America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
ASIA today presents a fascinating array of experiments in ways of organizing responsibility for industrial development. In one great area, mainland China, the state has been made the chief instrument for achieving the industrial revolution on the Communist model. Outside the Iron Curtain, too, government is everywhere cast in a central rôle, though doctrine is less binding, and wide divergences exist as to how, where and and to what purpose the state is to take the lead in economic affairs. Japan, the Philippines, Thailand, Burma, India, Pakistan --these countries run a wide gamut of non-totalitarian choices as between public and private initiative, or blends of the two.
Especially interesting is the contrast between India and Japan in the philosophy and practice of industrial enterprise. Observers have tended to neglect it in favor of the more dramatic confrontation of India and China in their respective Five Year plans. For those who are dedicated to democratic means, however, the contrast between India and Japan may be more deserving of study, since it highlights a range of choices within a basically liberal order. And it concerns the two Powers whose progress will largely determine the prospects for any such order in Asia.
To be sure, Japan is far ahead of India in industrialization. This alone accounts for many differences in the way they organize the functions of innovation, risk-taking and control of industrial enterprise. The Japanese have now risen well above the traditional poverty line of Asia. They possess skills and organization for modern life such as India is only beginning to acquire. But other differences are quite independent of stage of development. They can also be seen in a comparison of present-day India with Meiji Japan before the turn of the century. They relate more to contrasts in ruling philosophies, in social heritage and in natural endowment. With this caution as to interpretation, let us look at the two systems as they are operating today.
The visitor to Japan and India today is struck at once with the difference in the climate of enterprise, and in the vigor of business and governmental leadership. The driving energy of Japan's industrial upsurge originates mainly in private enterprise, large and small. The cities burgeon with factories, shops and office buildings. Postwar controls have mostly been scrapped. Politicians are cutting taxes. Bureaucrats worry over how to keep investment from getting out of hand. The system operates with few centralized decisions; it looks uncoördinated, even chaotic at times. But it is bursting with entrepreneurial vitality. And, until the recession of last year, it produced one of the most spectacular booms of the postwar world.
India, too, has been making rapid strides since winning independence in 1947. For the most part it is still building the base and making the great structural changes necessary for an industrial "take-off." Here, much more than in Japan, the government makes the news. It is the Congress Party leaders and their civil service colleagues who draft the plans, make the big investment decisions, mobilize resources and alternately rally and lecture the business community to keep in step. Here state initiative seems more resolute than in Japan, more all-encompassing, more democratic in inspiration.
Political declarations reinforce this impression. Japan's ruling Liberal-Democratic Party is not very articulate in giving voice to its slogans of "Free Enterprise Capitalism." Its ideologies come into prominence chiefly at election time, and then in well-worn clichés. The Tokyo ministries deal pragmatically with bottlenecks in steel and power, with exchange crises, with rice prices and the like. Yet one looks in vain for any clearly defined center of decision on long-range policy, except as specific issues go to the Cabinet. Special interests pull and haul. Ministries vie for power. Sometimes every interest seems to get attention except the public interest. Even the Economic Planning Agency remains rather on the sidelines. Its researches illuminate the scene and offer benchmarks for departmental planning. But it is hardly invited to share the seat of power. Its New Long-Range Economic Plan (1958-1962), approved by the Cabinet in 1957, is a set of guidelines, a forecast, a hope, not a commitment to action.
By contrast, India's development program is energized more largely by political leadership. Authority at the top remains highly centralized, despite the fragmentation of Indian society. Unified national plans, after wide consultation, are evolved by the Planning Commission, a powerful adjunct to the Cabinet which reflects and shapes top party decisions. They are then put forward for execution by the ministries, or by the states of India's quasi-federal system, responding to directives, subsidies or political pressures from the Center. Except in Communist Kerala, this takes place under the ægis of the Congress Party with its articulate avowal of the "Socialist Pattern of Society."
What Congress Party leaders mean by the "Socialist Pattern of Society" one might explore at length. Except as a general feeling that the government must somehow take the lead, one way or another, it means different things to different people. For the party has thus far remained a coalition of groups with divergent interests and outlook. Many a local Congress boss pledges his allegiance to socialism with tongue in cheek, only because it is inexpedient to do otherwise. Political realities at the lower levels of party and government are not necessarily what one might suppose from lofty party declarations or ministerial speeches. Related to this is the fact that the Congress, though it goes to the electorate on a platform well to the left of the conservative politicians who rule Japan, also finds it convenient to finance itself largely with donations from the business and landed classes.
For Prime Minister Nehru himself, however, and for great masses of his followers, the commitment to socialistic ideals is genuine. It means expanding output and jobs for social gain, not private profit. It emphasizes government responsibility to achieve greater equality of income and wealth. And it sees the means to these ends in some blend of social ownership of the principal means of production with social control of those which remain under private ownership. On this platform the Congress Party was re-confirmed in power in 1957. Thus ideological pronouncements at the top underline the contrast already noted between the business leadership and capitalistic orientation of Japan and the political initiative and socialist orientation of India.
While all this will do as a first approximation, the realities deserve a closer look. For the socialist-capitalist dichotomy exaggerates the differences between India and Japan in some respects, and fails to bring out meaningful differences in others.
Traditionally, socialism has been identified, first of all, with government ownership and operation of economic enterprise. In this respect neither Japan nor India is much socialized.
Never in modern times has Japan had a smaller public sector. Many war-born activities of the government were liquidated after the surrender. Under pressure from the Occupation authorities the government even got out of the steel business for the first time in 50 years. Today three public corporations run the national railways, the telephones and the telegraphs and the lucrative tobacco monopoly. Little else remains under state operation, apart from a few special banks and the national forests. Nor do the Japanese people seem unhappy on this score. They remember wartime bureaucracy with distaste. Even the Socialists, the chief opposition party, speak only vaguely of "socializing," i. e. controlling, six basic industries in their ambitious Five Year Plan for Japan. They do not press for nationalization. No doubt another war or economic collapse could start the pendulum back again. For the present, however, except on the far left, the Japanese look chiefly to fiscal policy, welfare spending and the regulation of private business to get whatever socialization they desire.
India, by contrast, has ambitious plans to expand the public sector. Little nationalization of existing enterprise has taken place since 1947, it is true, beyond the airlines, the life insurance business and one big bank. The Prime Minister has vigorously opposed it as a misuse of resources. But the Industrial Policy Resolution approved by Parliament in 1956 marks out large areas of industry in which the state is to be exclusively or predominantly responsible for new undertakings. They include large-scale transport and mining, electric power, and the metallurgical, heavy chemical and equipment industries. Under the Second Five Year Plan, also adopted in 1956, a score of industrial projects have been launched in the public industrial sector. They are now expected to cost the government about $1,500 million during the years 1956-61--nearly as much as the $1,650 million of private investment now budgeted for projects approved in the private sector of modern industry.
This new emphasis must be put in perspective, however. The government is confining its attention in practice mainly to a range of strategic, capital-intensive industries too costly and technical for private enterprise alone to develop quickly. In fact, three great steel undertakings will absorb more than two-thirds of all industrial investment in the public sector under the Plan. Even if targets are all met, government plants will account for less than 10 percent of Indian industrial output in 1961. As it is working out, a financial crisis has already caused some cutback in plans. Difficulties of staffing and operation may further cool enthusiasm for public management as more enterprises actually go into operation. Meanwhile private investment outlays have exceeded expectations. Indeed, the response of private enterprise to new levels of government spending has been one major source of inflationary pressure and dwindling reserves of foreign exchange. Indian businessmen today, with the chief exception of coal producers, seem less concerned with the threat of public competition than with the complexities of regulation and taxation.
The Japanese government also pioneered modern industry after 1868. Within 20 years it turned over most of its properties --many were losing money--to the rising business class. Whether New Delhi will eventually follow suit is hard to foresee. But doctrine and circumstance are both different in India today. One suspects that the present commitments of the government are nearer the minimum than the maximum, given the climate of opinion and the urge to get along quickly. In any event, this should not obscure the fact that India, like Japan, leaves the management of industry as well as agriculture and commerce mainly in private hands, subject to various public controls and influences--to which we shall now turn.
A second responsibility of government is direct action to influence the rate of capital formation and the direction of investment. Here there are significant differences between Japanese and Indian practice.
If Japan has little public enterprise, the government yet plays a major rôle in capital formation. Some 28 percent of gross national expenditure went into domestic investment during the six years 1951-56--a high rate by any standard. Nearly one-third of this--8 percent of gross national expenditure--was government spending for public works, for social overhead facilities like schools, and for equipping the railways and other state undertakings.
Nor is this all. Important also for industrial recovery has been the way the Tokyo government has enlarged and influenced the flow of funds into private enterprise. Unlike the government of India, it has not licensed private capital issues for this purpose. Neither has it resorted since 1950 to formal rationing of bank credit in order to conserve scarce resources for priority industries like shipping and power and steel. Instead, as in Meiji times, it has again set up a number of special institutions to mobilize and channel funds where needed. Some operate mainly with private capital, like the network of farm coöperatives that now reaches almost every village in Japan. Others have been capitalized with public money, though again mainly to finance the private sector.
One such institution of long standing is, of course, the Bank of Japan. The central bank has played a key rôle in re-financing postwar Japanese industry, while struggling none too successfully to restrain inflationary tendencies inherent in the heavy postwar demand for investible funds. Another is the big Japan Development Bank, which lends government funds to basic industries for plant and equipment. On a smaller scale are such institutions as the Export-Import Bank, the Agriculture, Forestry and Fishery Finance Corporation, the Small Business Finance Corporation, the Housing Loan Corporation and the People's Finance Corporation.
Some of this public lending would not have been needed had the government applied sterner controls over private credit. Much private capital has been misdirected into gaudy cinemas and the like. But this is the Japanese way of doing things, particularly when business enjoys such political influence as it does today, and profits so much from the largesse. In any case, without committing the state to direct managerial responsibilities, these specialized public banks have served to break bottlenecks in industrial growth, and to cover special needs in agriculture, small business and housing where ordinary banking facilities are inadequate.
Where does the money come from for these public investments and loans? One major source is the government's postal savings and insurance system, organized long ago for the general public. From this pool of private savings, supplemented by reserves and surpluses from other public accounts, the Tokyo government disposes of huge loan funds amounting to as much as a quarter of the loans and investments of the entire commercial banking system. In addition, Japanese taxes were raised to a high level by war and postwar necessities. There they have stayed with comparatively little reduction, despite a surplus on current account in every year since 1947. Over the six years 1951-56 this government surplus--the excess of taxes, tobacco monopoly profits and other current income over consumption expenditure --financed as much as two-thirds of government investment spending, or 20 percent of all gross domestic investment in Japan.
Thus the state in Japan has aided capital formation on a sizable scale, by mobilizing tax revenues and private savings (mostly small savings) in excess of its current spending, and then joining them with other private funds in public and private investment programs serving basic needs of the economy. Besides speeding economic growth, this pattern of finance contributes modestly to public ownership and equalization of wealth, while at the same time reinforcing private initiative.
Indian policies in this field lie in between the totalitarian socialism of Communist China and the Japanese tradition of relying mainly on private enterprise and then backing it in high-priority fields with generous doses of government funds and protection. This middle way has much to commend it. The danger is that it may fail to reap the benefits (along with the costs) of either alternative--the drive of unified, coercive planning from the Center, or the diffused initiative and energies of a freer system. Nowhere is this problem more serious than in capital formation. For India has yet to find a way to accumulate capital at a rate satisfactory for economic growth, and to transfer enough private savings to the public sector to fulfill its national plans.
The great effort of the First and Second Five Year Plans, it is true, raised net investment of all types from 6 percent or so to around 10 percent in 1955-57. This approximates Japan's rate of investment in the late nineteenth century, and is about half her present rate. But in India's case rising investment expenditure, public and private, has considerably outrun domestic resources mobilized for the purpose, especially in the public sector. In fact, savings evidently failed to grow at all in 1956 or 1957 from their 1955 level; probably they declined. When deficit finance was used to provide nearly 7 billion out of 15 billion rupees of development outlays in these two years, inflationary difficulties quickly set in. They were lessened only by running up a big deficit on current account in the balance of payments. Before long foreign balances were severely depleted, despite stepped-up external assistance. Growing pressure on food supplies and excessive imports of capital equipment led to an exchange crisis in 1957-58. This in turn caused a pruning of the Plan and renewed appeals for more aid from abroad. Foreign loans and grants are now to be relied upon to cover as much as 30 percent of all public development outlays during the three years 1958-60. With this help it is hoped to achieve the essential goals of a somewhat straitened but still far-reaching Plan.
Two reflections on India's problem are prompted by earlier remarks on Japanese finance. The first is the need for greater strength and elasticity in the tax system, especially at the state level. Government in India today captures only about 10 percent of the national income in taxes and other current revenue. This revenue is eaten up in military budgets and other non-development spending, which has risen 30 percent in the past three years. Little or nothing is left for capital formation as a result. Yet the Second Plan calls upon the Center and the states to provide five-eighths of India's monetized investment during 1956-61. Lacking savings from current revenue, they must rely on domestic borrowings and deficit finance, plus foreign aid. The shortfall is not surprising. The Planning Commission itself calls growing public savings "an essential corollary--if not a prerequisite--of a growing socialist pattern of society."
Now tax revenue is low partly because the country is poor. Politically, too, it is proving difficult for India as a democratically oriented, quasi-federal union to raise taxes and to keep down expenditures. The Union Parliament has lately approved sharp increases in certain levies, especially excises. But the gains have largely been absorbed in defense outlays and transfers to the deficit-ridden states. Corporation taxes and personal income taxes in urban India are already fairly stiff in the upper brackets, when they are paid. Businessmen complain of their tendency to destroy incentive, and now wealth and expenditure taxes have been added. On the other hand, out of 110,000,000 income earners, only 500,000 pay any personal income tax at all to the Center, as compared to 11,000,000 in Japan. India grants total exemption up to a higher level of income. She then applies lower rates--even with allowance for the new wealth tax--on incomes reaching as high as $12,000 or more.
Particularly noteworthy is the degree to which agriculture escapes taxation. The farm sector still produces nearly half the nation's income, but under the Indian Constitution it is entirely exempt from direct taxation by the Union government. And state land taxes have dwindled over a century to the point where they take little more than 1 percent of farm income. Indirect taxes on the farmer, too, are lighter than city people pay. The more prosperous landowners are grossly undertaxed, even though they reap much of the benefit from the development outlays and better farm prices. As a result the states as a group are failing to provide even the modest revenue increases asked of them under the Plans. Their Plan outlays likewise fell 24 percent short of schedule during the two years 1956 and 1957. Yet the Constitution assigns them major revenue rights and development functions, especially in the crucial field of agriculture and small industry.
The great progress already achieved in India's development makes an impressive case for foreign assistance today. In addition (this is not a question of alternatives), she is finding that she must mobilize her own rupee resources more effectively and channel them into priority uses. When it comes to taxes this is a political more than a technical issue, and it is one on which New Delhi and many states are divided. Together with lagging reforms in land tenure, village government and coöperation, it epitomizes the problem of "planning by persuasion" in a political system where major responsibilities are reserved to the states, and where local politicians and allied interests may be cool towards socialistic goals proclaimed by the nation's leaders.
A second problem of development finance in which India invites comparisons with Japan is in the field of banking. With the private sector asked largely to finance itself while the public sector competes with it for funds, India requires strong and diversified banking institutions under broad public control to enlarge savings and channel them into desired uses. The authorities are aware of organizational weaknesses here. They are moving to adapt to new circumstances the conservative banking tradition inherited from the British.
One need has been to strengthen the Reserve Bank of India and the newly nationalized State Bank of India to discharge the twin responsibilities of expanding the supplying of investible funds while checking any excessive tendency to over-investment and inflation. A second is to supplement these two great banks with other specialized institutions employing both public and private funds and technical staffs to support expansionist programs in various fields. For example, a new start is having to be made in agriculture, where coöperatives still provide less than 4 percent of farm credit, the government a similar amount and the commercial banks hardly 1 percent. For industry, too, there are now in operation a number of institutions like the National Industrial Development Corporation, the Industrial Finance Corporation, the Industrial Credit and Investment Corporation and the National Small Industries Corporation. Through them India will probably move in the direction of the German and Japanese tradition of closer links between banks and operating enterprises in the supply of long and medium as well as short-term credit. It is easier, of course, to create the machinery than to make it function vigorously, for the public as well as private sector, and for small enterprise as well as large. The difficulties encountered lately in mobilizing resources to meet the goals of the Second Plan are a measure of the urgency.
To conclude this point, it is possible that India could usefully draw on Japanese historical experience, not only in the example of taxation, but in the use of various semi-official banks, each autonomously accountable for its own operations but subject to broad policy guidance in energetically financing enterprise in its field. The vigor lately shown by the Indian business class where it is given attractive inducements may suggest some shift of emphasis towards this strategy of development, if it can be designed in such a way as to assure adequate public control.
On the other hand, such a strategy is probably less suited to India than Japan either today or earlier in her industrialization. To many Indians it seems immoral to lend public funds for private profit-seeking--a scruple that deserves to be strengthened in Japan. More than that, there is less strength and initiative in corporate organization outside government, and less of a consensus among India's still fragmented peoples on the goals and means of national development. She needs not only great construction programs which by their nature must fall in the public sector, but also the unifying, morale-building effects of a visibly national program--one which is politicized, publicized and dramatically packaged. Far more than Japan in modern times, she may have to bolster nationalism with socialism to assure political unity.
The third aspect of government responsibility, already touched upon, is the regulation of industrial activity left in the hands of private managers. In India as well as Japan this continues to form the bulk of industrial enterprise. Both governments, of course, maintain a variety of official controls and supports-- technical services, tariffs and exchange controls, labor codes, regulation of company finance and the like. Certain characteristic differences in the atmosphere of regulation and interaction between the state and the business community are interesting to note.
India has much more drastic and sweeping regulations. The government licenses all new undertakings in major industries. It also licenses new security issues, controls imports, fixes certain basic prices like cement and steel, and virtually determines wages through its labor tribunals. In major industries it can even issue sweeping directives to a firm as to how to conduct its affairs, and in the event of non-compliance take over its management for a period up to five years. By contrast, the Tokyo government limits its surveillance and control largely to two strategic sectors: it retains wide powers over foreign trade; and it operates the array of banking supports and controls described above. So dependent are most Japanese industries on overseas trade, and on the big government and private banks, that the Ministries of Commerce and Finance could reach almost anywhere with these control powers if they should care to do so.
India's more severe codes reflect the need to conserve scarce resources and, still more, the distrust of the businessman by the intellectual and civil servant. Deservedly or not, the Indian businessman has yet to establish respectability and win confidence in the degree attained by his Japanese counterpart two or three generations back. On the other hand, the civil servant in the upper brackets enjoys greater prestige than he can any longer command in Japan.
While Indian controls over business are more moderate than the law would permit, Japanese official influence runs well beyond statutory authority. Close, informal association between executives and officials is typical of the basic industries. One wonders whether Yawata Steel really does business any differently today than before the war when it was government-owned. Throughout the key industries there is much consultation and joint planning. It is not always clear who is controlling whom. The balance of power is apt to depend on whether the company is in debt to a governmental agency and therefore vulnerable to pressure. As private finance displaces emergency postwar lending by the government, business probably regains greater independence.
Here again an outsider is tempted to conclude that India and Japan could each usefully shift its practices somewhat towards the attitude emphasized in the other. Japan's national interest would be served by greater independence of the civil servant and party politician from business influence. What is good for Sumitomo is not necessarily good for Japan. India, on the other hand, might benefit from a healthier distrust of sweeping grants of power to the bureaucrat, and a new emphasis on educating the businessman to play his part through voluntary compliance and then rewarding him generously for so doing. What is good for Dalmia is not necessarily bad for India.
Finally, in both countries state spending, lending and other favors work commonly to the disadvantage of the little fellow. Usually he is not in the right line, or lacks the right connections. As business re-concentrates in Japan, the government seems more disposed to hasten than oppose the process. In India, too, modern capitalistic enterprise is oligopolistic, and the growing public sector strengthens the tendency. As for small-scale industry, both governments have development programs. But the Indian government has barely begun, and the Japanese government stops well short of what it is really capable of doing. Both ruling parties talk more than they act in this realm, although in Japan this has not deterred small industry from reviving since the war with remarkable vigor.
The heart of traditional socialism is a concern for equality or, more broadly, social security and welfare. The responsibility of the state in this sphere is central to what the Indians mean when they talk about the "Socialistic Pattern of Society."
India's efforts to fulfill this responsibility began with the displacement of the princely class, certain reforms in land tenure, the statutory ban on untouchability and the legal emancipation of women. They were extended to include better protection for factory labor, and the Community Development Program in the villages. They now involve heavy spending on education, medical care and other social services, amounting to as much as a quarter of all public outlays budgeted under the Second Plan. Here democratic ideals imbibed from the West join with ancient moral teachings revivified by Gandhi to create the most distinctive and challenging feature of Indian development.
It is no disparagement of these programs to say that they have only begun to scratch the surface; to make a start is the important thing. They encounter appalling difficulties, far greater than in Meiji Japan, of poverty, of social tradition and of size and heterogeneous structure. If the First Five Year Plan failed to bring any significant shift towards greater equality of income and wealth as among individuals, classes or regions, that is not surprising. For the opportunities opened up by change and growth in a society that is at all free are apt to benefit initially those with money, position and education. Meanwhile fiscal policy is a weak weapon for equalizing wealth if the state collects only 10 percent of the national income in tax revenue, two-thirds of it in indirect taxes having a wide incidence. Public ownership likewise is limited in effect when financed mainly by borrowing money from private interests or by inflationary finance. With all that can be done through such measures--and they have a special urgency in India--the basic engine of change must be industrialization, together with the diffusion of education and opportunity throughout a growing economy. This is bound to be a slow process, especially if a people happen to value political freedom.
Japan's experience is instructive in this regard. Historically it shows how long delayed such social gains can be when national leadership is not directed consciously to force the pace and spread more equitably the fruits of progress. Japanese capitalism combined with bureaucratic oligarchy to perpetuate sources of poverty and injustice long after the means to alleviate them were technically within reach. Yet equally modern Japanese history shows how industrialization tends in non-totalitarian societies to set in motion forces working to that end. Today the most striking thing about this island nation, relative to the rest of Asia, and relative to the Japan of a generation ago, is the advance in mass well-being, the rising social mobility, the more equalitarian, more open political and social structure.
It is the lessening of gross inequalities in wealth and income so long characteristic of Japan that is particularly relevant here. Partly this is fortuitous. An immense destruction of property values--the root of inequality--was effected by the war and by postwar inflation. Then came the Occupation reforms: the redistribution of farmlands, the de-concentration of big business, the rise of trade unions, the continuation of stiff, progressive taxation of incomes. Suggestive of the change is the fact that rent and interest accruing to individuals now absorb only 4 percent of the national income, as contrasted with 18 percent before the war. The farming class, with its rice prices now guaranteed by the government, lives nearly on a level with city people today for the first time in history. Social security programs cover over 12,000,000 workers. They fill the place in the national budget once assigned to war and armament.
On the darker side it is of course easy to qualify this picture of Japan. The congestion of urban facilities is almost unbelievable; taxes eat into meager incomes; labor relations are chaotic; chronic monetary instability bears harshly on the small businessman. The ever growing need for more jobs and more imports of food and materials to sustain the swelling population invites deep pessimism for the future, as it has for 50 years. Powerful forces in politics are ready to erode the postwar reforms at every opportunity. Yet the widening of the state's social responsibility and its greater responsiveness to popular concerns reflect structural changes deep in Japanese society. Only another great war or economic catastrophe could turn back the clock very far, and then only by forcing a suspension of constitutional government.
From this perspective on India and Japan no simple conclusions emerge. Certainly no facile dichotomy appears between the "socialist India" of Prime Minister Nehru and the "capitalist Japan" of Prime Minister Kishi. The Indian Congress Party, for reasons both within and beyond its control, preaches more socialism than it practises. Japan, even under conservative leaders, practises more socialism than it preaches. Moreover, the pattern of its policies is now pretty well rooted in a national consensus, and supported by a balance of interest groups and public pressures. India's policy framework necessarily faces a more uncertain future, in so far as it rests more heavily on the will of an enlightened minority.
The sympathetic observer, hopeful of the growing success of both systems of thought and action as alternatives to Communism, will recognize each as an intelligent adaptation to the changing circumstances of the two peoples. He may also suspect that each could learn something of value from the other.