Geopolitical Economic Viewpoint (Informs Our Understanding)

new york times OP-ED CONTRIBUTOR

The Slowing of Two Economic Giants

By PRANAB BARDHAN

Published: July 14, 2013

KOLKATA, India — THE world’s two most populous countries are slowing down. To be sure, China’s output is expected to grow by 7.8 percent this year, and India’s by 5.6 percent — far superior to 2 percent for Japan, 1.7 percent for the United States, 0.9 percent for Britain and a shrinkage (negative 0.6 percent) in the troubled euro zone, the International Monetary Fund projected last week.

But there is no sequel in sight for the 10-percent-plus growth China and India posted in 2010. The West can no longer count on their continued expansion to lift its sagging economies. For 2.5 billion people, the consequences are more dire: in India, less money to strengthen the threadbare social safety net, and in China, possible political instability. What does the slowdown mean for these two giants, and which will come out ahead?

Let’s start with China, the bigger of the two economies. Talk of a global “Beijing consensus” — state-controlled capitalism as an alternative to the “Washington consensus” about how poor countries should develop — has largely disappeared. China’s new leaders are focused on problems at home: battling corruption, reining in the overheated housing market, scaling back the government’s outsize role in the economy, and cracking down on financial speculation.

China may be close to exhausting the possibilities of technological catch-up with the West, particularly in manufacturing. For China to move up the value chain, and become an advanced-manufacturing powerhouse like Germany, it must move beyond off-the-shelf technology and copying rival designs and reap gains from genuine innovation, which can come about only through research and development.

China has amassed huge foreign exchange reserves, partly by keeping the value of its currency low. It now has to rebalance its economy away from the construction boom and financial speculation and toward private consumption and improvements in pensions, health care and other forms of social protection. Crony capitalism has been allowed to misallocate capital toward too-big-to-fail, low-productivity state-owned firms operated by loyal apparatchiks and away from dynamic private small firms.

Concentrated wealth poses problems for both countries. The Hurun Report, a Shanghai-based wealth monitor, estimated last year that the 83 richest delegates to the National People’s Congress and an advisory group, the Chinese People’s Political Consultative Conference, had a net worth of over $250 billion. By comparison, the declared assets of all of the roughly 545 members of the Lok Sabha, the lower house of India’s Parliament, amount to only about $2 billion.

In India, the collusion between Indian billionaires and politicians, while rampant, is somewhat less direct and more subject to political and media scrutiny. In China, collusion between party officials and commercial interests, especially at the local level, has caused widespread popular anger against arbitrary land acquisition and toxic pollution.

The economist and philosopher Amartya Sen recently argued on this page that India has lagged behind China because it had not invested enough in education and health care, which raise living standards and labor productivity.

He rightly emphasizes that deficient social services and the inequality that results are not just a matter of social justice, but of economic growth as well, as the history of much of East Asia shows. But one should not get the impression that progress in social services is by itself sufficient for growth. Exemplary welfare programs in the state of Kerala in India, and in Sri Lanka, have not been matched by spectacular economic performance. The latter also requires improvements in infrastructure, less cumbersome regulations and a culture that fosters entrepreneurial investment.

Mr. Sen raises but does not examine a puzzle: why voters in the world’s largest democracy cannot get politicians to effectively deliver social services. Infant and maternal mortality and poor sanitation are not salient electoral issues. This is partly because India’s fractious society (more heterogenous than China’s) has often emphasized uplifting the dignity of former oppressed social groups over basic good governance.

What of the Chinese model? The history of developing countries shows that authoritarianism is neither necessary nor sufficient for development. The Communist Party will find it increasingly tough to manage a complicated economy (without independent regulators) and political system (without an independent judiciary or effective rule of law).

Without innovation, China cannot sustain high growth, as the artificially low prices of land and capital for politically favored firms become difficult to maintain and the supply of cheap labor dwindles. Unlike in India, a significant slowdown could be regime-threatening for China — today’s young people, with higher expectations than their forebears, will have less tolerance for a shortage of good jobs and affordable housing. China’s leaders may be riding a tiger that will be hard to dismount.

On the other hand, India’s experience, like America’s, shows how partisan fragmentation in a rambunctious democracy can undermine effective governance. In the last few years the headline economic stories in India have been about pervasive corruption: politicized allocation of high-value public resources (land, mineral rights, oil and gas, telecommunications), shady public-private partnerships and the galloping cost of elections financed by the illicit incomes of politicians. India’s administrative system, where promotion has little connection to performance, encourages even more malfeasance than China’s. But India has independent judges, government auditors and a free press — checks on corruption that are absent in China.

As inequalities rise and resentment of official corruption, corporate oligarchy and economic and environmental depredations heats up in India, pressure for short-term populist palliative measures — subsidies, handouts, loan waivers and underpricing of energy and water — will also rise, at the expense of long-term investments in infrastructure, education and public health. China has deflected some of the same frustrations through high-profile construction projects, spectacles like the 2008 Olympic Summer Games and the 2010 Shanghai World Expo, and carefully orchestrated campaigns of nationalist fervor.

IN both giant countries there are glimmers of hope. China is making substantial advances in energy-efficient technology and improving health care and pensions. In India, voters are starting to demand good governance, and vigorous social movements against injustice — caste oppression, sexual violence andenvironmental degradation — are making a dent.

But China’s rigid political system makes it heavily dependent on enlightened consensus among its nonelected rulers, while India’s ramshackle, pluralistic democracy has been surprisingly supple, even if its citizens haven’t reaped the material benefits yet. They share a fundamental problem — a lack of accountability, especially at the local level — that, if not addressed, will make it impossible to sustain strong economic growth and provide a social safety net. In India, democracy is weakest at the village level: electoral participation is vigorous, but local elites often capture the local government, leaving bureaucrats little autonomy (or money) to carry out substantial improvements. In China, the failure of accountability is national, and inherent in the authoritarian system.

In the short term I expect China to do better than India in improving the material condition of its people, primarily because China has more money to spend on redistribution projects and because its infrastructure and administrative capacity are somewhat better. In the medium term, I anticipate that the two countries’ rates of economic growth will converge in the not-too-distant future, as India reaps the benefits of having a younger population. But in the long run, which country does better will depend on political reform, or its absence.