India's Promise - India and China
Monday, May 28, 2007GERSH: For centuries, India and China enjoyed roughly the same standard of living. They share a rich entrepreneurial heritage interrupted first by colonialism and later by socialist central planning. Economist Surjit Bhalla says there is a natural comparison between the only two countries in the world with more than a billion people. The difference now is that China is three times richer than India and growing faster. Bhalla says China embraced free market reforms in the late '80s, but India did not abandon its Stalinist economic model until a decade later.
SURJIT BHALLA, AUTHOR, "SECOND AMONG EQUALS": We were just as bad as them, or just as good as them depending on your point of view, in terms of economic freedom. We didn't have any. We were one of the most controlled economies and indeed, today, and even today we are more controlled than China.
GERSH: Comparing India and China can be a touchy subject. India is proud of its democratic traditions and belief in the rule of law. Even if it slows down development, the poorest slum dweller can still hold up the most massive project by taking the case to court. Indian Commerce Minister Kamal Nath says that is India's strength.
KAMAL NATH, INDIAN COMMERCE MINISTER: Well, China has its own genius, we have our own genius. China's growth is export market driven. Our growth is domestic market driven. So they are two different models. Really, you can't compare them. We are a market economy. We are a democracy. China is not. So, they are two different models altogether and I never make these comparisons. I never say it's India versus China. It's India and China.
GERSH: India's growth is also driven by world-class homegrown entrepreneurs. Its stock market is open and transparent, the banking system stronger than China's and Indian companies are used to the pressure of public shareholders. China's economy is still largely state-controlled, fueled by an undervalued exchange rate.
BHALLA: I believe what China has done unilaterally on its exchange rate is basically the cause of the global imbalances problem and it's stealing growth from other developing countries.
GERSH: Still, there is no denying China has done a much better job on infrastructure. Its highway network is seven times larger than India's, driven by the decisions of a single, centralized government. Political infighting and bureaucracy are legendary in the Indian government; the legal system moves at a snail's pace. Economist Arvind Subramanian says the Indian government is in a race between rot and regeneration and it's not clear which will win.
ARVIND SUBRAMANIAN, SR. FELLOW: In the long run, you cannot have a market economy functioning unless these basic functions that public institutions perform, like protection of property rights, sanctity of contracts. All these have to be maintained for a market economy to flourish.
GERSH: Some analysts argue even India's schools are falling behind China's when it comes to preparing a skilled workforce. Subramanian says top employers like Infosys are forced to pay average wage hikes of 14 percent a year because they can't keep up with demand.
SUBRAMANIAN: On the one hand, we've been growing based on skilled labor. But on the other hand, this pool of skilled labor is not as unlimited in supply as people think it is.
GERSH: Subramanian believes the slow pace of government reform will limit India's growth to around 7 percent a year, which would still make it a major economic power in just a few decades. But Surjit Bhalla believes India's young population will allow the country to grow even faster while China slows down due to international pressure on Beijing to rein in its trade surplus.
BHALLA: Indian growth rate is likely to exceed China's growth rate by 2010 at the latest. So, in other words, looking forward, what China has been through, India is basically China with about a five to 10-year lag.
