Asia 2014: Elections, flashpoints and a sweet spot

In part two of his interview, Financial Times Asia Editor David Pilling speaks to Asia House Web Editor Naomi Canton about  Asia 2014 with reference to the Indian general elections, the escalating tensions between China and Japan and the next Asian country to watch.

There was initially great certainty among commentators that opposition leader and Bharatiya Janata Party (BJP) prime ministerial candidate Narendra Modi would become the next prime minister in the upcoming Indian general elections following the success of the BJP and defeat of India’s ruling Congress party in three of the December 2013 State Assembly elections. However, the Delhi State Assembly elections were in fact hung and the Aam Aadmi Party (AAP), a brand new anti-corruption party, was invited to form the government in Delhi. Firstly, what might India be like under Modi? Secondly, what impact could the emergence of the AAP have on the spring elections?

The Indian electoral system makes it very hard to predict outcomes. So although Modi has emerged as a huge national figure, that may not have quite as big an impact in elections – often decided at state level – as might be assumed.

The Congress party-led coalition under Manmohan Singh has offered redistribution with slowing growth and poor social justice. It’s a disappointing cocktail. The nexus between government and rent-seeking so-called “entrepreneurs” has become more corrupt, a tragedy given Singh’s own high moral standing.

Investors would love a Modi victory. Since India needs foreign capital, this could give a self-fulfilling jolt to the economy. In fact, markets have already partially priced in a Modi win.

But hopes that Modi can translate the ‘Gujarat model’ to India’s cacophonous national scene are probably overdone. India’s development model itself is very questionable. With a large ill-educated and too often malnourished population it is not clear how it can keep on growing fast enough or indeed what growth has been for. Growth has benefited a few hundred million Indians, some of whom were already wealthy and some who have edged into the middle class.

Much of the population has been left entirely behind. India needs to shake some things up radically.

The state needs to be able to provide social goods – principally education and health, as well as a predictable, open investment environment that relies on rule of law (not rule of rupee-stuffed envelope). It’s a massive task.

The whole electoral issue has been thrown into further question by the stunning performance of the Aam Aadami Party in New Delhi. The fact that the party uses a broom as its logo – symbol of India’s low-caste street cleaners and indicating a desire to sweep the system clean of corruption – shows just how disaffected much of the Indian electorate has become. The AAP may not have time to become a national political force by the time of the general elections. But their emergence from nowhere is a strong sign of voter anger at the status quo. Indian elections always tend to contain an element of ‘kick the bums out’. This is likely to be stronger than ever in 2014.

As if this were not all enough, Manmohan Singh has complicated things still further by attacking Modi head-on as unfit to be prime minister of India. In a press conference in which he announced his retirement after the general election, the normally mild-mannered Singh said Modi would be “disastrous for the country”. He directly accused him of having a hand in the Gujarat pogrom, something Modi vigorously denies. How much influence Singh still wields is questionable. The allure of the Nehru-Gandhi dynasty also seems to be fading, suggesting Rahul Gandhi will struggle to sway the vote back towards Congress.

All this makes this one of the most fascinating Indian elections in years.

Modi is pro-reform and appeals to Indian youth, businessmen, the middle-classes and the poor alike. But he also has enemies. Will he be a divisive figure? Will global western leaders accept him?

Modi is almost by definition a divisive figure. If he becomes prime minister, he will have to bend over backwards to show he has put the past behind him and wants to run the country for the benefit of all Indians.

If he’s elected, the West will accept him. The US would not be able to maintain its stance of denying him a visa. Investors will welcome him.

As for Pakistan, that’s a different matter.

Why, despite the easing of restrictions on foreign direct investment (FDI) in multi-brand retail, have no western supermarkets entered India yet and doesn’t that make a mockery of all the protests of small shop owners  over a year ago?

Rules in India have chopped and changed so much that investors are now more wary than before. They fear being clobbered with high retrospective taxes. There has also been diminishing confidence in India’s long-term growth prospects.

Financial Times Asia Editor David Pilling

Are other Asian countries  worried about China’s growth? How significant is the Senkaku/Diaoyu islands issue and what is China trying to achieve?

There’s no concern about China’s growth per se. If anything the concern is that China’s growth may one day slow more than expected. Asian economies rely on China as the motor of the regional economy.

The Senkaku/Diaoyu dispute is extremely significant, now a much more dangerous flashpoint than Taiwan. The ADIZ (Air Defence Identification Zone) is a clever ploy by China to push the envelope. It wants to challenge Japan’s long-held claim that it enjoys sole administrative control over the islands. Beijing is also seeking to test the US-Japan alliance, specifically Washington’s commitment to defend the islands should they come under to attack.

I think conflict is plausible, though for the moment – thankfully – it’s a remote possibility. If it happened it would almost certainly be by accident not design. The chances of containment would be reasonable.

China wants many things: to reverse what it sees as a century of humiliation, to punish Japan, to break out of the first island chain and to challenge US hegemony in the Pacific. In this context, oil and fish are a mere bonus.

How positive are you that the reforms announced at China’s Third Plenum in Beijing, particularly the easing of restrictions on hukou (household registration cards legally required in China) and the loosening of the one-child policy, will be implemented? What impact would they have on China’s growth?

The changes announced after the Third Plenum are far-reaching. Implementation is a big obstacle. Even if implementation is effective, reforms are bound to have unintended consequences by disturbing the current equilibrium.

The main aim is to give a greater role to market forces to improve the allocation of capital in a state-led, investment-skewed economy. This is the only way to rebalance the economy towards the consumer.

The hukou reform is important, though initially limited to second-tier cities. The one-child policy is less important, though it has a certain symbolism. China’s ageing is baked in and will have profound ramifications and could trap China in middle-income status. Just as important are reforms of state-owned enterprises and the financial system. How China builds a social security system is also crucial.

The contradictions at the heart of China’s economy are massive. It’s growth is impressive, but its economic ‘efficiency’ far less so. Past performance is no guide to future dividends: but China has been going strong and overcoming massive hurdles for 30 years. It’s a brave person who would bet against it – just yet.

Which country in Asia is the one to watch (in terms of fast growth) over the next 20 years and why?

The Philippines has surprised many. In the past few years, it has moved from ‘basket case’ to investor darling. It is entering a demographic ‘sweet spot’. However, its economy is controlled by a few big families and the sort of takeoff once experienced by Japan, South Korea and latterly China is unlikely. Nor do we know what will happen when Benigno “Noynoy” Aquino steps down in a few years.

Mongolia is likely to grow fast, though that’s because it has a tiny population and massive natural resources. It’s not likely to be pretty watching the struggle over the bounties. Sri Lanka could be another country to watch.

David Pilling is the Asia Editor of the Financial Times in charge of coverage of the whole of Asia from Afghanistan to Japan and China to Australia. He was Tokyo Bureau Chief from 2002-2008. Currently based in Hong Kong, his weekly column explores Asian business, investment, politics and economics.

He will be discussing his book, Bending Adversity: Japan and the Art of Survival,(Penguin Press, January 2014) in conversation with Gideon Rachman,  Chief Foreign Affairs Columnist for the Financial Times, at Asia House on 14 January.

The book takes a fresh view of Japan’s lost decades after the bubble burst and examines the  background to Japan’s isolation in Asia, exploring Japan’s aptitude for reinvention and demonstrating its importance in the face of the economic slowdown and the 2011 earthquake.

To read Pilling’s first interview with Asia House, in which he talks about the challenges currently facing Japan, click here.

naomi.canton@asiahouse.co.uk