Author: Christopher Lingle
Publication: The Wall Street Journal
Date: January 15, 2003
Pundits and policy-wallahs in New
Delhi engage in a great deal of teeth-gnashing over the fact that while
the economies of India and China were roughly the same size in the 1950s
and 1960s, China's market reforms since the 1970s have pushed it well out
in front. This "India-China gap" reflects Beijing's greater ability to
expand exports and attract direct foreign investments. Measured in terms
of purchasing-power parity, China now ranks as the world's second-largest
economy. India trails at No. 4.
Despite the record of the recent
past, there is reason to believe that the economic gap between these rivals
will diminish. On the one hand, India may advance in relative terms without
undertaking serious reforms due to China's impending failures. China's
storied growth is likely to falter under the threat of a massive default
of the banking system or from political pressures brought about by the
restructuring of state enterprises. On the other hand, Indian leaders can
move their own economy forward by undertaking meaningful and aggressive
reform. Even though recent governments have dubious track records on economic
reform, there is hope that a perception of India's numerous advantages
will inspire more timely action. India scores well in the area of macroeconomic
conditions, where restrained monetary expansion has brought inflation to
manageable levels. Meanwhile, China's battle with price instability has
seen swings from high inflation in the mid-1990s to a troubling bout of
deflation.
An area that offers great promise
for economic growth in India involves labour-market reforms that would
allow companies to use contract labour. And those with fewer than 300 employees
may be able to hire and fire without consulting government departments
-- though the original plan for companies with up to 1,000 workers would
be better.
Although New Delhi has not kept
to its schedule for privatizing state-owned assets, it is beginning to
show progress. For example, along with other telecoms reform, the private
Tata group bought a controlling interest in telecoms service provider VSNL.
A quasi-divestment involved sale of 33.6% of IBP, a petrol retailer with
an extensive network of pumping stations, to Indian Oil Corp., another
public-sector company. After a three-month delay because of objections
from the oil and defence ministries, the planned sale of Hindustan Petroleum
and Bharat Petroleum, the nation's second-and third-biggest oil refiners,
is back on track.
While India suffers from a crumbling
physical infrastructure and an inflexible labour regime, it has numerous
(potential and unexploited) advantages over its constant rival. Plans are
well under way to improve upon an established transportation network, including
development of a nationwide motorway system to connect all of India's commercial
centres. By contrast, China must develop much of its physical infrastructure
from scratch. Although impressive gains have been made in some urban areas,
Beijing has not been able to oversee the development of a national network
that connects its far-flung commercial markets.
Perhaps China's biggest disadvantage
relative to India is in terms of its "institutional infrastructure." 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. 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 in having a democracy with fractious and parlous partisanship.
Delays in action may come as dirty political laundry is aired in the lively
and free media. 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 problems
invite reactions that include widespread economic failure or 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. But unless the political
aspirations of this fire-breathing beast are fulfilled, it threatens to
consume the communist 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. The good
news for Indians is that these ills can be more readily fixed than Chinas
democratic and judicial deficits.
(The writer is global strategist
for eConoLytics.com and author of The Rise and Decline of the Asian Century.)
