Despite impressive growth, the rising Asian giants have feet of clay

http://yaleglobal.yale.edu/display.article?id=6407



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.