Arguably, China?s successful embrace of one form of capitalism (?to get rich is glorious?) in 1978 ultimately played a role in steering India?s path of economic reform. Since then, China has often served as a benchmark for judging India?s progress, because it is the only other country that matches India in population size. Sorting out the lessons from China?s experience is always useful, beyond the comparison of the countries? planning exercises, the subject of my last column.
What should India learn from China, and what should it not?
One should start by rejecting the political values of China?s regime. Suppressing the free expression of ideas, or the exercise of political voice, is not necessary for economic development, or even for political stability. India?s previous flirtations with such suppression were never associated with economic progress, and recent attempts to impose broad censorship of the internet are indicators of insecurity of the political elite, and nothing more. The notion that China?s authoritarianism has virtues (often part of the ?Asian values? school of thought) to be copied by India must be totally rejected. Democracy is not incompatible with inclusive economic development.
In 2004, Joshua Ramo coined the term ?Beijing consensus? to describe China?s model of forward progress, as an alternative to the ?Washington consensus? articulated much earlier by John Williamson. Is that something to learn from? In fact, Ramo?s consensus was framed in terms of three broad and disparate themes: innovation, multiple measures of development and ?self-determination?. The last of these is an offshoot of an older rhetoric of anti-colonialism, while the second is both broadly accepted and perfectly compatible with the Washington consensus. On the other hand, the focus on innovation might be taken to reflect an approach that seeks to go beyond the current parameters of comparative advantage, to reshape the economy?s structure. This is certainly in line with China?s clearer focus on strategic industries, which I highlighted in my last column.
So India might learn from China?s approach to fostering innovation. There are several subsidiary aspects of this approach, beyond directly putting resources into research and development (though that is something India can learn from). China has been more self-confident in allowing foreign direct investment, and in creating the conditions for such investment. It has pursued upgrading its higher education system with a focus that puts India to shame. If growth is spurred by innovation, then India has much to learn from China on this front.
China has also pursued, at various times, trade liberalisation, fiscal discipline, tax reform and restructuring of government expenditure priorities, in addition to liberalising foreign investment. These are all part of the Washington consensus, and India has also done much in these dimensions, except perhaps improving the quality of government expenditure. In these dimensions, India is not learning from China, so much as learning from basic economic principles.
One area where India and China have diverged is in exchange rate management. China has fixed its exchange rate, and the presumed undervaluation has supported its pursuit of a mercantilist policy of export promotion and industrial upgrading. India, on the other hand, has been less firm about its exchange rate after the reforms of 1991, most recently permitting a relatively free float of the rupee. This is more in line with the Washington consensus, and coupled with the permitting of foreign portfolio flows, has sometimes come in for criticism. After all, don?t hot money and a gyrating exchange rate destabilise the economy? Should India learn from China on this dimension of economic policy?
It is true that, historically, mercantilism has often been a useful tool of development. But it is also true that there are other policy levers that a government can pursue to achieve commensurate results. If exporting leads to industrial upgrading and innovation, those goals can be supported more directly, rather than relying on the blunt instrument of exchange rate undervaluation. Nor is there any evidence that exchange rate fluctuations associated with international flows of portfolio capital have caused instability or harm to the Indian economy. On the other hand, a policy of keeping down wages and squeezing domestic consumption to promote export has high welfare costs that are not a necessary correlate of high growth.
The international macroeconomic side of China?s economic policy should therefore be consigned to the ?should not? column of what India might learn from its dynamic neighbour. At the other extreme, we should remember that before China embarked on its momentous policy shift, it had invested in its people in ways that India still has not. Basic health and education remain India?s weak spots, in terms of its development achievements. This is despite national missions and numerous expenditure schemes. Why did China do better? One conjecture is that India?s social fragmentation has played a role in its relatively poor performance on basic needs. But fixing this particular problem will require looking inward, not anywhere else.
The author is professor of economics, University of California, Santa Cruz