Author: ChrisRam

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The President, ‘scraps’ and concessions

It was a week of ‘scraps’ for President Jagdeo, if we count his inexplicable meeting last Monday at State House with the scrap metal dealers, who come under Prime Minister Sam Hinds’ portfolio. There were, however, two others, one involving the country and the other specifically the private sector. At the GBTI Business Forum 2008 on Monday, the President cast aside the expressed hope by the bank’s CEO that the forum rise above the controversy of the net benefits/loss from the CARICOM/EU Economic Partnership Agreement (EPA) and address its opportunities and offerings. The President chose instead to engage in what many in the audience saw as a barely disguised and inappropriately timed attack on the EPA, the Caribbean Regional Negotiating Machinery (CRNM), some of his own regional counterparts and the European Union.

But it was the launch of the new newspaper the Guyana Times where the President really bared his knuckles as he associated leading businessman and entrepreneur Yesu Persaud with ‘ignorance’ and suggested that the entrepreneur and leading private sector spokesperson for scores of years attend a seminar on the tax laws of the country. Mr. Persaud, speaking in his capacity as a private sector representative at the launch had dared to suggest that the concessions which the government had granted to Queens Atlantic Investment, the parent company of the Guyana Times Incorporated be extended to “all Guyanese.” A more transparent and equal treatment for investors has for years been the concern of domestic operators, and indeed the PPP in opposition, as they witnessed foreigners being granted sweetheart deals that effectively doomed local operators as second class in the scheme of things – the wood sector being the most obvious example.

Mr. Persaud was perhaps referring to ongoing concerns that concessions had been offered to the five new businesses of the investor group, instead of some only. The President who admits to being a close personal friend of the investors took umbrage at the call and announced that he had asked Mr Winston Brassington of the Privatisation Unit to hold a seminar on the tax laws, leaving the audience to wonder why not the GRA?

President Jagdeo explained that the concessions were in respect of the pioneering projects of the investors, the antibiotic plant and the textile mill. The problem which many share with Mr. Persaud is that the piecemeal information on the deals has had to be forced out of the government and its spokespersons while the group has remained conspicuously silent, obviously confident that the government would deal with it as a PR exercise and not a disposal of state resources in which all are interested. Perhaps the Guyana Times, which calls itself the Beacon of Truth, would show its editorial independence and commitment to truth and the people of a country that makes it all possible for its investors, to run its own story on what many may consider a steal of a deal.

The truth
All this of course could have been avoided if the government had complied with section 37 of the Investment Act 2004 that requires it to publish in the Gazette information regarding the fiscal incentives granted under section 2 of the Income Tax (In Aid of Industry) Act Cap 81:02. Only then would the nation be able to decide the real truth and how the agreement limits the concessions to the President’s “pioneer” industries.

The President was at pains to justify the as yet undisclosed concessions as having been granted under the authority of Cap 81:02. In fact, the act gives discretionary powers to the minister to grant concessions under two circumstances set out in section 2 as follows:

(a) the activity demonstrably creates new employment in one of the following regions –

(i) Region 1: Barima – Waini

(ii) Region 8: Cuyuni – Mazaruni

(iii) Region 9: Upper Takatu – Upper Essequibo

(iv) Region 10: Upper Demerara – Upper Berbice

(b) the activity is new economic activity in one of the following fields –


 (i) Non-traditional agro processing (excluding sugar refining, rice milling and chicken farming);

(ii) Information and communications technology (excluding retail and distribution);

(iii) Petroleum exploration, extraction, or refining;

(iv) Mineral exploration, extraction, or refining;

(v) Tourist hotels or eco-tourist hotels.

Limits
But the President should have informed himself that the authority for such concessions seems to be limited by section 6 of the Financial Administration and Audit Act (FAAA) which stipulates as follows:

(1A) Except as provided in subsection (1C) [dealing with the duty of the Minister of Finance to make subsidiary legislation to waive any tax payable due to the taxpayer’s inability to pay such tax because of natural disaster, disability or mental incapacity etc.], no remission, concession, or waiver is valid unless the remission is expressly provided for in a tax Act or subsidiary legislation;

(1B) No remission, concession, or waiver of tax by Order or other subsidiary legislation is valid unless the Act under which the subsidiary legislation is made expressly permits the Minister to provide such a remission, concession, or waiver.

The President and the Minister of Finance, who like the group have been silent on the issue, must now consider whether they were properly advised of the relevant provisions of the law including the limitations under the FAAA, and that section 2 of Cap 81:02 does not recognise the “pioneer industries” referred to by the President.

The Finance Minister Dr. Ashni Singh has an obligation to the nation to indicate whether any cabinet paper submitted under his name recommending the concessions quantified the cost to the country of the concessions granted to the investors. If there was no such paper it would be a serious indictment of the President, the Minister and the entire cabinet.

And the rent
While much attention has been paid to the tax holidays and the government boasts how attractive a deal it won with annual rental of $50 million dollars per year, the government has been careful to avoid the real value of this rent.

Remember that there is a 99 year lease and there is nothing to indicate that there is a rent escalation clause providing for periodic increases in rent based on inflation and other economic factors. This then is how the figures look if we place a time value on the rent the country will earn from this deal and assuming discount rates of 10% and 5%, with the former being the more likely:

Discounted at 10% 5%
by the 10th year $21M $32M
by the 15th year $13M $25M
by the 20th year $8M $20M
by the 25th year $5M $16M
by the 50th year $0.5M $4.6M
by the 75th year $43K $1.4M
by the 99th year $4K $0.4M

In other words, by the half-way stage of the agreement, using a discount factor of 10%, the amount of the rent expressed in today’s dollars will be $39,043 per month! Assuming the unlikely scenario that a discount factor of 5% is justifiable, the monthly rental at the same point would be a princely sum of $381,516.

Now look further down the road to the end of the lease period and see that the rent using a 10% discount factor would be, in today’s prices, $365.85 per month! So just what is this about an option to buy for US$3.5 million in three years time?

Do those who tout the benefits of the deal really believe that the investors are so ‘ignorant’ as to choose to spend US$3.5 million dollars when they are the beneficiary of the giveaway of a century minus one year?

Conclusion
The dilemma we now face is what happens if the government has granted concessions that are not ‘valid,’ as they would appear not to be under the FAAA. Would the taxpayers have to bear for 99 years, the burden of government’s decision?

The President had earlier announced that he left the meeting when the matter was being discussed by cabinet. Perhaps he should have stayed and advised his colleagues about the state of the laws and the limits of their powers.

He may have saved his friends and colleagues from possible embarrassment and the taxpayers of the country the waste of resources.

Still, I hope I am invited to the Privatisation Unit’s Tax Seminar to which I recommend that the members of the cabinet, the President’s advisers and investor friends be invited as well.

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The audit report: does it really mean anything?

The second oldest profession
Shareholders may not quite realise it but they not only appoint (and can remove) the auditors but the auditors are by law, required to report to them. That is the theory. The practice is that management deals directly with the auditors, fixes their remuneration, challenges them on key concerns they raise and most significantly can recommend their removal. The audit report – even to those who may have some understanding of its nature – has become so lengthy, boring and obscurely complex that it is likely that even the company secretary who reads it at the Annual General Meeting (AGM) does not quite understand what it really says. Richard Bennison, head of audit of KPMG UK in the prestigious monthly publication Accountancy of May 2008 was perhaps only a tad too cynical when he said that “The message of an audit report is, in the vernacular: These accounts are about right unless management have deliberately conspired to falsify them.”

A standard, clean audit opinion issued by the profession can run up to 500 words, about five times more than is required by the Companies Act 1991. How and perhaps more importantly, why did the second oldest profession not known for its literary skills, develop such a love for words with the result that an eight-line report in 1983 became sixteen in 1993 and some 27 in 2007? Has length added anything to shareholders’ understanding of the report or merely shielded the auditors from lawsuits for shoddy auditing work done well out of the sight of the shareholders who appoint them, and whose only communication with the shareholders is their report which is attached to the financial statements circulated with or contained in the Annual Report of the company?

Monopoly
The audit profession has had an unshakeable but arguably necessary monopoly on all companies operating under the Companies Act 1991 as successive Ministers of Finance have failed to trigger the section in the Act which would have dispensed with the need for an auditor. The smallest company then is required to meet the same stringent accounting and disclosure requirements as say, a Banks DIH. Auditors are also helped in another respect by the Companies Act 1991, which simply requires the auditors to state whether in their opinion, the balance sheet and the profit and loss account show a true and fair view. In the repealed Companies Act Cap 89:01 auditors were required to state, perhaps impossibly, whether the accounts showed “a true and correct view…”

Readers of financial statements also need to recognise that while the audit profession will not say it, “true and fair” is a largely undefined term and that within case law and auditing literature there may be more than one “true and fair” view of the state of affairs and results of a business. Add this to the prolixity of the report and we find a complete absence of a key ingredient prescribed by the Financial Reporting Council (UK) for audit reporting: to provide a positive contribution to audit quality. The FRC suggests that for such a contribution to take place it would require audit reports to be written in a manner that conveys “clearly and unambiguously” the auditor’s opinion on the financial statements, and addresses the need of users of financial statements in the context of applicable law and regulations.

The first rule: cover your behind
That is eminently sensible, but is that what auditors really want or do they want to avoid lawsuits which can cripple them? The first thing an auditor seeks to do is minimise his risk including the risk of being sued. Accordingly auditors need to protect themselves and that protection comes at the expense of clarity, brevity and utility. In my decades of auditing experience with a number of international and local firms I cannot recall a single conversation among audit partners identifying communication with shareholders as even the last of their audit objectives.

But if companies legislation is so precise about the report of the auditors, how did we get here?
The first thing to note is that Guyana does not have its own accounting and auditing standards. As members of the International Federation of Accountants (IFAC) dominated by the big firms in the developed world, the local accounting regulator, the Institute of Chartered Accountants of Guyana, is committed to its members adopting and applying the standards set by IFAC. While nationalists (if they still exist) may consider this another form of colonialism, the fact is that international banks and multilateral lending agencies as well as investors, stock exchanges and domestic banks find comfort in financial statements that are prepared and audited to the highest standards of best practice, which are in effect the standards set by the major players.

The initial explosion in the verbosity of the audit opinion was a reaction to what was described as the expectation gap – auditors had to disabuse readers of any notion that the audit was somehow expected to detect frauds or that the auditors were responsible for the preparation and content of the financial statements. The report by the auditors rightly seeks to draw attention to the fact that the management is responsible for the financial statements and that the auditors’ duty is to report on those statements using such methods and techniques as would enable them to report in a most cost-effective (read profitable) manner.

Case brief
But the real reason for all the ‘wordiness’ is the fear of litigation, a fear that has dogged the accounting and auditing profession if not as far back as the South Sea Bubble (1720), certainly in cases like Kingston Cotton Mill (1896) which put the auditor as a watchdog not a bloodhound; Hedley Byrne v Heller (1963) which established the principle that when a person makes a statement in a professional capacity, he voluntary assumes responsibility to the person he makes it to unless he has put a disclaimer in his communication; BCCI (1991), referred to satirically as the ‘Bank of Crooks and Criminals International,’ one of the first cases in which the financing of international terrorism was an issue; and more recently, the 2003 Scottish case Royal Bank of Scotland v Bannerman Johnstone Maclay (‘Bannerman’), in which the court ruled that in preparing the audited accounts of their clients, APC Ltd, Bannerman may have owed RBS, one of APC’s creditor banks, a duty of care and therefore liable for any loss suffered as a consequence.

It was sufficient for RBS to show that Bannerman should have been aware that the accounts and audit report would be provided to RBS for the purpose for which RBS relied on them, even though they may have been prepared for a different statutory purpose. Crucial to the court’s reasoning was the absence of any third party disclaimer in the audit report – which has come to be known as the ‘Bannerman’ statement, used by auditors to discourage third parties from relying on the audit. It is widely believed that it was the presence of such a provision that protected Ernst & Young in a £350M case involving German truckmaker MAN and a subsidiary audited by Ernst & Young, which had been bought by MAN.

Not everyone is happy with such a disclaimer, and a suggestion by the Audit Practices Board of the UK to dispense with the Bannerman statement has met with consternation among UK audit firms. The leading accounting body in the UK, the Institute of Chartered Accountants in England and Wales, is convinced that the Bannerman statement remains a strong and integral part of the audit report, and that there is nothing wrong in principle with disclaiming any duty to third parties.

Tax evasion is not a crime?
In Guyana, some auditors give their blessing to accounts which have been accepted by financial houses and the Guyana Revenue Authority (GRA), but which even Alice would consider pure fantasy. During the last decade we saw some high profile receiverships in which businesses went under shortly after receiving clean reports from their auditors, causing massive losses to the banks. The GRA is too often the victim of some of the most spurious accounts imaginable and yet neither the banks nor the GRA has taken any action against any auditor.

Using history as their guide, auditors assume that the chances of their being sued by lenders for negligence in signing off on the financial statements of their clients are about as likely as snow in Guyana. Those auditors who also prepare the tax returns for their clients must know that those returns are relied upon by the tax authorities for the assessment of taxes and that under the Income Tax Act they can be held criminally liable for aiding and abetting in tax evasion.

Since in Guyana it does not appear that tax evasion is a crime then clearly aiding and abetting it cannot be a crime either! Instead of sanctioning those auditors and tax consultants whose product is so egregiously bad, the GRA routinely issues them with annual Tax Practice Certificates that are used as a licence to continue in their ways.

One of the new rights created by the Companies Act 1991 is the right of the shareholder to have the auditors answer at the AGM questions relating to their duties as auditors. So far it is the directors who have been answering those questions and it would be fascinating to witness such an encounter between shareholder and auditor! That little exercise in shareholder democracy may do more for governance than all the hundreds of words in the audit report.

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A man for all seasons

As my family mourn the passing of our gardener who touched the lives of all seven of us, I cannot help but note how in our society, obituaries seem reserved for the rich, the powerful and the famous. And how the remarkable qualities of the less fortunate are ignored in their lifetimes and forgotten at their death. He was sixty-nine years old but no one, young or old, knew him by any name other than ‘Pops.’ Since his sudden death last Friday, the members of our family have been expressing their impressions of Pops and it is remarkable how we each saw him in our own special way.

Christelle who is ten remembers Pops not as the gardener but for the way, “We all felt like family,” for being there every day, not as work but as a hobby. She remembers Pops for always watching over her, her sister Christen and brother Christoff with care and love as they played outside in the yard.

Christen remembers seeing him coming to work on his red bike, putting on his hat when the sun was hot and taking refuge in the garden shed when it was unbearably so. She remembers him as always being at Ogle – in the morning when she woke up, to the time she came from school, and after she migrated, on her vacation from the US. She recalls how if there was a stray cat around, he didn’t get rid of it, he took it home and cared for it.

Ravee remembers Pops as simple a man as one can ever know. One who could neither read nor write but whose life proved that one does not have to be an intellect to be special. Having known Pops since he was an early teenager, Ravee’s fondest memories of Pops are the times he would sit outside on the patio at Ogle and just ‘gaff’ with Pops.

From those “dozens of conversations” over the years [and no doubt for Pops’ helping to slip him in the house when he came in late after the rest of us were asleep], Ravee remembers Pops as loyal, honest and caring.

Christoff who is perhaps the quietest of our children remembers Pops as “a man who you could talk to for hours on end no matter what you are doing.” He recalls how Pops could carry on a conversation about most things and how he had something to say whenever Christoff went outside.

Ena recalls that having first worked as a tiler while the house was being built, Pops brought a garden into being from what was up to then a pasture, giving life to their ideas and richness and warmth to the yard. He was always reluctant to prune the plants, arguing that to cut off the flowers or fruits was a sin. Practical man as he was, while taking care of the flower garden, he argued respectfully for more attention and space for the kitchen garden, noting, “You can’t eat flower plant.”

For me, Pops represented treasured values and an era that is sadly passing. He cared for our children with love and respect, treated his job as sacred, never missed a day’s work on account of rain or shine, ill-health or holiday, never quite trusted the motor car, thought the computer flash drive I sometimes carry around my neck as a “tabeej” (the Hindu phial to ward off evil), never questioned an instruction or a request that he cover for someone who had not turned up for work. He had a remarkable sense of humour and brought to the daily discussion with his colleagues the most practical point of view, scolding Benjie, who works in the house, “Man han(d) mek fuh wuk, nah clap roti,” or telling Ena, if she dabbles with her hands in the garden, “You nah doo dah, da ah me wuk, you guh look after de bass.”

He was caring and loving. I never heard him raise his voice to anyone and he would willingly offer to share his modest lunch with any of our other staff, even as he took out his false teeth to start his meal.
He was the only Indian among the Ogle staff but mixed freely, could discuss race without causing offence and was great fun to be with.

Recently he and I were discussing his future and as he looked forward, his words were, “Me nah ah guh nowhere, ah right ya me guh dead.” I thought there and then how much Ena, Ravee, Roger, the three youngest ones and I are indebted to him.

I actually looked forward to the day when we could do something for Pops, to help him through his old age, as he has done for us as a family for fifteen years. Now, that opportunity has gone and we are left with cherished memories of one of the greatest men I have met, my father included.

We were indeed fortunate to know him and have him as a member of our family for as long as the youngest children have been around.
When they went to live in the States it was Pops with whom I shared my Sunday mornings while he tended the plants and vegetables as if some divine authority was causing him to act with the highest standard of love for the land, for nature, for his colleagues, his grandchildren and for us.

Christen, as children do, thought that his enduring qualities would cause him to be there forever. He may not be, but his memories and values will be.

Farewell, Pops, you have done your duty, made your mark and as Ena suggests, you are called on to other gardens. We will miss you though.

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China and India – Reshaping the world economy (conclusion)

Introduction

Not a day goes by without something being written about the miracle of China and India and the inevitability of these great countries graduating to superpower status. Their praises are sung in hyperbolic rhythms by a body of writers who have created a whole new cottage industry dedicated to them. The only question in the minds of many of these writers is not whether but how soon the two Asian giants – or as they are sometimes called the dragon and the elephant – will return to the glory days of four centuries ago when they were the dominant forces in world trade. One estimate is that by mid-century, India and China’s share of global output is expected to grow from 6% now to around 45%, spurred both by exports and burgeoning domestic purchasing power as more and more of their more than 2 billion people copy and can afford to live western lifestyles. All the measures suggest that China and India will overtake Germany and Japan and dwarf every other economy except America.

China is spending like a runaway train with expenditure on transportation infrastructure in the five years from 2001 to 2005 exceeding all the expenditure in the preceding fifty years. Spurred by the need to impress the world at the Summer Olympics later this year, it has built its new airport terminal which is 17% larger than Heathrow, faster than it would take London to complete an enquiry to consider whether it would add another terminal. Nothing seems impossible anymore so that when China announces that it will complete an expressway from Beijing to Taiwan’s capital Taipei by 2030, no one considers the challenges of crossing the 150 km Taipei Straits. What China does in one year, other countries seem unable to achieve in as many as ten.

More statues of Jesus

Some questions have however been creeping into the writings suggesting that the world needs to consider more than the marvel of these two giants which, even before their resurgence, had given the world so much. Among China’s many gifts going back more than one millennium are the clock, technology in hydraulics, shipbuilding, weaving and spinning machines, paper and ink, and more leisurely comforts like the toothbrush and playing card. Then like now India’s gifts were in know-how including mathematics from the decimal point to the Pi (the numerical ratio of the circumference to the diameter). Complacency overtook them both as power and politics placed a brake on their development.

Once again, in the blink of an eye, both countries have become so big that economies around the world – from its neighbours in Asia, Europe and North America – are now dependent on them for a full range of goods and services. In their separate ways, China’s workforce and work ethic and India’s information technology and back-office services have brought down prices for the family, the office and the factory. It is ironic that more statues of Jesus are made in atheistic China than are made in the entire Christian world! There are few products in the world that do not include some component or know-how from these giants and it would not be surprising if the harshest critics of out-sourcing among television commentators were wearing shoes or garments made from China. Indeed even those thousands in San Francisco protesting China’s Tibet policy during the passage of the Olympics Torch in their city last week might have been similarly attired. There simply is no getting away from the growing dominance of China and India.

Economic and military power

Yet, nothing should be taken for granted and admiration can easily turn to hatred if these countries behave like superpowers usually do, flexing their muscles and showing no regard for domestic and international concerns. China, for example, is accused by its critics as being willing to work with the most extreme regimes, as in Darfur, if only to source raw materials for its huge factories. Its size and economic power are fast translating into military ambitions and it has its sights set firmly on Taiwan which is now treated as a pariah by so many of its former friends, afraid to offend China. China’s patience is legendary but will it lose it and “reclaim” Taiwan and will the world stand idly by?

As world demand for Chinese goods and Indian technology increases, it brings with it increasingly affluent domestic populations aspiring to higher standards of comfort, if not luxury. To meet those growing demands, China and India are displaying an increased appetite for natural resources, contributing to the driving up of prices of commodities including food around the world. But as their factories produce the goods to meet both international and domestic demand, they add to the pollution problem of their people and the rest of the world. It is troubling that neither country, along with the USA and Australia seems willing to enter into binding commitments on pollution controls. They will need to learn a lesson from America when it comes to the use of economic and military might.

The mighty challenges

With the Communist Party still calling the shots in China and national and provincial politicians wielding considerable influence in India, corruption remains high in both nations. China is still to safeguard the intellectual property of manufacturers, the music industry and the arts. The state of the laws generally has not kept pace with development and cases of broken contracts and theft of intellectual-property are often not worth pursuing. India has a Western-style legal system that produces decisions that rank with the best the House of Lords can offer. But as they say, one cow does not make a herd and the country’s court system generally moves at a snail’s pace.

India’s growth can also suffer at the fiscal level. Budget deficits are high and with the considerable infrastructure deficit and the army of poor and hungry Indians wanting a piece of the Puri, it will require sustained growth to generate the taxes to meet the necessary demands on the federal and state budgets. Disease thrives on poverty and even as India promotes health tourism, the potential for a pandemic is ever present as AIDS and TB threaten hundreds of millions.

India has been relatively fortunate that it has been able to graduate from a low growth rate despite failing infrastructure, a bureaucracy controlled by a 10-million babu raj exercising impenetrable red tape, and an inhuman caste system that seems as unmovable as Mount Everest. The politicians in India are finding it difficult to erase the Gandhi/Nehru philosophy of self-reliance and restrictions on bank lending and foreign investment which impose limits to growth and development.

Unemployment

Despite all the economic achievements of China and India, each year tens of millions of youth join the job queue, some in front and others behind the estimated 200 million yet to reap the benefits of the Asian Miracle. The heavy hand of China was inadequate to prevent more than 57,000 labour strikes while social rights activists in India lament the failure of economic achievements or social programmes to reach the poor. In a federal democracy that could be a recipe for political instability which can derail any economic train.

China’s critics complain about the country’s labour practices which permit low wages paid to workers forced to perform under dehumanizing conditions, about large state subsidies, violations of WTO Rules including dumping at below market prices and an undervalued currency, the Chinese yuan. As the benefits of industrialisation stretch into the countryside and bring urban/rural wages in a more tolerable relationship, farms are being destroyed and farmers deprived of their lands creating serious tensions between the party and the people.

For all its greatness and growth, China is considered hugely wasteful. Even as the world marvels at its 9.5% growth rate in 2004, it should not ignore the fact that $850 billion – half of GDP – was mainly plowed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad.

China is also confronting its biggest problem and one that can cause it to lose its competitive edge, its one-child policy introduced as a population control measure. By 2015, its working-age population will begin to decline and in 20 years, an estimated 300 million Chinese will be over sixty years old with no guarantee of any state assistance. With a growing middle class and persons less reliant on the State, can China continue its communist ways and treat any future Tiananmen Square-type uprising with the same heavy hand that it used in 1989 and will the world remain spineless as it tramples the rights of the Tibetans as it is doing now?

Conclusion

For all the dazzling performance of China and India, their continued success will take more than cheerleaders. They currently only account for 6% of global gross domestic product, half that of Japan, and while the signs are good, their success is not guaranteed. The expectations of the hundreds of millions of their people will only be satisfied if the economies of these countries continue to grow at rates that guarantee jobs for the tens of millions entering the workforce annually. That is a huge responsibility and for a world that depends on the goods and services from those countries, any setback in the two countries would have a huge and possibly disastrous effect.

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China and India – Reshaping the world economy

Introduction

To be honest, this article was prompted by China’s harsh treatment of the people of Tibet who would just like to live in peace, free from the heavy hand of Beijing and to practice their Buddhist lifestyle. It is taking place in a glory year for China as the Olympics are held in that country whose government will simply not have anyone spoil their party, not even crusaders for human rights or nationalist respect. Even though such consideration and debate do not rightfully belong to this column – the first in a two-part article on the two fastest-growing economies of the world – such consideration is not entirely irrelevant since economics have social and other consequences as economic power sparks other ambitions and attracts fear if not respect. Indeed this perhaps explains why no country is planning to boycott the Beijing Olympics and why human rights abuses in China are discussed in only the most veiled terms.

In Guyana we must never ignore human rights issues anywhere, but an equally important consideration in any discussion on China and India is the importance of the right mix of policies to spur economic growth and development. Indeed the experiences in China and India are not entirely dissimilar to us here where we attempted to practice an extreme form of socialism beginning with the Sophia Declaration in 1973 and ending with Hoyte’s version of Glasnost, his embrace of the IMF and Cheddi Jagan’s continuation of the programme despite his personal and his party’s antagonistic position to the IMF. We too experienced good growth for some years but this fell off amid other conflicts and the economy has survived in great measure because of debt write-offs.

Reclaiming their rightful place

When in 2006 the Prime Minister of India proclaimed that India and China are on the way to reclaiming their rightful places in the world economy, the world did not see that as some idle boast or threat but rather a simple factual statement. America and the West called for globalisation and China and India opened their doors, not completely, but enough to cause huge consternation and fear among segments of the American population at the way these two countries are shifting the tectonic plates of the world economy. What makes the story of China and India is not only their similarities but their differences – ideologically, historically, culturally and economically. One is dictatorial while the other is democratic; the court system of one would be considered too free by the other; China is Communist but pro-business while India is free-market but at times highly suspicious of business; one emphasizes its human infrastructure while the other promotes the low wages of its people; one still operates with a Five-Year Development Plan while the other seems to worship not any omnipotent, all powerful, many handed deity but the invisible hand made famous by Adam Smith.

But it is not the differences that cause leading journalists like Lou Dobbs to worry – rather it is their similarities – up to recently they were considered part of the Third World, too large and too poor to succeed, over-populated and almost unmanageable. Yet before the world could appreciate the release of the latent powers of numbers, India and China have become the fastest-growing economies giving them the claim to superpower status in less, far less than twenty years. It is true that they will never be able to reclaim the position they held in 1600 when their combined economies accounted for more than half of the world’s economic output or even their position in the late nineteenth century as two of the largest economies in the world.

The decline

Several things intervened between then and now, including the meteoric rise of the United States of America, which with a workforce driven by a lust for things material and powered by enterprising migrants escaping from the famine in Ireland and war in Europe grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights. There were too the Marshall Plan in Europe and the rise of Japan and South Korea in Asia.

Yet, the decline in both absolute and relative terms of China and India had little to do with such external forces but was directly the result of inward-looking yet adventurous policies by these countries often on the brink of war, with daggers drawn and guns pointing at each other. For several decades political considerations dominated and shaped domestic policy as the countries were held spell-bound by their history of invasion and colonialism and the philosophies of great founding leaders – Mao Tse-tung in the case of China and Mahatma Gandhi for India, one a revolutionary who believed that power lay in the barrel of a gun the other a believer in the principle of non-violence. What would these great leaders think about the country they either killed or died for?

Ten years after announcing the formation of the People’s Republic of China in 1949, Chairman Mao’s disastrous Great Leap Forward caused the death of 30 million in four years of famine while his Cultural Revolution in 1966 saw the decimation of the intellectual and bourgeois class, the closure of universities and destruction of books. His policies according to the author Robyn Meredith in the book The Elephant and the Dragon, may have succeeded in the creation of a society in which private property was practically non-existent but also in a generally downward spiral in the well-being of the country and the people.

Signal left and turn right

The transformation began with the rise to power of Deng Xiaoping who beginning the reform in the countryside, broke up the collectives and introduced the rudiments of a market economy. Over 125 million jobs were created by 20 million entrepreneurs who rediscovered the capitalist instinct of the Chinese. While significant the changes were not nearly enough and it was time to look outward. Instead of heading to Europe and North America, however, Deng went into his own backyard, Malaysia and Singapore, whose Prime Minister Lee Kuan Yew he admired deeply and with whom several learning visits were exchanged. His “special economic zones” were characterized by employer-friendly labour laws and low taxes all the while formally remaining loyal to socialism. There is the joke of Deng being asked by his chauffeur which way to turn as they reached a junction. Deng, the quintessential pragmatist instructed the driver: “Signal left and turn right.”

Now fifty years on, the transformation is like the world has never seen. What makes the situation even more mind-boggling is what has taken place within the past decade. In 2000, 30% of the world’s toys came from China. In 2005 that grew to 75%. One out of every three pairs of shoes made today is the product of Chinese labour and between 1996 to 2004 exports of electronic equipment had increased 800%, from $20 billion to $160 billion. When last did we hear that Small Is Beautiful, the title of a series of books by E. F. Schumacher.

India

Pained by the experiences of colonialism and exploitation in which the masses of India lived in abject poverty while as a colony the country was the gem on the Royal Crown, Gandhi was a great believer and practitioner of economic independence while opposing mass industrialisation, preferring traditional means of production, symbolised by the spinning wheel on the Indian Flag. Even after his assassination in 1948, the Congress Party of India, first under Jawaharlal Nehru and later other members of the dynasty continued the policy of self-sufficiency, shutting India from the outside world, equally difficult for Indian producers to export as for foreigners to invest in the vast country. One of India’s best known companies, the Tata Group, formed in 1868 became a key part of the country’s freedom movement and out of its nationalist commitment built its mills to supply the steel for the country’s successive five-year development plans.

The productive capacity of the country was, however, kept in check by a rigid policy of licensing so that even a manufacturer of motor bikes could only produce as many as his licence permitted. With socialist instincts running through its veins, the government found its finances in perpetual deficit as it made efforts to create jobs which were in turn protected by costly guarantees that were a severe strain on companies. Ironically, it took the cataclysmic second oil shock sparked by the 1991 Gulf War to cause India to awake to the reality that having 330 million people, or 40% of the population, in total poverty was neither moral nor compatible with sustaining its position as the world’s largest democracy. Narasimha Rao who became Prime Minister after the assassination of Rajiv Gandhi, appointed the economist Manmohan Singh, current Prime Minister, as Finance Minister. Unlike China, India took the route of the IMF, devaluing the currency, removing import and export restrictions and expensive bureaucracy.

It is the result of the vision of these leaders and the number and energy of their people that is causing such consternation among Westerners and Americans in particular who see their solo superpower role under threat from the rapid growth of these two economies. For China the growth rate has been averaging 10% per annum while India’s at 6% may seem modest except when it is compared with the 3% in the US and other western countries. Indeed the admired has become the admirer and Lee Kuan Yew told a Forbes Conference in 2006 that he has been visiting China “every year and each time he is surprised at the rapid changes”.

These two countries both have young populations, high Asian saving rates and have put in place measures which barring some catastrophe can keep growth in the high single-digit range for decades. Admittedly they have come from a low economic base but with the substantial catching up they still have to do, there is no reason for them to slow down.

To be concluded next week.