Why has China grown faster than India, and what do their futures hold?
I’m attending an outstanding development conference in Shanghai, and my senior colleague T.N. Srinivasan–a longtime expert on trade, growth, and Asia–is giving the keynote address. He tackles a topic no less large that the economic history and future of China and India.
Srinivasan’s answer to the first question—why faster growth in China—boils down to three assertions and a conclusion:
First, productivity growth is king. Sustained growth in both countries comes from learning to make better things more efficiently.
Second, reforms stimulate productivity growth. In both nations, a period of intense economic and political restructuring (mostly towards markets) led to takeoffs in growth.
Third, the reforms followed major crises. In China, reform followed the failures of the Great Leap Forward and the Cultural Revolution, while in India it was the balance of payments crisis in the early 1990s.
So why did China take off sooner and faster than India? Because the crisis hit earlier. Today’s fruits of prosperity grew from the seeds of Mao’s disastrous policies.
What does the future hold? Well, Nobel Laureate Bob Fogel predicts that China will produce 40% of world production by 2050, and India just less than a third of that.
Both countries, by this reading, are resuming their historic dominance—in 1820 China and India produced a third and a sixth of world production. Fogel’s prediction also implies that China will continue to grow faster than India to 2050.
Srinivasan begs to differ.
In his view, India has higher potential for growth than China. India is younger, more rural, and engaged in lower productivity activities. A shift into higher productivity activities will only accelerate their growth.
He also stresses that India’s economy is more market oriented, has a more efficient financial sector, and more experience in domestic innovation and entrepreneurship. China, he says, has less room for improvement; the population is aging, is already better educated and healthier than India, and has less capacity to innovate. Growth will continue, but it may have peaked.
India’s acceleration hinges, however, on the right reforms. These Srinivasan enumerates. Of their chances of enactment, however, I am not sure.
I know too little of China and India to say whether Srinivasan is right or wrong. If he’s correct, two thoughts strike me with regard to the region I do know: Africa.
First, I wonder whether the financial crises of the 1980s sowed the seeds for the high levels of growth we have seen across Africa the past ten years. Likewise, does today’s crisis present an opportunity for far-reaching growth-boosting policy change? If I were a Minister of Finance or a World Bank country director, I might be inclined to see the current world economy as an opportunity rather than a threat.
Second is the role of history. Development reports are fond of a particular comparison: in 1950 Asian country A had the same income per capita as Sub-Saharan African country B, while today A is ten times richer than B. Sometimes A is China or South Korea, while B might be Mali or Sudan, but the message (and the implied puzzle) is the same.
The usual answers vary: differential policies, political stability, geography, or human capital are just a few.
I think the comparison is flawed, however. It ignores the vast differences in development that do not show up in GDP per capita figures between Asia and tropical Africa.
As Srinivasan notes, in 1820 China and India were the world’s economic (and in some cases technological) powerhouses. They had centuries of bureaucracy, business, government, and sophisticated technological innovation behind them. Their vast numbers of rural poor, however, drove down the per capita income numbers and obscured the very fundamental differences at the centers.
This point is similar to the “it’s all institutions” point of view. I’m being slightly more specific, I think. Bureaucracies, business sectors, and universities are not just inventions, they are social and cultural phenomena that can take generations to develop and mature. This is a point too seldom explored.
By this reading, Sub-Saharan Africa may not lack institutions, it may simply have lacked (so far) the time needed for institutions to diffuse and develop. We are already seeing these institutions diffuse from the rest of the world to Africa, at possibly unprecedented rates of speed (as institutions and culture go).
Africa’s slow growth since 1950 is not so much a puzzle from this point of view, but rather an historic achievement. Has any civilzation ever moved from a (relatively) stateless region to one with advanced bureaucracies, universities, and commercial sectors in just three or four generations?
So, unexpectedly, I leave China much more optimistic about Africa than I arrived. What Europe and China and India took millennia to achieve Africa has done in a century.
Nevertheless, future success still boils down to the right leaders, the right opportunities, and the right reforms. We can expect to see a lot of variation across the continent in our lifetimes. But with the foundations now built, a number of African tigers (or should I say cheetahs) look more likely this century than the last.