Yasheng Huang of MIT and Tarun Khanna of Harvard created quite a stir back in 2003 when they suggested in a widely discussed Foreign Policy article that India’s chaotic development model may actually outstrip China’s in the long run. Yasheng Huang is back with an op-ed in the Financial Times in which he points to what China can learn from India’s quiet rise. Here are some of Huang’s observations about the state of the Indian economy.
From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment. While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.
An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy-handed political intervention. In this regard, India has done a better job than China. From India emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident. Although it has many flaws, India’s financial system did not discriminate against small private companies the way the Chinese financial system did.
With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. Yes, “Made in China” labels are still more ubiquitous than “Made in India” ones; but what is made in China is not necessarily made by China. Soon, “Made in India” will be synonymous with “Made by India” and Indians will not just get the wage benefits of globalisation but will also keep the profits – unlike so many cases in China.
Pessimism about India has often been proved wrong. Take, for example, the view that India lacks Chinese-level infrastructure and thereforecannot compete with China. This is another “China myth” – that thecountry grew thanks largely to its heavy investment in infrastructure. This is a fundamentally flawed reading of its growth story. In the 1980s,China had poor infrastructure but turned in a superb economic performance. China built its infrastructure after – rather than before – many years of economic growth and accumulation of financial resources. The “China miracle” happened not because it had glittering skyscrapers and modern highways but because bold economic liberalisation and institutional reforms – especially agricultural reforms inthe early 1980s – created competition and nurtured private entrepreneurship.
Admin update: Read a short interview with Huang and Khanna as a follow-up to this article.