The Indian tortoise and the Chinese hare
The Korea Herald
"India everywhere" was the theme at this year's World Economic Forum. In the West, there is so much focus on China that India's achievements are often acknowledged only as an afterthought. As if to underscore the point that political stability must triumph in the long run, the Indians plastered Swiss buses with the banner: "India: The World's Fastest Growing Democracy."
The India media blitz was a huge success. In Davos, speaker after speaker touted the idea that even if China is ahead now, over the longer run, the race between Asia's two giants is a toss-up. For a few days at least, India's emergence as a superpower on par with China was taken as a fait accompli. But what is the reality in the race between economies with more than a billion people each?
On the surface, China has opened up quite a lead on India. Twenty-five years ago, at the start of the contemporary wave of globalization, national output in India and China was about the same. Now, by any measure, China is more than twice as rich.
But the real difference is not so much that successful Chinese are doing better than successful Indians. After all, the Indian elite are world-beaters, as Lakshmi Mittal's bold $22 billion bid for French steelmaker Arcelor shows. No, the real difference - whether we like to admit it or not - is that China's communist government has succeeded in globalizing a much larger share of its population than India's democratic government has managed to do.
Not that China is exactly egalitarian. It is only along the coast, home to roughly one in three Chinese citizens, that most people can be said to have really joined the 21st century. Much of rural China is still miserable, with 150 million people effectively unemployed and health and education standards often befitting an earlier century.
But caste-bound India's record of exclusion is worse. Perhaps only one in five persons are integrated into the global economy. For every call center employee, there are many more people still eking out a subsistence living on the land. Whereas China probably has about 450 million people in its globalized economy, India has at most 200-250 million. It is this difference, more than anything else, that sets the two economies apart.
What can India do to close the gap? Its biggest shortcoming is its lack of roads, bridges, ports, and other infrastructure, where the contrast with China is just stunning. If your products can't get to the global economy, you cannot conquer it.
Over the past five years, China has multiplied its highway system five-fold. Its 50,000 kilometers of new roads are built to handle even large aircraft, which is more than one can say about some of the runways at India's shambolic airports. It is not just a matter of money - India's central bank is rolling in cash, which it has mainly invested in low-yield foreign treasury bills.
The real problem is that China's authoritarian system faces little opposition when it decides to bulldoze a shantytown that stands in the way of a new airport. India's government, by contrast, has neither the power nor the inclination to trample over poor people to make rich people richer.
Unfortunately, without infrastructure, the 800 million-plus Indians who have not yet "made it" don't have a chance. India will never be able to create enough jobs in services alone; it must be able to compete in low-end manufacturing areas as well. Without better infrastructure, the majority of India's citizens will remain frozen out of globalization.
So, is the idea that India's economy could overtake China's hopeless romanticism? Not necessarily, if only because the areas where India excels, notably services, have far higher potential margins than manufacturing. Here, the Chinese, hampered by a vastly inferior legal system, will not be able to compete easily.
Western companies are far more inclined to trust Indian firms with sensitive financial information or patents than they are in the case of China. Foreign companies know that if they outsource any high-tech process to China, they might as well publish their blueprints on the internet.
India also has a much better developed financial system than China, an advantage that will be increasingly important as the two countries develop. Command and control financing ("directed lending," as economists call it) works well when it comes to building bridges; it is a lot less effective when it comes to choosing what companies deserve to survive.
The challenge for the Indians, and, indeed, for other emerging markets like Brazil, Russia, and Mexico, is that they need to find ways to broaden the successful sectors of their economies without strangling them. If India is to ever catch up with China, it must globalize more of its citizens, through better provision of health, education and infrastructure. Only then will we truly start seeing "India everywhere."
Kenneth Rogoff is a professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF. - Ed.