My favourite methpahor for comparing India and China is the comparison between IITK and IIML. Things at IIML, at any level, are more controlled, more planned and hence the tasks get done more smoothly in comparison to IITK. But if I have to choose between IITK and IIML I would any day choose to live at IITK. Because the kind of outlet IITK gives to individual’s creativity, talent and approach is not that easy to get at IIML. It is similar between China and India. Chinese government has nurtured and guided the economy. In India things have happened. And the following articles explain the ensuing differences:
- Can India Overtake China? (Thanks to Ayan for providing the link.)
- India’s Entrepreneurial Advantage
- Chinal the best of all possible models
- Sector by Sector
I would like to synthesize it here. Overall it can be argued that India stands superior in terms of Banking Infrastrucure and Capital Markets, Legal & Judiciary system (despite its inefficiencies) & most interestingly in promoting domestic entrepreneurship. China has done well on the front of Hard (Physcial) Infrastructure and in attracting Foreign Direct Investment.
One of the interesting issues is that of Domestic Entrepreneuship in India vs. huge FDI in China. Interesting because as far as I understand, neither of these was completely intentional. It turns out that domestic entrepreneurship is China has been stiffled by Government’s desire to maintain the monopoly of State Owned Enterprises (SOEs). On the other hand to stimulate development in certain sectors, the FDI was welcomed. So, it wasn’t exactly because of FDI that the domestic entrepreneurship did not come up as strongly as in case of India. The two things happened independently. In India, similarly, it wasn’t exactly to promote domestic entrepreneurship that FDI was not embraced as early as by China. It was more of the political feeling of not getting dependent on Foreign Funds. Although in recent years we hear the talk of protecting domestic enterprises (e.g. in case of retail) from FDI, it was certainly not the initial motive. Entrepreneurship prospered despite government I would say. The situation is changing now, but this is how it has happened. Even in China the entrepreneurship situation is changing and more domestic enterprises (non SOEs) are coming up. However, as of now, the net result is that domestic entrepreneurship has not played as important a role in China as in India and similarly FDI has not played as important a role in India as it has done in China.
Future now is in convergence, and which one would be more successful will be determined by whether it is easier to promote domestic entrepreneurship in FDI laden China; or is it easier to attract FDI in India?
Next comes the development of hard infrastructure. No mystery – the planning and control by Chinese Government over a long period of time has contributed to this. Indian politics has often been blinded by the short term of governments, ethnic rivalries, populist agendas and issues like Kashmir. Not to say that these disadvantages are to disappear overnight, but despite these India is making progress. And the best advantage of India is its stable democracy despite all the turbulences in the background. China on the other hand, as I quoted in the last article in this series, is a Geopolitical problem waiting to happen. Politics still suppresses individual’s voice there. One of my “favourite” news item, that I have earlier quoted in this blog, is here – China Tightens Grip on Internet – With New Content, Media Rules. Here again there is a need of the convergence for both of them to be able to make progress. While India needs to catch up with China in terms of infrastructure, China needs to rethink its political system.
China has also lagged in Banking and Capital Market reforms. The capital is still in the hands of bureaucrates, which in turn in also a barrier in the development of Entrepreneurship.
One the one hand, the development fueled by the Government’s Intervention is likely to carry all the sins of inefficiencies and misallocation of resources; on the other hand it is also fair to ask if the “free market way” is the only way of reforms. Several people have put up this question and have argued that since countries like China have not started in the state of a Perfect Market, turning to markets to reform them might not be the best way. To some extent the present day success of China has proved this point of view. However, my contention is this. If perfect markets are pre-requisite of a market-led development, excessive control by government is the pre-requisite of a government-led development. The former was absent and the latter was present – true. But the future will depend on whehter what is present is sustainable also and whether this development under control has nurtured enough talent in the economy and society so that the cotnrols can be smoothly phased out. Probably even more importantly whether the “powers that be” are at all in a mood of giving up a unsustainable system smoothly. The new legislations (mentioned earlier) do not give encouraging signals.
A better insight can be obtained by looking at the development in particular sectors of the economy, which has been outlined in the last of the artcles given in the list I provided at the beginning of this post. I expect to explore that further later.