The Next Asian Miracle by Yasheng Huang: A Discussion

While browsing through the latest issue of Foreign Policy, I came across this article, "The Next Asian Miracle" (Foreign Policy, Issue 167 - Jul/Aug2008), by Yasheng Huang, Professor at Sloan School of Management, MIT. Professor Huang is also the author of Capitalism with Chinese Characteristics (New York: Cambridge University Press, 2008). The article turns conventional wisdom on its head when asserting that, "Democracies are peaceful, representative—and terrible at boosting an economy. Or at least that’s the conventional wisdom in Asia, where for years growth in India’s sprawling democracy has been humbled by China’s efficient, state-led boom. But India’s new found economic success flips that notion on its head. Could it be that democracy is good for growth after all? If so, China better watch its back".

Interestingly, Yasheng Hunag is also the author of another exciting piece written along with Tarun Khanna, Professor, Harvard Business School, "Can India overtake China?" (Foreign Policy, Jul/Aug2003 Issue 137) in which they put forward the view that, "What’s the fastest route to economic development? Welcome foreign direct investment (FDI), says China, and most policy experts agree. But a comparison with long-time laggard India suggests that FDI is not the only path to prosperity. Indeed, India’s home grown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets". The following post, discusses Huang's findings as they go against the logic that is flowing in the pro-liberalisation circuits in India that democracy is bad for growth.

In the past decade, we the privileged in India have been watching the Chinese growth with awe inspiring admiration. The blistering infrastructural growth of which the train to Lhasa, Tibet was one example, there have been many other such momentous public infrastructure projects which we in India, sighed about and fantasized might occur here. Chinese infrastructural development in the past decade rivals some of the best in the developed world and is one of the most visible marker of how China has left India behind. The Indian case right now is one of 'pessimistic optimism', optimism about the metropolitan airport modernisation projects and the other such plans but the pessimism comes about with the delay and the uninspiring results.

After reading Pallavi Iyer's account Smoke and Mirrors: An Experience of China (New Delhi: Fourth Estate, 2008), The Hindu's China correspondent, instinctively, I suppose for Indians, does the inevitable China/India comparison and concludes that the Chinese have left us far behind. It did smack an easy conclusion to make especially if the most consistent inferiority she registers is those related to infrastructure. In one anecdote, when travelling with a Chinese delegation from New Delhi to Agra, she recounts how one of the Chinese, one hour into the journey asks her, when do we get onto the highway! The hullabaloo over the nuclear deal has turned the most optimistic into cynics, of the risks of negotiating a multi-party democratic system, (only throws up coalition governments in the time since reforms started (1992) in India) and it has made the best of us yearn for the authoritarian infused efficiency associated with the Chinese.

In the article under discussion, Hunag examines, "... the commonly held notion that—especially among Asian countries—authoritarian states have an advantage in growing an economy compared with their democratic counterparts, who are forced to reckon with such pesky trappings as labor standards and political compromises. But surely, the familiar China-India comparison would support an authoritarian edge, right? The conclusion seems so obvious: China is authoritarian, and it has grown faster; India is democratic, and it has grown more slowly."

The conclusions are different as India seems to have left behind the Hindu rate of growth, 2-3% annual and is growing at the East Asian rate, 8 or 9 %. The growth is not merely in the IT sectors and Hunag says that manufacturing is taking off and the agricultural sector too shows signs of growing (I have my doubts about this really rosy picture Huang presents, we should not forget that we have farmer suicides in one of the fastest growing states of Maharashtra). Starting from these figures, Hunag states that where does it leave the 'authoritarian edge' argument and hopes that the 'Indian miracle should debunk-hopefully permanently-the entirely specious notion that democracy is bad for growth". Huang further suggests that the 'Chinese political elite should reflect on the Indian experience deeply as well as absorb the real reason behind their own miracle'.

For long the idea held that there was a trade off between economics and politics, but the idea was never proven. A deeper look at India and China, 'shows that they have succeeded and failed at different times for remarkably similar reasons. Their economies performed when their politics turned liberal; their performances faltered when their politics slid backward'.

The India Story

The 1990's saw privatised TV stations, political decentralisation and improved governance. Indian growth stagnated in the 1970's-80's not because of democracy but because India was less democratic than it appeared. Nehru's economic choice of a developmental strategy is always reviled and condemned for the limited Hindu growth from the 1950-1990's, but according to Huang, the real culprit was the Indira Gandhi regime (1966-1984). On Nehru's economic policy, Huang is kinder when he states that, 'commanding-heights approach was the reigning ideology in many developing countries, some of which, like South Korea, were quite successful. The issue is not how harmful Nehru’s economic policies were, but why India intensified and persisted in this model when it was clearly not working. To answer this question we have to understand the lasting damage that Indira Gandhi inflicted on Indian democracy.'

Political scientists have long been familiar with the damage that Indira wrought about on the system, in terms of destroying institutions painfully laid and built during the early years after independence by her father, Nehru. This has been aptly summed up in the article, "On the crisis of political institutions in India" by Sudipto Kaviraj (Contributions to Indian Sociology, Vol. 18, No. 2,1984). Patronage as electoral strategy destroyed the democracy in the Congress party system, weakened it, reduced grass roots reach, crushed political opposition, pandered to special interests and political handouts and replaced federalism with centralised rule. The rot went deeper when after the imposition of Emergency in 1975, Indira Gandhi cancelled the 1976 general elections.

Between 1966-1976, the Indira Gandhi government invoked Article 356, empowers the federal government to dismiss state governments in emergency situations—36 times. Nehru and his successor (1950–65) resorted to this measure only 9 times. From 1980 to 1984, Indira invoked this power an additional 13 times..."the cumulative effect of Gandhi’s actions...though still retaining some essential features of a democracy,[the political system] became unaccountable, corrupt, and unhinged from the normal bench marks voters use to assess their leaders...The economic consequences of this period of illiberalism were long lasting. Because Gandhi’s political fortunes depended on patronage, she felt no compulsion to invest in real drivers of economic growth—education and health. The ratio of teachers to primary-school students throughout the long Gandhi years stubbornly hovered around 2 percent. After her rule, in 1985, only 18 percent of Indian children were immunized against diphtheria, pertussis,and tetanus (dpt), and only 1 percent were immunized against measles. Even today, India is still paying for her neglect."

The China Story

Hunag going against the conventionally held wisdom suggests that the Chinese economy took off not because of the authoritarian regime but rather despite it and in large measure due to the relative liberal political reforms of the 1980's. When the reforms were reversed after Tienanmen Square protests in 1989, the mid-1990's saw governance worsen, a fall in income growth,immunizations, rising inequality and adult illiteracy even while the country's GDP was booming.

In Huang's words,"The real Chinese miracle began back in the 1980s—when Chinese politics was most liberal. Personal income growth outpaced GDP growth; the labor share of GDP was rising; and income distribution initially improved. China accomplished far more in poverty reduction in the 1980s without any of the factors (such as foreign direct investment) now viewed as essential elements of the China model. In four short years (1980–84), China lifted more of its rural population out of poverty than in the 15 years from 1990 to 2005 combined...China became less authoritarian under the troika rule of Deng Xiaoping, Hu Yaobang, and Zhao Ziyang in the 1980s. Therein lies the key insight into China’s economic takeoff...But in the 1990s, the Chinese state completely reversed the gradualist political reforms that the leadership began in the 1980s. This assessment comes from a well-placed insider,Wu Min, a professor at the Party School under the Shanxi Provincial Party Committee. In a 2007 article,Wu revealed that the political reform program adopted at the 13th Party Congress in 1987 implemented some substantial changes. The congress abolished the party committees in many government agencies and explicitly delineated the functions of the party and the state. After 1989, there was no progress on the political reform front, especially in reducing and streamlining the power of the Communist Party....The economic consequences of these reversals were substantial. The 1990s saw depressed growth in household incomes relative to GDP, which means that the average Chinese person was losing ground. The employee share of GDP—the income going to the general population—peaked in 1990, at 53.5 percent. By 2002, it had declined to 45 percent of GDP. At 45 percent, the Chinese economy in 2002 was benefiting its people less than it was in 1978, when its employee share of GDP stood at 48 percent. Similarly threatening for the poorest Chinese is a development that has garnered almost no attention: The country is backsliding on literacy...the number of illiterate Chinese adults increased by 30 million between 2000 and 2005. In 2005, there were 115.7 million illiterate Chinese adults, compared with 85 million in 2000. The roots of the problem began in the 1990s. Consider how literacy is defined—the ability to identify 1,500 Chinese characters by the age of 7 to 9. An adult reaching into the illiterate group by 2005 received all his or her primary education in the mid-1990s. In addition, immunization rates against dpt and measles—rising throughout the 1980s—began to decline in the 1990s."

The Shocking Explanations

1. China survived Tienanmen protests in 1989 because the rural population was most content with the broad based economic growth of the 1980's and the political reforms.

2. India grew after 1990's not only due to the economic liberalisation but also because this time also saw political reforms easing the centralised government. India was more free, for instance, liberalisation of the electronic media saw the proliferation of TV channels, enriched entertainment and provided a platform for airing of grievances to highlight corruption. In 1992, the Panchyati Raj (Village self government) bill was passed by the government.

"World Bank indicators show a notable improvement in key areas of Indian governance during the period of high growth since the mid-1990s. In fact, India leads China in a number of important areas of reform. Throughout the 1990s, India reduced state controls on the banking sector, allowed the entry of private domestic and foreign banks, and abolished government interference in setting the equity pricing of initial public offerings on the stock exchange.China is nowhere near India in terms of pace and depth of financial reforms".

3. Democracy makes reforms impossible? The answer, all reforms in India have been carried out by coalition governments rather than by a single majority ruling party. The Narasimha Rao government in 1992, the BJP led NDA government in 1998 and the Congress led UPA 2004, were all ruling coalitions (Coalition governments by nature are more broad based as they bring together different political parties representing different demands and grievances to power sharing.)!

4. Infrastructural Woes. In India, the notion held is that an authoritarian government could leap frog over political, legal, religious complications to build world class airports, highways etc. Huang suggests that, "Building infrastructure has followed—not preceded—Chinese growth. In 1988, China had roughly 91 miles of expressway. That did not begin to change until the late 1990s,when the country poured massive resources into infrastructure. Only in the past eight to 10 years could the country claim to have infrastructure rivaling that of developed countries ...there is no doubt that China outperformed India in the 1980s. It was reforms and social investments that propelled Chinese growth, not fancy airports and skyscrapers."

5. Infrastructure attracts FDI? For Huang, this is putting the cart before the horse. He suggests that FDI follows GDP growth and not the other way around. 1980's China received little FDI but grew faster. FDI is a result of growth. The policy maker should be worried about how to grow not how to attract FDI, growth even with the current levels of infrastructure will increase FDI, this growth can also self finance infrastructure.

The Chinese infrastructure growth since the 1990's is unchecked and not constrained by public voice, media or private land rights. Hunag says, 'That a country constructed nearly 3,000 skyscrapers in Shanghai and added 30 million illiterate Chinese during the same decade is truly remarkable.'

Conclusion in Hunag's words

The economic dividends of political reform don’t appear overnight, which skews the timeline and confuses the cause. But by using nearly every metric, political liberalization has spurred rather than stunted growth in both China and India.

The post has freely and copiously quoted from Huang's piece to convey to the reader, the tone and import of his arguments. It is also directed at those who may not have access to it. It would not be wrong to suggest that ideological moorings of the author affected his case for political reforms in China and the interpretation of statistics. But a reading of this piece, excited my sense of the riddle we all increasingly appear to be caught in, the eye balling China/India growth story. For we in India often wonder at the trade off between economic growth and political checks and balances. The Indians take solace in the fact that there is little risk that growth might result in a political explosion of the state. This piece suggests that not only will the checks and balances promote growth but it will also make it broad based and inclusive. Therefore, it appears the rather pink economic health of India is precisely due to the murky but negotiable political system where all grievances find their way into the system, as they also through the judiciary, federal structure and the media (The Gujjar agitation and the bullying of the central government by the regional parties and the communists are all in this reading, welcome for growth and our future!). The Chinese will have to contend with a better life style and increasing income levels but run the risk of a future fraught with political,social risks and tapering economic growth if they do not liberalise politically. The most exciting part of this piece was its nuanced approach to the political systems in both China and India, rather than taking authoritarian and democratic government respectively as given, it looked beyond the veneer normally ignored in studies of this kind.