TCS Daily


The India-China Gap

By Christopher Lingle - November 10, 2004 12:00 AM

When Zhu Rongji visited India in 2002, it was somewhat surprising that the local media fawned over him so much. To a considerable degree the deference shown him was justified on strategic grounds, given that it came during a time of great instability in South Asia. Yet his well-reported proclamations were given disproportionate weight in terms of introspection about India's economic affairs.

To be fair, China has posted some considerable economic success of late. While India and China had economies of roughly the same size in the 1950s and 1960s, China's greater progress with market reforms since the 1970s pushed it well out in front.

In particular, China has had spectacular success in expanding exports and attracting direct foreign investments. Measured in terms of purchasing power parity, China now ranks as the second largest economy in the world with India trailing at number four.

Despite the record of the recent past, there is reason for hope that the economic gap between these rivals will soon diminish. On the one hand, India may advance in relative terms through no fault of its own. This is because China's storied economic growth is likely to falter under the weight of a massive default of the banking system or from political pressures arising from restructuring of state enterprises.

On the other hand, India's leaders are becoming aware that their own economy can move forward more rapidly by undertaking meaningful and aggressive reform. For example, India scores well in the area of macroeconomic conditions where restrained monetary expansion has brought inflation to a record low 2.5 percent. China's battle with price instability has seen swings from high inflation in the mid-1990s to its current troubling bout of deflation.

One area that offers promise for India's economic growth involves labor market reforms that would allow companies with fewer than 1,000 employees to hire and fire without consulting government departments. This could be the most significant single step taken recently to boost India's economy. It is as least as important as dismantling the license-permit-quota raj and advancing the convertibility of the rupee.

While India suffers from crumbling physical infrastructure and an inflexible labor regime, it has numerous (potential and unexploited) advantages over its constant rival. While China's labor market is more flexible, it has to develop much of its physical infrastructure from scratch and it lags far behind in terms of "institutional infrastructure" that includes legal and judicial systems.

In terms of non-economic aspects of the China-India gap, India has a leg up. Although the Indian legal system is far from perfect, it is commonly understood that the role of laws and the courts is to protect individuals from abuses of power whether involving the state or private actors. Laws in China are generally used as instruments of state control over individuals and to direct their actions.

This brings up India's putative disadvantage in having a democracy with fractious and parlous partisanship. Delays in action may come dirty political laundry is aired in the lively and free media that encourage open discussion of social, economic and cultural issues.

As it is, China's excessive authoritarianism and obsession with state power and control, along with its controlled media, stifles settlement of contentious issues. Left to simmer unabated, these unresolved problems invite reactions that include widespread economic failure or rioting and other expressions of civil discord that have become increasingly common.

Beijing has awakened a sleeping dragon and harnessed it to boost China's economy. Unless the political aspirations of this fire-breathing beast are fulfilled, it threatens to rise up and consume the Communist Party leadership to end its grip on power.

As for India, the tendency of its economy to lag behind is not due to its vibrant democracy. Instead, India suffers from too little economic liberalism and too many government interventions based upon misguided socialist precepts. It turns out that curing India's ills is not as difficult as the democratic and judicial deficits that China suffers from.

Christopher Lingle is Global Strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.


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