Date of publication: October 25, 2005
Source: YaleGlobal
Despite impressive growth, the rising Asian giants have feet of clay
http://yaleglobal.yale.edu/display.article?id=6407 [1]
By Pranab Bardhan
BERKELEY: 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.
Pranab Bardhan is Professor of Economics at the University of
California, Berkeley, and co-chair of the MacArthur Foundation-
funded Network on the Effects of Inequality on Economic Performance.
He is Chief Editor of the Journal of Development Economics.