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Pranab Bardhan is professor of economics at the University of California, Berkeley. His books include Scarcity, Conflicts, and Cooperation.

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"Pranab Bardhan is one of our most sophisticated thinkers on economic development. His skills are on display in this enormously insightful book. I cannot think of a better comparative guide to the rise of China and India."--Dani Rodrik, Harvard University

"Bardhan's book is erudite, informative, and accessible, and his scrutiny of the conventional wisdom about the past quarter century of reform in China and India is always provocative. You do not have to agree with him to be stimulated and rewarded by his insightful scholarship. This book deserves a wide audience."--Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures, and Yours

"This book is an important reference for anyone interested in growth and poverty alleviation in China and India. It makes eye-opening comparisons and offers acute insights across such wide-ranging topics as poverty and inequality, labor and anticompetitive regulations, industrial concentration in India compared to other countries, electricity in Indian agriculture, Chinese financing of roads, and Indian and Chinese business-state relations."--Philip Keefer, World Bank

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AWAKENING GIANTS, FEET OF CLAY

PRINCETON UNIVERSITY PRESS

Contents

PREFACE.......................................................................................viiChapter 1 Introduction: The Myths Floating around the Giants..................................1Chapter 2 Economic Reform and Growth: Differing Patterns and Institutions.....................19Chapter 3 Agriculture: Still the Most Crowded Sector..........................................42Chapter 4 Infrastructure: The Dazzling Difference.............................................54Chapter 5 High Saving, Low Financial Intermediation...........................................65Chapter 6 The Pattern of Burgeoning Capitalism................................................78Chapter 7 Poverty and Inequality: How Is the Growth Shared?...................................90Chapter 8 The Social Sector: The Relevance of the Socialist Legacy............................104Chapter 9 Environment: The Alarming Signs.....................................................117Chapter 10 Looking to the Future: Through the Lens of Political Economy.......................125Afterword to the Paperback Edition............................................................161REFERENCES....................................................................................167INDEX.........................................................................................175

Chapter One

... and I know too much now To really feel at home in any one place —from the Malaya-born poet Goh Poh Seng's As Though the Gods Love Us

Over the past few years the media, particularly the financial press, have been all agog over the rise of China and India in the international economy (and how they have done relatively well even in the current global downturn). After a long period of relative stagnation, these two countries, containing nearly two-fifths of the world population, have had their incomes growing at remarkably high rates over the past quarter century or so. In 1820 these two countries contributed nearly half of world income; in 1950 their share was less than one-tenth; currently it is about one-fifth, and the projection is that in 2025 it will be about one-third.

India was slightly ahead of China in 1870 as well as in the 1970s in terms of the level of per capita income at international prices, but since then, particularly since 1990, China has surged well ahead of India. India's per capita income growth rate in the past two decades has been nearly 4 percent. China's has been at least double that rate, and even discounting for some overstatement in the Chinese official rates of growth, China has clearly grown significantly faster than India. In the world trade of manufacturing, China, and in that of services, India, have made big strides, much to the (as yet largely unfounded) consternation of workers and professionals in rich countries. Apart from attracting substantial foreign investment to their own large domestic markets, global companies originating from these two countries have started flexing their muscles in acquiring companies in Western markets. Journalists have referred to the economic reforms and integration of these large countries into the world economy in all kinds of colorful metaphors: giants shaking off their "socialist slumber," "caged tigers" unshackled, and so on. Newspaper columnists and media pundits have sent breathless reports from Beijing and Bangalore about the imminent and inexorable competition from these two new whiz kids in a hitherto complacent neighborhood in a "flattened," globalized playing field. Others have warned about the momentous implications of "three billion new capitalists," largely from China and India, redefining the next phase of globalization.

Although I believe there is some exaggeration in this buildup and in the supposed difficulty of the rich countries in coping, this book is not a reexamination of the challenges that China and India pose for the rest of the world either in economic or geopolitical terms. It is more an attempt to look inside these two countries and carry out a comparative assessment of their economic achievements and their still massive problems, with the focus on structural and institutional issues in the domestic political-economy context. My purpose is also less to draw policy lessons than to understand what has happened and under what structural constraints. In the subsequent pages there will be less emphasis on short-run macroeconomic issues (such as those relating to the immediate global financial crisis, or to monetary or exchange rate matters, or to business cycles or panicky withdrawals of international portfolio investment or the trade credit crunch or stimulus packages or adjustments to sudden shocks, internal or external, which are the staples of daily business news), and more on long-term trends and problems. For these two countries with a long history, however, I'll concentrate largely on what happened in the past quarter century.

In this short book we cannot go into much depth on any question, obviously, but we'll try to be on guard against the hype and oversimplifications that afflict many recent accounts of the two economies. One such oversimplification relates to the issue of democracy or authoritarianism either facilitating or hindering development. We shall discuss some of the complexities of this issue in relation to China and India in our concluding chapter. Another relates to the preoccupation with income growth rates; apart from noting some problems with the growth rate estimates, we'll try to go beyond national average income growth and delve a bit deeper into the anatomy of the political-economic forces, particularly those relating to distributive conflicts. In both countries such conflicts are often rankling and simmering just below the surface. When in recent years I read many of the glowing accounts of the two economies, laid out in rather simplistic and aggregative terms, I was reminded of what Henry James wrote in a different context (in his 1909 preface to The Princess Casamassima) about "our not knowing ... and trying to ignore what 'goes on' irreconcilably, subversively, beneath the vast smug surface."

Many years ago when I was teaching at the Delhi School of economics, I was once asked by my friend and colleague the late Dharma Kumar, if I had freedom of choice to live in India or China, which would I choose, ignoring the obvious cultural constraints (such as my not knowing the Chinese language). I think I disappointed her when I said that if I were poor, I'd probably choose living in China. Today I am less sure of my answer, even though the Chinese poor are materially even better off now compared to the Indian poor than when I was asked that question. Today I sometimes feel that my (somewhat evasive) answer may be on the lines of the quotation from the Goh Poh Seng poem cited in the epigraph to this chapter.

II

For about one hundred years before Liberation in 1949 in China, and for about two hundred years before Independence in 1947 in India, the encounter of these two countries with the international powers has not been altogether pleasant. There are disputes among historians about how much of the economic stagnation and relative decline in this period is due to that encounter. But there is no dispute today that the rise of China and India, and the (partial) restoration of their earlier important place in the world economy within a rather short span of time (a little more than a quarter century) has been one of the most striking phenomena in recent history in the international economy. To explain this phenomenon, it has been common to use a set of simple generalizations that seem to have now become part of the conventional wisdom. The familiar story runs along the lines of the following two paragraphs.

Many decades of socialist controls and regulations stifled enterprise in both countries and led them to a dead end. Their recent market reforms and global integration have finally unleashed their entrepreneurial energies. Their energetic participation in globalized capitalism has brought about high economic growth in both countries, which in turn led to a large decline in their massive poverty. The two countries are now full of billions of "new capitalists" striving to find their place in the sun. Although India's performance in this respect has been substantial, it has been overshadowed by the really dramatic performance of China both in economic growth and poverty reduction. China has now become the manufacturing "workshop of the world." China's explosive industrial growth in the past quarter century is hailed as historically unique, even better than the earlier East Asian "miracles." Like those "miracles," China's is often regarded as another successful story of a "developmental state," with an active industrial policy and a state-financed and -guided program of industrialization.

China's better performance than India's suggests that authoritarianism may be more conducive to development at early stages, as we have seen earlier in South Korea, Taiwan, and Singapore. In the Chinese case, however, regional economic decentralization provided some dispersal of power and more autonomy and incentives to local people, and even without democracy it led to broad-based local development (unlike in Russia, where regional decentralization led to collusion between local governments and oligarchs, only recently curbed by a semiauthoritarian and centralized Putin administration). Global capitalism, however, has inevitably brought rising inequalities, more in China than in India, and this may portend some problems for the future political stability in China, as it does not have the capability of democratic India to let off the steam of inequality-induced discontent. But all is not lost for democracy in China. The prospering middle classes will, slowly but surely, demand more democratic rights and usher in democratic progress in China, as they have in South Korea and Taiwan.

There are, of course, elements of truth in this story, but through constant repetition it has acquired a certain authoritativeness that, closer scrutiny shows, it does not deserve. Much of this book will challenge different parts of this oversimplified story.

First, two relatively small points about industrial growth in China. While China is possibly the largest single manufacturing production center in the world in many goods in terms of volume, it is not so in terms of value added. Contrary to popular impression, the world share of manufacturing value added in the United States or European Union is still substantially higher than in China. Similarly, although the industrial growth rate has been phenomenal in China, it is not historically unique. Figure 1 in our next chapter shows the growth in value added in the secondary sector (manufacturing, mining, utilities, and construction) during the first quarter century of accelerated growth, in China (from 1978), along with comparable figures for three other East Asian countries during their growth spurts: Japan (from 1955), Taiwan (from 1960), and South Korea (from 1965). China outpaces Japan in this period, but not the other two countries. Of course, China's scale makes the growth event huge and incomparable to the growth of the other three countries.

More important, consider the oft-repeated point that it was global integration that brought about high income growth, which then brought down the extreme poverty that had afflicted China and India over many decades or even centuries. First, contrary to popular impression, China's growth has not been primarily export-driven. As we'll suggest in the next chapter, in terms of growth accounting, the impact of net exports on China's growth in the period 1990–2005 has been relatively modest compared to the impact of domestic investment or consumption. Second, China had major strides in foreign trade and investment mainly in the 1990s and particularly in the subsequent decade; yet already between 1978 and 199 , before those strides, China had a very high average annual growth rate of about 9 percent. As we'll show in chapters 2 and 7, much of the high growth in the first half of the 1980s and the associated dramatic decline in poverty happened largely because of internal factors, not globalization. These internal factors include an institutional change in the organization of agriculture, the sector where poverty was largely concentrated, and an egalitarian distribution of land-cultivation rights, which provided a floor on rural income-earning opportunities, and hence helped to alleviate poverty. Even in the period since the mid-1980s there is a great deal of evidence that domestic public investment in education, agricultural research and development, and rural infrastructure has been a dominant factor in rural poverty-reduction in China.

While expansion of exports of labor-intensive manufactures may have lifted many people out of poverty in China in the past decade or so, the same is not true for India, where exports are still mainly skill- and capital-intensive. It is also not completely clear that economic reform is mainly responsible for the recent high growth rate in India. Reform has clearly made the Indian corporate sector more vibrant and competitive, but most of the Indian economy is not in the corporate sector, with 90 percent of the labor force working outside this sector, public or private. Consider the fast-growing service sector, where India's information technology–enabled services have made a reputation the world over while employing less than one-half of 1 percent of the total Indian labor force. Service subsectors such as finance, business services (including those IT-enabled services), and telecommunications, where reform may have made a significant difference, constitute only about a quarter of the total service-sector output. Two-thirds of this service output is in traditional or "unorganized" activities, in tiny enterprises often below the policy radar, unlikely to have been directly affected, to any substantial extent, by the regulatory or foreign trade policy reforms. It is yet to be empirically and convincingly demonstrated how the small corporate sector benefiting from reforms pulled up the vast informal sector.

As for poverty in India, the national household survey data suggest that the rate of decline in poverty has not accelerated in 1993–2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some nonincome indicators of poverty such as those relating to child health, already rather dismal, have hardly improved in recent years. The growth rate in the agricultural sector, where most of the poor are, has declined somewhat in the past decade, largely on account of the decline of public investment in rural infrastructure, which has little to do with globalization. Also, those who envisage "billions of new capitalists" in China and India do not realize that hundreds of millions of poor people in both countries are currently scrounging a living from tiny family enterprises of extremely low productivity, and they don't have the kind of access to credit, marketing, and infrastructure or the basic skills and education and risk-bearing capacity that can make a capitalist enterprise possible. They are there because the capitalist parts of the economy (under state or private auspices) cannot absorb them.

All this is not to suggest that economic reform and global integration have not been important in China or India or that there has not been some unleashing of entrepreneurial energies in recent years; my plea is only to suggest looking more into the complex interaction of markets with the structural forces, positive and negative, that affect the lives of the poor.

China and India have now become poster children for market reform and globalization in parts of the financial press, even though in matters of economic policy toward privatization, property rights, and deregulation and lingering bureaucratic rigidities both countries have demonstrably departed from the economic orthodoxy in many ways. This has not escaped the attention of the Heritage Foundation, however. If one looks at the figures of the widely cited Index of economic Freedom 2008 released by the Heritage Foundation, the ranks of China and India are quite low; out of a total of 157 countries, China's rank is 126th and India's 115th, and both are relegated to the group described as "mostly unfree," in a position much worse than many "moderately free" countries in Central and South America. Of course, not many have pointed out that the economic (particularly growth) performance of these two "mostly unfree" countries in terms of economic freedom seems to have been much better than that of most others.

Although there is no doubt that the period of socialist control and regulations in both countries inhibited initiative and enterprise, it would be a travesty to deny the positive legacy of that period, particularly in the pattern of state-controlled capitalist growth in China in recent years.

It is arguable that the earlier socialist period in China provided a good launching pad particularly in terms of

• a solid base of minimum social infrastructure (broad-based education and health care) for workers;

• a fast pace of rural electrification that facilitated growth of agro-processing and rural industrialization;

• a highly egalitarian land redistribution, which provided a minimum rural safety net that in the early years eased the process of market reform, with all its wrenching disruptions and dislocations;

• a system of regional economic decentralization (and career paths of Communist Party officials firmly linked to local area performance)— for example, county governments were in charge of production enterprises long before economic reforms set in (creating a pool of manufacturing experience, skills, and networks) and, drawing on this pool, the production brigades of the earlier commune system evolved into the highly successful township and village enterprises that led the phenomenal rural industrialization;

• the foundation of a national system of basic scientific research and innovation (even in 1980, spending on research and development as a percentage of GDP was higher than in most poor countries);

• high female labor force participation and education, which enhanced women's contribution to economic growth.

(Continues...)

Excerpted from AWAKENING GIANTS, FEET OF CLAYby PRANAB BARDHAN Copyright © 2010 by Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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