China and India: Giants unchained? Not so fast

Pranab Bardhan – Yale Global

Copyright The International Herald Tribune and Yale Global
THURSDAY, NOVEMBER 3, 2005
BERKELEY, California The media have been all agog over the rise of China and India in the international economy. But while there is no doubt about the great potential of these two economies, severe structural and institutional problems will hobble them for years to come.
Both China and India are still desperately poor. Of the total of 2.3 billion people in these two countries, nearly 1.5 billion earn less than $2 a day, according to World Bank calculations.
Of course, the lifting of hundreds of millions of people above the poverty line in China is a historic achievement. 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 – and before the big strides in foreign trade and investment in the 1990s.
Assertions about Indian poverty reduction through trade liberalization are even shakier. In the 1990’s, 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? The total number of workers in all forms of IT-related jobs in India comes to less than a million workers – one-quarter of one percent of the Indian labor force. India is the largest single-country contributor to the pool of illiterate people in the world.
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 the 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).
Domestic private enterprise in China, while active and growing, is relatively weak, and Chinese banks are burdened with bad loans. Commercial regulatory structures in both China and India are still slow and heavy-handed. According to the World Bank, to start a business requires 71 days in India, and 48 days in China (compared to 6 days in Singapore).
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.
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 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’s authoritarian system of government will likely be a major economic liability in the long run. China is far behind India in the ability to politically manage conflicts. Over the last 50 years, India’s heterogeneous society has been riddled with conflicts, but the system has by and large managed these.
In China, there is a certain pre-occupation with order and stability (and 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.
We should not lose our sense of proportion in thinking about the rise of China and India. There are many severe pitfalls and roadblocks which India and China have to overcome 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, chief editor of the Journal of Development Economics. Reprinted with permission from YaleGlobal Online, (http://yaleglobal.yale.edu).)


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