The proverbial India – China comparison

There is this obsession with Indians about Chinese cities, their outrageously large engineering projects, their ventures in Africa, the Chinese people and other things Chinese. Especially in my neighbourhood which is a rather insignificant south Indian town where a private university (happens to be my alma mater too) has been admitting hundreds of Chinese students in its various technology programs (undergraduate) over the past couple of years. It is a common sight in the town to see these chatty young faces walking by, learning and living in a completely different culture. What brings them here is an MoU of this private Indian university with another in China to teach their students in an ‘english medium’ institution. At least that is how the common story goes on coconut radio here.

Now, after a term of economics as a major subject I have begun to see things a little more differently and perhaps clearly. The clarity that has set in is about the difference in Indian and Chinese initiation of market reforms, which has come to determine the current economic statuses and accomplishments of both these large nations. This in a way refers to the ‘path dependency school’ of thought which I have just begun to explore.

The difference in initiation of market reforms is on 4 counts:

  1. Colonial history and political experience:  As a consequence of an early brush with British imperialism (the exploitative opium trade & trading environment on the offshore ports off the mainland) the development thought in China was marked by an intense mistrust of the markets. With the humiliation and forced submission brought about during the opium wars with Britain in late 19th century Chinese were very clear about their mode and degree of interaction with foreign trade interests. Consolidation of power and later rule of the communist party carried these early experiences to the formation and governance style of the state. Later reforms too were guided by this in a sense that China believed that state owned companies must be the major players in the market. State’s participation in the market meant that it would play an enormous influence instead of allowing a free market play. Chinese state owned companies like CNOOC, OCBC etc as a consequence grew bigger  on state involvement. The reform process in China has been different from the Indian reform process in the extent of participation and control by the state. This consequently made it easier for Chinese companies to compete overseas and at the same time give a tough competition (although skewed) to foreign multinationals desirous of doing business in China. A case in point is Chinese search company Baidu vs. Google China. Similarly, online commerce company Alibaba gave a tough run to foreign ecommerce majors like eBay and Amazon. Markets in China have had a greater control by the state and designed to incline with Chinese interests. 
  2. Role of State: The communist party in China has had a long reign of power and is still going strong. State’s presence is pervasive in the economy. This is quite different from India. Indian companies have competed in the international markets alone and on their own merit compared to the state backed Chinese companies. While the reform trigger for India was a balance of payment crisis brought about by the state (to mark the tipping point), China’s reform process appears to be gradual and not crisis induced. China exhibited high levels of readiness in terms of literacy, infrastructure and other necessary ingredients for people to make use of the rapidly liberalizing markets.
  3. Development Strategy: As said earlier, during market reforms initiation in China it was better prepared to make use of the opportunities that opening up of markets presented. The workforce was literate and trained as well as the state of infrastructure complemented the opportunities of the time quite well. Transport network, production and labour linkages, power infrastructure and financial system – all of it could aid a rapid growth process. Higher literacy meant that the population was essentially a ready workforce which would only require basic training for their vocation. At the same time a single party rule meant faster decision making process and rapid implementation of projects which required things like public consent, relocation of people etc. The concerted action required from various departments and wings of the system was achieved conveniently due to their political structure.
  4. Leverage of International Trade: While India and China stood at the same position with respect to their initial mistrust of the markets and capitalists, China moved ahead with a different strategy whereas India completely shut itself off from the markets in the initial years (at least for the first four Five Year Plans). During these the famous Mahalanobis model of economic growth was being test fired in India. In spite of having a large domestic market China still focused on international trade. It promoted manufacturing sector by developing production processes so massive that it could produce goods much cheaper than what it would take to produce them in the western countries. This cost advantage boosted Chinese manufacturing sector to begin with. Consequent export market growth paid huge dividends in later decades. For instance China has the world’s largest forex reserves. All this while Indian export market was small and comprised of raw goods primarily.

It may appear that Indian market reform story has been slower than that of China. The point being made here is that the two countries have had a vastly different path to growth from the late 20th century. In comparing them one should be conscious of the paths that these countries have taken. Otherwise the exercise would be unproductive as it is often seen.

 

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