I’d like to make a few observations about China and India, both of which are viewed with awe by much of the world, particularly following their near-immunity to the 2008/09 financial crisis, when both countries’ soaring growth continued, in marked contrast to the rest of the world which went into long, drawn-out recessions. What policy lessons one draws from these countries’ experiences, around the crisis and longer term, are critical to the success of other countries’ development. Though China and India are both relatively low income countries, China now has a per capita income that is more than twice as large as India’s, following a decade of double-digit economic growth, while India itself is doubling every decade. So while their incomes and productivity levels lag considerably behind the most advanced economies, they are advancing rapidly and now contribute nearly a third of global growth.
Some observers have taken China’s development experience as evidence that a state-dominated growth model can be effective and even should be emulated in more advanced countries (World Bank Growth Commission, 2009). This viewpoint has been dubbed by some as the Beijing Consensus (Yao, 2010), which could serve as a counterpoint to the often-parodied Washington Consensus of rapid market liberalisation. Yet this characterisation of China’s `other way’ represents a deep misconception about the factors which drove growth in China following its post-1978 reforms. In fact, the gradual emergence of a private sector, in its various guises, was the overwhelming driver of reform, and this was enabled by a decentralisation of governance, and a slow withdrawal of the state (Dougherty et al., 2007; Huang, 2008). At the same time, this process has been enabled by a rise in education quality and human capital accumulation that has strongly supported growth.
Consequent with China’s development experience is India’s more messy development process, where changes in policies are debated at length, and scandals are the subject of discussion for years. This viewpoint is often characterised — implicitly — as a kind of Delhi Discord, the product of extensive debate and slow deliberation in a federal country with a lively democracy. What is under-appreciated here is that the long debate and slow deliberation are the result of basic rule of law and strong institutions that are relatively responsive to public opinion and monitored by a diligent (if activist) and independent Supreme Court. Such institutions have enabled the private sector to flourish in domains where regulatory barriers are no longer binding, particularly as the License Raj has been rolled back since the 1980s. However, regulatory restraints and entry barriers still exist in a number of domains — notably labour regulation — which stunt the scaling up of manufacturing (Dougherty, 2009). In addition, a legacy of weak educational provision has been less than supportive of growth.
What lessons can we take from these contrasting development experiences? The risk of a blow-up in the Chinese case cannot be eliminated. Given weak governance institutions, political transitions such as the one taking place at present are highly unstable, and have even spilled over to complicate economic policymaking. For instance, they have made sensible monetary and exchange rate policy almost impossible. Moreover, personal whim still plays a pivotal role, at central and local levels, with additional stress from the lack of effective vents for political expression. A major scandal or domestic economic crisis could easily trigger a major social meltdown.
In contrast, India’s more institutionalised economic policy making environment provides outlets for crisis-management that Chinese policy makers can only envy. While India’s more deliberatory system may have held back or slowed certain reforms, it has provided a more balanced foundation for growth, which the country is only now beginning to enjoy. Even with recent corruption scandals — large as they may seem — India enjoys a system of de jure and de facto anti-corruption institutions that are more effective than would be expected given its current stage of development.
Sean Dougherty
Senior Economist, Head of Latin America Member Unit, OECD Economics Department
© Sean Dougherty 2012. The author is an official at the OECD. The above remarks are purely personal.