GUATEMALA CITY — During his visit to India in 2002, the local media fawned over Chinese Premier Zhu Rongji. To a considerable degree the deference shown to him was justified on strategic grounds, given that it came during a time of great instability in South Asia. Yet his proclamations concerning economic affairs were given disproportionate weight.
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. Despite India having a more predictable legal system and more extensive use of the English language, China received 10 times more foreign direct investment last year ($54 billion).
Measured in terms of purchasing power parity, China now ranks as the second-largest economy in the world with India trailing at number four. Although China has 30 percent more people than India’s 1.05 billion, its $1.4 trillion economy is already three times larger than India’s.
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 action of its own 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 on macro-economic conditions under which 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. Although China has a more flexible labor market, it must develop much of its physical infrastructure from scratch, and it lags far behind in terms of “institutional infrastructure,” which includes legal and judicial systems.
In terms of noneconomic 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 as a democracy with fractious and parlous partisanship. Action is delayed, and dirty political laundry may be 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, 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. And curing these ills is not as difficult as making up for the democratic and judicial deficits that China suffers from.
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