China, India Superpower? May be not that fast

Tuesday, November 6, 2007

The media, particularly the financial press, are all agog over
the rise of China and India in the international economy.
After a long period of relative stagnation, these two countries,
nearly two-fifths of the world population, have seen their incomes
grow at remarkably high rates over the last two decades. Journalists
have referred to their economic reforms and integration into the
world economy in all kinds of colorful metaphors: giants shaking
off their "socialist slumber," "caged tigers" unshackled, and so on.
Columnists have sent breathless reports from Beijing and Bangalore
about the inexorable competition from these two new whiz kids in our
complacent neighborhood in a "flattened," globalized, playing field.
Others have warned about the momentous implications of "three billion new capitalists," largely from China and India, redefining the next phase of globalization.

While there is no doubt about the great potential of these two
economies in the rest of this century, severe structural and
institutional problems will hobble them for years to come. At this
point, the hype about the Indian economy seems patently premature,
and the risks on the horizon for the Chinese polity – and hence for
economic stability – highly underestimated. Both China and India
are still desperately poor countries. Of the total of 2.3 billion
people in these two countries, nearly 1.5 billion earn less than
US$2 a day, according to World Bank calculations. Of course, the
lifting of hundreds of millions of people above poverty in China has
been historic. Thanks to repeated assertions in the

international financial press, conventional wisdom now suggests that
globalization is responsible for this feat. Yet a substantial part
of China's decline in poverty since 1980 already happened by mid-1980s
(largely as a result of agricultural growth), before the big strides
in foreign trade and investment in the 1990s. Assertions about Indian
poverty reduction primarily through trade liberalization are even
shakier. In the nineties, the decade of major trade liberalization,
the rate of decline in poverty by some aggregative estimates has,
if anything, slowed down. In any case, India is as yet a minor player
in world trade, contributing less than one percent of world exports.
(China's share is about 6 percent.)

What about the hordes of Indian software engineers, call-center
operators, and back-room programmers supposedly hollowing out
white-collar jobs in rich countries? The total number of workers
in all possible forms of IT-related jobs in India comes to less
than a million workers – one-quarter of one percent of the Indian
labor force. For all its Nobel Prizes and brilliant scholars and
professionals, India is the largest single-country contributor to
the pool of illiterate people in the world. Lifting them out of
poverty and dead-end menial jobs will remain a Herculean task for
decades to come. Even in China, now considered the manufacturing
workshop of the world (though China's share in the worldwide

manufacturing value-added is below 9 percent, less than half that
of Japan or the United States), less than one-fifth of its labor force
is employed in manufacturing, mining, and construction combined.

In fact, China has lost tens of millions of manufacturing jobs since
the mid-1990s. Nearly half of the country's labor force remains
in agriculture (about 60 percent in India). As per acre productivity
growth has stagnated, reabsorbing the hundreds of millions of peasants
will remain a challenge in the foreseeable future for both countries.
Domestic private enterprise in China, while active and growing,
is relatively weak, and Chinese banks are burdened with "bad" loans.
By most aggregative measures, capital is used much less efficiently
in China than in India, even though in terms of physical infrastructure
and progress in education and health, China is better poised for
further economic growth. Commercial regulatory structures in both
countries are still slow and heavy-handed. According to the World
Bank, to start a business requires in India 71 days, in China 48
days (compared to 6 days in Singapore); enforcing debt contracts
requires 425 days in India, 241 days in China (69 days in Singapore).

China's authoritarian system of government will likely be a major
economic liability in the long run, regardless of its immediate
implications for short-run policy decisions. In the economic reform
process, the Chinese leadership has often made bold decisions and
implemented them relatively quickly and decisively, whereas in India,
reform has been halting and hesitant. This is usually attributed
to the inevitably slow processes of democracy in India. And though
this may be the case, other factors are involved. For example,
the major disruptions and hardships of restructuring in the Chinese
economy were rendered somewhat tolerable by a minimum rural
safety net – made possible to a large extent by land reforms in
1978. In most parts of India, no similar rural safety net exists
for the poor; and the more severe educational inequality in India
makes the absorption of shocks in the industrial labor market more
difficult. So the resistance to the competitive process of market
reform is that much stiffer.

But inequalities (particularly rural-urban) have been increasing
in China, and those left behind are getting restive. With massive
layoffs in the rust-belt provinces, arbitrary local levies on
farmers, pervasive official corruption, and toxic industrial dumping,
many in the countryside are highly agitated. Chinese police records
indicate a sevenfold increase in the number of incidents of
social unrest in the last decade.

China is far behind India in the ability to politically manage
conflicts, and this may prove to be China's Achilles' Heel. Over
the last fifty years, India's extremely heterogeneous society has
been riddled with various kinds of conflicts, but the system has
by and large managed these conflicts and kept them within moderate
bounds. For many centuries, the homogenizing tradition of Chinese
high culture, language, and bureaucracy has not given much scope
to pluralism and diversity, and a centralizing, authoritarian
Communist Party has carried on with this tradition. There is a
certain pre-occupation with order and stability in China (not just
in the Party), a tendency to over-react to difficult situations,
and a quickness to brand dissenting movements and local autonomy
efforts as seditious, and it is in this context that one sees
dark clouds on the horizon for China's polity and therefore the economy.

We should not lose our sense of proportion in thinking about the
rise of China and India. While adjusting its economies to the
new reality and utilizing the new opportunities, the West should
not overlook the enormity of the economic gap that exists between
it and those two countries (particularly India). There are many
severe pitfalls and roadblocks which they have to overcome in the
near future, before they can become significant players in the
international economic scene on a sustained basis.

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