Pranab Bardhan (2010)

Awakening Giants, Feet of Clay: Assessing the

Economic Rise of China and India, OUP

Chapters 2, 10
 Discussions
Chapter 2: Economic Reform and Growth:
Differing Patterns and Institutions

Chapter 10: Looking to the Future through the

Lens of Political Economy
 2. Economic Reform and Growth:
Differing Patterns and Institutions

Both countries started reforms in the 1980s

India: response to crises
China: chalked out strategy
Chinese reforms may be understood under:
• Reforms in Agriculture
• Reforms in Manufacturing
• Reforms in Governance
 Agricultural Reforms

Household Responsibility System (HRS)

• A contracting system with individual farm
households on their land use subject to taxes
and procurement of produce by authorities
• Large increase in procurement price +
incentive to retain extra output after meeting
state obligations
• 1979-84: avg rog of agr output: 7.1 percent pa
• 1970-78: 2.7 percent
 Non-agriculture

• Same principles: Apart from contractual

delivery to the state, industrial and commercial
enterprises given residual control: boosted
production incentives
• Dual track system: combining elements of both
the earlier plan and new market systems;
without a change in state ownership of
resources.
• By 1990s: the 2 tracks unified in favour of the
market
 Key aspects of non-agricultural reforms

• Most dynamic part of Chinese economy:

Township and Village Enterprises (TVEs)
• Provided leadership in labour intensive rural
industrialization of China
– 1978: less than 6 % of GDP
– 1996: 26 % of GDP; with avg annual rog around 28
%
• TVEs represented an institutional innovation
employing the incentives of a market economy
without privatizing ownership.
 Managerial Responsibility System

• Unlike State Owned Enterprises (SOEs) they

were not subsidized by higher level govts
• MRS: SOE managers often signed
performance responsibility contracts and
were given more autonomy in decisions,
financial incentives tied to enterprise
performance, profit retention for
investment and worker bonuses
 Summary
Non-agricultural reforms

SOEs
TVEs

• Industrial output rog

MRS Outright privatization
– 1978-1993: 9.3%
– 1993-2004: 11%
– TFP Growth: 3.1 %
• In 2004, China’s share in worldwide manufacturing value added
was 9% (Japan 21 %; US 24%)
• Growth of exports and FDI contributed to employment; yet
exports and FDI NOT the main drivers of growth
• Since late 1990s, composition of China’s trade shifting from low
tech L intensive pdts (e.g. garments, toys, shoes) to higher value
products (computers, mobiles, equipments)
 Indian Reforms

Industrial deregulation and trade liberalization in

the 1980s

• Abolition of
– most industrial licenses
– Restrictions on entry or capacity expansion
– Quantitative restrictions on trade and exchange control
– scaling down import tariffs; foreign investments
 Some comparative numbers

• China’s trade-GDP ratio rose from 21 to 65

% before and after 1990-91.
• India’s: from 16 to 45%
• India’s avg applied tariff rates still about
twice China’s
• India’s anti-dumping measures one of the
most protectionist in the world
Comparing industrial growth performance
Disaggregated analysis

Rates of growth (annual percentage changes)

Output Employment Output per Factor

worker prody
1987-2004 China 10.0 3.1 7.0 4.1
India 5.9 3.4 2.5 0.6
1987-1993 China 9.3 4.4 4.9 3.1
India 5.1 3.3 2.1 0.3
1993-2004 China 11.0 1.2 9.8 6.2
India 6.7 3.6 3.1 1.1
Comparing industrial growth performance
Disaggregated analysis

Worker characteristics: India

• Low education levels
• Low female WFPR
• Weak infrastructure
 TFP Comparisons across 4 industrial groups:
1980-2004
(PPP $)

• Machinery and equipment

– India’s productivity>China’s
– Gap declining over time
• Food and beverages; chemicals, building material
– India at par with China
• Textiles, leather etc
– India’s productivity>China’s in the beginning
– Gap declining over time
• Paper, printing; tobacco, petroleum, coal
– India more productive than China
• 1978-1993: Even service sector TFP grew faster in
China than in India
Why has India not succeeded in a massive
expansion of labour-intensive manufacturing
jobs as in China?

Most commonly cited problems

1. LR finance of small firms
2. Effects of 2 long standing policies
(a)Reservation of large number of products for
small scale (SS) industry (did not exist either in
China or Vietnam)
(b)Rigid labour laws
 Relook at reservation policy and labour laws

• Reservation policy seems to have prevented

utilization of economies of scale and efficiency of the
large factory
• Built-in disincentive for a successful small firm to
expand scale
• Although list has dwindled over time (from more
than 800 to less than 40)
• Labour laws (chapter V-B of the Industrial Disputes
Act) make it very difficult to fire workers in large
firms
• Both these policies adversely affected India’s textiles
and garments sector
Are the effects of these policies exaggerated?

• In textiles, India has a clear economies of scale in

spinning
• Dutta Roy (2004) found the impact of job security
regulations statistically insignificant in 15 out of 16
industries studied
• Deshpande (2004) suggests that Indian labour market
is not as inflexible as it is made out to be;
employments were variable
• Labour laws implemented at the state level; well
known that state governments look the other way
when labour laws are violated
• Gupta et al (2009) find that the impact of
delicensing reforms (since 1985) have been
highly uneven across industries; industries
that are (unskilled) labour intensive
experienced smaller gains in growth of
value added
 Labour laws in China?
• Until late 1990s, government tightly
restricted dismissal of workers
• Enterprises could dismiss no more than 1%
of their employees each year; were barred
from dismissing certain types of workers
and were expected to place dismissed
workers in new jobs
• Since Jan 2008, a new labour law partially
secures the tenure of longtime workers
 Back to India…

• Indian trade unions of different political

persuasions have been hostile to any labour
market reforms
• BUT, they represent only a tiny fraction of the total
industrial labour force (90% in unorganized
sector)
• Union formation is legally quite easy (any 7 people
can start a union) + lack of secret ballots in union
decisions keeps the labour movement weak and
fragmented
• The supposed procompetitive effects of
deregulation and trade reforms haven’t made a
dent on industrial concentration
• Measures of industrial concentration such as
the Herfindahl index haven’t fallen much over
time
• OECD (2007): based on scores of Herfindahl
index, India’s share of highly concentrated
industries is more than three times that of
China
Size structure of non-agricultural enterprises

• Almost 87% of manufacturing employment in microenterprises of fewer

than 10 employees

Percentage of all manufacturing employment (NSS, ASI data)

Firms employing 6-9 Firms employing >500

workers workers
1984-85 40 30
2000-01 42 23
Inferences
1. There is a bipolar distribution with a “missing middle”
2. Declining share of employment of large firms
3. Large productivity gap
– Labour productivity in 500+ workers firms almost 10 times that of firms
employing 6-9 workers
 Factors for the “missing middle”
And declining employment in large firms

• Labour laws have discouraged hiring but not

layoffs: power structures
• Infrastructural deficits: electricity: voltage
fluctuations, outages throughout the day – hits
firms particularly in the middle (can’t afford
generators; located in small towns)
• Inadequate access to credit
• Policy uncertainty index
 China: Regional experimentation and Regional
Competition

• TVEs, SOEs: Xiaoping’s phrase “crossing the

river groping for the stones”
• Regional autonomy (self contained, with low
inter-regional interdependence): In China,
failures didn’t spread; while in India successes
didn’t spread (except Green Revolution)
• Local governments in India do not have
sufficient resources
• Local officials in China have built in career
incentives, India: promotion by seniority
 Caveat!!
• In spite of huge statistical bureaucracies, can the
growth numbers be believed?
• Revised PPP figures by the 2005 International
Comparison Program coordinated by the World
Bank brings down the per capita income levels of
both countries by a staggering 40 percent!!

• No clear implications for the growth rates though!

 Chapter 10
Looking to the Future through the Lens of
Political Economy

• Two-way relationship between democracy and

development
– Democracy unleashes both positive and
negative forces for development
• Tension between participatory and procedural
aspects of democracy
– Authoritarianism is neither necessary nor
sufficient for development
• A heterogeneous society, with social and
economic inequalities, makes change and
reform difficult
• In a homogeneous society, authoritarian
leadership can be decisive
• Absence of institutional checks and balances:
fragility of governance of even a strong
government
• Indian local democracy and self-government
still inadequately developed; elections not
followed by accountability
• China’s economic performance better than
India’s: rates of growth, industrialization, rates
of poverty reduction, infrastructure
development, fiscal health
• Financial infrastructure weaker in China
• India’s capital markets, stock markets,
corporate enterprises more autonomous
• Less than 25% of urban women partake in
labour force in India compared to 70% in China
• Urbanization faster in China, but urban savings
rate<rural. So, overall household saving rate in
China likely to decline in China
• Household savings to GDP in China< in India
• Bes savings in China>in India
• Public sector savings in China> in India
• China has had a sustained current account
surplus for 2 decades; foreign savings not a
significant source of investment finance
• Indian policymaking less sure-footed. Why?
• Does inequality of opportunity matter for economic growth?
• Impact of inequalities on labour force: health and education
outcomes
• Barriers faced by the poor in land, credit markets
• Social justice
• Inequality generated conflicts
• Equity and efficiency go together: institutional structures and
opportunities for cooperative problem solving are foregone by
societies that are highly polarized.
• India: considerations of equity have often been used for
regulatory excesses; even when the policies haven’t helped the
poor much.
• Limits of democracy: high inequality leads to
– Conflicts
– Inertia to reform
• India: one of the worst records of
intergenerational mobility
• Unpopularity of reform in general public –
National Election Survey 2004- more than two
thirds of about 23K sample respondents said
that reforms help only the rich or none at all
• Anti-reform populism – partly a product of
manifold inequality and conflicts.
• Newly emergent, hitherto subordinate,
social groups, often represented by
primarily caste-based or regional parties.
• As they capture state power, they find
themselves not too keen on giving up on
benefits acquired.
 General problem of collective action
India
• Even the elite is highly fragmented
• One of the world’s most heterogeneous
societies (language, religion, caste & ethnic
divisions)
• Long term productivity requires
infrastructure investment, which may
require short run sacrifices by the elite, e.g.
giving up subsidies, under-priced public
goods, salaries or perks etc.
• Although infrastructure remains a
bottleneck, there is a more general
consensus on the other major public good –
macroeconomic stability – as a precondition
for growth
– Inflation control
– Factor market (land) reform
– Fiscal subsidy
– Rent sharing with newly emergent social groups
 2 kinds of collective action problems

1. Sharing the costs of bringing about the

change (free rider problem): Pivotal agent
– Groove-Clarke tax
2. Sharing the benefits (bargaining problem)
As more hitherto subordinate social groups
have become politically important, the source
of demands from the polity has also become
diverse.
• When the interest groups are socially and
economically fragmented, pulling in
different directions, policy making more
difficult
• Jenkins (2000): Indian political system has
clever, sometimes clandestine ways of
introducing reforms – “reforms by stealth”
 China
• TVEs and other reforms saw very few losers.
• Later years – market allocations,
commercialization, corporate restructuring:
laid off many + breaking of the “iron rice bowl”
of employees (social protection): many losers
• Fast growing economy was able to absorb and
compensate many of the losers
• Indian reforms hasn’t seen many losers (trade
and industrial policy; trade and financial
sectors; while keeping labour laws untouched
for long)
 Authoritarianism Vs Democracy

• China’s dramatic success – myth that

authoritarianism delivers better than democracy,
particularly in early stages of economic
development
• Also, other East Asian examples - South Korea,
Taiwan etc
• Disastrous authoritarian regimes: Africa etc
• Successful industrial democracies: India, Costa
Rica, Botswana
• However, authoritarianism neither necessary nor
sufficient for economic development
 Advantages of democracy for
development
Even if we do not value democracy for its own sake, we
can count the following advantages for development:
1. Democracies are better able to avoid catastrophic
mistakes and better capacity for managing
conflicts. Democratic pluralism: India vs
homogenizing monolithic state force.
– Capital punishment in both countries, but China
executes more people in a week than in decades in
India
2. Some degree of tolerance for diversity and dissent
act as safety valves for democracy
3. Democracies in general experience more
intense pressure to share the benefits of
development
4. Transparency, stake holding. Authoritarian
states can withhold information on critical
issues
Disadvantages: the Indian Experience

• Democracy may also hinder the development

process
• Competitive populism: short run pandering,
handouts (e.g. misinformation, fake news)
make hurt investment, physical infrastructure,
institutions in the long run
• Competitive populism also makes it difficult to
experiment on policy
• Electoral politics may lead to clientelism,
particularly funders of elections
• In Indian democracy, legislative process
often relegated to a second order of
importance. Legislature a theatre of the
absurd, with low quality debates
• General education low, civic associations
weak, public debates relatively uninformed
• Indian urban middle classes have a prickly
nationalism, it turns to majoritarian atavism
as a unifier in the context of social and
cultural diversity
• Questioning the national loyalty of domestic
minority groups
• While democracy has brought about a social
revolution (“India’s Silent Revolution” by
Christophe Jaffrelot, Columbia University
Press), there have been limits…
• National Election Surveys, various rounds find
increasing number of marginalized
respondents “better placed” compared to
before
• Why do poor become so important at the time
of voting, but are unable to punish ineffective
politicians?
• North Indian preoccupation with symbolic
victories among emerging lower caste
political groups (Hasan, 2000) – BSP
• Indian electorate
– Less forgiving for sharp economic declines
– High degree of inflation sensitivity
– Reflexively anti-incumbent - discontinuity
• Demand and supply of governance
• Decentralization – federalism less successful
than China’s
 Contrasts in the style and content of
governance
• Collective action and goal formulation less of a
problem in China than heterogeneous India
• Corruption pervasive in both countries, but
Chinese corruption qualitatively different than
India in 3 ways:
– China: lines of authority more well defined. Not so
in India, so even after paying a bribe, one isn’t sure
of getting the job done
– Official rewards tied to performance in China
– Compulsions of expensive elections in India
 Some positives too…

• Democracy has ushered in a social

revolution
– Diminishing hold of elite control
• Loosening of earlier administrative
protocols
• Steady erosion of institutional insulation of
decision making in public administration
and economic management.
Fundamental tension between participatory
and procedural aspects of democracy in India
– a hindrance to development?

Theoretical advantages, disadvantages of democracy (in

the face of inequalities)
How has democracy been working in India?