How The Dragon Out Manoeuvred The Elephant

The Age

Tuesday September 23, 2008

Mark Crosby

India's democracy and rule of law are no substitute for the orderliness and leadership of which China is capable, writes Mark Crosby.

WHEN China began economic reforms in 1979, per capita purchasing power was about two-thirds the level of India. At that time both economies were dominated by a labour-intensive agricultural sector and, despite the two countries having about two-fifths of the world's population at that time, together they accounted for less than 2% of global trade.

Today per capita purchasing power in China is more than double the level in India. Despite India's very strong recent economic growth, the slightly faster gross domestic product (GDP) growth in

China and slower population growth there mean the income gap is widening rather than narrowing.

A common claim is that India's advantage in having English commonly spoken, and having a stronger legal system and democratic institutions will soon lead to India catching up and eventually overtaking China's income levels. In my view, India will struggle to close the income gap with China, let alone catch up.

There are several reasons to be pessimistic about India's prospects relative to China's. First, China has always had basic education for more of the population than is the case for India. Still today India's adult female literacy rate is below 50%, while in China it is closer to 90%. It is hard to participate in a modern economy and lead a productive work life without being able to read or write.

A second and widely remarked difference between China and India is the quality of infrastructure. In China, public infrastructure is world class, while in India it is very poor. For example, China has built 35,000 kilometres of national highways in the past 10 years, while India is planning to build 15,000 kilometres of highways. China's public transport, ports, airports and roads are far superior to India's. The only part of India's economy with decent infrastructure is telecommunications - India's outsourcing and information technology businesses are built around high-quality IT and internet access. This shows how India can do well, but at the same time highlights how poor infrastructure reduces business productivity in other sectors of the economy.

One factor that has forced China to have high productivity is openness to trade. Since 1979 China's share of world trade has grown from about 1% to more than 6%. China's

trade-exposed industries must continue to raise productivity in order to survive in a global market. In contrast, India's share of world trade remains below 1%.

India's historic reliance on self-sufficiency has protected her industries, leading to a lack of incentive to innovate and raise productivity. This has changed since India began its economic reforms in the early 1990s but its share of trade is still only a 20th of the level of China.

A final factor that limits growth in India is the difficulty in making necessary policy changes and further reforms. India is democratic, but this makes decision-making time consuming. In respect to infrastructure in particular, decision-making is very slow, and complicated by difficulties in acquiring land. China, of course, is not democratic, but it does have leaders with vision. Infrastructure plans for the next 20 years and more are mapped out and implemented. There are problems with the process for land acquisitions, but these problems are being tackled and in general the end result is a net benefit for society as a whole.

In comparing India and China, it is not at all clear that law and democracy will lead to better outcomes than order and leadership.

Mark Crosby is an associate professor at Melbourne Business School and director of business research at Melbourne University's Confucius Institute.

© 2008 The Age

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