It?s finally official?China is now the second largest economy in the world relegating the long stagnant Japanese economy to third place. China has chosen to downplay its newly acquired status insisting that it is still a developing economy with tens of millions of people still in poverty.
In per capita income terms, the Chinese have a point. The country?s per capita income is only $3,800, around one-tenth the per capita income of the US and lower (in not dissimilar proportions) than per capita income in Japan, Germany, France and the UK. Significantly, even though China is widely perceived to be the top manufacturing nation in the world (and it probably is in terms of volume), actual manufacturing value added in China is still lower than manufacturing value added in the US and Japan, both of which are often perceived to be declining manufacturing powers. Even with Japan, there is therefore, much catching up to be done.
But when you consider where China was in 1978 before it began its economic reforms?its per capita income was actually lower than India?s?what it has achieved in the last three decades is fantastic.
What makes China stand out though beyond its belated embrace of free markets, is the awesome capacity of the Chinese state. That?s what, in your correspondent?s view, really puts it miles ahead of India.
And I am not about to make the old, outdated and frankly wrong argument about authoritarianism vs democracy and the alleged superiority of the former.
China was, after all, an authoritarian state right from the Communist Party takeover in 1949. The first 30 years of communism were, as we well know, a disaster, worse even than the first 30 years of India?s disastrous socialism. But post-1978, the state must share equal credit with the market for China?s phenomenal performance for two reasons.
First, for enabling the smooth transition from communism in the first place. In 1978, communism was, after all, not an obsolete system that needed immediate junking?the Soviet Union was still in a robust cold war with the US. So, there was no real global momentum for change, of the kind that happened after the collapse of the Soviet Union in 1990.
Internally, in a system devoid of democracy and other freedoms, there was never going to be any mass movement that would have forced the need for change. Yet, the same party apparatchiks who had learned their trade under Mao Zedong, effected a complete U-turn and carried with them a country of nearly a billion. Closed political systems are not usually known for that kind of quick adaptability. But China was different. It continues to be different from other ?closed? political systems even today.
For one, a group of people take key decisions, rather than a single individual. There is much discussion and debate on policies within the top leadership, even if it isn?t made public. The top leadership undergoes a complete makeover every 10 years, and there is a respectable amount of democracy in that process of change, more perhaps than in India?s political parties. That makes the system less tired, less rigid, more dynamic and open to change and renewal. Interestingly, and this is a point well made in Pranab Bardhan?s new book on China and India, the Chinese state is highly decentralised, where many decisions are taken away from Beijing. The Centre in Beijing has actually devolved considerable financial and functional autonomy to governments in the provinces and to local governments (in cities, for example).
Above all else, this helps pinpoint accountability in the functioning of different organs of the state. And this directly relates to the second reason for giving the Chinese state enormous credit for the country?s economic performance?its ability to deliver top class public goods, particularly infrastructure. That is probably the single most important reason (with low wages in second place) that acts as a magnet for foreign investment in manufacturing to China. The lack of good quality infrastructure is probably the single most important explanation (with labour laws a distant second) for the absence of a diversified (particularly labour-intensive) manufacturing sector in India.
In fact, Beijing?s willingness to allow autonomy to other organs of the state also explains the strength and survival of thousands of autonomous state-owned enterprises, which continue to contribute a significant share of GDP and an even more significant share of employment in China.
If there is one thing that separates China from India, it is the superior functioning of the Chinese state. The Indian state is democratic (and that has many things going for it, including freedom for citizens), but it is also too controlling, too unwilling to allow genuine autonomy to state agencies and largely unable to enforce accountability. If India is ever to catch up with China, the functioning of the state needs to be radically reformed to complement, and not obstruct, the growth already being delivered by the forces of the free market.
?dhiraj.nayyar@expressindia.com
