India or China?

NEW DELHI – When US President Barack Obama visited India in November and complimented its leaders on the growing success and prowess of their economy, a tacit question returned to center stage: Will China grow faster than India indefinitely, or will India shortly overtake it?

In fact, this contest dates back to 1947, when India gained independence and democracy became the country’s defining feature, while China turned to Communism with the success of Mao Zedong after the Long March. Both countries, the “sleeping giants,” were expected to awaken at some point from their slumber. But, since the growth model in vogue at the time laid principal emphasis on capital accumulation, China was widely held to have the advantage, because it could raise its investment rate higher than India, where democracy limited the extent to which the population could be taxed to increase domestic savings.

As it happened, however, both giants slept on – until the 1980’s in China and the early 1990’s in India – mainly because both countries embraced a counter-productive policy framework that crippled the productivity of their investment efforts.

Reflecting flawed economic arguments, India embraced autarky in trade and rejected inflows of equity investment. It also witnessed economic interventionism on a massive scale, including the proliferation of public-sector enterprises in areas beyond public utilities. In China, the results were similar, as the political embrace of Communism meant going autarkic and giving the state a massive role in the economy.

After progressively dismantling their inefficient policy frameworks in favor of “liberal” reforms, the two giants began to stride forth. The race was finally on. And, once again, China seemed to be the horse to bet on: it grew faster, because it changed its policy framework much faster than democracy permits. But there are good reasons to suspect that China’s authoritarian advantage will not endure.

First, while authoritarianism can accelerate reforms, it can also be a serious handicap. Years ago, when both Mao and Zhou Enlai were alive, Padma Desai, the Columbia University expert on Russia, was asked about China’s future growth prospects. She answered: it depends on whether Mao dies first or Zhao dies first – her point being that in a top-heavy system, growth paths can become unpredictable, and thus subject to volatility.

Moreover, we know from experience elsewhere – and now in China itself – that as growth accelerates, political aspirations are aroused. Will the Chinese authorities respond to them with ever greater repression, as they have with dissidents and Falun Gong, creating discord and disruption, or will they accommodate new popular demands by moving to greater democracy?

Again, China’s authoritarian politics means that it cannot profit from the innovations that depend on software, as that is an instrument through which dissent can flourish and become subversive of total control. As one wit has observed, the PC (personal computer) and the CP (Communist Party) do not go together.

Finally, China’s growth must continue to depend on its exploitation of external markets, which makes it vulnerable in a world that is increasingly making democracy and human rights a central preoccupation. In such a world, continued hassles and hiccups for Chinese exports can be confidently expected.

Economic factors also militate against Chinese prospects. China was clearly able for many years to exploit a “reserve army of the unemployed” à la Karl Marx – to grow rapidly without facing a labor-supply constraint, so that capital accumulation would not run into diminishing returns. But now, given China’s one-child policy and lack of adequate infrastructure (including housing) in rapidly growing areas, labor is getting scarce and wages are rising.

In economic jargon, the supply curve of labor was flat but is now sloping upward, so that rapidly increasing demand for labor resulting from rapid growth is driving up wages. That means that China is beginning to “rejoin the human race” as capital accumulation meets scarcer labor and growth slows.

By contrast, India has a far more abundant supply of labor, as well as a more favorable demographic profile, so that, as India’s investment rate increases, labor will not be a constraint. India will thus become the new China of the past two decades.

Besides, in contrast to China, where economic reforms were quicker and more complete, India still has a way to go: privatization, labor-market reforms, and opening up the retail sector to larger, more efficient operators are all pending – and will give a further boost to India’s growth rate once they are implemented.