When left is right

If only economist Milton Friedman were still alive, he would weep at the recent turn of events encompassing Asian politics in recent weeks. No, I am not talking here about North Korea's nuclear weapons or even the US economy's downward spiral, but instead the rising dominance of Asian communists. Even as China confronts its age-old corruption problem and India attempts to re-equalize the playing field, the chief beneficiaries have been diehard communists in these countries. A leftward tilt
in Asia spells disaster for the region's growing economies, and will likely herald an era of falling stock and property markets. The backdrop for this surge in populist policies is surprising. Asian economies have continued to grow, mainly because of the ability of Chinese and Indian consumers to expand their purchases even as the American consumer begins to show signs of self-doubt. The primary factor has been the growth of income inequality, which combined with greater political liberalism has imperiled the current economic equilibrium across the continent. At its most extreme, one thinks of countries such as Nepal, where a communist insurgency has nearly wiped out government infrastructure, replacing it with a parallel state. Similar problems prevail in other parts of Asia, to varying degrees. All these micro-trends, though, pale in comparison to the surge toward the left in China and India. Gini lets the communist genie out A lot of newsprint has already been expended on the crackdown on corruption in China, which netted prominent members of the Shanghai clique, which owed its allegiance to former president Jiang Zemin. While the process of replacing bureaucrats and ministers under new administration is hardly new - and particularly not in China, where new emperors frequently changed their generals and key ministers - what might be left unnoticed is that it is more traditional communists who are being tapped to take up these vacancies. The idea that "communism with Chinese characteristics" has rendered many officials corrupt [1] is neither new nor surprising, but the notion that the Chinese Communist Party (CCP) has not suffered as a result is contentious. Indeed, the rising number of "public disturbances" and "mass incidents" over the past few years is well documented by Chinese authorities. These show that protests over the provision of services, embezzlement, lack of policing and other civic issues have been on the rise. In an earlier article, [2] I wrote about the factors limiting the reform impetus in China, including the fear of authorities that accelerating the pace of industrial reforms would produce far too many unemployed people, in turn affecting social stability. This is a lost opportunity for China, as it will become more expensive and difficult to institute reforms in future years when the country's demographics worsen. Another factor that imperils the ability of authorities to impose reforms is the significant increase in wealth disparity. China is estimated currently to have a Gini coefficient (a way of measuring economic inequality) higher than that of the United States, [3] suggesting that a trend toward the "robber baron" politics of Russia where a handful of people control more than three-quarters of all output isn't impossible. From the perspective of Beijing, the above adds up to a fear of losing control over the population, particularly if recent experiences with citizen activism are an indication of future potential. Accessing more media including blogs and mobile-phone text messages, Chinese are now able to communicate faster, even with the presence of censors and monitors. In turn, authorities have to "behave" themselves, which is why Beijing chose to crack down on the most egregious examples of power abuse in cities such as Shanghai. Going forward, more focus is likely to be placed on addressing the growing wealth inequality in society, hence a resurgence of "redistributing" income as a way to maintain support for the CCP. For example, in the area of housing, it is possible that various city and local governments will be forced to increase their investments in public housing, which are designed to be given to needy party members. This reverses some of the gains made by private developers in China in recent years, but will prove populist enough to be pushed through by the party. For the same reasons, China will prevent its banks from withdrawing liquidity from loss-making companies, to avoid employment losses. This will surely disappoint investors who have bought into recent bank listings from the country, but would hardly surprise political analysts. The shroud strikes backIf Chinese authorities face resurgent communist ideology focusing on a redistribution of income, Indian politicians have a more basic problem. The current United Progressive Alliance (UPA) government got into power in India on the platform of debunking the previous government's record on economic growth by pointing to growing inequalities. India's Gini coefficient is better than China's, and yet the level of fretting from politicians would lead one to believe that a Russia-type situation has prevailed already. Recently Sonia Gandhi, president of the Indian National Congress, gave a speech to the chairpersons of the other parties making up the UPA coalition in which she called for an end to the country's obsession with becoming a superpower, and urged instead a focus on more basic issues. Her slogan, on which speechwriters must have spent a few hours, used a catchphrase - "It's not about e-quality" - referring to the country's burgeoning information-technology-led service exports - "but rather equality that matters." That simple statement unfortunately takes the Congress party and its cohorts in the UPA back to the disastrous experiments with socialism that characterized the era of Indira Gandhi and her father, Jawaharlal Nehru. Already saddled with hare-brained schemes such as the Rural Employment Guarantee program, India's federal government will likely embark on more populism in coming months. This comes at a dual cost to the economy - the government, first, wastes money that would be much better utilized by the private sector (the "crowding out" effect), and second, incurs substantial borrowings for limited gains. That the Congress party will find itself in an indefensible position on reforms comes as no surprise to me, [4] but the speed at which this eventuality has come about is staggering. Failing to notice that the country needs to create wealth before it can be redistributed has been a hallmark of Indian politics, and Sonia Gandhi appears to represent no exception to this. The regressive tax regime that still pervades the country and the general mistrust that Indian society shows toward successful business people both operate as key impediments in India's path toward growth. It is not without reason that Sonia Gandhi has been dubbed by the Indian intelligentsia the "Shroud of Turin", a reference not so much to her Italian ancestry from that city as to the apparent inability of any sound economic thinking to get through her intellectual defenses. In this scenario, lower economic growth is almost certain for India in the next few years. This is, however, not fully priced into the country's surging stock and property markets, much like the experience in China. When the time for a reckoning comes about, perhaps accelerated by the slowdown in the US economy, investors in both China and India will realize the deleterious impact of left-leaning thought in these two countries. There is yet time for redress, but the window grows shorter by the hour.