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China Could Learn From India’s Slow and Quiet Rise

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    China Could Learn From India’s Slow and Quiet Rise

    China Could Learn From Indias Slow and Quiet Rise
    Yasheng Huang
    The Financial Times, 27 January 2006


    http://yaleglobal.yale.edu/display.article?id=6887


    In an article published in 2003 called Can India overtake China? Tarun Khanna of Harvard Business School and I argued that Indias domestic corporate sector strengthened by the countrys 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 an annual gross domestic product increase of around 2 to 3 per cent and its performance is beginning to approach the east Asian level. From April to June 2005, Indias 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 Chinas level of domestic investment in new factories and equipment, and only 10 per cent of Chinas foreign direct investment. While Chinas 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 Indias entire GDP. That is higher than any other country, exceeding even Chinas own exalted levels in the era of central planning. The evidence is as clear as ever: Chinas growth stems from massive accumulation of resources, while Indias growth comes from increasing efficiency.


    The microeconomic evidence also casts India in a better light. While Indias stock market has soared in recent years, the opposite has happened in China. In 2001, the Shanghai Stock Market index reached 2,200 points; by 2005, half the wealth wiped out. In April 2005, the Shanghai index stood at 1,135 points. This sharp deterioration occurred against a backdrop of GDP growth exceeding 9 per cent a year. It is difficult to find another country that has this strange combination of superb macroeconomic performance and dismal microeconomic performance. It is a matter of time before the two patterns converge.

    Why, then, is India gaining strength? Economists and analysts have habitually derided Indias 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. In fact, one can easily think of counter examples. Brazil was a darling of foreign investors in the 1960s but ultimately let them down. Japan, Korea and Taiwan received little FDI in the 1960s and 1970s but became among the worlds most successful economies.

    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, Indias financial system did not discriminate against small private companies the way the Chinese financial system did. Infosys benefited from this system. It was founded by seven entrepreneurs with few political connections who nevertheless managed, without significant hard assets, to obtain capital from Indian banks and the stock ­market in the early 1990s. 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. 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 therefore cannot compete with China. This is another China myth that the country 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 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, which produce tangible and immediate results. 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. India seems to have the right policy priorities and if China does not invest in rural education soon, it may lose its true competitive edge over India a well-educated and skilled work-force that drives manufacturing success.


    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 and to abandon its sense of complacency acquired in the 1990s. 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.

    The writer, associate professor of International Management at MIT Sloan School of Management, is author of Selling China (Cambridge University Press, 2003 and Chinese edition, 2005).

    #2
    Re: China Could Learn From Indias Slow and Quiet Rise

    That India's growth is picking up is more important than whether it outpaces China or not. I can understand the author views it that way since his purpose and interest is to motivate China to change, rather than to give kudos to India.

    From an Indian point of view, the facts and interpretations in the article are mostly correct and I would credit the multi-party system for that rather than any great machiavillian strategy that someone hatched in a back room.

    The numerous (thousands I think) of political parties formed on the basis of locality, ethnicity, religion, language, some even based on prefessions and vocations of people. This leads to all the colorful cacophony of the Indian political scene but silently has ensured that people got represented in more than one way and fora. given the zamindari and caste based village society that was strangling India for several centuries, this multi-party system has provided a methodical cure for such cob webs

    I used to worry what will happen if only the large cities of India develop and the villages get left behind. That's no longer such a great concern - the villagers seem as much drawn into the new world as the city dwellers are. This has happened in 2 ways as I can see. The number of 'cities' has exploded. Used to be that Bombay, Delhi, Calcutta and Madras were the cities. Now when people say large cities, that includes Bangalore, Hyderabad, Pune, Ahmedabad, etc. More importantly, dozens of smaller cities dot all over with large city benefits of employment, transportation, facilities (and yes pollution).

    Secondly, in the villages, everyone is running around with cell phones, almost all villages seem now connected in the gigantic bus network and an airport is never too far away. Imagine the difference between when we all used to run out to spot a plane versus now villagers take a bus to the airport, hop into a rural connection for a few hundred rupees!

    Yup - something is more right about the way India is progressing

    Comment


      #3
      Re: China Could Learn From Indias Slow and Quiet Rise

      Hey you Pak-haters! what is this news doing on a Pakistani forum?

      If it is really itching you to post it somewhere then post it on some Bharati or Chinese forum.

      But I understand it's beyond the bigots like you.
      "Ana mazloom hussein"
      http://www.youtube.com/watch?v=KA1L18wKHzY&feature=related
      http://www.tebyan.net/Religion_Thoughts/Articles/Miscellaneous/2008/1/29/59771.html

      Comment


        #4
        Re: China Could Learn From Indias Slow and Quiet Rise

        ^ thanks for your understanding and allowing me to post here. But I am not a Pak-hater. There's a very time tested technique to deal with this - just move on to someother thread if you don't like what you see here.

        Comment


          #5
          Re: China Could Learn From Indias Slow and Quiet Rise

          Why do we Pakis prefer to be idiots. I can see even Pakis benefit from the content of the thread. Its economics and every country has one.

          Comment


            #6
            Re: China Could Learn From Indias Slow and Quiet Rise

            Is this news in any way related to Pakistan?
            I'm like the whole library in Kemet with Annunaki genetics!

            Comment


              #7
              Re: China Could Learn From Indias Slow and Quiet Rise

              http://www.ibj.com/topstories.asp?A=17885

              India's biggest question marks remain its marginal infrastructure and its lack of reliable middle management.

              India has clear advantages over China, its main competitor. There, U.S. executives have to bridge a language barrier. And in China, intellectual property protections are spotty. That's critical when a company is writing proprietary software or researching new drugs.

              "I think cost was and is the big driver [for India] at least to warrant consideration," said Fitzgerald, who now runs a consulting firm. "If you know exactly what you want and can articulate that, you could get something done for maybe 60 percent less."

              "But to really get it right, you still have to pay a project manager," Fitzgerald continued. "That management layer, the few people who do it well, are in very high demand in India. They're probably the bottleneck in this whole process."

              Comment


                #8
                Re: China Could Learn From Indias Slow and Quiet Rise

                Fitzgerald is under estimating the pool of managers in India. I wonder if he is an American, unfamiliar with the management and supervisory cadre available in the country. I can think numerous sources of management talent, in addition to the tens of thousands of MBAs graduating each year.

                When the air transport industry took of, pilot shortage was met with ex-airforce pilots extending their tenure or retiring earlier.

                When the electronics, satellite and telecom industries took of, leaders came from similar agencies of the government.

                When the private stock holding culture took of, the rotund banking industry yielded thousand of workers and managers and analysist

                The great Indian beurocracy has built such excess fat over the years that we can safely state that there will not be a shortage of any type of talent.

                In fact, as in all these cases given, it makes both the public and private enterprise more efficient.

                Comment


                  #9
                  Re: China Could Learn From Indias Slow and Quiet Rise

                  Originally posted by _Lahore_Ka_Cheetah
                  Is this news in any way related to Pakistan?
                  So you don't care what happens in your bordering countries.

                  Comment

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