India versus China comparison has been written about ad nauseam. However, descriptions of this race and conjectures on the eventual winner have largely ignored discussing the relative merits of their differing approach to growth. Such a debate is important not only to decide the future course of policy in the two fastest growing economies in the world but also from the perspective of a developing economy wishing to emulate their rapid growth. Which system is better suited to achieve maximum prosperity in the shortest possible time?A lot of people consider the Chinese system to be the correct answer to the above question. They hold the opinion that India could grow much faster if only it could implement economic policies like the Chinese instead of dithering and taking two steps backward for every one step forward. The usual comparison is India’s patchy manufacturing record with China’s global manufacturing power. Chinese state’s role in creating the industrial superpower is much admired. Its phenomenal ability to plan policy and easily execute it to generate double-digit growth year on year instils both awe and fear. The Chinese system seemingly provides an antidote to the frustration felt at India’s doddering pace of liberalisation. If only populist politicians stopped caring about their vote banks and starting caring about the nation; goes the refrain.
However, the question posed above is incomplete. Not only should a desired system deliver maximum prosperity in the shortest time but should also ensure that it is reasonably equitably distributed and is sustainable. It is with these expanded objectives that we should analyse Chinese and Indian approaches.
Both approaches are free-market based but differ in the treatment of free markets. The Chinese approach is one of guided development where the market’s invisible hand is held firmly by the government to ensure it does not go astray. The Indian approach is restricted laissez-faire where the invisible hand is occasionally nudged into the preferred direction but largely left alone.
Guided development approach lends itself well to catch-up industrialisation as it involves following known development policies. Instead of letting the market reinvent the wheel, the government shows the way through massive incentives such as easy credit, provision of infrastructure, favourable export policy. This approach has been tried and tested by Japan and the NIEs during their industrialisation (or re-industrialisation in case of Japan). The inherent assumption in guided development is that once industrialisation is achieved, the invisible hand of the market can function normally as the government lets go. This is a critical assumption and if falsified, can lead to a lot of pain.
Restricted laissez-faire is a meandering approach to development emphasizing the role of the individual rather than the state. The state does provide incentives for growth but there is no concerted or holistic policy for growth. Certain sectors may be favoured and win concessions while others have to fend for themselves. The result is usually unpredictable and slower growth as compared to guided development.
Therefore guided development would seem an obvious choice. However, it is akin to an athlete taking performance enhancing drugs. Current performance may seem dazzling but it comes at the cost of long-term health. The main casualties are innovation and efficiency.
Directing resources according to a grand plan starves entrepreneurs with different ideas. The economic potential thus lost manifests itself in the long-run. The US economy has grown faster than any other developed economy because its innovators were consistently increasing economic potential. Compare it to the Japanese, which stalled when its export-incentivised manufacturing juggernaut ran into trouble. The reason for the non-existence of a Chinese Infosys does not have so much to do with a relative lack of English speakers as with the fact that services were not part of the manufacturing-led growth plan. The plan followed conventional economic thought classifying services as non-tradeables that cannot earn the foreign capital required for growth. Realising their folly, the Chinese government has now turned the full force of their economic juggernaut to services, especially IT, where India is the current market leader. However, the delay has made it much harder for them to compete because the Indian companies have gone up the learning curve and now benefit from economies of scale.
It may be paradoxical to say that China is inefficient when its products have captured a large share of the world’s markets. But the low-cost of production is not only because of economies of scale but also because of wages kept in check by fiat and an undervalued currency. In effect, China is running a free one-for-one scheme for the world’s consumers. Inefficiency is not at enterprise level but at economy level. Macro-economic policies can artificially create seemingly efficient industries through hidden subsidies. However, this aspect of guided development is not as deleterious as the stifling of innovation. Indeed, the infant industry argument calls for protection until developing country firms can compete with the established players. Also, in the initial stages of development, earnings from trade and trade-induced capital flows can increase economic potential much faster than efficiency deterioration and thus lead to quicker growth. Later as macro-economic policies swing towards neutrality, business usually adjusts with the most efficient firms surviving.
The most insidious effects of guided development are corruption and curbs on individual freedom. Guided development necessitates a strong hold of government over the economy so that the planners can subvert the market to achieve their ends. It also requires individual will to be subordinated to collective good. Everyone must adhere to the grand plan. This confers immense power to government officials who find it easy to use it for selfish purposes.
The combination of a corrupt and repressive state can ultimately derail the economy and cause social unrest. An extreme example of this was the Soviet economy. China is facing a crisis of sorts as economic growth has sharpened divisions between the urban rich and rural poor. Corrupt local officials are making the state’s attempt to remedy the situation more difficult. They are also said to be ignoring the writ of the centre and continuing to pursue policies which are overheating the economy.
It is true that absence of guided development does not guarantee an absence of corruption. India is a case in point. However, corruption in India is actually a legacy of the state’s attempt to guide the economy. The complex regulations and discretionary power vested in government officials was a recipe for disaster which finally materialised in 1991. India is also an example of how difficult it is for the state to withdraw from the economy. Special interest groups and bureaucracy resist attempts to curtail their power. Japan is still trying to get rid of the politician-bureaucrat-businessman nexus to jump start growth. Proponents of guided development forget that it is harder to leave the invisible hand than to grasp it.
All this does not mean that India has got it right. The main thrust of a developing country’s government should be in infrastructure and education which impact economic potential the most. These areas are also where the invisible hand is most prone to failure. Guided development takes care of these issues. Contrast China’s diktat on English instruction starting at primary school level with Karnataka’s chauvinistic idiocy (West Bengal has been down this road and found out the dead-end at the end of it). The most worrying aspect is that the effects of neglecting infrastructure and education are perceived too late and are almost impossible to undo. In the end, even though India has got it largely right, it may scramble to get the power plants and roads in place and train skilled manpower. By then the global economy would have consigned it into the rubbish bin of also-rans.
Also by Shashank
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