India May Be Primed to Narrow
Its Economic Gap With China
China increasingly is seen abroad as a huge economic success and a major competitive threat. Its export prowess is lifting millions of Chinese out of poverty and frightening manufacturers and factory workers not only in the U.S., but everywhere from Malaysia to Mexico to Madrid.
India -- despite its impressive call centers, software firms and pharmaceuticals factories -- is viewed as a less successful economy and a less formidable competitor. The Chinese have order, discipline, modern telephones and roads, less poverty and faster economic growth. The Indians have democracy, chaos, lousy phones and roads, more poverty and slower growth.
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CAPITAL EXCHANGE
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So now come a couple of academics, a Chinese-born political scientist at Massachusetts Institute of Technology and an Indian-born Harvard Business School professor with a provocative argument: The future belongs to India.
China's success and global reputation reflect the huge foreign investment in factories, buildings and machinery. Foreign direct investment in China is more than 10 times India's. In part, China benefits from a larger and wealthier diaspora. China also welcomed foreign companies, partly to avoid creating its own class of capitalists. "China was sold to multinationals to allow it to sidestep entrepreneurs," Harvard's Tarun Khanna says in an interview, acknowledging that may be changing now.
Still, "you would be hard-pressed to find a single homegrown Chinese firm that operates on a global scale and markets its own products abroad," Mr. Khanna and colleague Yasheng Huang write in Foreign Policy magazine.
India shunned foreign investment for a time and, even after changing its mind, failed to attract much of it. But the professors note it has something that China doesn't: "companies that compete with the best that Europe and the U.S. have to offer," such as software company Infosys Technologies Ltd. and pharmaceuticals maker Dr. Reddy's Laboratories Ltd. India lacks the physical hardware of a modern economy, but it has more of the software of a modern economy -- courts, financial system and the like -- than China.
Their bottom line: "India's homegrown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets."
The argument, not surprisingly, is making them very popular in India. Their article has been widely described or reprinted in the Indian press, not always with permission. (Note to India: Intellectual-property rights matter.) The Chinese, Mr. Khanna hears, are translating it and distributing it discreetly.
But do they have the story right? No simple generalization about countries so large and diverse can ever be truly accurate. And no comparisons between them obscure the reality that both have done much better since shifting economic strategies (in 1978 in China, in 1991 in India).
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COMPETING GIANTS
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CHINA |
INDIA |
| Population |
1.28 billion |
1.05 billion |
| People in poverty |
10% |
25% |
| 1990s economic |
9.6% |
5.5% growth rate |
| Foreign invest.* |
$44.2 billion |
$3.4 billion |
| Phones per |
247.7 |
43.8 1,000 people* |
| Diaspora |
55 million |
20 million |
*2001
Source: Foreign Policy magazine
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The question boils down to this: Can India close the gap with China over the next 20 years so that more of its people prosper and it overshadows China as a global competitor?
Professors Khanna and Huang think so. Other observers are skeptical. "They're wrong in suggesting China is taking the wrong route," cautions Sunil Dasgupta of the Brookings Institution, a Washington think tank. "It's already richer than India. India is going to be playing catch-up for the next 20 years."
But Joydeep Mukherji, who tracks India and China for Standard & Poor's in New York, thinks the professors are onto something. Taking a number-cruncher's approach, he finds the Chinese miracle less impressive than its press clippings. Shave a bit off the official statistics for exaggeration, and China has grown perhaps 7% a year for the past decade or so. India has grown 6%. But China, as a nation, saves about 40% of income, and invests that plus what foreigners invest. India saves about 24% domestically, and draws relatively little foreign investment.
So China, to make it simple, is like a business that invests $40 and earns $7 a year. India invests $24 and earns $6 a year. "A huge amount of money in China is wasted," Mr. Mukherji says, particularly investments made in China by the Chinese government. "For a country that's so big and saving so much, China is unusually dependent on foreign investment." That is key to its success, but also underscores how poorly its domestic investments fare. About half the loans made by China's banks will never be paid back; a lot of Chinese savings has been squandered.
"India gets more bang for its buck," Mr. Mukherji says. Its banks have less than half as many bad loans as China's. "The bottom line for me: If India can raise its savings and investment rate modestly, then it can raise its growth rate quickly."
That "if" so often creeps into conversations about India, and it's an important qualifier. Mr. Huang and Mr. Khanna may yet prove to be lousy forecasters. But they wisely cast a skeptical eye on the durability of the Chinese economic miracle and call attention to India's sometimes-unappreciated potential to grow and compete.
Updated July 24, 2003 1:41 p.m.
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