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.