A business professor at MIT Sloan argues in the Financial Times that India is economically underrated. Yasheng Huang sounds a clarion call for China to relax its financial controls:
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Rama vs. dragon? Cake. |
From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment…… in 2003 and 2004, [China] was investing close to 50 per cent of its GDP in domestic plant and equipment - roughly equivalent to India’s entire GDP. That is higher than any other country… China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency…
While India’s stock market has soared in recent years, the opposite has happened in China. In 2001, the Shanghai Stock Market index reached 2,200 points; by 2005, half the wealth wiped out. In April 2005, the Shanghai index stood at 1,135 points… [Link]
Huang argues against using foreign direct investment as a key measure of economic growth:
Brazil was a darling of foreign investors in the 1960s but ultimately let them down. Japan, Korea and Taiwan received little FDI in the 1960s and 1970s but became among the world’s most successful economies…With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies… [Link]
His analysis is that India has a more laissez-faire attitude in both politics and entrepreneurship:
[Infosys] was founded by seven entrepreneurs with few political connections who nevertheless managed, without significant hard assets, to obtain capital from Indian banks and the stock market in the early 1990s. It is unimaginable that a Chinese bank would lend to a Chinese equivalent of an Infosys…China was light years ahead of India in economic liberalisation in the 1980s. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector. [Link]
China’s hidden weakness is the massive and often centrally planned investments, which are often less productive than the Indian investments. In the long run, that’s not going to work without more open competition, creativity and entrepreneurship. India’s hidden strength is that the country is already extremely entrepreneurial - but in the informal sector. An Indian friend mentions that most of the cars we see on the roads, and many computers in the offices, are assembled in small, informal factories, outside the law, to avoid the many regulations and taxes that still curbs the Indian economy. Imagine what the Indians could do if all that energy was legalised. [Link]
It contradicts what I’ve read elsewhere, that it is quicker to start a new business in China than in India. If India’s labor laws are better than China’s, it’s only because we’re comparing socialism lite with socialism 2.0:
The Doing Business database ranks China a modest 91st on the overall ease of doing business, with India worse but not dramatically so at 116th… in China it’s quicker to start a business, get goods from factory floor on board a container ship, and register property. But Indians - perhaps surprisingly - seem to have more flexible labour laws and fewer hassles with licences. [Link]In India, about 670 industries are completely reserved for very small companies, which means that the economy lose the benefits of scale, donŽt get foreign investments and are unable to compete globally. In 2001, the average Indian clothing company had only 50 machines, compared to 500 in the typical Chinese plant. The same problem exists in India’s agriculture, where only farmers and their children are allowed to own land, so outsiders can’t buy farm land and introduce modern and efficient technology. Small might be beautiful, but it also creates poverty. [Link]
Huang reverses the casuality of infrastructure and growth, saying the growth comes before the roads and skyscrapers due to the elimination of agricultural subsidies and structural liberalization in the economy:
China built its infrastructure after - rather than before - many years of economic growth and accumulation of financial resources. The “China miracle” happened not because it had glittering skyscrapers and modern highways but because bold economic liberalisation and institutional reforms - especially agricultural reforms in the early 1980s - created competition and nurtured private entrepreneurship… [Link]On the Indian highways we made 40 kilometers/hour when we were lucky. In China that is called a traffic jam. [Link]
Finally, he’s one of the few to tip his hat to India’s investment in rural education. India spends around 60% of what the U.S. does on public education as a percentage of their respective GDPs.
China… created many world-class facilities, but badly under-invested in education… India, meanwhile, has quietly but persistently improved its educational provisions, especially in the rural areas. For sustainable economic development, the quality and quantity of human capital will matter far more than those of physical capital… [Link]
And yet:
Indian bureaucrats keep their jobs no matter if they spend the resources on physical and social infrastructure or on themselves. This is a serious problem with the schools. Unionised teachers keep their well-paid jobs even if they are bad, abuse the children or don’t even bother to turn up. ThatŽs one of the reasons why India’s illiteracy rate is absurdly high - 40 percent. [Link]
It’s an interesting contrarian view; my Indian friends often return from Shanghai agog at its Bladerunner-like resurgence and pessimistic about the ability of the Indian government to execute. It is essentially a tortoise vs. hare argument, that China’s growth is coming via flashy financing (foreign direct investment, the equivalent of VC financing at a startup) while India’s is coming through organic, sustainable growth (the equivalent of revenues).
Outside of regional politics and oil, ‘India vs. China’ is an artificial horse race handicapped to sell copies of Businessweek. The countries will benefit from each other’s rise as trading partners. They recently agreed to collude on oil deals to avert bidding wars where both lose on price.
But India’s ace in the hole is its democracy vs. China’s repression. There’s no way China will beat India in the long run with its new, even stricter censorship. Centralizing thought dampens innovation. And a democracy gives you a much better shot at political and economic stability in the long run.
China on Sunday imposed more restrictions intended to limit the news and other information available to Internet users, and it sharply restricted the scope of content permitted on Web sites… This restriction on the ability of Web sites to republish articles produced by the huge array of news organizations that do not fall under direct government control seems intended to ensure that the Propaganda Department has time to filter content generated by local publications before it can be widely disseminated on the Internet. [Link]According to official reports, there were 160 major incidents of unrest and violent protests every day in China in 2003. This shows why you can’t create political stability without democracy, free press and rule of law. When the powerful abuse, demand bribes or steal land, people have no way to protest peacefully, and they rarely win if they go to the courts. As long as the legal and political system isn’t opened up, the only possible protest is a riot. [Link]
A financial crisis does not seem unlikely, and how the undemocratic system would deal with such difficulties is another mystery. As long as China’s political and legal system is not as open as the economy, China will remain a risky and unpredictable place. [Link]
Related posts: BusinessHype, India still not in the same league as China, The India-China gap, The myth of Indian liberalization,
