China and India: awakening giants, feet of clay

<p><em>Romesh Vaitilingam interviews Pranab Bardhan for Vox<br />
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<p><em>May 2010<br />
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<p><em>Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/5109]</em></p>
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<p><strong>Romesh Vaitilingam:</strong> Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with professor Pranab Bardhan of the University of California, Berkeley. Pranab and I met at the London School of Economics in May 2010 where we spoke about his new book &quot;Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India&quot;, and I began by asking him what he saw as the value of comparing these two enormous countries.</p>
<p><strong>Pranab Bardhan:</strong> Well, these two countries, being enormous, as you said, obviously attract attention when they start rising and this is a historic phenomenon. If you go back to 1820, if you take the calculations of Angus Maddison, who recently died, actually. 1820, half of the world income was coming from these two countries. Jump to 1950, nine percent. That's a big decline. The projection is that 2025, the two together will be about 36 percent.</p>
<p>So it's not been restored to half a world income, but then, it&rsquo;s significant. In 200 years, that's a big change, and the rise has happened in the last 20, 25 years. So such a short period, such a big change, particularly in China, has attracted obviously a great deal of attention.</p>
<p>Most of the interest I see in Western media and also some in academia, is interested what this implies for the rest of the world. That is not the focus of my book.</p>
<p>My book is trying to understand what has happened to these masses of people in these two giant countries, and under what constraints they live. So in that sense, it's an obvious comparison. Both are ancient countries, both are primarily agrarian countries until very, very recently.In terms of national income, they're not primarily agricultural countries anymore. In India, it's about 17 percent of GDP, in China, it's about 12 percent.</p>
<p>But huge numbers of people are still dependent on agriculture. In India, it's more like half, in China, less than half. But still, very large. So they're still agrarian country in terms of livelihoods of people, and both are doing very well, particularly in terms of economic growth.But what I'm interested in is not just growth rates. Because in the case of China, it's not just the growth, it's the composition of the growth that's also attracted attention.</p>
<p>It's become the so called manufacturing workshop of the world. I slightly qualify that in the book, because when people think about manufacturing workshop they're really thinking about output. For these countries, relatively poor countries, most of the manufacturing they do is processing, assembling. So an economist who's more interested in what's happening to value added, deducting the cost of components and materials, in those terms, China is not yet the value added manufacturing center of the world. Not yet. Numbers are that in 2009, China has about 15 percent of total world value added in manufacturing, about the same as Japan. Where the United States is about 25, Europe is about 20.</p>
<p>So it's not yet the largest, it's probably going to go there, some years. But that's just in a sense minor qualification. It is no doubt a huge phenomenal increase manufacturing.<br />
Corresponding thing that's also attracted a lot of attention in India, is not manufacturing, is the service sector. Particularly, you hear stories about software, business processing. So if China is called the manufacturing workshop, India has become the back office of the world, and so on.</p>
<p>People call me a contrarian, because I also have tried to talk about qualifications. There is a qualification there in India; in fact, I would say huge qualification for India. Some people in India think that India won't be able to skip this stage. You go to service after you've done quite well in manufacturing, most of the rest of the world, developed countries, that's how it happened. India seems to be leap frogging.</p>
<p>But I think there are problems there, and you can see that when you look at the numbers. You hear about these stories: software, information technology. So if you take all of the people who are employed in the IT, information technology, or wherever information technology is, IT enabled services, including the low tech end of it, including call centers, say--so if you take all the possible numbers of people employed in this sector, as of today, what proportion of the total Indian labor force they employ? It's less than one half of one percent. So with all the big stories it's not going to transform India.</p>
<p>Manufacturing's more likely to have transformed China, because manufacturing employs a lot of people. Particularly China's gone for, in the beginning, no longer now, gone for labor intensive manufacturing, like, garments, shoes, toys, wigs, and so on. Those are labor intensive; they employ a lot of people.</p>
<p>But Indian success stories are not in labor intensive. So most of software is skill intensive, so that's why it doesn't employ vast masses of people. It's highly skill intensive. India's done reasonably well in pharmaceuticals industry, that's also research and skill intensive. India has just about started doing well in some industries, like car industry, and car parts, and some machine tool industry.But all of these are relatively capital intensive and skill intensive. </p>
<p>So in that sense, the transformation, the people used to be in agriculture, really to give them good jobs, that has not happened for the majority of people.</p>
<p><strong>Romesh:</strong> I would like to come onto directly that issue, actually, the impact of the growth of these two countries on the lives of the great mass of the population. I mean, we about the burgeoning middle class, so many people taken out of poverty. What is the reality about the impact of growth on poverty and inequality in these two countries?</p>
<p><strong>Pranab: </strong>The reality is very, very impressive in the case of China. It's an unparalleled achievement in history. Because there are always controversies about poverty numbers. But, I think the basic truth would be there, whichever numbers, poverty lines you use, etc. So let me take a crude one but it's easily available, which is the World Bank number, and let me take one dollar a day as the poverty line, in 2005 prices.</p>
<p>So if you compare China between 1981 and 2005, which is the latest data that the World Bank will give you. So in 24 years, about 625 million people have been raised above this one dollar line, poverty line. Never before in history this has happened. Within 24 years, less than a quarter century. Nothing comparable has happened in India.</p>
<p>In India, there has been a significant decline in the percentage of people who are below that line, so from about 44 percent in 1981 has come to about 24 percent, something like that. But the population is growing, so if we look at the absolute numbers, there's not that big a change. So it's still about 250 million people are below the poverty line. Of course China, even when it's now 2005, it's only eight percent. Eight percent of 1.3 billion is a large number. It's still about 100 million people below the poverty line, but the raising 625 million is really unparalleled. So it is very impressive for China, India is significant but not that dramatic.</p>
<p>One important purpose of this book is to clarify and sometimes dispel some of the myths that have accumulated, and I can give you an example of this from, in answering your question. So this big poverty decline, in much of the financial press you'll often see, this is because of the global integration of China into the world economy. So globalization, trade, foreign investment, these have been so, I mean all these years they have been insulated and now in global integration, this historic decline. </p>
<p>I don't believe in that. It's not entirely untrue, but much of it is not true, and I'll give you the numbers. So I told you about the 625 million people who have been raised above the World Bank poverty line within 24 years. But now in my book, I cite the yearly changes in this period. So if we look at this series, more than half of this was done by 1987. China's big global integration was late in the '90s, and in a big way, since China became a member of the WTO, the World Trade Organization, in 2001. But by '87 more than half of the 624 million had been raised, so what's going on in the '80s? What was going on in '80s, big change in agriculture in China.</p>
<p>And that is why in these two large countries, I studied these mainly agrarian countries and the poor are concentrated in the agricultural sector. So what happens to agriculture really decides the destiny for quite some time, maybe not 50 years from now, but even now.</p>
<p>So China, big change happened in agriculture in the early '80s. One is they de-collectivized. So they gave households the right to use land as they want subject to some limits.<br />
But it also was associated with what I would call one of history's most egalitarian land reforms. So they did not give people ownership rights on land, use rights. But the use rights were completely equitably distributed. So if you live in a village, you will get the same amount of land as your neighbor. The only qualification is if you have a larger family to start with, you will get a little bit more land. So it is by demographic.</p>
<p>And of course it depends on the regional average, so you get the average of the whole region. Subject to these really rather two minor things, it's really one of history's most egalitarian land redistributions.</p>
<p>What does it do on the question of poverty? The question that you asked me. It provides a floor to your income; your income is not going to fall below a certain level because everybody has land.</p>
<p>That is not true in India. In India, vast masses of people are still landless, landless or almost landless. If you take landless or almost landless, they're 40 percent of the rural households. There is no floor for these people. That is the big difference.</p>
<p>So the dramatic change I think in China is because of this land reform. They also did other things to agriculture. They suddenly raised the price at which they were procuring grains from the farmers. So that played a role no doubt.</p>
<p>The major change I think was in agriculture but I'm not going to suggest that globalization did not play any role. It did play a role, later, because as I already mentioned Chinese started producing in labor intensive industries and those were the products they could sell cheaply in the world. So trade and foreign investment in those industries played a role. So I'm not denying that, but I don't think that is it, the major changes really started in agriculture. So it's domestic factors rather than globalization which played a very important role. India also.</p>
<p>India has not globalized to the same extent as China did. India's opening up of the economy to the rest of the world, to the global economy, started only in middle '93, '94, around that time. So if you again look at the poverty figures in India, not dramatic declines. It's been declining, almost steadily. You don't see that the rate of decline suddenly picked up when India became more globalized since '93. It's almost the same rate.</p>
<p>I read about this in the Economist magazine, Financial Times, which I read very diligently every week. But it's through constant repetition that this has become conventional wisdom. And this is one of the things that I'm challenging.</p>
<p><strong>Romesh: </strong>The title of your book is &quot;Awakening Giants, Feet of Clay.&quot; What do you mean by the feet of clay?</p>
<p><strong>Pranab: </strong>Several things, different types of things in the two countries. India, feet of clay is easier to write about. There are lots of things they haven't done as well as China. Poverty I just told you that has not been done that well. Growth rate is lower. Manufacturing, where the jobs are, they have not done that well compared to China. Something again that is contrary to popular impression: A lot of people think the Chinese inequality is more than India's, that's not the case. They look at numbers, but they are really comparing apples and oranges.</p>
<p>The Chinese numbers of inequality are income inequality; India does not collect income data. Indian inequality is consumer expenditure. In all countries, almost all countries, consumer expenditure distribution is less unequal because the rich people save but it's not captured in the consumer data. So the usual figures, they really don't compare. India does not collect income data usually. But there are one to two years some institutions have collected income data and if you use those, inequality is much higher in India.<br />
In general inequality is much higher in India partly because of something I've already mentioned and partly about something else, which is a lot of people don't have any floor, I mean the landless people or near landless people. So at the bottom there are a lot of people.</p>
<p>And the same thing is true in education. And if you did not have land, one way you could escape is through education. In India still, a very large number of people are illiterate. Even in the young, if I remember right, 16 to 24 age group, about 20 percent are illiterate.</p>
<p>And the other thing about India before I talk about China is that Chinese still have really the--in the book there's a chapter called &quot;Dazzling Difference&quot;--the dazzling difference is in infrastructure. What do I mean by infrastructure? I mean roads, highways, and ports and airports, electricity et cetera, railways. In all of this, India is lacking. </p>
<p>The feet of clay for China would be several. One of course has to do with the environment. Partly because China has industrialized much more than India, certainly in some indicators of environment like pollution etc., China is much worse.</p>
<p>India of course is not that much better in some other aspects of environment. If you look at, say, sanitation, drinking water and sanitation. Some people would say India is worse in terms of the pollution. But pollution due to fossil fuel combustion is much worse in China.</p>
<p>Financial sector is healthier in India than in China. Corporate governance is much less transparent in China. And to this day the state really controls the economy and the state controls the banks much more than in India. The state is very important in the banks. They control the banks so there is a lot of this, you might say, crony capitalist lending.<br />
And for example in the recent crisis the government just ordered the banks to give out huge loans. So there is a loan spree that went on, but it's starting to show up in the form of non performing loans, bad loans.</p>
<p>And this has fed the property bubble. China is now on a huge property bubble. It's a big problem for them. India also has some of this state control of banks, therefore some misallocation et cetera, but nowhere near China's.</p>
<p>The other feet of clay has to do with the politics, political economy rather. And one of the points that I make here and in fact I have a whole chapter which is essentially talking about democracy and development, et cetera, and obviously China is an authoritarian country. But Indians shouldn't take too much satisfaction out of it because even though India is a democratic country there are lots of what I call accountability failures, in the sense of accountability to the poor people.</p>
<p>The poor people are not just larger numbers below the poverty line--education, health, nutrition, horrendous situation in India. So in a sense, local leaders are not that accountable to the people. There are serious accountability failures.</p>
<p>In China, obviously it's an authoritarian country. So as a result what happens is that the Chinese try to control too much and they control very heavy handedly. And sometimes this means, and in fact this sounds like a paradoxical statement, is that it looks like the Chinese government is a stronger government. It takes decisive action, quick decisions.</p>
<p>India has a slow democratic process. Any controversial issue they will go on arguing and discussing and street demonstrations and maybe even property damage and police firing and all that. So it looks like they are messy. But India's strength is in the messiness. So a given fall in economic performance is not that regime-threatening. Chinese regime derives legitimacy from high economic growth and the nationalist glory that derives from it.</p>
<p>So they get very scared if their growth rate starts to fall. But India, a large decline in growth doesn't do anything to the regime. Because the regime derives its legitimacy elsewhere and that legitimacy is from the democratic pluralism.</p>
<p>So China, whenever there's some disturbance, some conflict, like a ton of bricks that try to come crashing down on it, and therefore generate more conflicts and more unrest.India has a lot more conflicts than China because India is a much more heterogeneous society, in terms of religion, in terms of caste, in terms of ethnicity, in terms of language. It's one of the world's most heterogeneous societies. Still, there are some conflicts in India which we have not been able to resolve, but by and large, compared to China, compared to what China faces in Tibet and with the [inaudible] , it's minor compared to what India faces.</p>
<p>India manages conflicts, and one of the things I say, democracy allows you to manage conflicts better. And when you cannot manage conflicts well, there is a tendency to go off the rails. So in that sense, potential instability of the Chinese government is much more... Going off the rails is much more likely to happen, and therefore the ensuing political instability and economic instability.</p>
<p><strong>Romesh: </strong>Can we learn from these two countries about this fundamental relationship between politics and economics, in terms of advice you would give to other countries about what political framework would you ideally have to encourage rapid growth? Because we've seen it in both countries. And, as you said, one's a democracy and one's very authoritarian.</p>
<p><strong>Pranab: </strong>Well, it depends on what you mean by growth. To me, growth per se doesn't mean much, particularly in poor countries. It&rsquo;s that growth in income in the bottom half of the populace. There, I think India has not done that well, even with the high growth rate now; it's not really gone down to that level. The other is delivery of social services. I would say India is dismal in progress in education, health, and nutrition.</p>
<p>And so, the advice is really strengthening the mechanisms of accountability. Democracy at the parliament level is not enough. India has democracy in the parliament level, at the provincial level, and so on. But, local level democracy is still weak, so there is accountability failure.</p>
<p>The corresponding problem in China is that while the Chinese have done much better in the education service and poverty removal, but... Let me give you an example of accountability failure to the local level: What it does is that the Chinese local party officials, they are in cahoots with commercial developers, mining interests. They pollute the environment. They grab land much more arbitrarily. There are some problems in India in land acquisition, but nowhere near. Some estimates that I've seen as of 2007, China has already displaced nearly 65 million, 66 million people.</p>
<p>They do it heavy handedly, so there is a tremendous amount of unrest. It's because there's no accountability. In India, there is at least some forum where you can protest about the land acquisitions.</p>
<p>So in terms of advice: Strengthen accountability mechanisms at the local level, that would be the major thing, and of course, from that follows many other mechanisms of doing things.</p>
<p>However, although I mentioned that some of the poverty decline is not... in either country is due to domestic factors, not globalization, I'm not anti globalization. I think the good thing about globalization it certainly has helped China a great deal, and to some extent India is in terms of two things. Particularly, one is it helps technological upgrading, and the other is, it disciplines.</p>
<p>You tend to because flabby, when there's no competition. Global competition reduces the flab of the company. So no doubt globalization plays an important role, and this is a problem that the Indian left, for example, they're quite often anti globalization. I think this is going to harm the economy. It's going to shut out from the rest of the world.</p>
<p><strong>Romesh: </strong>Well, that comes on to the final question that I wanted to ask you, which is really, serious economists are wary of making forecasts, but you've done a very detailed study of these two countries. Where would you project forward for the two of them, comparatively? Or another way of asking you, you cite in your book being asked many years ago which country you would prefer to live in, all else being equal. What is your prognosis of the future prospects of these two countries?</p>
<p><strong>Pranab: </strong>I stand by my saying that... In fact, I quote a poet saying that I now know too much to feel at home anywhere, to answer your last question. Going back to the future, it's also very wary of us giving any famous last words, really. But, the big thing people point out increasingly is the demographic issue. China, because of the One China policy, the growth rate of the population has been lowered. So, very soon the Chinese population will start aging, looking at the future, aging much sooner than India. </p>
<p>They do a number... They draw charts for the number of workers per dependent. So they peak, and then fall, as has happened already in Western countries. China, the peak could be reached in three years. 2013 and out. It might be give or take.</p>
<p>The corresponding peak in India will be in 2035. So, there is a demographic window of opportunity for India. If things go well, then this will narrow the growth rate difference between China and India, and some optimists in India see India's even exceed China's.</p>
<p>But I have again, as usual, I have some qualifications. One qualification is that: Why is it that the younger population helps growth? Two reasons. One is that younger populations are productive. Old people are not that productive, so it improves productivity. Second, is that younger people save. Older people dissave. So, saving also. Both of these reasons raises growth rate.</p>
<p>The saving angle probably might work in India. In fact already, the household savings rate is higher in India than in China, although the total savings is higher in China, because much of the other savings, non household savings in China is government savings, and the state company's savings.</p>
<p>But, it's the productivity. So, this assumes that high productivity because of younger workers and higher savings, assumes these younger people have good jobs. Unfortunately, the higher growth of rate of population in India is in areas which are not growing very fast. It's in these large, populous, backward areas. They are backward mainly in terms of economic growth. They are also backward in terms of fertility control. The higher growth area's fertility control is much more active.</p>
<p>So, unless these large numbers of people move and go to the high growth areas, which to some extent is happening, but it cannot happen in a big way, there is a good chance that India may not be able to give these young people that many good jobs.</p>
<p>To that extent, I would say, it qualifies the demographic difference, the marrying of the growth that people talk about.</p>
<p>The other is education being better in China than in India. The quantity of productive people may go down, but quality will improve, because of the larger spread of education. So in this respect, I would qualify this optimism in India that the growth rate is going to...</p>
<p>But, demographics are only one aspect. Future growth rates also depend on how technology improves, because that's the ultimate driver. And in that respect, both countries spend more money on research and development, et cetera, but China's doing much more. In fact, in science and technology education, China is doing much better than India.<br />
One indicator is if you look at citation index in science journals, China used to be lower than India. I am not talking about Chinese or Indians abroad... I'm talking about residents, in Chinese governments, which probably tells you that, in terms of research and development, Chinese development of technology may be faster.</p>
<p>So, if you are interested growth rates, over time probably they will grow at similar rates. China for some reasons doing similarly, for some doing better than India. But if they can maintain this growth through this, it is good enough. </p>
<p>But, it will also depend on income inequality. I said China's income inequality is somewhat better than India's. There's no question that its income is going up. So, what will happen to the bottom half of the population, even if the growth rate remains high, will depend on what has happened to inequality.</p>
<p>So, China as well as India, both countries' inequalities are growing and going up. That is a problem that both countries have to resolve. They haven't successfully done so, so far.</p>
<p><strong>Romesh: </strong>Pranab Bardhan, thank you very much.</p>