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Saturday, February 25, 2006

Rogoff: The Indian Tortoise and the Chinese Hare

India everywhere? Not without roads, bridges, and better health and education programs. Here's Kenneth Rogoff of Harvard University, formerly the chief economist at the IMF:

The Indian Tortoise and the Chinese Hare, by Kenneth Rogoff, Project Syndicate: “India everywhere” was the theme at this year’s World Economic Forum. ... The India media blitz was a huge success. In Davos, speaker after speaker touted the idea that even if China is ahead now, over the longer run, the race between Asia’s two giants is a toss-up. ... But what is the reality in the race between economies with more than a billion people each?

On the surface, China has opened up quite a lead on India. Twenty-five years ago, at the start of the contemporary wave of globalization, national output in India and China was about the same. Now, by any measure, China is more than twice as rich. ... [T]he real difference – whether we like to admit it or not – is that China’s communist government has succeeded in globalizing a much larger share of its population than India’s democratic government has managed to do.

Not that China is exactly egalitarian. It is only along the coast, home to roughly one in three Chinese citizens, that most people can be said to have really joined the twenty-first century. Much of rural China is still miserable... But caste-bound India’s record of exclusion is worse. Perhaps only one in five persons are integrated into the global economy. ... Whereas China probably has about 450 million people in its globalized economy, India has at most 200-250 million. It is this difference, more than anything else, that sets the two economies apart.

What can India do to close the gap? Its biggest shortcoming is its lack of roads, bridges, ports, and other infrastructure, where the contrast with China is just stunning. If your products can’t get to the global economy, you cannot conquer it. Over the past five years, China has multiplied its highway system five-fold. ... It is not just a matter of money – India’s central bank is rolling in cash, which it has mainly invested in low-yield foreign treasury bills.

The real problem is that China’s authoritarian system faces little opposition when it decides to bulldoze a shantytown that stands in the way of a new airport. India’s government, by contrast, has neither the power nor the inclination to trample over poor people to make rich people richer. Unfortunately, without infrastructure, the ... majority of India’s citizens will remain frozen out of globalization.

So, is the idea that India’s economy could overtake China’s hopeless romanticism? Not necessarily, if only because the areas where India excels, notably services, have far higher potential margins than manufacturing. Here, the Chinese, hampered by a vastly inferior legal system, will not be able to compete easily. Western companies are far more inclined to trust Indian firms with sensitive financial information or patents than they are in the case of China. Foreign companies know that if they outsource any high-tech process to China, they might as well publish their blueprints on the Internet.

India also has a much better developed financial system than China, an advantage that will be increasingly important ... Command and control financing ... works well when it comes to building bridges; it is a lot less effective when it comes to choosing what companies deserve to survive. ... If India is to ever catch up with China, it must globalize more of its citizens, through better provision of health, education and infrastructure. Only then will we truly start seeing “India everywhere.”

    Posted by on Saturday, February 25, 2006 at 01:46 PM in China, Economics, India | Permalink  TrackBack (0)  Comments (3)

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