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Comparing economies in India and China

It was somewhat surprising that the Sri Lankan media fawned over Chinese Premier Zhu Rongji (朱鎔基) during his recent visit to India. To a considerable degree, the deference shown to him was justified on strategic grounds, in view of the great instability in South Asia. As causes for introspection about India's economic affairs, however, Zhu's proclamations may have been given disproportionate weight.

To be fair, China has posted some considerable economic successes of late. While India and China had economies of roughly the same size in the 1950s and 1960s, China's greater progress with market reforms since the 1970s has pushed it well out in front.

In particular, China has had spectacular success in expanding exports and attracting direct foreign investments. In terms of purchasing power parity, China now ranks as the second largest economy in the world, with India trailing at number four.

There is reason to hope that the economic gap between these rivals will soon diminish. India may advance in relative -- if not absolute -- terms as China's much vaunted economic growth is likely to falter due to massive defaults in the banking system or from the restructuring of state enterprises.

India's leaders are becoming aware that their economy can move forward more rapidly if they undertake meaningful and aggressive reform. India scores well, for example, in the area of macroeconomic conditions where restrained monetary expansion has brought inflation to a record low of 2.5 percent. China's battle with price instability has seen swings from high inflation in the mid-1990s to its current troubling bout of deflation.

One area that offers promise for India involves labor-market reforms that would allow companies with fewer than 1,000 employees to hire and fire without consulting government departments.

While India suffers from crumbling physical infrastructure and an inflexible labor regime, it has numerous advantages. While China's labor market is more flexible, it has to develop much of its physical infrastructure from scratch and it lags far behind in terms of "institutional" infrastructure that includes legal and judicial systems.

In terms of non-economic aspects, India has a leg up. Although the Indian legal system is far from perfect, it is commonly understood that the role of laws and the courts is to protect individuals from abuses of power, whether involving the state or private actors. Laws in China are generally used as instruments of state control over individuals and to direct their actions.

This raises India's supposed disadvantage in being a democracy, which is fractious and, supposedly, dangerously disunited. Action can be delayed as dirty political linen is publicly aired in the lively and free media.

As it is, China's excessive authoritarianism and obsession with state power and control, along with its controlled media, stifle efforts to settle contentious issues. Left to simmer unabated, these unresolved problems invite reactions that include widespread economic failure or rioting and other expressions of civil discord.

Beijing has awakened a sleeping dragon and harnessed it to boost China's economy. Unless the political aspirations of this fire-breathing beast are fulfilled, it threatens to rise up and consume the Chinese Communist Party leadership and end its grip on power.

India suffers from too little economic liberalism and too many government interventions based upon misguided socialist precepts. Curing these ills is not as difficult as rectifying the democratic and judicial defects from which China suffers.

Christopher Lingle is global strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.
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