A window of opportunity

In the 2000s, India was often coupled with China. At a time when we were growing at 8 and 9 percent annually, many argued we were just a step behind China, having begun reforms a decade later. The 2010s changed that, as our growth rate fell, and China continued to grow rich. It is worth reminding ourselves that from the same per capita and overall GDP in 1980, China is today over five times India. At $11,000 per capita it has a $14 trillion economy, to India’s $2000 per capita and $2.7 trillion economy. China’s manufacturing sector is eight times India’s, at $4 trillion, to India’s $500 billion. China exported $65 billion to India last year, almost all manufactured goods; we exported $21 billion to China, largely commodities. Last year, after China’s adventures on our northern border, we attempted to reduce our dependence on China. The result? China overtook the US to become our largest trading partner; we are simply too dependent on them for everything from Active Pharmaceutical Ingredients to smart phones. And China’s total R&D spending is twenty times India’s, at $375 billion. China’s Huawei spends $ 19 billion on R&D each year, more than all of India’s R & D spend ($ 17 Billion) – every firm, government laboratory and university combined. So what chance do we have of catching up?

Perhaps I am becoming soft and sentimental as I get old, but I think we have a very good chance. China has had a dream run, growing at 9 percent annually for forty years. After foisting the Covid virus on the world and deceit over its initial spread, it handled things amazingly well. A country with the same population as India reports just 6000 Covid deaths, to our 450,000 (both official figures). But even though it has fully vaccinated over 90% of its total population (we are at 50% of our adult population), it continues to follow a zero-covid policy, choosing to stamp out instead of live with the virus. Xi Jinping, China’s President, has not left the country in two years. As more and more countries (Singapore, Australia and New Zealand now also included) move to living with low levels of serious cases from endemic Covid instead of defeating it, China is increasingly isolated. Gideon Rachman suggested in an article in the Financial Times that China’s zero-Covid policy, and corresponding self-isolation, could extend ‘well into 2023’. This self-isolation is having an impact on China’s economy – domestic travel is well down even on last year, domestic consumption is depressed, and increasingly draconian zero-Covid practises (locking 30,000 people into Shanghai Disneyland till all could be tested, after discovering one case) are having an impact. Further, new controls on China’s tech giants have supplemented concern with wobbly real-estate companies and increasingly anti- business rhetoric from Mr Xi. As a result, private equity investors in Silicon Valley, sovereign wealth funds in Singapore and Britain’s chief spy are all expressing concern about an excessive reliance on China. There is a widespread undercurrent of wanting to diversify away. After a four-decade-long story of amazing success, China seems to be going wrong.

A 2012 book by the economists Daron Acemoglu and James Robinson asks Why Nations Fail. The reason, they argue, is the nature of institutions, in particular between extractive and inclusive institutions. Both economic and political institutions matter. Extractive institutions exclude the majority of society from the process of political decision-making and income distribution. But institutions can also include most of society in economic and political life. 'Rich nations are rich largely because they managed to develop inclusive institutions at some point in the last three hundred years,' they say. Inclusive economic institutions are open: people with good ideas can start businesses where their property rights are protected, workers can undertake activities where they can be more productive and earn more, and more efficient firms will replace less efficient ones. They go on to say that 'Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education... The ability of economic institutions to harness the potential of inclusive markets, encourage technological innovation, invest in people, and mobilise the talents and skills of a large number of individuals is critical for economic growth.' Economic and political institutions tend to reinforce each other. Extractive economic institutions (a fairly small group of people controls and benefits from most economic activity) rely on extractive political institutions where power isn’t shared.

But countries can grow for extended periods with extractive political institutions. In the last forty years, China has been the world’s fastest growing country, while combining extractive political institutions with inclusive economic institutions. With Deng Xiaoping, economic benefits were more widely shared. They continue, writing ten years ago, that 'The growth process based on catch up, import of foreign technology, and export of low-end manufactured products is likely to continue for a while....history and our theory suggest that growth with creative destruction and true innovation will not arrive, and the spectacular growth rates in China will slowly evaporate.'

Inclusive economic institutions are first inspired by, and then reinforced by, inclusive political institutions. More plural systems of governance deliver a more inclusive political system. The great economist Gary Becker, who won the Nobel Prize in 1992, wrote a blurb for Why Nations Fail: 'The authors convincingly show that countries escape poverty only when they have appropriate economic institutions, especially private property and competition. More originally, they argue countries are more likely to develop the right institutions when they have an open pluralistic political system with competition for political office, a widespread electorate, and openness to new political leaders.'

Messers Acemoglu and Robinson (A&R) write, again concerning China, that ‘Inclusive economic institutions can only survive in the long run if they are supported by inclusive political institutions.’ Under increasingly authoritarian rule, China is, it would seem, working hard to prove A&R right! In the bargain, they are putting at risk the very foundations for decades of economic success. As China struggles, a window of opportunity for India to catch up has opened. We must take full advantage, but that means being clear of what makes us unique as a country, where our strengths really lie, and how we can play to them. That is the second part of this article.