Rule and reform: China vs India

In November I took part in a conference at Harvard University, comparing governance and economic reform in the “giants”, China and India. Their size, growth rates and long-run potential beg for comparisons, despite the differences in the two countries’ political systems and economic structures. The big question, one which loomed over the conference, somewhat unspoken, is whether the giants will realise their potential. In China’s case, loss of reputation in manufacturing due to quality issues, environmental damage, and risks of political instability can all be seen as threats to growth. India’s negatives seem to arise from political gridlock, and the inability to overcome basic constraints in infrastructure and institutions.To look clearly into the future, one has to have a good sense of how each country got where it is. What has been the political logic of the process of economic reform in each country? The final two papers in the conference provided an insightful comparison. Mary Gallagher of the University of Michigan told the story of China. My understanding of what she said fits well with a standard story of reform. The Chinese government, centralised through the Communist Party apparatus, skilfully managed the process of change. Reforms were sequenced to insulate potential losers until late in the game, until the winners from reform could build influence. In some cases, potential losers were converted to eventual winners, as growth created fruits that could be spread around. Political will and foresight played an important role in shaping this successful transition. Of course, not everything has been perfect. Letting go of controls has been easier than restructuring. Inequality has widened dramatically, and some groups have been marginalised: there is a growing urban underclass.

The China story, in this telling, involves a traditional analytical framework of competing interests being managed within a set of political and social institutions, with the combination of the two leading to positive change. Yet, underlying the interplay of interests and institutions is the powerful driver of ideas. The shift in the attitude of the Chinese leadership toward wealth accumulation is well known, and almost taken for granted. What struck me listening to the conference papers was that the role of ideas may be the key to understanding the differences in performance between India and China. This represents a different perspective for an economist: before listening to Devesh Kapur’s paper on the political economy of reform in India, I would have argued that India lags China because of its institutions and its different interest group structure: democracy versus authoritarianism, fragmentation versus relative homogeneity. Kapur, director of the Center for the Advanced Study of India at the University of Pennsylvania, added ideas explicitly to the usual mix of interests and institutions, suggesting a new way of thinking about the difference between Chinese and Indian reforms.

My reading of the role of ideas (not necessarily completely in line with Kapur’s) is that China saw a much sharper shift in the conception of what forces drive material progress. China’s experience with central control of all facets of society and economy, the sharp discontinuities it had already undergone, and the ability of the Communist Party to reach down to the local level, meant that the country’s ideational shift was comprehensive and far-reaching. In India, on the other hand, economic reform has not been accompanied by a similar sea change in perceptions. Liberalisation has been seen by many in the bureaucracy or political leadership as a necessary evil, to be implemented grudgingly on an as-needed basis, rather than as a fundamentally new approach to organising the economy. It is important to realise that this is not a difference between elite and masses—it is large segments of the elite that have failed to change their attitudes, despite the failures of the old Indian model of supposedly state-led development. The result is a false equation of concern for distributive justice with a preservation of the ancien régime, or with restoration of some non-existent golden age of governance.

Perhaps it has been inevitable that ideas have been slow to change in India—it has had no Cultural Revolution, no proletarian or peasant revolution, no fundamental shaking up of social relations. This may be the critical difference between the two giants, but through its implications for ideational change or stability rather than through resulting differences in institutions and interest groups. India may need to see a more thorough shift in ideas about governance and markets if economic reform is to succeed in the long run. Kapur points out that new ideas are entering Indian discourse and policymaking, through the Indian Diaspora, and through a rise in entrepreneurship. These attitudinal changes may need to diffuse throughout society if India is to match China in its long run growth.

Certainly, India has the advantages that arise from openness and diversity, if these are allowed to flourish through the inflow as well as domestic blossoming of ideas. On the other hand, China has raced ahead of India in higher education. Its leadership seems to be working aggressively on problems of environmental damage, governance, regional inequality, and other consequences of its headlong rush for growth, without undercutting the strengths of the market. If this view is correct, any perceptions of Chinese fragility may be too pessimistic. India’s rulers may need to learn from how China tackles some of its current problems. But the biggest lesson from China may be the power of ideas: India still needs to fight a battle on that front.

Nirvikar Singh is professor of Economics at the University of California, Santa Cruz

66 Responses to "Rule and reform: China vs India"

  1. Anonymous   May 10, 2008 at 4:30 am

    It looks like the hare and the rabbit race…China is ahead in the short run but India’s more steady institutions may be China in the long run.

  2. Guest   May 10, 2008 at 6:54 pm

    How do you the difficulaties of political transition to a more democratic regime in China? Can that transition occur smoothly or not? Would that stall or impair long run growth?

  3. Anonymous   May 10, 2008 at 7:00 pm

    For whatever reason an "authoritarian" economic reform process has been the norm – rather than the exception – in Asis; India is an exception in the sense of having been a democracy at an early stage. India has been so far more succesful than the other "democracy" in the region, Pakistan, that has been a political and – partly – economic failure. China followed the authoritarian (often one-party) model of economic transformation and reform that was followed by Singapore, Taiwan, Korea, Thailand, Hong Kong, Malaysia and many other East Asian countries. All these countries achieved a more democratic political regime only after having implemented economic reform and having achieved a middle income stage of economic success. And some remain authoritarian in some dimension, say Singapore. So China is the rule rather than the exception.

  4. Guest   May 10, 2008 at 10:57 pm

    Prof Singh, this is an excellent discussion of the political and institutional constraints to long run growth; its application to the comparison between China and India is most fascinating. Welcome to our new RGE Asia EconoMonitor; it was an honor that your contribution was the very firs one in this forum. Nouriel

  5. Roland   May 13, 2008 at 12:13 am

    It looks like China has experienced what Gerschenkron called "clearing the decks," while India has not. Mao’s Cultural Revolution had the unintended result of facilitating capitalist modernization in China.

  6. Guest   May 27, 2008 at 10:31 am

    The point I made in my post, of the importance of ideas, can also be inferred from Alan Greenspan’s separate treatments of China and India in different chapters of his book, The Age of Turbulence. I don’t necessarily subscribe to all of his world view, but his comments on attitudes among India’s ruling elite make interesting reading.Nirvikar Singh