In India and China, "Reform Works"


By Bruce Einhorn When it comes to the often-tortured relations between India and China, Shireshankar Menon has just about seen it all. The 52-year-old diplomat is now on his third stint as India's ambassador to China, having first served in Beijing in the mid-1970s and then again in the 1980s.

When Menon was doing his first tour of duty as ambassador, China was still under the rule of Chairman Mao Tse-tung, and Nehru's daughter Indira Gandhi governed India. Both countries were competing to assume the role of leaders of the Third World, and Indian troops were engaged in a face-off with Chinese counterparts in the Himalayas, where the two countries had a nasty and sometimes bloody border dispute.

All that left little room for business. "We hadn't even started trading in 1974, when I first went," says Menon. Whatever trade there was went through Hong Kong, which, as a British colony, was neutral ground. Today, bilateral trade is surging, jumping from $1.8 billion in 1998 to $3.5 billion last year and likely to hit $10 billion by 2005.

In January, Chinese Premier Zhu Rongji traveled to India's political, commercial, and tech capitals -- New Delhi, Bombay, and Bangalore -- and heralded a new era of economic cooperation between Asia's two giants (see BW, 3/11/02, "India's China Challenge").

It's all a welcome change for Menon. "We have possibilities today we couldn't have 30 years ago," he marvels. I spoke to him on Mar. 1 in Hong Kong shortly after he gave a speech at the Asia Society. Here are edited excerpts of our conversation:

Q: How do relations today compare to the first time you were ambassador in Beijing?

A: This has really been a great transformation. The societies have been transformed, both India and China. What we see is a relationship that is really a function of those changes -- and of a changed context in which the relationship operates. There's the end of the Cold War and a much more globalized world economy and, in many ways, technology that liberates and gives you options.

Q: So what's the future of economic ties?

A: There is tremendous potential, not just for trade but for other forms of economic cooperation. Trade has been growing in double digits for the past few years -- it grew by more than 24% last year. But [in absolute terms], it's still small. The good thing is growth is coming in new sectors, such as chemicals, pharmaceuticals, plastics, and seafood. It's no longer just commodity trade -- Indian iron ore for Chinese coking coal. That's good news as the economies get more sophisticated.

Q: Many people in India are obsessed with China these days, given that the Chinese economy has performed so much better than the Indian economy. As your government pursues economic reform, do you think that China has any lessons for India?

A: There is interest in learning from each other, from each other's experiences. [But] there is no model to be transferred, transported. The Chinese model is that there isn't a single model. That's what the Chinese seem to say to visiting Indian delegations. The Chinese tell every Indian delegation, "We're crossing the river by feeling the stones underfoot." What they mean is they are pragmatic, if they feel for a stone and it's stable, they put their weight on it. If not, they search for another stone. The choice of means is surely on whether it works or not.

Q: Does that work for India?

A: Frankly, that's a lesson that's easily said but hard to practice. Especially when you are in an industry facing competition in an increasingly open market, as India gets more open and more integrated into the world economy. But experience shows that over the past 10 years, Indian industry has coped very well. Our national income has doubled in 10 years. And as exports keep growing, the fact shows that competitiveness is growing too in the economy.

Q: But doesn't India lag way behind China?

A: China started reform earlier than India -- from a higher economic base. China started about 20 years ago, India about 10 years ago. The record over that period shows that reform works in both countries. I wouldn't say that it works better or worse.

Look at social indicators, net improvement in India has been impressive in literacy and longevity. China hasn't shown those levels during the reform period, but it had made that investment earlier. India had institutions in place that you need for a market economy -- we had a mixed economy to start with. China had to work on that part of it.

Q: What things about India interest the Chinese?

A: First, there's information technology, the whole software industry. Secondly, education. Thirdly, India's experience of being in the World Trade Organization is something they ask us about. Its impact on domestic agriculture, for instance.

Q: Speaking of software, some people in the Indian IT industry worry that Indian companies like Infosys and Satyam that have plans to open big operations in China are just helping the Chinese develop a software industry that will eventually eclipse India's.

A: Ten years ago, I remember hearing that about diamond cutting. The same things were said: We are destroying our potential, creating competitors, other people are learning how to cut diamonds. But what happened is that our diamond exports have moved up steadily every year. What the market asks for is a higher level of skill, and there are niches in this market that India continues to serve.

I would expect that in IT, the whole nature of tech and the market is changing so fast, it's not a question of creating competition with yourself for tomorrow, it is a matter of catching up to tomorrow. And the companies that have chosen to establish a presence in China, like Satyam and Infosys, I think understand that.

Q: Of course, despite the new era of good feeling, there are still some sore points between India and China. There's the exiled Tibetan leader, the Dalai Lama, for instance. He's based in India. Do you get a lot of complaints from China on that?

A: Not very [often]. Ultimately, it's an issue between the Chinese and the Dalai Lama. As far as India is concerned, he is there [in India] as a religious leader, and he has told us that he doesn't undertake political activities from Indian soil.

Q: And what is the status of the border dispute in the Himalayas?

A: We have a joint working group charged with finding a mutually acceptable solution to the boundary question. And they are doing that. But the border is peaceful basically. And both sides have agreed that we will respect the status quo while we try to find a solution. And we have agreed that the existence of the boundary question will not be allowed to prevent the development of the relationship in other fields. It's a slow cumulative process.

The record of what we have been doing with China speaks for itself. We have worked at this relationship, improving it, managing the difficult issues, discussing them. Our goal is a cooperative, friendly relationship. We are working at that through a process of engagement.

Q: Any lessons there for India's relations with Pakistan?

A: Pakistan could learn [that] you don't focus on the most difficult issue and hold everything else hostage to it.... Sure, Pakistan can learn from that. But it is up to Pakistan to figure out what it wants to learn. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online


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