The Rise of the Asian Giants: China and India compared Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Leverhulme Centre for Research on Globalisation and School of Economics, Nottingham University March 15 th, 2007

2 China and India “Let China sleep, for when she wakes, she will shake the world.” Napoleon Bonaparte

3 China and India “China will again become a viable great power; India may become a great democracy.” Lord Meghnad Desai

4 China and India Potential Priorities Performance Prospects

5 1. Potential Asia’s rise is the third great transformation since the industrial revolution: –Early 19 th century: rise of the UK –Late 19 th and early 20 th centuries: rise of US, Japan and Germany and Russia –Post-second world war: from Japan’s surge to the rise of China and India East and south Asia contain more than half of humanity This is surely the end of the era of European dominance

6 1. Potential

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9 2. Potential

10 1. Priorities The two countries are both enormous and homes to ancient and sophisticated civilisations. But they are also fundamentally different: –China has been unified for at least half of the last 2,000 years, while India was never brought fully under a single centralised system of government. –India was conquered by foreigners who brought their culture with them; China’s were “sinicised”.

11 1. Priorities –China’s had an imperial system; India had dynasties. –Chinese imperial dynasties endured; India’s were brief. –China’s is an integrated society; India’s is pluralistic. –China’s historic source of stability was political; India’s was social.

12 1. Priorities These differences help explain a number of contrasts between today’s China and India: –China’s meritocracy; and India’s policy of reservations –China’s ability to mobilise resources; and India’s weaker public sector –China’s bureaucratic authoritarianism; and India’s democracy. –Chinese elites think democracy is inefficient; without democracy, there would be no India. These differences also are reflected in growth strategy and performance.

13 1. Priorities China’s growth strategy is a hybrid: –Like Japan and South Korea in the past, it relies on: Industrialisation through very high savings and investment; and; Trade as an engine of growth; –But China is far more open to trade and foreign direct investment than its smaller predecessors; and so –China is a vast combination of South Korea and Hong Kong.

14 1. Priorities China’s state plays a central role in development: –As mobiliser of resources; –As investor; –As manager of political consequences. China’s aim is “development without political upheaval”.

15 1. Priorities India’s growth strategy has been unique: –Growth without industrialisation; –Driven by skill-intensive services; –With low formal sector employment; –Tyranny of interest groups; –And relatively low trade and foreign investment. India’s aim is “growth without social upheaval”.

16 3. Performance Overview Openness Growth Contributions to growth

17 3. Performance: overview

18 3. Performance: overview

19 3. Performance: overview

20 3. Performance: overview

21 3. Performance: openness

22 3. Performance: openness

23 3. Performance: openness

24 3. Performance: openness

25 3. Performance: openness

26 3. Performance: openness

27 3. Performance: growth

28 3. Performance: growth

29 3. Performance: growth

30 3. Performance: growth

31 3. Performance: growth

32 3. Performance: growth

33 3. Performance: contributions to growth

34 3. Performance: contributions to growth

35 3. Performance: contributions to growth

36 3. Performance: contributions to growth

37 3. Performance: contributions to growth

38 3. Performance: contributions to growth

39 3. Performance: contributions to growth

40 4. Prospects China has outperformed India so far China does have weaknesses –A communist party-state –Weak rule of law But also important strengths: –Open economy –High saving and investment –High literacy –Classic east Asian export-oriented manufacturing –Big investment in infrastructure

41 3. Prospects India does have strengths: –Stable political institutions –A sophisticated legal system –English as the business language But also weaknesses: –Lower investment; –Failure to industrialise; –Weaker integration into the world economy; –Misallocation of public spending and worse infrastructure; –Distorted labour markets; and –Lower literacy.

42 3. Prospects

43 3. Prospects

44 3. Prospects India is in an excellent position to exploit the opportunities and, given its size, manage the risks Its performance has greatly improved over the past one and a half decades. But China’s performance shows India could do much better