into considerable opposition from the foreign-owned firms. So, as a general rule, the Fund is very skeptical about the use of these types of fiscal incentives because they may in the end create more problems than they solve.

QUESTION: You favor a move by China to stop giving foreign firms special privileges?

MR. DUNAWAY: Yes. Equal treatment between the domestic and foreign firms at this point would be--and that's a stated policy of the Chinese government at this point, is that they want to unify the corporate income tax.

Thank you very much for coming.