Indian lessons & non-lessons for China

India today presents a sorry picture of messed-up opportunities and policies. The government may fall because of Marxist resistance to the Indo-US nuclear deal. The government is too timid to pass on the high price of oil and fertilisers to consumers, so the true fiscal deficit has suddenly doubled. Infrastructure is a mess. Inflation has gone through the roof.

China has problems too. Yet it has faster growth, less inflation, and a state that looks effective and purposeful.

Don’t be misled by the comparison, says Prof Yasheng Huang of MIT in a recent article in Foreign Policy magazine. India’s 9% growth for five years has changed world history.

“The emerging Indian miracle should debunk — hopefully permanently — the entirely specious notion that democracy is bad for growth. And the emerging Indian miracle holds substantial implications for China’s political future.

As Chinese political elites mark the 30th anniversary of economic reforms this year, they should reflect on the Indian experience deeply and absorb the real reason behind their own miracle. If India, with its noisy, chaotic, and lumbering political arrangements, can grow, then no other poor country must face a Faustian choice between growth and democracy.

“A deeper look at the two countries shows that they have succeeded and failed at different times for remarkably similar reasons. Their economies performed when their politics turned liberal; their performances faltered when their politics slid backward. Now, as many poor countries grapple with similar political and economic choices, we must understand this dynamic. It is high time to get the China-India story right.”

Indians are so used to 9% growth that it’s no longer news. Yasheng provides a timely reminder that it is a tectonic shift that has changed the history of both India and world economic development.

Most economic successes of the Third World in the last 50 years were in autocracies — Korea, Taiwan, Indonesia, Thailand and Singapore (a quasi-democracy). Asian democracies lagged well behind in the 20th century. The Pinochet dictatorship in Chile produced the most spectacular Latin America outcome. And after 1980, China became the growth superstar.

Yet autocracies also created economic disasters in Africa and Latin America. Careful economic studies in the 1990s showed that, on balance, democracies fared as well or marginally better than autocracies.

Till 2000, the democracy-versus-growth story read as follows. Democracy’s checks and balances thwart sweeping changes by governments. In Indian democracy, dozens of people have a foot on the economic brake, but none on the accelerator. So, sweeping changes made by successful autocracies are not possible in a democracy. But neither are disastrous policies witnessed in Africa.

Democracies will grow neither as fast as successful autocracies nor as slowly as the worst autocracies. They can at best aspire to medium-high growth, exemplified by India’s 5.8-6.2 % in the 1980s and 1990s.

Many Indians hoped for a different end to this story. They longed, wistfully, for 7% growth. Nobody anticipated that India would in one giant leap go from 6% to 9% in 2003-08. This, says Yasheng, has transformed the growth-versus-democracy story. Very true. Yet he exaggerates the lessons to be learned.

He claims that China took off not because it was authoritarian, but because the radical political and economic reforms in rural China in the 1980s sparked unprecedented agricultural growth. Chinese elites claimed to have avoided Soviet-style collapse by not reforming politically. The very opposite is true, says Yasheng.

China survived the 1989 Tiananmen crisis because its villages were happy. In the 1980s, rural China experienced the most radical economic and political reforms that raised incomes and decimated poverty. The industrial drive of the 1990s gave China world fame, but benefited mainly the cities, while rural areas fell behind. Adult illiteracy rose, immunisations fell, and the rural poor suffered high costs of private education and healthcare.

By contrast, says Yasheng, India in the 1990s amended its Constitution to devolve power to panchayats. India learned from China of the 1980s to expand social and rural spending.

“The auxiliary institutions of Indian democracy, so atrophied under Indira Gandhi, have been renewed. World Bank indicators show a notable improvement in key areas of Indian governance during the period of high growth since the mid-1990s.”

Alas, Yasheng is hopelessly wrong on some of these points. Indira Gandhi’s Garbi Hatao phase and Emergency were economic and political disasters. But she abandoned that political path on returning to power in 1980, and initiated economic liberalisation herself.

Devolution to panchayats remains mostly on paper, contributing very little to economic development. Governance may be improving in some ways, but the World Bank’s Doing Business report ranks India only 120th out of 180 countries. Four-fifths of incumbent governments are voted out because of poor governance. Increased social spending is mostly wasted on absentee teachers and health staff. It is plain wrong to claim that these factors have helped India accelerate to 9% growth.

Still, India must have an institutional basis to have achieved so much with such muddled, incomplete economic reform. Nehruvian socialism may have been an economic disaster, but Nehru’s institution-building provided a rock-solid base that withstood his economic errors, and helped India accelerate after economic reform.

Yasheng says that China has rhetorically returned to its 1980s vision of political reform, in the sense of empowering rural areas. “But consolidating these achievements will require a more substantial undoing of the illiberal policies of the 1990s. How India managed to emerge from its own long shadow of illiberalism offers some valuable lessons. In the past, China taught India the importance of social investments and economic opening. It is time for today’s China to take a page from India — and from the China of the 1980s — that political reforms are not antithetical to growth.”

This has a core of truth. Yet, overall, it is an unwarranted exaggeration. India has indeed proved that a messy democracy can grow fast. But it proved the opposite for so long that China has a right not to be too impressed.

 

What do you think?