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June 15, 2010

China & India – Awakening Giants, Feet of Clay

Professor Pranab Bardhan

By kind invitation of Virenda Sharma MP, the Henry Jackson Society was pleased to host a discussion with Professor Pranab Bardhan, Professor at the University of Berkley, BP Centennial Professor at the London School of Economics and author of Awakening Giants, Feet of Clay.  He discussed popular misconceptions of India and China and the differences between their respective economies and methods of governance.


Thank you Mr Chairman, Ladies and Gentlemen.

Let me start by pointing to something that I am not going to talk about neither here nor do I talk about it in my new book and that is –in the Western media in particular, there is a great deal of interest in what the rise of these two large countries, China and India, implies for the West. This is certainly an important question and no doubt there has been a very big change in the last three decades in the rise of these two big countries.  In fact if I can give you a simple historical fact these two countries China and India in 1820, contributed to almost half of world income.

Then if you jump to 1950, India and China were contributing 9% -a huge fall which has a lot to do with what happened in this period in these two countries.  The two countries that counter the international powers have not been altogether pleasant. Then if you jump to 2025 and look at the projections: for 2025 are that China and India will contribute about 36% of world income.  So in 200 years, 1820-2025 – there will not be full restoration but there will be partial restoration.  So that is the first part of the title of my book –“Awakening Giants…” But what I was going to say is that my book is not really about what it implies for the rest of the world, it is more about what it implies for the people within those two countries.  There are 2.5 billion people living in those countries who are mostly poor and what has happened to the lives of these large numbers of people and under what structural constraints do they live?

Now since I am going to talk only for about 20 minutes I do not have the time to cover many of the important issues but I am certainly going to talk about their achievements and failures and that is the other part of my book’s title “Awakening Giants, Feet of Clay”.

In particular I am going to talk about two or three classes of “some needs” that have developed around the rise of these two giants.  You see that all the time in the financial media, financial press and financial related TV programmes and also in some academic writings: you see that there are some things which are not entirely true.  But through constant repetition, they become part of conventional wisdom.  So my book is largely about qualifying and sometimes challenging those parts of conventional wisdom.  I will not have time to go over all of these, but I will take three sets of such qualifications to conventional wisdom.

First of all and these are examples really that I can give you.  At the question and answer time I would be happy to elaborate more on these. –but first of all if you read even the most respectable parts of the financial media, you will often see that the big changes that have happened to the likes of people inside these two countries, say huge change in the level of poverty.  Poverty reduction in the two countries has been quite significant in India and dramatic in China.  For example in China, depending on what kind of poverty numbers you have in mind, but if I take the poverty line released by the World Bank of $1 per capita per day and $1 in such a way deflated that it is comparable within the countries deflated by 2005 prices (because the money income has to be deflated to find the real value of that money): if you take that, then between 1981 and 2005 -24 years and less than a quarter of a century, 625 million people have lifted above that poverty line in China.    Never before in history has this happened and this is an unparalleled achievement.  India has also had a significant reduction in this period although nothing on the level of what has happened in China.  I am not going to go into the reasons why their performances have been different right now but I would be happy to answer questions on this later on.  In the financial media it is often said that these significant changes have happened because of globalisation, because this is the period in which China and India decided to be integrated into the global economy.  There is no doubt that I am actually in favour of globalisation and there is no doubt that globalisation plays some role in this reduction of poverty.  I am going to claim and I have cited a lot of statistics to prove this –that this dramatic reduction in China’s poverty and significant reduction in India has relatively little to do with globalisation and much to do with what happened in the country in terms of internal factors.

So what kind of internal factors do we have in mind? –if you look at the numbers (there is a table in my book giving these numbers for most of these years 1985-2005), you will see that most of the reduction of poverty in China happened in the early 1980s.  China got really integrated in the global economy in the 1990s.  Particularly between the latter part of the 1990s and 2001, China became a member of the World Trade Organisation.  I am talking about the early 1980s and at this time there was a big change in agriculture in China.  These two countries are primarily agrarian so most of the poor are concentrated even today in the agricultural sector.  In China something big happened in this agricultural area in the early 1980s and what happened was that China moved from the commune system of agriculture to what they called the “household responsibility system,” namely that each household could now cultivate its own land.  By own land I do not mean that they got ownership, they got user rights but everybody had some piece of land. More importantly and for my present purpose, everybody got an equal amount of land.  This was one of history’s most egalitarian redistributions of land and one of the most egalitarian land reforms in recent history.  So as a result if you are a poor person, if all else fails, you can always fall back on this piece of land.  This provided a flow; India does not have that flow.  In India even today, a very large percentage of the rural population is still landless, they do not have any land or for all practical purposes they do not have any land.   So that damaged the big chain and this is an entirely internal domestic factor very little to do with globalisation.

Globalisation did play a role in China in the later years because it allowed China an opportunity to expand jobs in labour intensive goods which were then exported.  –What do I mean by labour intensive goods? –I mean things like garments, shoes, toys which employ a lot of unskilled labour.  Poor people can get jobs there; so that came later.  But more than half of the 625 million people were lifted above the poverty line in the early 1980s.  India even now is much less globalised, in the sense of exposure to international trade, foreign investment etc. Although foreign investment is significant in India now, it is less significant in India than it is in China.  But in India this reduction in poverty has not happened as much in the 1980s before this global integration really happened as much as in the 1990s.  What were the other factors?  -they were the Green Revolution for example, so that agricultural change again played a role in India.  So that is about poverty.

Similarly you will hear often stated that in China, inequality is going up which is true; in both China and India, economic inequality is going up and you will often see this stated in the financial papers like the Economist magazine.  You will often find stated that China’s inequality has gone up so much that it has now caught up with the United States and very soon it will be as unequal as Latin America; but I want to talk about the statement that you see in the financial media that China’s inequality is so high now.  There is no doubt that China’s inequality is rising but it is not as high as the financial press makes it out to be.  Another statement you will often see is that in India it is less unequal than China; that is not true.  Most of the time, the figures that are cited they are comparing apples and oranges: India does not actually collect data on income distribution so what you find cited in the newspapers etc. is not income distribution, it is consumption expenditure distribution. In almost all countries, consumption expenditure distribution is less unequal than income and if any one is interested I would be happy to elaborate on this.

At the moment inequality in India is much higher than in China.  Chinese income inequality although I have just said that India does not collect income distribution, there are one or two institutions which occasionally collect income data in India and are not the types of data that companies publish.  The other thing is that Chinese income inequality is much below the United States but very below anywhere in Latin America.  The important thing however is not income inequality –for these poor countries what is important and I presume this is true in some sense of all countries, but particularly of these two countries, is inequality of opportunity.  Philosophers make this distinction between inequality of opportunity and inequality of outcome.  You and I have the same opportunity but suppose that you were more hardworking than I am, obviously you will have more income but people do not usually mind that income difference, it is the inequality of opportunity that they are concerned about.  The inequality of opportunity in these two countries, largely depends on three major factors:

1/how unequal is land distribution because these are agrarian countries still? We had measures of land distribution –inequality of land distribution is much higher in India than China.

2/how unequal is education? Do people have the opportunity to educate themselves because that is an important way of climbing out of poverty.  How do you measure inequality in education?  The answer is very crudely.  The crude measure of doing this and we have access to that is by saying suppose each of us write a number on a piece of paper saying the number of years of schooling we had and then we put these pieces of paper together and do a chart of distribution: this is the crude way of measuring education inequality.  India has one of the worst and most unequal education distributions, in fact India’s education inequality is worse than most Latin American countries.  China is much better when it comes to education inequality.

3/ The third kind of inequality of opportunity that is important is social and there the picture is mixed when you compare China and India.  For example if you are looking at gender inequality the picture is quite mixed.  In fact China is worse in gender inequality if you take the crude measure of how many age groups 0-5, how many boys are there versus girls?  In 2009, in China there were about 119 boys for 100 girls.  There is tremendous discrimination against girls particularly given that they have a one child policy so quite often sex selective emotion is rampant in China.  In India, the corresponding number for 100 girls is 109.  It is quite bad in north-western parts of India that the average is 109.  On the other hand China is much better in gender inequality when it comes to female education; female literacy for example is much better.  Similarly women’s participation in the labour force is much better in China, so in that sense Chinese women have the opportunity to contribute to economic growth more than Indian women do.  So that is about inequality and that is the first set of issues.  Again some people say inequality has gone up in both of these countries because of globalisation and on this again I am not sure.  Yes, globalisation does sometimes increase inequality but not necessarily: Ill just cite one piece of statistics and then move onto my second set of examples. The statistics are that if globalisation is the main cause of rising inequality in China then you would expect in coastal China which is much more exposed to international trade and foreign investment, here rising inequality would be higher than in the rest of China but this is not true.  The rise of inequality is highest in China in the interior provinces in the West, there and coastal china income is going up everywhere.  The rise is more in the provinces which is less exposed to globalisation so there are other reasons.  So that is my first set of issues challenging existing conventional wisdom.

Moving onto the second: China and India have now become poster boys for economic liberalisation, privatisation etc. You see this being cited all the time in the financial press.  It is very doubtful -yes both China and India have liberalised a great deal but more in China than in India but compared to some other countries they have far to go.  So let me give you an example: there is a conservative think thank in Washington DC called the Heritage Foundation and some of you may have heard about it.  Every year they publish a ranking of economic freedom (by this they mean freedom to do business) so essentially how low the regulations are, restrictions, controls etc on economic business and they give a rank.  These are ranked I think by more than 150 countries so if you go to their website you can get the 2010 ranking.  Now where do China and India belong? –Certainly not in the top hundred.  They rank number one as the most free which is normally Singapore, Hong Kong etc and the least free as a very high number in terms of ranking.  China and India are normally around the ranking level of the 120s and not in the top 100.  In fact then they classify different countries in categories, -free, mostly free, mostly un-free etc.  India and China are listed in the mostly un-free category.  In fact economic freedom index wise, India and China are below Saudi Arabia, below Singapore of course, below even Guinea and almost all of Latin America and yet economic performance is much better in China and India.

My second proposition is yes that economic globalisation has happened in China and in India but their growth is not due entirely to economic freedom.  Freedom is important but there are other factors.  In fact if you think of the last two years of financial crises in the world, as you know China and India have recovered from the crisis much faster certainly compared to other Western countries and there are many reasons why this is the case.  Some of the reasons behind this fact has to do with the simple elementary fact that China and India have not liberalised very much in the financial sector.  To this day, in the financial sector the state controls the major part of the banks both in China and India; more in China than in India.  Bond markets are very weak in both countries, many kinds of standard financial liberalisation that international organisations recommend have not been carried out in China and India.  For example, capital account controls are still very much there in both China and India.  The one reason why China and India have survived the economic crisis better is because the savings rate is very high in both China and India. For poor countries, Chinese savings rates are about 50% and India, which is much poorer than China at the moment, save about 36%.  Their high savings rates create a lesser dependency on foreign resources. Certainly foreign resources come to those countries, but they are less dependent on them and can therefore survive the crisis better.

This brings me to something that I want to mention about the nature of capitalism, which is just beginning to develop in China and India. In India it is fairly straight forward because India has a long history of capitalist business, and in fact over the last two decades, with economic reforms, the sector that has advanced the most is the corporate business sector. Private corporate business in India is much more vigorous than in China. The financial sector I just talked about is also much more vigorous and much more transparent in India than in China.

Chinese capitalism is definitely the more fascinating subject because what is most arguably the most vigorous capitalism is taking place in a country ruled by the Communist Party – certainly an irony of history. If you look into the nature of the development of capital in China, it is kind of complicated. Much of the source of dynamism in China is due to the development of private capital, but private capital still operates with a handicap. Though they have operated with more handicaps in the past, there are still some that are more of a handicap than others, particularly with regard to finance, as an example. State owned companies still dominate in many sectors and that is where the nature of capitalism in China has got to a point to worry about. In some sectors, what is developing is predatory or corrupt capitalism. A senior Chinese economist, probably one of the most well-respected located in Beijing, has described Chinese capitalism as ‘crony capitalism’. In my book I go into this quite a bit, but let me just give you one number. This is a Chinese study by academic and social sciences, conducted in 2007, they wanted to find out the total number of the richest people in China – richest defined as those that had, at that time, more than 100 million Yuan, which was about $14 million USD at that time. They counted the number of Chinese citizens, not abroad, and the number came to about 3400 if my memory serves me right. The study then showed that out of the 3400, nearly 3000 were relatives of Party officials.  This is a fantastic number!  I would not have believed it if it was not a document of the Chinese academia and social sciences, and it is a great indicator of the ‘crony capitalism’. This is an authoritarian country and if you are politically well connected there you can get away with anything – and that is the predatory nature of capitalism that I am referring to.

Having said this part, the part of the feet of clay, let me also dispel some of the ideology that has developed on the other side. On the other side, people say ‘all the big developments in Chinese growth is because of what happened in the last quarter century’ or the last three decades after economic reform. People deny the legacy of the earlier period, a lot of bad things happened in the earlier period, everybody knows that, but everyone should not completely deny the positive legacy of that period as well and I will give you an example. Not just in the West, the Chinese leadership and the Chinese elite will tell you this, but the earlier period was a period of darkness.  Let me give you an example, and this is a particularly shining example when compared to India, China in the earlier period – the so-called ‘Socialist Period’- improved basic education and health for the poor.  In a way, India to this day has not done that.  This all provided the ground work for industrialisation. Similarly, China had a system of rural infrastructure – much more developed than in many other developing countries including India – which helped later industrialisation and egalitarian land distribution.

One other thing that happened both in China and India was that the state played a very important role, in the earlier period, in building the technological capacity.  In India you have heard about the Indian institute of technology which is run by the state. In China, the state even in 1918, controlled research and development, which was one of the highest in the developing world, and on that basis of technological achievement, China has gone into selling high-tech media oriented technology products. For example, many of our laptops that we use are made in China, mobile phones, digital cameras – all made in China. Now China is going into even more high-tech products and India of course is going into even more high tech software, pharmaceuticals etc. This is possible because of the technological base that was developed in the earlier so-called Socialist period.

The last thing that I want to talk about is again the need that is developing, not so much in the West, but more in China. It is a need that is propagated by the Chinese leadership. You hear it all the time when you go to China and it is now being said in the international forum, and that is the Chinese dramatic success shows, compared to other developing countries including India, that in the early stages of industrialisation authoritarianism is good.  I do not believe this for a moment. I say this in my speeches to Beijing, and they did not like it, I said that authoritarianism is neither necessary nor sufficient for development. In fact I gave examples, if China had some democratic accountability, some of the ‘feet of clay’ that I am referring to, would not have been there. I have already talked about the predatory capitalism, let me give you another side of that.

Some of the capitalist excess that is taking place in China now is happening because it’s largely the local government Communist officials that own or take money from local business. So what kind of capitalist excess did I have in mind? One, damaging the environment – China’s overall damage is really unbelievably high. The local officials do that because up until very recently, local officials promotion depended on high economic growth in the local area. They just went at a break neck speed for growth rather than doing something about the environment or doing something about inequalities. That is one part of the capitalist excess; the other part is the local officials, in collusion with local businesses, are grabbing land, essentially taking land away from the peasants. They can get away with this because of the lack of democratically accountability because the local officials do not have to win elections.

India also has problems with this type of land acquisition, but they can also protest. If there are environmental problems, they can protest because there is a very active environmental movement in India and nothing of that kind exists in China. What China propagates with regard to authoritarianism being a need to gain industrial success is not true. One final remark, a lot of people think the Chinese government is strong and that it makes decisions very quickly etc, and all this is true – the leadership is a profession. In comparison, India looks very messy. It can take a long time to get used to it. If you visit India after visiting China, it can look very chaotic. I am going to claim that India’s strength lies in its messiness because this messiness arises out of democratic endurance. In China, because it does not have democratic accountability, what happens is that the Chinese leadership does not get the correct information because the loyal party official will suppress bad news until quite late. The Chinese leadership, since it does not have democratic accountability, will over-react. They will act very heavy handedly, and if you ask me in that sense, the Chinese government is weaker, is more brittle, because they have a tendency to go off the rails.

In India, during the financial crisis, when the Chinese growth was falling a little bit, Chinese Party newspapers started saying that if it falls below 8%, there is trouble with the government. An Indian colleague, jokingly, said that if India’s growth would fall to 0%, nothing would happen. There would be no threat to the stability of the government because the government derides its legitimacy from elsewhere than from democratic accountability.

Getting back to the land acquisition law in India, the law we have is from 1894. There is not much land reform going on in India in the last two decades, but the trouble that is brewing now is the government is trying to get that land for industrial purposes, which is legitimate because industry is what will create jobs, not agriculture in India – too many people are in agriculture. I have written several articles in the Indian press on this, and I think the major problem is to re-think the question ‘why are the peasants unwilling to give land even though they know the productivity in agriculture is not merely low but is declining because the demographic pressure on land is high?’  I think it is because the compensation is not good enough.  I have suggested compensation which I think will make the peasants quite often voluntarily give up land if they really get good compensation.  The government is aware that there are political problems.  The different political parties have different opinions on this.

With regards to the nature of capitalism in both China and India, I should perhaps rewrite my book and include a chapter this with more on China than in India.  Let me give you a striking example –in Shanghai or any other major city you wake up in the morning and see on your house wall written in white paint there is (and I can even tell you the paint) one Chinese character and if you are Chinese you know what it means.  It says “to be raised, or destroyed;” so a local official in cahoots with the local business has decided to bulldoze your house without even telling you.  Quite often if you go and complain they will not even listen to you, the police will not consider your case and you will get minimal compensation.  There is nobody that you can turn to.  It is not an accident in spite of all the repression in China that they have now stopped publishing data about this.  The latest data that they published in 2006 amounts to 87,000 incidents in rural China primarily because of two reasons.  The first is because of land grabbing by local officials; India has been protesting about land acquisition but it has been taking place no where near the scale of that in China.  Already by 2005, about 70 million farmers had been evicted in China (these numbers are given in my book) and their land had been grabbed.  Democracy is flawed in India, it is a ramshackle democracy but it is a vigorous democracy because it is not just shouting and protesting.  Indian democracy does not depend on the middle class of liberal values, its the poor people’s fated democracy.  Larger numbers of poor people vote in India than in the Western countries and they are very assertive.  Unlike in the United States, where if you are a US congressman, the chances of being re-elected are very high, if you are a MP in India, the chances of not being re-elected is very high.  Quite often they say “well he or she has not done anything for me” so we are going to thwart this democracy.  Yes there are other aspects of democracy; which are to do with rights and what you are referring to which are basic needs.  Basic needs are part of an economic right and you refer to this being the tribal population’s problem within the most deprived but I can give you statistics by different socio-economic groups.  For a large number of socio-economic groups, their situation has improved considerably, however not enough to my satisfaction.  Chinese performance in poverty removal has been much better than in India.  The problem is that India is much a conflicted society than China which is a much more homogenous society and India has social conflicts.  Quite often for poor people, although a leader has not done enough for removing their poverty, they vote for a politician because the politician has improved their dignity, in terms of caste and social dignity etc and these are very important in a heterogeneous high conflict population.

With regards to bias in other poor places in China and state control of growth in particular provinces, this would not be loosened but the Chinese authorities are worried about it.  I already referred to the 87,000 incidents of unrest reported by Chinese police in the countryside but I think that is less important for the Chinese legislature because in the countryside, people are scattered around.  So whenever there is unrest, what the Chinese immediately do is try to contain the conflict so that is does not spread, immediately punish the leaders and then to satisfy the local people they punish the local officials but they will not allow it to spread.  Their problem is in the urban areas, in the urban cities and towns where inequalities have grown faster and now there is a property bubble going on fed by the state laws.  There was a huge overstretching of credit and many believe that China will have in the future a large number of what economists call “non-performing loans” –bad loans and that might lead to the property bubble bursting.  Already the property prices are so high, that many low class people can not afford to have a flat or apartment.  An example of this –I do not know how many of you have read in the last two months there have been several incidents of people in China going crazy stabbing children in schools.  There are such crazy people all over the world.  You hear it in the United States that people have been shot, here in China they have been stabbed.  A sociologist has studied these recent incidents and let me give you once incident: -I forget the name of the area but this person who stabbed several children –what was his background?  Well he was actually a surgeon in a local hospital but had resigned from that.  He did not have the sort of job you would expect of someone who had acted in this way.  His problem was that he was going out of his mind for the simple reason that he tried very hard to get an apartment but could not afford it.  This is particularly important because as I already told you China has fewer girls than boys so if you are an eligible bachelor it will be very hard for you to get married without an apartment and so he was dating women and getting frustrated because nobody would marry him and go out with him because he did not have an apartment.  Following on from this he became crazy; I am not saying this happens all the time but it is symptomatic of the housing prices going out of most people’s reach.

So a lot of people were extremely dissatisfied about that in addition the land grabbing which was going on.  People have bits of land and bulldozers come and remove you and then you are given a pittance for compensation.  The other thing is the internet because discontent rises much faster in the cities through the internet.  The Chinese government tries to control the internet –they call it the “great firewall” like the Great Wall of China, but the internet savvy people always play cat and mouse games with the sensors.  Do not underestimate the strength of the Chinese sensors however, they are very good at their work.  But nonetheless if there is a disturbance, things will spread; the rumours will spread very fast in China and China has the world’s largest internet savvy people.  Although I can not predict what will happen, but all together if you ask me where disturbances will break out –this will happen in the cities.  Last but not least, a large floating population of migrants have come from the villages and work in the cities but they do not have the privileges.  Their children for example can not go to the school, they do not have the health benefits and retirement benefits.  The benefits for this micro population are all in the villages from whence they came.  So these things are explosive, whether they will explode or not I do not know.

With regards to high saving rates: the main reason why these are so high in China and India is because neither country has good social protection so whenever you get some money you want to save for your retirement because most of the people are not covered by retirement benefits or indeed health benefits. They do not have educational benefits for their children either so they want to save for these too; lack of social protection is not the only reason for these high rates therefore but it is a major reason.

Between 2003-2007 the phenomenal growth in world trade just before the world economic crisis contributed to Chinese export growth hugely.  It contributed to 15% of the growth, 85% of the growth was domestic.  I think over time the dependence of the domestic socio group will increase in China however there at least one or two things which will dampen China’s growth over time.  The first is demographic because Chinese population is aging very fast because of the one child policy.  If you look at the numbers of workers to dependents, there are more aging dependents to workers.  This will peak in China in three years in 2013, in India it is going to peak in 2035.  So India’s population is much younger and younger people save more than the older people and younger people are not so productive as old people.  So both these reasons mean that India’s growth will go up over time, China’s growth will probably dampen over time.  On the other hand, Chinese higher education, science and technology are advancing much faster in China than in India so even though there may not be a quantity of people, the quality will improve much faster.  The other is information technology which I mention in my book if you censor too much, it has a negative effect on innovation in information technology because the major damage of censorship is sub-censorship and you are afraid to go in certain directions because you do not know the potential consequences.  In an increasingly knowledgeable economy in the world this will be a problem for China.

I mentioned in my talk that China often acts unnecessarily heavy handedly, it is also true in the case of their fertility control policy; for instance for one part of India, Kerala which is in South India fertility rates have declined faster in Kerala than in China even though Kerala does not have any drastic one child policy.  This has happened because of an improvement in mothers’ education and also their job opportunities so as you can see there are other ways of bringing the fertility rate down and this is another example of this.  China understands that their fertility rate is unnecessarily heavy handed so Chinese authorities are slowly relaxing the one child policy; already in many rural areas this has already been relaxed and you are able to have two children.  In the cities they are worried that they will not be able to control things, and the Chinese government to me gives the impression of being a “control freak”.  Some of you may know that at the time of the Olympics, the major national anthem was going to be sung by a little girl but at the last minute they discovered that this little girl who sings wonderfully had a gap between her two front teeth.  This issue went all the way to and was discussed in the Politburo and the Politburo decided that she could not sing because of the gap between her two teeth.  Another prettier girl was chosen to lip-sync whilst the other girl sang from behind –this is what I call a control freak!