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Do the Awakening Giants Have Feet of Clay? – Part I

China and India have made impressive strides in recent decades, expanding their economies and middle classes. This two-part series examines and tests the claims made by economist Pranab Bardhan in his book “Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India.” In the book, Bardhan points out that while the two nations have lifted millions out of poverty, both continue to work under structural constraints with much political uncertainty. Anticipation of great global achievements from either nation, he argues, is based largely on myths created by the media and part of academia. The achievements of India and China are significant, but analysts cannot overlook the inequality and other serious hurdles that remain. In searching for formulas to achieve growth or market reform, Bardhan cautions, other countries should avoid the extreme political paths taken by authoritarian China or the rowdy democracy of India. – YaleGlobal

Do the Awakening Giants Have Feet of Clay? – Part I

China and India both face serious hurdles in boosting living standards for people
Pranab Bardhan
YaleGlobal, 19 April 2010
Pollution and poverty: China's growth has to cope with pollution (above) and India's poor need help

BERKELEY: Over the past few years the media have been all agog over the rise of China and India in the international economy – and their remarkable recovery in this current global recession. After decades of relative stagnation, these two countries, containing nearly two-fifths of the world population, have had incomes grow at remarkably high rates since 1985.

In the world trade of manufacturing, China, and in that of services, India, have made big strides, much to the consternation – as yet largely unfounded – of workers and professionals in rich countries. The industrial growth along with acquisition of international companies by China and India attract much of the Western media attention.

But more revealing is what has happened to the lives of people inside these two countries and under what structural constraints. It’s imperative to demolish myths that have accumulated in the media and parts of academia around the economic achievements of China and India and get a better sense of the real challenges faced by them.

In the recent, often breathless, accounts of the economic rise of China and India, a set of simple generalizations have become part of the conventional wisdom. The familiar story runs along these lines:

Many decades of socialist controls and regulations stifled enterprise in both countries and led them to a dead end. Their recent market reforms and global integration have finally unleashed their entrepreneurial energies. Energetic participation in globalized capitalism has brought about high economic growth in both countries, which in turn led to a large decline in their massive poverty. 

In particular, China is now the “manufacturing workshop of the world” and its industrial growth during the past quarter century is hailed as historically unique, even better than the earlier East Asian “miracles.”  India’s economy has been transformed by service-sector-led growth, but overall growth has not been as dramatic as in China. China’s better performance suggests that authoritarianism may be more conducive to development at early stages, as demonstrated earlier in South Korea, Taiwan and Singapore.

Global capitalism, however, has inevitably brought rising inequalities, more in China than in India.  But all is not lost for democracy in China. The prospering middle classes will slowly but surely demand more democratic rights and usher in democratic progress in China, as they have in South Korea and Taiwan.

There are, of course, some elements of truth in this story, but through constant repetition it has acquired a certain authoritativeness that, as closer scrutiny shows, it does not deserve. The story is far too oversimplified.

It’s imperative to demolish myths around the economic achievements of China and India and get a better sense of the real challenges.

First, two relatively small points about industrial growth in China: While China is possibly the largest single manufacturing production center in the world for many goods in terms of volume, it is not so in terms of value-added; the world share of US or EU in this area is still substantially larger.

Similarly, although the industrial growth rate has been phenomenal in China, South Korea and Taiwan grew at a faster pace in value-added terms during the first 25 years of their growth spurt. More important, contrary to popular impression, China’s growth over the last three decades has not been primarily export-driven. While China had major strides in foreign trade and investment during the last 15 years, before – during the period between 1978 and 1993 – the nation had a high average annual growth rate of about 9 percent.

Much of the high growth in the 1980s and the associated dramatic decline in poverty happened largely because of internal factors, not globalization. These internal factors include an institutional change in the organization of agriculture, the sector where poverty was largely concentrated, and an egalitarian distribution of land-cultivation rights.

It is also not completely clear that economic reform is mainly responsible for the recent high growth rate in India.

While expansion of exports of labor-intensive manufactures did lift many people out of poverty in China, the same is not true for India, where exports are still mainly skill- and capital-intensive. It is also not completely clear that economic reform is mainly responsible for the recent high growth rate in India. Reform clearly made the Indian corporate sector more vibrant and competitive, but most of the Indian economy is not in the corporate sector, with 94 percent of the labor force working outside this sector, public or private. Consider the fast-growing service sector, where India’s information-technology-enabled services have made a reputation the world over. But that sector employs less than half of 1 percent of the total Indian labor force.

While globalization generates some destabilizing forces, the rise of inequality is not the highest in the globally more exposed coastal regions of China, but rather in less-integrated interior areas. Contrary to popular impression, the level of economic inequality is actually lower in globally more integrated China than in India. In particular, domestic factors like the much higher inequality in land distribution and education drive greater inequality in India.

For the financial press, China and India have become poster children for market reform and globalization, even though in matters of economic policy toward privatization, property rights, deregulation and lingering bureaucratic rigidities both countries have demonstrably departed from the economic orthodoxy in many ways. If one looks at the figures of the widely-cited Index of Economic Freedom of the Heritage Foundation, the ranks of China and India remain low: out of a total of 157 countries in 2008, China’s ranks 126th and India 115th. Both are relegated to the group described as “mostly unfree.”

Contrary to popular impression, the level of economic inequality is actually lower in globally more integrated China than in India.

Although there is no doubt that the period of socialist control and regulations in both countries inhibited initiative and enterprise, it would be a travesty to deny the positive legacy of that period. It is arguable, for example, that the earlier socialist period in China provided a strong launching pad particularly in terms of a solid base of education and basic health, rural infrastructure, a rural safety net from equitable distribution of land cultivation rights, regional economic decentralization and high female labor participation.

A major part of the legacy of the earlier period in both countries is the cumulative effect of the active role of the state in technological development.

The relationship between democracy and development is quite complex, and authoritarianism is neither necessary nor sufficient for development. In fact, authoritarianism has distorted Chinese development, particularly as powerful political families distort the allocation of state finance and unaccountable local officials in cahoots with local business carry out capitalist excesses, both in land acquisition and toxic pollution.

Democratic governance in India, on the other hand, has been marred by severe accountability failures. Nor can one depend on the prospering middle classes to be sure-footed harbingers of democracy in China. In many cases the Chinese political leadership has succeeded in co-opting the middle classes, including the intelligentsia, professionals and private entrepreneurs, in its firm control of the monopoly of power, legitimized by economic prosperity and nationalist glory. Indian democracy derives its main life force from the energetic participation of the poor masses more than that of the middle classes.

While both China and India have done much better in the last quarter century than they have during the last 200 years in the matter of economic growth, one should not underestimate their structural weaknesses. Many social and political uncertainties cloud the horizons of these two countries for the foreseeable future.
 

Pranab Bardhan is professor of economics at the University of California, Berkeley. His most recent book, "Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India,” was published by Princeton University Press. Click here to read an excerpt.
Rights:Copyright © 2010 Yale Center for the Study of Globalization

Comments on this Article

28 April 2010
http://www.airandshox.com
-htairandshox , airandshox
25 April 2010
Regarding the comment made in this article "Consider the fast-growing service sector, where India’s information-technology-enabled services have made a reputation the world over. But that sector employs less than half of 1 percent of the total Indian labor force.", I wish Mr Bardhan had taken into account ground realities instead of parroting this widely quoted statistics. This 1% are young people who have large disposable income and they generate indirect employment which, anecdotically speaking, is anywhere around 10 times the direct employment level. This fact should be acknowledged
-dm , india
22 April 2010
For anyone enamored with China's current economic performance and who thinks that China is destined to be the illustrious example for the rest of the world, a walk in one of Beijng's seemingly modern neighborhoods would quickly disabuse one of that delusion. First however, you would have to survive the horrific traffic and the rabid-ridden stray dogs.
Likewise for India, a brief ride on Indian Railway will quickly bring you down to reality.
The glowing reports of the Thomas Friedmans in the West reminds me of the typical kindtergarten teacher's report card: Johnny shows great potential but he needs to work harder at it.
Yes, China and India have great potential, but ... .
M. Bakri Musa, Morgan Hill, CA (bakrimusa.com)
-M. Bakri Musa , Morgan Hill, CA
21 April 2010
That India and China both are on the move is crystal clear. Both have different political and economic systems.Comparing one against the other is an UNACADEMIC exercise.
-Anup Sharma , Hanoi Vietnam
20 April 2010
This article portrays the right picture. Reports published last week puts 37% of Indian population below 'official' poverty line. That's more than the % established in 2004.
-Mohd Rizvi , Kentucky, USA