The Poverty Problem

Threats to Political and Social Stability
Falling employment and increasing poverty levels may precipitate political and social troubles in India and China. For more than two decades, China's Communist Party has used economic reforms as a source of legitimacy for its rule, even as it resists political freedoms and tries to rein in dissidents in the autonomous regions of Xinjiang and Tibet. But if a decline in growth slows the rate of economic reforms, it could threaten the party, say experts. CFR International Affairs Fellow Brian P. Klein writes in the Far Eastern Economic Review that social unrest could spike if China's annual growth rate falls below 8 percent, a level of growth inadequate to create the number of new jobs required.

A slowdown in exports contributed to the closing of at least 67,000 factories (NYT) across China in the first half of 2008, prompting laid-off workers to take to the streets in protest. Joshua Kurlantzick of the Carnegie Endowment for International Peace's China program writes in the New Republic that so far China has kept the labor protests separate from one another, preventing them from developing a common theme or a common leader. "But if China's downturn turns into an outright recession, the country could face its first serious threat to the regime," he warns.

According to the International Monetary Fund's (IMF) 2008 world economic outlook, China's gross domestic product (GDP) growth is expected to fall from 11.9 percent in 2007 to 9.3 percent in 2009. Adam Segal, CFR senior fellow for China studies, says the Chinese government's announcement of a $586 billion stimulus package in November 2008 shows how worried leaders are. "This is the first serious slowdown for China in thirty years," he says, adding that the government knows that to maintain social stability, it must keep generating employment for those migrating from rural to urban areas. In an October 2008 meeting with Singapore's prime minister, Chinese President Hu Jintao acknowledged the need for sustained economic reforms. He said the country will sustain its economic and social stability by "transforming the economic growth pattern, restructuring the economy, attaching more importance to agriculture, and taking regulatory measures."

In India, no one is going to be satisfied with a growth rate lower than what they have come to expect in the last ten years, says Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics. The IMF projects India's growth will fall from 9.3 percent in 2007 to 6.9 percent in 2009. "Not meeting expectations poses a problem for policy," he says, adding that the government is sensitive to this and has already cut interest rates and pumped liquidity into its capital markets to sustain investment. But in India, the threat is different than the one faced by China, says Segal. India, a diverse, multiethnic, multifaith country, has always struggled with a degree of social instability as various minority groups seek redress against discrimination. Instability may rise as the country goes to the polls early next year and opposition groups try to take advantage of the financial crisis to highlight the government's deficiencies, say experts.

Stimulus and Questions Over Trade
Some economists say both China and India, with their relatively insulated financial sectors, are better positioned than many other developing economies for a quick recovery from the current crisis. The governments in both countries have responded with a slew of measures. India has undertaken a balancing act of easing the central bank's key lending rate to increase liquidity in the markets while moving to tighten monetary policy in other areas to stave off inflation. China, with its focus on economic growth, has announced several stimulus policies. The biggest by far is a $586-billion package slated for investment over the next two years in a number of sectors, including low-income housing, rural infrastructure, water, electricity, transportation, technological innovation, and earthquake reconstruction. Analysts see this as a step in the right direction.

China's top-down governance structure gives it a greater ability to mobilize resources and implement policies faster, says experts. CFR's Segal says "it's probably better to be a poor person in China than India" because of China's ability to spend on projects that could provide immediate relief to the poor. In India, taking steps through a democratic system makes the response time longer in such a crisis. India also lacks the ability China has to respond with direct cash transfers.

Some economists are worried about the impact on poverty reduction if the current financial crisis spurs protectionism, undermining free trade policies. In November 2008, the Indian government, in response to a fall in global commodity prices , imposed a 5 percent import duty (Bloomberg) on a range of iron and steel products, and slapped a 20 percent duty on crude soybean oil imports to protect domestic producers. India and China have also been called upon to agree to the World Trade Organization's Doha development agenda, dealing with a range of international trade reforms, including some in the agricultural sector. In July 2008, the seven-year negotiations reached a stalemate when India and China refused to compromise over measures to protect farmers in developing countries from greater liberalization of trade. But leaders attending the G-20 summit on the financial crisis in November 2008, which included India and China, promised to refrain from protectionist measures in the next year, and called for each country in the group to make "positive contributions" to a successful conclusion of the Doha round.

© 2008