China and India: Not So Different

Whether the economic tumult in China in recent weeks represents an overdue market correction or a more significant inflection point is a matter of debate. But one clear message is just how profoundly wrong is the long-running argument that China enjoys a decisive “autocratic advantage” while India is excessively burdened by a “democratic disadvantage.”

For years Chinese policymakers were praised as far-sighted virtuosos of economic management, the modern equivalent of Plato’s Guardians. Numerous paeans (examples here, here, here and here) were written about the glories of state-managed capitalism that Beijing practices. A former economic advisor to the mayor of London contended that state-owned enterprises were “key to [China’s] ability to calibrate macroeconomic policy.”

A major US labor union figure asserted that the superiority of China’s economic model calls into question the very premises of free-market capitalism. And a well-known US commentator praised Beijing’s capacity to “just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.”

Inside China, the head of the central bank touted Beijing’s “superior system advantage when it comes to making vital policy decisions.” And just a year ago, President Xi Jinping proclaimed confidence in the strength of the Chinese model while noting that democratic political systems are “prone to paralysis and gridlock and ultimately governmental weakness.”

Unfavorable comparisons were drawn between the supposedly steady pace of economic reforms being rolled out in Beijing and the stasis within New Delhi’s halls of power. As others were extolling China’s policy-making prowess in recent years, the Washington Post was highlighting the ineffectualness of Prime Minister Manmohan Singh (here and here), Time magazine crowned him “The Underachiever,” and The Economist declared his government in the throes of “Brezhnev-grade complacency.”

Yet this comparison is difficult to square with how the Chinese system failed to act on the major warning signs that were already flashing even as its economic boom gathered pace last decade.

In March 2007, Premier Wen Jiabao publicly warned that “this is not a time for complacency” and that “The biggest problem in China's economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable.'' He pointed out that “China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced.''

Just days earlier, Li Keqiang, then the Communist Party chief of Liaoning province and currently serving as Wen’s successor, privately admitted to the US ambassador something that others within China’s leadership circles must have realized as well: the glowing economic statistics generated within the Chinese system were “man-made” and fabricated.

If the Chinese model of economic stewardship were really the agile, omnipotent system it was made out to be, it should have swiftly sprung into action in the face of these indicators. Instead, the leadership in Beijing procrastinated when it had the opportunity afforded by good economic times to take necessary corrective steps, just as the policy elites in New Delhi did during the early part of the Singh era.

To be sure, Indian leaders cannot compete with their Chinese counterparts when it comes to deploying state power in razing villages and neighborhoods for infrastructure and industrial projects. Nor are they in the same league regarding the capacity to extract savings from households and channel them toward favored state-owned companies.

But in terms of the dynamics of economic decision-making, a common factor seems to have operated in both capitals, where a lulling complacency took hold among policy elites during the boom times of the last decade.

As Prime Minister Narendra Modi is now finding out, the slow pace of economic modernization in India is because the sense of urgency gripping New Delhi back in 1991 has long since dissipated. A similar thing occurred in China, once the serious economic problems of the 1990s – hyperinflation in the first part of the decade, debt-laden state owned enterprises in the latter – were tackled.

Indian Prime Minister Singh and Chinese President Hu Jintao presided over the bulk of their respective country’s boom times. It is striking that their 10-year tenures – which largely coincided – have each come to be known in key quarters as “the Lost Decade” (examples here and here).

The most basic lesson of the Chinese and Indian cases does not turn on the differences between political systems. Rather, it is about the similar difficulty of enacting systemic reforms in large, complex countries outside the crucible of intense crisis.

Indeed, the danger now in Delhi is that the current growth pickup will permit official hubris to crowd out good policy intentions. One detects more than a whiff of overconfidence when Jayant Sinha, the minister of state for finance, declares that “It is India’s moment” or boasts about India being on the verge of leaving “China behind as far as growth and development matter.” These statements are not only at odds with the more somber sentiments of the Indian business community, but are all too redolent of the easy talk about the coming “Indian Century” that the Singh era specialized in.

David J. Karl is president of the Asia Strategy Initiative, an analysis and advisory firm, and chief knowledge officer of Geoskope, an emerging market intelligence company. He can be reached via Twitter @DavidJKarl.