Saturday, February 26, 2005
Financial Times series on India/China
Over the past week, FT has been running a three-part series comparing India and China. I have excerpted the relevant parts of these stories and posted them here as three separate blog posts. However, if any of you want to read the full stories, send me a note and I'll send it to you. The series kicked off with an analysis of the growth trajectories of the Indian and Chinese economies, by Martin Wolf. In particular, he tries to answer why China has had a far superior growth performance.
Both are the heirs of great civilisations. But China's civilisation is inseparable from its state, while India's is inseparable from its social structure, above all from the role of caste. This difference permeates the two countries' histories and contemporary performance. As Lord Desai of the London School of Economics has noted, "for India, the problem (is) achieving unity in diversity". China, however, is a "unitary hard state, which can pursue a single goal with determination and mobilise maximal resources in its achievement".*
These political and social differences explain, in large measure, the contrasts between the two development strategies. China has largely replicated the growth pattern of the other east Asian success stories, though its financial system is still weaker and its economy more open to foreign direct investment than those of Japan and South Korea. Its growth is based on high savings, massive investment in infrastructure, universal basic education, rapid industrialisation, an increasingly deregulated labour market and an internationally open and competitive economy.
India's pattern of growth has been extraordinarily different, indeed in many ways unique: it has been service-based and apparently jobless. Savings are far lower than in China, as is investment in infrastructure. India's industrialisation has hardly begun. Literacy is low, while elite education is well developed. India's formal labour market is among the most regulated in the world. Regulations and relatively high protection against imports continue to restrict competition in the domestic market.
China has accepted both growth and social transformation. India welcomes growth but tries to minimise social dislocation. The Chinese state sees development as both its goal and the foundation of legitimacy. Indian politicians see the representation of organised interests as their goal and the foundation of their legitimacy. Chinese politics are developmental, while India's remain predominantly clientelist.
If China's growth does remain rapid, can India match it? The optimistic view has been well expressed by Vijay Kelkar, a former senior civil servant. Mr Kelkar argues that India's political stability, well-entrenched democracy, relatively effective financial system, deepening international economic integration and improving environment for provision of infrastructure augur well for future growth. More fundamentally, India enjoys a greater demographic dividend, with the population of working age expected to rise as a share of the total until 2050, unlike in China, while the quality of the labour force is also improving. The private savings rate should continue to rise as living standards improve and the child dependency ratio falls. Finally, the growth of productivity has been reasonably good in India since 1980, with total factor productivity (the rise in output per unit of input of labour and capital) increasing at about 2 per cent a year.
Yet India, too, suffers from many constraints. Public sector dis-saving imposes a significant limit on capital formation. The political and legal systems, though well developed, are also cumbersome and inefficient. Politics lacks a focus on development. Hitherto, in addition, the growing supply of labour has not been matched by a rise in demand. As a result overall employment has risen at only 1 per cent a year over the past decade. Literacy remains too low.
Both are the heirs of great civilisations. But China's civilisation is inseparable from its state, while India's is inseparable from its social structure, above all from the role of caste. This difference permeates the two countries' histories and contemporary performance. As Lord Desai of the London School of Economics has noted, "for India, the problem (is) achieving unity in diversity". China, however, is a "unitary hard state, which can pursue a single goal with determination and mobilise maximal resources in its achievement".*
These political and social differences explain, in large measure, the contrasts between the two development strategies. China has largely replicated the growth pattern of the other east Asian success stories, though its financial system is still weaker and its economy more open to foreign direct investment than those of Japan and South Korea. Its growth is based on high savings, massive investment in infrastructure, universal basic education, rapid industrialisation, an increasingly deregulated labour market and an internationally open and competitive economy.
India's pattern of growth has been extraordinarily different, indeed in many ways unique: it has been service-based and apparently jobless. Savings are far lower than in China, as is investment in infrastructure. India's industrialisation has hardly begun. Literacy is low, while elite education is well developed. India's formal labour market is among the most regulated in the world. Regulations and relatively high protection against imports continue to restrict competition in the domestic market.
China has accepted both growth and social transformation. India welcomes growth but tries to minimise social dislocation. The Chinese state sees development as both its goal and the foundation of legitimacy. Indian politicians see the representation of organised interests as their goal and the foundation of their legitimacy. Chinese politics are developmental, while India's remain predominantly clientelist.
If China's growth does remain rapid, can India match it? The optimistic view has been well expressed by Vijay Kelkar, a former senior civil servant. Mr Kelkar argues that India's political stability, well-entrenched democracy, relatively effective financial system, deepening international economic integration and improving environment for provision of infrastructure augur well for future growth. More fundamentally, India enjoys a greater demographic dividend, with the population of working age expected to rise as a share of the total until 2050, unlike in China, while the quality of the labour force is also improving. The private savings rate should continue to rise as living standards improve and the child dependency ratio falls. Finally, the growth of productivity has been reasonably good in India since 1980, with total factor productivity (the rise in output per unit of input of labour and capital) increasing at about 2 per cent a year.
Yet India, too, suffers from many constraints. Public sector dis-saving imposes a significant limit on capital formation. The political and legal systems, though well developed, are also cumbersome and inefficient. Politics lacks a focus on development. Hitherto, in addition, the growing supply of labour has not been matched by a rise in demand. As a result overall employment has risen at only 1 per cent a year over the past decade. Literacy remains too low.
