Chaotic capitalist India v orderly communist China.

Listener: 22 January, 2011

Keywords: Political Economy & History;

Some 125 million years ago a huge chunk of land broke off from Gondwanaland, drifting away at a rate of 20 cms a year (roughly five times the speed the West Coast is drifting north). About 50 million years ago, the triangle of the Deccan peninsula smashed into Eurasia, forcing up the Himalayan mountain range. The geological pressures are still there – witness the nearby earthquakes. Add to them political pressures, for north of the range is China, south is India (and Pakistan).

Even the borders of these two countries are unsettled, with a war in 1962 and unresolved boundary claims. Each became an independent nation only about 60 years ago, when the British Raj left the Indian subcontinent in 1947 and Mao’s Communist forces gained control of the Chinese mainland in 1949.

This stimulated debate over which would flourish better – “capitalist” India or “communist” China. We now know communism as it was then defined did not triumph, but neither did the highly intervened market of India – which has also since experienced considerable liberalisation. Today’s contest – if there be one – is between the orderly communist “democracy” of China and the mildly chaotic liberal democracy of India.

China seems to be winning, for its economy is growing at 8-10% a year, while India’s is growing at 6-7% – still two or three times the rate of the rich world. Were it not for China, India would be considered one of the world’s miracle economies.

With its larger village (farm) sector, India is more constrained by biology, whereas China is better placed for the huge American market. It is easy to beat up the prospects of either; India’s growing population will overtake China’s ageing one, which might affect their economic performances. (As a not insignificant aside, authoritarian China was able to impose family planning on its population; when democratic India tried this the government was defeated.) Each also faces various social problems: China has not got a proper middle class; India has caste and communal (religious) tensions. Both have environmental challenges.

Perhaps China’s recent economic success is a bit too, shall we say, “communist”. A major reason for the collapse of the Soviet empire was that its industries could produce only routine mass products. As income levels rose, consumers demanded increasingly complicated and varied goods and services, which required higher quality and nimbler production than Soviet-style economies and firms could deliver.

This applies to investment goods, too: the machinery in China’s successful factories is often produced in the US and Europe, as are the product designs. China and India’s production (including services) needs to become more sophisticated if the countries want to move beyond low-wage mass markets.

There is a view that privately owned Indian business, unshackled by political direction, is better positioned to make this leap. (The underlying argument celebrates the chaos of capitalist markets compared with the order of central direction.) Indians are not weighed down by the Confucian approach to knowledge and so are likely to be more innovative. Only time will settle the argument, but it may not be accidental that Infosys, the 10th largest software developer in the world, started in India.

The rapid growth and size of China and India are changing the shape of the world economy. Depending on how the European Union is treated, they are already respectively the second or third largest economy in the world and the fourth or fifth. We are entering an era of a multipolar world of five great powers, none of which can dominate the other four. Ultimately none can afford to get offside with another – since the other three big powers may align themselves with the “enemy”.

In any case, they want to trade. China and India are even building a railway across the Himalayas to facilitate it. While the geological tensions remain, let’s hope the political ones abate and they both get on with improving the quality of their people’s lives.

This is the first of a series of columns on India, made possible by a travel grant from the Asia New Zealand Foundation.