China’s and India’s Climb to the top of the Economic Pyramid

Stephen DeAngelis

January 09, 2009

In yesterday’s post [India Learns Link between Security and Prosperity], I explored the security situation in India and how it might affect India’s future. Indian author, Gurcharan Das, in a New York Times‘ op-ed piece, uses the recent terrorist attacks in Mumbai as a backdrop as he examines how India and China are trying to climb the economic ladder but using very different approaches [“The Next World Order,” 1 January 2009]. Das writes:

“China and India are in a struggle for a top rung on the ladder of world power, but their approaches to the state and to power could not be more different. Two days after last month’s terrorist attack on Mumbai, I met with a Chinese friend who was visiting India on business. He was shocked as much by the transparent and competitive minute-by-minute reporting of the attack by India’s dozens of news channels as by the ineffectual response of the government. He had seen a middle-class housewife on national television tell a reporter that the Indian commandos delayed in engaging the terrorists because they were too busy guarding political big shots. He asked how the woman could get away with such a statement. I explained sarcasm resonates in a nation that is angry and disappointed with its politicians. My friend switched the subject to the poor condition of India’s roads, its dilapidated cities and the constant blackouts. Suddenly, he stopped and asked: ‘With all this, how did you become the second-fastest growing economy in the world? China’s leaders fear the day when India’s government will get its act together.’ The answer to his question may lie in a common saying among Indians that ‘our economy grows at night when the government is asleep.’ As if to illustrate this, the Mumbai stock market rose in the period after the terrorist attacks. Two weeks later, in several state elections, incumbents were ousted over economic issues, not security.”

Das makes an interesting point. Although widespread prosperity requires good governance, people will almost always find a way to make the best of things despite the government. Somalia is a case in point. There has been no effective government there for over a decade yet a struggling Somali economy has managed to survive. Among some of the most difficult conditions possible, people manage as best they can — not just “at night when the government is asleep,” but as shown in Somalia even in the absence of government. India and China, of course, both have functioning governments that affect their economies. Das explores the difference between the government-driven economy in China and the government-inhibited economy in India.

“[The political-economic conditions in India] baffled my Chinese friend, and undoubtedly many of his countrymen, whose own success story has been scripted by an efficient state. They are uneasy because their chief ally, Pakistan, is consistently linked to terrorism while across the border India’s economy keeps rising disdainfully. It puzzles them that the anger in India over the Mumbai attacks is directed against Indian politicians rather than Muslims or Pakistan. The global financial crisis has definitely affected India’s growth, and it will be down to perhaps 7 percent this year from 8.7 percent in 2007. According to my friend, China is hurting even more. What really perplexes the Chinese, he said, is that scores of nations have engaged in the same sorts of economic reforms as India, so why is it that it’s the Indian economy that has become the developing world’s second best? The speed with which India is creating world-class companies is also a shock to the Chinese, whose corporate structure is based on state-owned and foreign companies.”

Human beings are often captives of their past. We have a difficult time seeing alternative approaches to problems or imagining futures that aren’t simply extrapolations of the past. That’s why individuals who manage to break such shackles are so valuable. They can see possibilities where others see roadblocks. India is blessed with a healthy number of such entrepreneurs. Surprisingly, Das believes India’s reviled caste system has helped create them.

“Vaishyas, members of the merchant caste, who have learned over generations how to accumulate capital, give the nation a competitive advantage. Classical liberals may be right in thinking that commerce is a natural trait, but it helps if there is a devoted group of risk-taking entrepreneurs around to take advantage of the opportunity. Not surprisingly, Vaishyas still dominate the Forbes list of Indian billionaires.”

Using India’s caste system as a blueprint for prosperity is not recommended. It has many more detrimental features than positive ones. Das, however, is correct to assert that entrepreneurs are a source of prosperity. Both India and China have entrepreneurs who have become amazing success stories. Take, for example, Liu Yongxing, a former factory worker who Forbes lists as the wealthiest person in China, with a fortune estimated at $3 billion. His story is detailed in an interesting article in the New York Times [“Contradictions in China, and the Rise of a Billionaire Family,” by David Barboza, 1 January 2009]. As Barboza writes:

“The hope among economists is that China’s next path to riches will inspire an even larger and more innovative group of entrepreneurs, and tap more of this nation’s impoverished rural areas.”

Returning to Das’ op-ed piece, Das touches on another interesting point.

“In a much-discussed magazine article last year, Lee Kwan Yew, the former prime minister of Singapore, raised an important question: Why does the rest of the world view China’s rise as a threat but India’s as a wonderful success story? The answer is that India is a vast, unwieldy, open democracy ruled by a coalition of 20 parties. It is evolving through a daily flow of ideas among the conservative forces of caste and religion, the liberals who dominate intellectual life, and the new forces of global capitalism.”

Of course, it’s more than the fact that India is a democracy and China is not. As Das goes on to note, people fear China as a military power but have no such fear of India.

“The idea of becoming a military power in the 21st century embarrasses many Indians. This ambivalence goes beyond Mahatma Gandhi’s nonviolent struggle for India’s freedom, or even the Buddha’s message of peace. The skeptical Indian temper goes back to the 3,500-year-old ‘Nasadiya’ verse of the Rig Veda, which meditates on the creation of the universe: ‘Who knows and who can say, whence it was born and whence came this creation? The gods are later than this world’s creation. Who knows then whence it first came into being?’ When you have millions of gods, you cannot afford to be theologically narcissistic. It also makes you suspect power.”

It may be true that Hinduism makes people skeptical of power, but the growing influence of fundamentalist Hindus is as bad for India as fundamentalist religious adherents pushing political agendas have been elsewhere around the globe. Zealots produce bad policy and bad policy inhibits stability and growth. Das’ point, however, is that India will continue to develop despite its politics.

“Both the Chinese and the Indians are convinced that their prosperity will only increase in the 21st century. In China it will be induced by the state; in India’s case, it may well happen despite the state. Indians expect to continue their relentless march toward a modern, democratic, market-based future. In this, terrorist attacks are a noisy, tragic, but ultimately futile sideshow. However, Indians are painfully aware that they must reform their government bureaucracy, police and judiciary — institutions, paradoxically, they were so proud of a generation ago. When that happens, India may become formidable, a thought that undoubtedly worries China’s leaders.”

The international community needs both India and China to continue to climb the economic ladder. They also need them to waste as little money as possible on a non-productive arms race. India sees itself trapped between a hostile Pakistan and an unfriendly China. As a result, it follows the same “peace through strength” strategy that the U.S. used during the Cold War. Better relations between India and China would help both countries climb the ladder a bit faster — but continuing border disputes may prevent that from happening in the near-term. In the end, I predict that economics will trump politics and that economic ties between the two countries will continue to strengthen. Both countries have a myriad of internal challenges they must solve before they can assume their place on “a top rung on the ladder of world power” and the more resources they can devote to those challenges the better.