What China Can Learn from India

Yasheng Huang from the MIT Sloan School of Management says China could learn a thing or two from India about economic development. He believes India will outperform China in the next few decades unless "China embarks on bold institutional reforms":

China could learn from India’s slow and quiet rise, by Yasheng Huang, Financial Times: In an article published in 2003 called “Can India overtake China?” Tarun Khanna of Harvard Business School and I argued that India’s domestic corporate sector – strengthened by the country’s rule of law, its democratic processes and relatively healthy financial system – was a source of substantial competitive advantage over China. At that time, the notion that India might be more competitive than China was greeted with wide derision.

Two years later, India appears to have permanently broken out of its leisurely “Hindu rate of growth” ... and its performance is beginning to approach the east Asian level. ... 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. ...

Why, then, is India gaining strength? Economists and analysts have habitually derided India’s inability to attract FDI. This single-minded obsession with FDI is as strange as it is harmful. Academic studies have not produced convincing evidence that FDI is the best path to economic development compared with responsible economic policies, investment in education and sound legal and financial institutions.

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... 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. Infosys benefited from this system. ... It is unimaginable that a Chinese bank would lend to a Chinese equivalent of an Infosys. With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. ...

Pessimism about India has often been proved wrong. Take, for example, the view that India lacks Chinese-level infrastructure and therefore cannot compete with China. This is another “China myth” – that the country grew thanks largely to its heavy investment in infrastructure. ... 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 in the early 1980s – created competition and nurtured private entrepreneurship.

For both China and India, there is a hidden downside in the obsession with building world-class infrastructure. As developing countries, if they invest more in infrastructure, they invest less in other things. Typically, basic education, especially in rural areas, falls victim to massive investment projects... China made a costly mistake in the 1990s: it created many world-class facilities, but badly under-invested in education. Chinese researchers reveal that a staggering percentage of rural children could not finish secondary education. India, meanwhile, has quietly but persistently improved its ­educational provisions, especially in the rural areas. For sustainable ­economic development, the quality and quantity of human capital will matter far more than those of physical capital. ...

Unless China embarks on bold institutional reforms, India may very well outperform it in the next 20 years. But, hopefully, the biggest beneficiary of the rise of India will be China itself. It will be forced to examine the imperfections of its own economic model ... China was light years ahead of India in economic liberalisation in the 1980s. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector. The time to act is now.

Update - New Economist adds:

MIT's Yasheng Huang writes ... that China could learn from India's slow and quiet rise ... Huang's claims are, I think, exaggerated - India's poor infrastructure is a problem, and its education system has major shortcomings. Nonetheless, it is refreshing to read a piece these days that doesn't extoll the virtues of China, and which demonstrates that "pessimism about India has often been proved wrong"

Comments

[Emmanuel]

The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.

I am much more impressed by India's example than China's as well. That creativity, entrepreneurship, and freedom thrive in India are notable achievements. Don't forget, India's growth is also predicated on services as well as on manufacturing; they can do practically everything there. At the same time, I cannot conclude that China would do well by emulating India. As development history is littered with the remains of would-be copycats drawing from narrow context-specific examples, China is probably better off gradually trimming down its excesses in the areas of resource wastage, political tyranny, and general unconcern for social and environmental matters.

In any case, my hat's off to Manmohan Singh, the father of India's revival. He's one of those world figures I unreservedly admire. This unassuming man has led that country, first as finance and now prime minister, to admirable and what appears to be sustainable growth. India has had loads of brilliant economists, but he is probably the only one (aside from P. Chidambaram) who knows how to work the levers of power in actuating worthwhile change.

[Fred Hapgood]

The relative heterogeniety of India is a significant cultural advantage. To an Indian, the rest of the world is just more India.

[amit]

As an Indian, I started laughing reading Fred's comment. That is unbelievably perceptive. However, India still has miles to go...

[Dinesh]

As an Indian, I completely agree with what Fred said. A mature comment, looking at the way we Indians blend in any part of the world.

[Ari]

http://www.nytimes.com/2006/01/24/arts/design/24tyeb.html?ex=1295758800&en=50eb5eb53269a7ea&ei=5090&partner=rssuserland&emc=rss

January 24, 2006

Indian Artist Enjoys His World Audience
By SOMINI SENGUPTA

MUMBAI - The man who makes the most coveted art in India lives in a small fourth-floor walk-up apartment in a crowded, unremarkable suburb. A sign in the hallway warns of an irregular water supply; the bustle of striving metropolitan India seeps in through his shuttered windows, making it even harder for the artist, 80 and hard of hearing, to entertain a visitor. The only luxury item in his living room is a snowy white iPod, resting on a set of speakers, unless you include a 1959 portrait of his wife, drawn in Chinese ink, that hangs above their dining table, and his 2003 painting "Falling Bird."

Tyeb Mehta's paintings fetch the highest prices of any living Indian artist: last fall, "Mahisasura," a 1997 rendering of the buffalo-demon of Hindu mythology, brought $1.58 million at Christie's in New York, the first time a contemporary Indian painting had crossed the million-dollar mark. (The turning point came five years ago, when a room-size triptych by Mr. Mehta, "Celebration," sold for more than $300,000, signaling a surge of market interest in Indian art.)

Mr. Mehta's career has mirrored the changing fortunes of contemporary Indian art over the last six decades, from the intellectual fervor of its birth at Indian independence in 1947, to a lifetime of aesthetic and financial struggle, to the improbable rise of the Indian art market in the last few years. As the Indian economy has galloped forward, art galleries have mushroomed, prices have skyrocketed and contemporary art has become the latest marker of affluence among the newly minted rich.

Mr. Mehta seems to have taken it all in with a sense of amused detachment. He calls the surge in art prices "meaningless." Still, the recognition pleases him.

"Good it happens in our lifetime," he said. "I'm 80 years old. I could be bumped off anytime by the Almighty. If somebody has some money, they can buy. Let them buy."

Yet Mr. Mehta has, in fact, reaped little financial reward from the art boom. His work has ballooned in price, but the pieces have changed hands several times since he made them, so the sales are in the secondary market. He could churn out drawings and paintings now to profit from the bull market, but he hasn't. Mr. Mehta has never been terribly prolific, and he produces very little today. Art critics rank him among India's least commercial artists. Vincent van Gogh, he is fond of pointing out, died hungry.

Tyeb Mehta was born in 1925 in rural Gujarat, in western India, and was reared in the Crawford Market neighborhood of Mumbai, also known as Bombay, in an orthodox Shiite community known as the Dawoodi Bohras....

[T Yang]

As a chinese, I dont think we can learn anything from india, mailand china can learn from Hong Kong and Taiwan about economic development.

The reason for China outperform India is that China's leaders know where China is going to be tomorrow,they never eat up their economic devolopment goals in the past 25 years. but Manmohan Singh does not tell where india will be, could you tell me what a single economic promise made by the politician have been achieved in the past, they are talking too much but do less

[T Yang]

China and India are two giants in asia, they are trying to study each other in different way.

Indian study china focusing on china's weakness and trying their best to prove china's gloomy future and india's greatness, Chinese are studying india's strongpoint and try to learn somthing from it.This is main different between them.

For a simply example, Indian are misunderstanding about china's financial system which is realy a source of china's development, otherwise, there is no development on infrastructure,economic and social stable in china.This may strange to you but it is true if you could calm down and study china's experience carefully. Don't be cheating by people even like 'Indian hero' Yasheng Huang, simply use your own brain.

Indian should become little humble and dont pretend to know everything about others,try to find something true and not always boast your greatness.

[Santosh]

China is just as culturally diverse as India. Posters above who believe that India has an advantage of diversity are ignorant of China.

[Binyamin]

Santosh...are you kidding yourself? India has huge religios minorities...several thousand endogamous groups. There is NO country, perhaps besides the US, as diverse as India. China is relatively homogenous...that is why it can survive unter an autocracy.

[Guruprasad]

China is much better than India. I think people shouldn't get fooled themselves that chinese premiers are not recognising future problem. They're much smarter and intelligent that so called economic analysts. As an Indian I believe and accept that china is more powerful and has large even massive bargaining capability than India at international arena. This is not going to change even after couple of decades. India's religious issue is going to be its biggest problem and I firmly believe that Indian Politician doesn't have the guts to solve that. China would remain powerful in the coming years. Tortoise can win only in story,in real life only hare wins. Make no mistake, chinese hare is the winner.

[Real Person from the Real World]

Ever take a look at eBay, as a microcosm of international sales and markting? There are all kinds of Chinese sellers on eBay. I don't see that may Indians, altho I bid on an Indian film I nevcr received. On the other hand, I recently got a copy of a film by Swedish Director, Igmar Bergman, from some eBay guy in Shang Hai. The film, probably an illegal copy, is imposible to get otherwise. Some people I know, have bought things from Chinese sellers, and find the stuff is obviously fake. The lesson is that the Chinese know what people want, and supply it, whether it is worth what they are selling it for, or not. As with the Japanese, it may take awhile, before the quality gets there, and the future is uncertain. The Indians on the other hand, have been heavily been investing in tech education and technology businesses. They are often charming salesmen. They may lie all over the place, they may be greedy at times, but ultimately, they endeavor to offer bang for the buck. So, who will win the economic game? The guys who sell anything they think you will pay for, whether it is worth it or not, or the guys who maket and sell what they perceive is worthwhile to the west, and who are struggling to invest in that, in order to be a real player?

[predictool]

Real Person from the Real World
your story is simple but powerful,however,maybe it is just a case.In your story,India produce and sell products on western demand, and Chinese produce and sell products on your demand.the difference lies in products style and producing ways,and that which one is more competitive should determine to the volume of value-added in producing and selling one unit product.