Most Americans will no doubt remember the television commercials for a certain variety of “lite” beer that staged an argument between the advocates of “tastes great” and those of “less filling.” The “argument” was absurd, of course, but it was not meant to be taken seriously. Unfortunately, the same kind of argument now characterizes the debate about whether China or India has the brighter future as a great power. The debate has become ideological in nature, pitting the potential of an “authoritarian” state against that of a “democratic” one.
China may be ahead now, democracy partisans contend, but it is a one-party, authoritarian state with scant signs of an independent civil society. Political dysfunction is ultimately bound to roil China’s marketplace and lead to economic decline and decay. India, meanwhile, is a thriving democracy—an English-speaking one, too—that in due course will pull ahead of China and, with its very large population, maybe even the whole world.
Those who think China will come out ahead usually argue that it will inevitably become more democratic as a growing middle class pushes its political envelope. The belief that market-based social change drives liberalizing political adaptation is almost universally held by Western scholars. China partisans sometimes add that at China’s present stage of economic development a heavy government role in industrial, fiscal and trade policy is not necessarily a bad thing. Postwar Japan did it, and it became both economically mighty and an increasingly liberal democracy. (The same has been argued for South Korea, Taiwan, post-World War I Turkey and Pinochet’s Chile.)
Put a little differently, the present debate is one that pits democratic fundamentalists against democratic gradualists. It proceeds deductively from general principles and theories of political economy to predicted outcomes. There is nothing inherently wrong with theory, of course, but theory alone is never enough to reach genuine understanding, particularly in a case that involves Westerners trying to make sense of two very different non-Western societies.
This particular deductive democratic-authoritarian debate vastly oversimplifies the complex relationship between political change and economic growth, and obscures the importance of cultural traditions and history in shaping this relationship.
Once placed in real cultural contexts, democracy and autocracy are not clear opposites or policy alternatives. History and culture are far too varied to be compressed into a democracy-versus-autocracy paradigm, and attempting to compare China and India on this basis quickly sinks into logical incoherence. In its present form, this is a debate everyone is bound to lose.
What a Comparison Requires
How economic modernization happens is a subject of great interest and uncertainty. We still have much to learn about the relative significance and interplay of factors like geography, natural resources, culture, social structure, institutions and leadership. The best way to learn, however, is to proceed inductively—looking at reality for what it is, and accepting that paradox and ambiguity are more likely outcomes than absolute “truth.”
A serious China vs. India comparison also needs a meaningful focus. A good place to start is with a key test of any contemporary political system: its capacity to eliminate absolute poverty and, closely related, to manage corruption. The relationship between widespread abject poverty and a state’s potential for great power status is, of course, not a simple or static one, but at a minimum we can agree that it is hard to see how any country with persistent, widespread and abject poverty can be considered a superpower in today’s globalizing world. This criterion happens to be well suited for shedding light on the broader canvas of our comparison.
What are the basic facts? China is continuing its breakneck pace of economic growth. It has become America’s second-largest trading partner (after Canada), and the world’s fourth biggest economy measured in terms of gross national product. Economic growth averaged 9.8 percent annually the past 28 years, and more than 10 percent during the 2003–07 period. There appears to be no end to China’s economic growth potential. India’s economy, meanwhile, grew 6 percent annually in the 1990s, and after 2000, economic growth gradually increased to 7, 8 and 9 percent in the last two years. Exports, high-end manufacturing and booming IT software and back-office services have been growing even faster, leading an increasing number of Asia watchers—in Asia as well as in the West—to predict that India will one day surpass China.
One might surmise from this basic data that both India and China are rapidly solving their poverty problems, more or less in proportion to the scale and pace of their growth. But this is not so: China is overcoming its poverty problem, while India is not.
The reason is elusive, particularly to those who have searched for it in the wrong ways. For example, “development” economists these days favor cross-country statistical analysis of China and India as a way of ranking relative success or failure in governance. But much of this analysis focuses on indicators of good and bad traits at such levels of generalization that any one of several factors can radically shift results: errors in data acquisition, accuracy of assumptions, adequacy of sample size and distribution, and cultural and linguistic factors that affect the validity of responses to survey questions.
The most ambitious attempt to judge quality of governance is the World Bank’s Governance Indicators project. This study involves 212 countries and territories and examines 310 variables derived from 33 sources that include international and non-governmental organizations, universities, commercial risk-rating agencies and surveys of firms and individuals. Despite this wide array of sources, the Bank acknowledges its considerable statistical effort remains “a rather blunt instrument for specific policy advice at the country level” because it cannot clearly explain how specific dimensions of governance being measured affect the overall quality of governance in a specific country. One problem is that the methodology is limited to applying numerical values to formal rules, as well as to the institutional environment in which rules are applied. However, an organism—in this case, society—is not simply the sum of its parts. Concern about the veracity of such data can only be heightened by the World Bank’s December 2007 release of a long-awaited revision to its report on world GDP based on purchasing power parity, which reported that the economies of China and India are actually 40 and 36 percent smaller than previously thought.
It is partly because quantitative comparisons cannot get us very far that many observers quickly resort to qualitative ones. It is still popular, for example, to describe China by analogy to another country rather than through its own experience, most often by labeling China as “Leninist” to reduce its experience to a lesser-included case of Soviet Communism. Equally problematic is the widespread view that China and India’s integration into the global marketplace will make their political economies more Western—“free markets promote free societies.” These two approaches seem at first glance to be quite different, but they are not: Both try to understand China and India in terms of experiences that are neither Chinese nor Indian.
The only way to actually understand China, India or any other complex society is through its own history and culture. This requires that we shed our own cultural preconceptions and actually know something about the culture and history of the societies we care to compare. Gurcharan Das, former CEO at Procter & Gamble India and author of India Unbound (2001), is thus correct to observe that making comparisons between countries like India and China is fraught with “easy abstractions and uneasy facts.” Case in point: Although China and India both borrowed socialism from the West, they developed distinct socialist models that divide them more than bring them together.
No country can match the far-reaching and disruptive changes China endured in the 20th century. From the end of the Qing empire in 1911, through frail republic and destructive warlordism, Japanese invasion, civil war and Communist-directed social upheaval, the Chinese people experienced a kaleidoscopic nightmare. Mao Zedong’s Great Leap Forward resulted in the worst famine in recorded history: Thirty million people died, and millions more were crippled for life. Mao’s Great Proletarian Cultural Revolution then led to a decade of chaos, terror and the total disruption of Chinese society.
When Mao died in 1976, Chinese leaders faced a momentous choice: continue his policies or follow a new path. China chose the latter and succeeded in part by shrewdly grafting new policies onto existing socialist doctrine. Deng Xiaoping quickly abolished China’s agricultural commune system and established the “household responsibility system”, in which farmers became long-term tenants under government contract. Farmers acquired the right to earn income from the crops they sold, which introduced informal markets that allowed farm prices to rise above the old support price. The new Party leadership approached reform in urban areas with greater caution, as the government sought to deal with the complexities of state industrial enterprises.
China had a special advantage as it worked through this transition. Throughout its history, when emperors died or were overthrown, a merit-based civil service founded on Confucian principles almost 2,000 years ago provided enormous stability to government. The Communists had not destroyed this traditional structure; now they modernized and adapted it, channelling local initiative and experimentation into a national reform effort. Deng had no master plan; he was a visionary pragmatist who famously declared, “Black cat, white cat, it doesn’t matter, so long as it catches mice.” But his most important insight was to acknowledge that all elements of Chinese society wanted radical change away from Maoism.
After 15 years of partial reform, in 1992 Deng turned socialism on its head when he told the Chinese people that “to get rich is glorious.” China’s constitution was amended in 1993 to feature a “socialist market economy”, which actually meant the abolition of the planned economy under public ownership. Private ownership was legitimized by constitutional amendment in 1999; the protection of private property in 2007. The “iron rice bowl”, the symbol of the static, state-centric social contract between government and people, was no more.
Since 1993, government from Beijing to the smallest township has been downsized by a third, and the state sector as a whole has shed 45 million jobs. The number of state enterprises has declined by 90 percent through merger, sale and closure to 157 centrally administered “group companies”, which account for only a quarter of Chinese industrial output. According to government statistics, firms registered as private account for another quarter of industrial output, but this figure does not take into account the opaque ownership of many Chinese firms. If we take into account “spontaneous privatization” of state enterprises and private ownership in collective enterprises, private enterprise could amount to roughly three quarters of the industrial economy.
The essence of China’s socialist market economy today is a complicated mix of private, semi-private and state capitalism. It works most of the time because China’s core economy is open and market-driven, and also because it is based on China’s long tradition of inclusiveness, which favors local initiative and experimentation in trying out new ideas prior to adopting them as national policy. China’s situation therefore cannot be usefully analogized to that of other countries. It reflects a distinct cultural and historical tradition.
India, like China, has also followed a distinct path. The Congress Party led India to independence from Great Britain in 1947, and its Nehru-Gandhi dynasty dominated Indian politics for the next four decades. Jawaharlal Nehru’s legacy has shaped modern India more than that of any other individual, even Mohandas Gandhi. Nehru’s socialist vision encompassed economic self-sufficiency and state control of the economy, but in a democratic secular society based on Indian traditions of tolerance and pluralism. Nehru insisted on equal rights for all India’s citizens regardless of caste or religion, a stance that earned him the undying hatred of conservative Hindus who had hoped to establish a Hindu-controlled state.
Ironically, the structure of the Congress Party itself was anything but democratic. Upper caste elites dominated the Party, which gradually lost the support it needed from the lower castes. At the same time, Nehru scorned private business and favored an import-substitution production model. To achieve his goal, he sought the rapid growth of state-owned basic industries, lifetime employment for government workers, incentives for small-scale private industry only, and the establishment of technical universities. He neglected reforms in agriculture and public education, and he invested little in infrastructure outside of what was necessary for state-run economic operations. Meanwhile, the government regulated every aspect of the economy, earning it the sobriquet, the “License Raj.”
Indira Gandhi, who succeeded Nehru as Prime Minister in 1966, continued his policy of state subsidies and public-focused investment, fueling fiscal deficits which were financed by further borrowing. After she was assassinated in 1984, the country rallied around her son Rajiv, but he did little to solve the country’s problems, and in 1991 he was also assassinated. When Narasimha Rao then assumed the Prime Minister’s office, India lacked sufficient foreign exchange to buy oil after prices rose in the wake of the Gulf War. When India’s gold reserves were flown to London as security for a loan, politicians across the spectrum decried “the pawning of Indian gold” as a national humiliation. India was indeed bankrupt, but Rao saw the crisis as an opportunity to unite all parties in support of badly needed reforms. He devalued the Indian rupee by 20 percent and ended the fifty-year dictatorship of “License Raj” over foreign trade.
As India’s fiscal crisis wound down in the mid-1990s, so did the impetus for reform. Vested interests struck back to preserve the status quo. Although Rao’s government sought to liberate market forces to generate wealth, it did so to sustain the welfare state, not to eliminate it. Massive government subsidies remained essentially untouched, and there was no real effort to privatize state enterprises or upgrade infrastructure. Indian authorities considered land reform too fraught with controversy even to seriously discuss the issue, and they permitted foreign investment only in selected areas. As a founding member of the World Trade Organization, India was given a “free ride” on most of the requirements imposed on new members (such as China) to open their economies to foreign investment and competition.
India’s private sector benefited most from the Rao-era reforms. With the removal of socialist controls over investment, licensing, pricing and technology, Indian firms moved to capture global market share. India’s top companies today are the equal of any in the world, possessing the skill and experience to move rapidly into sophisticated global markets. Today, India is out-competing China in IT services and software because of its better trained and qualified English-speaking work force.
Nonetheless, developing a more broadly based competitive manufacturing sector will be difficult as long as the Indian government reserves more than 800 products for its subsidized small-scale domestic industry. That is one reason Indian investment abroad was double the foreign investment flowing to its shores. India’s average import tariff is still almost three times China’s. The higher cost of importing limits the ability of Indian firms to attract capital and to compete with Chinese companies. So do India’s labor laws. Firms with more than a hundred employees cannot fire an employee without government approval, which is virtually impossible to get. Many Indian enterprises therefore have little choice but to make capital-intensive investments in a labor-rich environment, or to outsource labor to firms in the poorly regulated informal economy.
Worse yet, India has failed to deal effectively with widespread poverty. Its quasi-market economy cannot produce a bridge between India’s high-level achievements and the mass of its poor population. Prime Minister Manmohan Singh, who was once Rao’s Finance Minister, believes the best cure for poverty is growth—the old Western idea known as “trickle down.” “Trickle down” can work when labor markets are flexible and human capital can develop freely, with access to quality education sustained by social trust and an effective institutional set-up. It does not work, however, in countries with institutionalized corruption and high barriers to social mobility, especially grossly unequal access to education, and it never will.
Subsidies to critical political constituencies and poor farmers will not solve India’s poverty problem either. Although they are enshrined in India’s constitution, making them virtually reform-proof under India’s present government-by-coalition, few of India’s many subsidy programs benefit those most in need. A comprehensive study of anti-poverty programs in 2005 revealed that more than 73 percent of allocated funds are misappropriated, misused or pocketed by local bureaucrats and politicians. The funds the poor do receive only reinforce their disadvantages. For example, every Indian family is guaranteed by law a hundred days annually of labor at the minimum daily wage ($1.75), usually in jobs no one else wants. Such jobs almost by definition cannot provide the skills India’s poor need to rise in the world. Nor do the poor have access to education, which explains why India’s adult literacy rate is only 57 percent (compared to 84 percent in China).
Perhaps the greatest economic disparity between China and India is inequality between the sexes. The percentage of women in China’s labor force is three times that of India’s, and the disparity is six times greater in urban areas. In 1980, India and China were statistically equal in terms of per capita income; now China’s per capita income is two-and-a-half times that of India. Barriers to women entering India’s workforce explain a great deal of the variance.
The complexity of comparing the sources and persistence of poverty in China and India is mirrored by the difficulty of comparing the nature of corruption. Westerners tend to see corruption solely as an individual ethical problem. But its roots in India and China are broadly social and systemic. Inadequate government salaries, uncertain local revenues, ill-defined property rights and a lack of accountability provide a breeding ground for rent-seeking behavior by local officials. Bribes and kick-backs have become an implicit, if not explicit, part of the budgetary cycle. When wide income differentials and deep-seated poverty exist, greater economic openness creates a host of new opportunities for the powerful to exploit the poor. Conventional wisdom has it that democracies, with their characteristic respect for the rule of law, are far better equipped to deal with exploitation than autocracies. By this logic, India should be able to deal far more effectively with corruption than China. But the reality is not so simple.
Each level in China’s hierarchical government is responsible for regulating its own behavior, and each level employs severe penalties to regulate the rest of society. But it doesn’t work: In 2005, central government prosecutors investigated 41,000 corruption cases and filed charges in 75 percent of them. Apart from some high-profile convictions, there is scant evidence this effort has been successful. Judges are hired, promoted and fired by the same officials who may be under investigation. Without real accountability, economic growth and rising land values provide a host of new opportunities for the powerful to enrich themselves at the expense of the citizens they are supposed to serve.
India has an independent judiciary, but low salaries and virtually guaranteed tenure provide Indian judges with huge incentives to render judgments in exchange for a fee. Many of them do, their opportunity enhanced by an incredible court backlog—28.7 million cases in 2007—that would take 300 years to clear at the current rate of judicial review, even if no new cases were added to the docket in the meantime. Moreover, corruption in India is institutionalized. It is seen as an entitlement that comes with a government job and is practiced far more openly than in China. The magnitude of the problem is evident: In the late 1990s, for example, the power sector had annual financial losses of more than $5 billion, of which $4 billion was money literally stolen from the system. With little left for investment or maintenance, it is no wonder that India ranks among the worst nations in providing power to its citizens.
Conventional deductive wisdom is thus left with a dilemma: Which is worse, a dysfunctional legal system (India), or one controlled by an essentially unaccountable Communist Party (China)? As with most aspects of any serious comparison between China and India, there is no simple answer.
It should by now be clear that indigenous conditions and cultural particularities, not abstract nouns, best explain economic realities. China is not a political democracy, but in some ways it is a more egalitarian society with a freer market than India; India is a political democracy, but with a society still largely segregated by caste, and with a more constrained market than that of China. As democratic fundamentalists see the world, this cannot be; but it is. As democratic gradualists see the world, this has to change; but actually, no, it doesn’t (although it might).
So how do things really stand? What do the facts tell us that our theories might otherwise obscure? Above all, they tell us that China has significant advantages over India. Its large, open, market-driven economy attracts the world’s highest levels of foreign direct investment. China has the highest savings rate in the world, too, almost twice India’s, and most savings are re-invested in productive activities.
To be sure, China suffers from liabilities that India does not, or at least not to the same degree. While China has created the physical infrastructure to enable continued rapid economic growth, it still lacks the critical regulatory infrastructure to support such growth. Headlines about Chinese toys with lead-based paint, poisoned pet food, pharmaceuticals and seafood, rising death rates from air and water pollution—these are all warning signs that continued high growth is ultimately unsustainable if the Chinese government cannot protect its perishable human and environmental capital. China also faces a deepening crisis of accountability, as local governments seize farmland for development, impose arbitrary taxes, and do little about pollution. Violent protests are on the rise (from 74,000 in 2004 to 87,000 in 2005). Because the legal system is neither independent nor effective, individuals are left without redress against a government that is accountable only to itself. In imperial China, individuals could petition the emperor directly as a last resort. They still do. In 2005, the government received an astonishing thirty million petitions from Chinese citizens seeking a redress of their grievances.
Meanwhile, Indian democracy remains in a state of constant flux, because while it has eliminated caste distinctions in public places, the caste system still exists. Yet Indian democracy works anyway because of the country’s long tradition of toleration for diversity and Nehru’s insistence that the constitution mandate equal rights for all Indians—without which the British could never have successfully tutored Indians in the theories of John Locke. The result is that Indian culture has achieved what Western Lockeans would have sworn is impossible: It has institutionalized political pluralism and toleration in a society in which it is self-evident that all men, and especially women, are most assuredly not created equal.
How does this work? V.S. Naipaul has characterized Indian society as “a million mutinies now” in describing the perpetual conflict and simmering violence of India’s crowded cities. Yet he also describes areas like a neighborhood in Mumbai in which the dwellings of Dalits (formerly known as Untouchables) adjoin those of Muslims. Both groups feel alienated by the majority, and so they support each other. India is thus a land of countless shifting alliances.
Indeed, the Indian government actively enables diversity to flourish. India’s constitution guarantees both the individual’s right to equality before the law and the right of religious and linguistic groups to retain their own civil laws governing marriages, divorces, births, deaths and inheritances. The government also promotes diversity by reducing economic differences among castes through the world’s largest affirmative action program. In the states of Rajasthan and Tamil Nandu, two-thirds of state government jobs are reserved for lower castes.
Nevertheless, Indian democracy is constantly under threat of violence driven by religious orthodoxy. And it has recently been plagued by political weakness at the center and growing regional assertiveness and autonomy. Since 1996, six different minority governments have governed India by coalition because India’s two national parties, Congress and Bharatiya Janata (Hindu nationalist), have been losing votes to caste-based and regionally oriented political parties. In the 2004 election, Congress had to rely on left-wing parties dominated by the Communist Party of India (Marxist), to form a majority in parliament. This Left Front, supported by powerful interest groups, opposes any reforms affecting subsidies and job guarantees. (Note the irony: In China, the Communist government is the engine of economic reform, while India’s four Communist parties are a principal obstacle to it.)
Weakness at the center has energized regional politics. But greater decentralization has not engendered more flexible or liberal policies, largely because caste considerations are even more definitive at the regional level than at the national one. The result is that novel coalitions of Brahmins, Dalits and others, while testimony to the vitality of Indian democracy, still produce little in the way of genuine reform for India’s poorest citizens.
India’s political and economic regionalization, in turn, will likely slow the maturation of any national consensus on reform. So will a broad tolerance for government ineptitude. Astute India observers have noted that, in traditional Hindu belief, intentions matter rather than achievements. This helps explain the inertia of India’s government, which endlessly debates the finer points of good government without taking real action. It also helps explain why getting a government job is seen by so many Indians as an end in itself—how one does the job is not so important. And if actions do not matter, then history does not matter either. Why keep a record of something unimportant? It is significant that, in stark contrast to China, India has no ancient written history; much of what is known comes from the writings of Chinese and Muslim visitors.
India’s socialist democratic economy and China’s socialist market economy clearly demonstrate that there is no simple or necessary causal connection between economic freedom and democracy. Socialism fits well with China’s and India’s traditions of collective responsibility and individual subordination to the collective. Conversely, market capitalism is an uneasy fit, but a modern economic necessity. Each country is struggling in its own way to adapt it to its culture. China and India are hardly alone in this: Japan also continues to struggle toward a genuine market economy 140 years after the Meiji emperor launched the “Westernization” of the country.
The problem all non-Western societies have with forms of political economy minted in the West is narrowing the conceptual divide between the development models advocated by socialism and market capitalism. In theory, socialism is about the state leveling opportunities, while capitalism is about winners and losers as determined by the market. In practice, however, every government, no matter how liberal (in the proper sense of the term), intervenes in markets to protect or balance vested interests, and every government, no matter how statist, allows whole areas of economic exchange to go unregulated. Perfect competition cannot exist. Nor can a complete absence of competition exist. What determines the specific mix in any concrete historical situation, including present non-Western ones? History, culture and luck, as always.
Where does this leave India and China? Those who see India coming out ahead point to India’s rapidly increasing growth rate and note that this was achieved without China’s advantages of modern infrastructure, substantial foreign investment or a better educated population. But India cannot sustain such a high growth rate. It already faces skill shortages, and it cannot depend on the service sector to drive the economy. India’s infrastructure, already under enormous stress, cannot support continued high growth indefinitely. Successful Indian businesses like the Tata Group attribute their success to their ability to innovate around such obstacles as crumbling bridges and roads, lack of power and water, and the red tape of “License Raj.” But only the rich and powerful can find ways around or through these problems.
China’s socialist market philosophy works because the Chinese have a very open economy, and they don’t tinker with the price mechanism (except to support grain prices and regulate price increases in essential public goods and services). This is the key to the market’s success. But China’s lack of regulation may cause the human and environmental cost of rapid growth to outweigh the benefits.
The essential policy irony, then, seems to be this: If China dramatically liberalizes its politics, it may prove even less able to control the negative consequences of unregulated fast growth. If India dramatically liberalizes its economy, the country may prove ungovernable at the national level as state governments sieze the initiative In a world of ambiguity, the real test of China and India’s ability to become economic superpowers is whether they can eliminate absolute poverty. Indian Nobel Laureate Amartya Sen understood what abject poverty was all about when he defined development as being about expanding real freedom and meaningful choices. Indians who live desperate lives at less than $1 a day—about two-thirds of India’s population compared to about one-fourth of China’s—with little or no access to education, have no meaningful choices. Without them, other freedoms mean little.