“Isn’t China Socialist? How is it working for them then?”

A few months ago I met an author who is writing a book on China. He was being shown around by a Chinese guide during a visit to China for research. They were checking out a gated residential area where the houses cost millions of dollars. The author asked his guide how it was possible to have such expensive housing in a country committed to communism. The guide said, “In China, we do what we have to do. If it works, we call it communism and get on with doing what needs done.”

That’s good old fashioned Confucian pragmatism. Deng Xiaoping was led by that spirit when he said, “No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat.”

China is working because its leaders like Deng Xiaoping have brains, guts, spine, and vision — four things that are missing in India’s leaders in general but are particularly absent in Congress leaders. The lack of brains, guts, spine and vision is epitomized in the person of Dr Manmohan Singh.

See Prof Pranab Bardhan’s quote from Authoritarianism and Democracy:

India’s experience suggests that democracy can also hinder development in a number of ways. Competitive populism– short-run pandering and handouts to win elections– may hurt long-run investment, particularly in physical infrastructure, which is the key bottleneck for Indian development. Such political arrangements make it difficult, for example, to charge user fees for roads, electricity, and irrigation, discouraging investment in these areas, unlike in China where infrastructure companies charge full commercial rates. Competitive populism also makes it difficult to carry out policy experimentation of the kind the Chinese excelled in: for example, it is harder to cut losses and retreat from a failed project in India, which, with its inevitable job losses and bail-out pressures, has electoral consequences that discourage leaders from carrying out policy experimentation in the first place. Finally, democracy’s slow decision-making processes can be costly in a world of fast-changing markets and technology.

Bardhan is a keen observer of India and China. In 2003, I had posted excerpts from an essay of his titled, “Crouching Tiger, Lumbering Elephant.” Worth re-reading.

I recommend another article by Bardhan. In the Jan/Feb 2008 issue of Boston Review, he wrote, “What Makes a Miracle: Some myths about the rise of China and India“:

When I grew up in India, I used to hear leftists say that the Chinese were better socialists than us. Now I am used to hearing that the Chinese are better capitalists than us. I tell people, only half-flippantly, that the Chinese are better capitalists now because they were better socialists then!

Moving on, back to the comments. DK wrote:

It rewards a lack of merit. And since the majority would like to get something for nothing, they prefer Socialism. Of course you know this, but this point should have been brought out in your post.

This is also the reason why India remains, at its heart, a socialist nation. It is very difficult to convince someone with minimal knowledge of economics (which even our most “educated” people have) that competition and choice is good. We are hardwired to believe that there is always one single pie and more competition means that one’s own share of the pie will be reduced.

And the only way, we can challenge this is by making people (and I mean the ones who vote) very clearly understand that Govt. handouts and doles are simply a way of making them progressively and increasingly dependent on these. Again, the typical Indian would rather look at short term benefits rather than long term ones.

Thanks, DK.

Rex’s tongue-in-cheek comment was

“Socialism? But Chacha Nehru recommended socialism for India, therefore it must be good!”

No, can’t argue with that, can you? Chacha Nehru’s shit didn’t stink, if you were to go by what the followers of the Congress party say. India’s misfortune is that his followers continue to rule the land. It’s all karma, neh?

Thanks to Ketan for referring to Ayn Rand’s Atlas Shrugged. Agree totally.

Dinesh Darme started off his comment with

Incentives are ok. But upto a certain point. Just ask what compelled mathematicians, physicist, writers, etc to work much harder, to burn the midnight oil. It wasn’t fame/material riches/facilities. They did so because of their love for specific fields. They were in pursuit of knowlegde.

I think there is a simple misunderstanding here. The words “incentives” and “motivations” are not synonyms. We all are motivated by incentives. That is tautologically true. If the incentives are missing, we are not motivated to get things done.

Motivations can be internal or external. For a person to burn the midnight oil, regardless of the kind of work, the person has to be motivated. For some, the work is its own reward because they are internally motivated. Einstein wanted to know how the bits that make up the universe work. He was not really “working”; he was playing.

Most of us, especially in poor countries such as India (thanks to retarded leaders like our beloved Chacha Nehru), don’t have the luxury of doing things that are merely internally motivated. Most of us have to work, not play. But I do think that in the not too distant future, more people would have the opportunity to play. See my article, “The End of Work: An Essay on the Dawning of the Post-work World”, for a wild-eyed speculation of that future.

What sort of incentives work depends on what you need to get done. For motivating people to blow themselves up and kill infidels in the bargain, brainwash them with visions of virgins and rivers of wine. This will not work for anyone who is not brought up to believe in fantastically stupid ideologies.

For someone who has a few billion dollars of wealth, the incentive to make another million will not work. But an entrepreneur will work ceaselessly to make her first couple of million bucks.

Love, fame, money, affection: all these are powerful motivators but what works for one may leave the other cold. Still, like all living beings, we are motivated by “rewards” whether internal or external. Remove the reward, and you can be sure that the action will not take place.

Any system which neglects to take into account this fundamental truth falters and fails. The carcass of communism is proof that disregarding the fact that incentives matter is fatal.

Finally, Kaffir asks

Atanu, and what are your incentives (in the sense you used the word in your post) that keep you writing this blog?

Good question. I have mentioned this before but I am too lazy to dig up the references. So here it is in a nutshell.

I am a student of economics because I want to understand why India is poor. It bothers me that India is poor because I find the sight of poverty truly distressing. I feel sick to my stomach. Why? Because I empathize with the poor and I vicariously feel the pain. Why? Because I love comfort, I like good food and drinks, I love music and reading and visiting places — all of which I would not have had had I been poor.

I am primarily motivated by internal motivations. I strongly identify with Bertrand Russell’s motivation:

Three passions, simple but overwhelmingly strong, have governed my life: the longing for love, the search for knowledge, and unbearable pity for the suffering of mankind.

[See this.]

Money does matter to me but not too much. I don’t have too much of it, and neither do I have too little. I have just the right amount. I have no personal ambitions.

I write this blog because it is play, not work.

Be well, do good work, and keep in touch.

He states the standard view explaining the rapid growth of the two countries:

What explains this strikingly rapid growth? The answer that continues to dominate public discussion in the United States runs along the following lines: decades of socialist controls and regulations stifled enterprise in India and China and led them to a dead end. A mix of market reforms and global integration finally unleashed their entrepreneurial energies. As these giants shook off their “socialist slumber,” they entered the “flattened” playing field of global capitalism. The result has been high economic growth in both countries and correspondingly large declines in poverty.

Then he proceeds to demonstrate why that explanation is incomplete at best and provides a more nuanced and comprehensive explanation which touches on matters that are often neglected in the narrative explaining the growth miracles. For instance:

Start with the claim that global integration and associated market reforms resulted in high growth, which in turn produced dramatic declines in extreme poverty. Applied to China, the timing simply does not fit. China has indeed made large strides in foreign trade and investment since the 1990s, but well before then, say between 1978 and 1993, the country had already achieved an average annual growth rate of about nine percent—even higher than the impressive seven percent growth rate in East Asia between 1960 and 1980.

It is a very well-reasoned article and must be read in full. Let me close with the concluding paragraph of the piece.

Chinese and Indian economic performance has been far better in the last quarter-century than in the previous two hundred years—and this is one of the striking events in the recent history of the international economy. Other countries must adjust to this reality, and learn to treat the partial restoration of the earlier global importance of these two countries as an opportunity for trade, investment, and exchange of ideas, not as a threat. (We also need to work in tandem with them on the environment.) But we must remember that the story of their rise is more complicated and nuanced than standard accounts make out. That more complex story includes the positive legacy of China and India’s earlier statist periods, which offers general lessons for the process of development much too often ignored.

Economic growth in a sense, and to a much larger extent economic development, is more akin to a game of golf than a game of chess. In golf, the opponent’s moves matter very little; you may as well play by yourself and later compare scores if needed. In chess, your move depends on how your opponent has moved and how he is likely to respond to your move. In other words, chess is a strategic game while golf is not. All this is very broadly speaking, naturally. I don’t mean to imply that there are no dependencies among economies as they grow; what I mean is that, especially for a large economy like India, how much it produces and how determines how materially prosperous it is and is independent of how other economies are growing. For strictly benchmarking purposes, one can glance over at the neighbors. And if one is smart, one can learn from the experiences of those neighbors. Still, when it comes to economic growth, it is largely the case that you are playing against yourself.

Here I want to glance at India’s large northern neighbor and recently a strategic competitor in the fiercely competitive game for control of scarce resources. China has been moving mountains — quite literally as you will soon note — for quite a few years for growing its economy. From an Indian perspective, it is a chilling reminder that there are no shortcuts to economic growth and that it takes something special in terms of will and perseverance to overcome the ill-effects of flawed economic policies and failed leadership. It is also a story of hope and the indomitable human spirit, a story of almost superhuman striving by mere mortals.

Words, not Numbers

Regular readers of this blog may have noticed that rarely do I have charts, graphs, and tables of statistics in my posts. It is not that I mistrust those devices as they do illuminate the subject. But I leave the numbers to sources that do rely on them for making their points. Honestly speaking, I am fairly suspicious of numbers that have pretenses to a degree of precision that is not even theoretically possible. In one report I had read (from some global consulting firm), I had seen figures which made my head hurt. It said something like, “By July of 2010, the US would have outsourced 10,573,425 jobs to India.” I wondered if they meant July 1st or July 31st; and whether it was by 10 AM of a particular date or was it by 10:30 AM. How did they know that the number in the units’ place was 5 rather than 6 or 4?

I am convinced that you, gentle reader, have seen a lot of numbers projecting what is going to happen to India by such and such a date. One report that I recently glanced at was from KcKinsey which Sramana Mitra has blogged about recently on the growth of India’s middle class. Makes fascinating reading, I am sure, for MBA-types. But I digress. I will get back to that McKinsey report in a different post shortly.

For now, I would like to point you to a National Geographic feature titled “China’s Boomtowns” from June 2007 (Hat tip: Abhishek Sarda.) It is well worth the 10-odd minutes it takes to read it. No charts and graphs there. But it tells a story that makes you admire the spirit of the Chinese. There are lessons in that story that underline some of my obsessions that have to do with the prerequisites of economic growth in the modern world. Without any charts or graphs, the story is replete with lessons that we should have learnt and perhaps we still can if only our benighted leaders were to pay attention.

Similar Pasts

For much of the recent past, China and India were similar in many respects. Very large populations, very deep and widespread poverty, largely agricultural, and saddled with brain-dead economic policies rammed down the throats of the powerless populations by ignorant policymakers. Then the Chinese people got lucky: they got a dictator who was smart. This dictator was different from the other dictator who had propelled China into a “Great Leap Forward” which left tens of millions dead. India matches the first part of China’s story — it got a dictator who wanted to personally control India’s climb into “The Commanding Heights” but succeeded in digging a very deep hole for most of the 350 million living around 1950 that even 60 years later, the number of deep-hole dwellers is variously estimated to be between 500 and 800 million. Thanks awfully, Mr Jawaharlal Nehru.

The new path that the dictator of China took around 1970 propelled economic growth and lifted hundreds of millions out of the hole that had been dug for them by communism. India, by contrast, continued along the path blazed by Nehru, and the path was solidified into an 8-lane superhighway by his daughter. (She was another ignorant autocrat — and appeared to be fairly convinced that ignorance was better than knowledge since she saw no need for the education of the masses. Though she had all the opportunity in the world, she herself never got any formal education and I believe was kicked out of Shantiniketan, a school where you would have to work hard to get kicked out of. The irony that numerous educational institutions are named after her would not be tolerated but for the ignorance of the Indian population.)

India went careening down this superhighway of socialism until it was wrecked through a collision with the barrier of a balance of payment crisis. Headless chickens have been known to display more foresight than the architects of India’s economy.

But I digress once again. Let me get back to what China did: it became the world’s manufacturer. Manufacturing is capital intensive but if you do enough of it, you do require lots of people. Lots of people churning out stuff means that there is more to go around. So labor is attracted into the sector and the laborers get paid wages. Those wages may be low compared to advanced industrialized economy standards but are far superior to the alternative of starving on a farm in the rural interior of China.

Manufacturing

Where did all the wealth that exists in the world today come from? (Wealth is stuff — not money. Stuff that we eat, stuff that shelters us, stuff that transports us, etc.) It is largely manufactured. There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. The fact though is that manufacturing has what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. So large manufacturing units produce stuff more efficiently. And large manufacturing units require lots of people and large amounts of supporting activities which in turn require even more people. In other words, a population living in a bunch of villages is not as productive as the same population living in a city and helping with manufacturing. Cities are the engines of growth because manufacturing has scale economies.

Cities, not Villages

Indian policy makers have an obsession with villages. Villages were Gandhi’s fetish; and Gandhi is an Indian fetish. So I think that the policy maker’s obsession derives from the fetish**2 (the fetish of a fetish) that Indians indulge in. I am not against fetishes, mind you. My own obsession with the primacy of individual freedom compels me to approve of all personal fetishes. Whatever floats your boat, is what I say. But when fetishes intrude into sensible policy making, I draw the line.

So the point that I am attempting to make is this. Build cities. That will require a great deal of manufactured stuff. So you need lots of manufacturing. And forget the crumbling mega-slums we currently pretend are cities, and forget the tiny impoverished settlements we call villages. Build livable cities and build factories that will produce the stuff that the poor currently don’t have because it is not produced. Manufacturing so much stuff will require lots of people. And we have people coming out the wazoo — they are currently stuck in a declining agricultural sector.

Yeah, move a few mountains. They do that in China. India can imitate that bit at least.

The collective leadership that is fueling china’s growth today will have to go away in the future. Communism is not going to last long enough for china to become a developed nation. Once communism collapses and democracy begins to form in china, there will be a prolonged period of little or zero growth in the country’s economy.

That is when India will overtake china.

It is very likely wishful thinking combined with admirable patriotism that motivates Anand above. The engine of communism has been decoupled from the Chinese train long ago and it is the engine of capitalism that is driving that one. As Pranab Bardhan had observed, the Chinese were better socialists than Indians, and now the Chinese are proving to be better capitalists than Indians.

The Chinese are collectively smarter than Indians. That proposition can be rather simply defended by causal empiricism. China is an economic power to be reckoned with; India has promise but all too often we are unable to realize that promise. The Chinese are better at solving problems that require collective action, Bardhan has argued.

And what about democracy? The virtues of democracy are notably absent in practise while theory never seems to lack it. Envisioning democracy in an environment of full information, morally and intellectually powerful leaders, full literacy, an empowered population, etc, immediately compels one to the position that democracy is the best way to order society. Democracy in all levels of society is certainly the first best recommendation in a first best world.

But if you care to note, it is not a first best world. The system has too many distortions. For instance, half the people are illiterate; only single-digit percentages are somewhat educated; information gaps you could pass an oil-tanker through exist; leaders whose moral fibre is as weak as their feeble intellects stand out; politicians whose only compelling interest appears to be personal aggrandizement and enrichment are the only choices one faces during elections. It is definitely a second best world.

It has always been a second best world. Recognizing that, we must defend against advocating first best solutions. Democracy as it exists in reality in India is a mill-stone that has kept India poor. No where in the world has democracy worked at a stage of development that India is in. Democracy has not even been tried in any country with India’s characteristics.

The Chinese are not stupid. They will get democracy when they are good and ready, when the conditions are such that democracy will help rather than hinder.

Have you ever noticed that the most powerful ‘democracy’ in the world does not ever support democratic action internationally? The US is so dead set against democracy in international settings that you would think that they were raised on Genghis Khan’s mother’s milk.

The US talks loudly about democracy but is not stupid enough to actually practise democracy abroad; at home, they do have the regular circus act of choosing between Tweedledum and Tweedledee. You may recall that Tweedledum and Tweedledee agreed to have a fight. So also, the Democrats and the Republicans agree to have a fight every four years. They are pretty much indistinguishable when it comes to matters of substance, such as how much to spend on weapons of mass destruction, how much to subsidize their rich farmers (thus starving poor farmers in poor countries), how much to protect their trade barriers, etc. Sure they differ on matters such as school prayers, abortion rights, school vouchers and other relatively trivial issues.

No sir, even at home they have a form of shadow democracy. And abroad they drop even that pretense and subscribe to the only sensible policy that the rich and the powerful have: dictatorial.

Coming back to the point, China is way ahead of India in terms of economic might and momentum. India will have to play the game of catch up for a very long time. To shorten the time, we will have to use the power of ideas. Unless we act totally rationally, our chances of becoming a developed nation are far slimmer than China’s.

By most criteria of standard economic measurements of levels of living and their growth, China has clearly won the race.

To support his conclusion, he notes

Over the last three decades official data suggest that the average annual rate of growth of per capita income was about 7 per cent in China1 and 2.5 per cent in India. Productivity per hectare in agriculture (say, in rice) has been much higher in China for centuries, but the relative progress in manufacturing in recent decades has been phenomenal. In the early fifties the total GDP in manufacturing in India was slightly below that in China , in the late nineties it was less than a quarter of that in China. In 1999 the manufacturing share of GDP was 38 per cent in China, while it was 16 per cent in India. Indian labour productivity in manufacturing was about 71 per cent of that in China in 1952; in 1995 it was 37 percent2. Compared to India, total electricity use per capita is twice as high in China and teledensity (the number of telephones per thousand people) is several times higher. In 1999 the share of world trade (exports plus imports) in goods was 3.3 per cent for China, 0.7 per cent for India; in services the corresponding percentages were 2.1 and 1.2. The total amount (in dollars) of foreign direct investment in China was 18 times that in India in 1999. In the same year gross domestic saving as a proportion of GDP was exactly twice as high in China as that in India.

… The social or human development indicators all indicate the superior performance of China. The life expectation at birth is about 70 years in China, to India’s 63. Under 5 child mortality (per thousand live births) was 37 in China and 90 in India in 1999. Female illiteracy for above age 15 was 25 in China and 56 in India in 1999.

Dismal reading if you are an Indian wondering what went wrong. Bardhan’s thesis is that China has been better able to resolve collective action problems.

I have been convinced for many years that both at the macroeconomic level of political economy and the micro level of management of public space in general and of common property resources in particular , one of the most serious problems that Indian society faces is that of collective action. At the macroeconomic level collective action is necessary in formulating cohesive developmental goals with clear priorities and avoiding prisoner’s dilemma-type deadlocks in the pursuit of commonly agreed upon goals.

He had analysed India’s fiscal crises and development gridlock as an ‘intricate collective action problem in an implicit framework of non-cooperative Nash equilibria’ nearly two decades ago. In his judgement, Indian reform would lumber along, clumsily and haltingly. It is a despiriting conclusion reached by one who knows something about India and economics.

What interests me particularly in the paper is his identification of China’s township and village enterprises (TVE’s) as an important institutional innovation that has changed China’s fortunes. These are non-state industrial enterprises under local government (and sometimes semi-private) control.

Take the TVE’s which formed the leading sector in the industrial economy in the last two decades. I believe that the clue to their dramatic success particularly in coastal China lay in three major elements of this unique institutional experiment: (1) there was intense competition among the TVE’s run by different local governments; (2) this competition had teeth (unlike , say, in the case of the competition of public sector banks in India) in the sense that there was a “hard budget constraint” imposed on them, so that by and large a failing TVE could not expect a bailout by the provincial or central government (although there was some cross-subsidisation between enterprises within the same township or village); and (3) when the TVE made money, the local authority was largely allowed to keep most of it (residual claimancy without private ownership was the novel institutional feature).

Institutional innovation is what India chiefly needs. Like China’s TVE’s, we too have to find our innovation that would transform India’s economy. Since rural India is demographically larger, we need to focus on rural India seriously. Some of us are convinced that something like the RISC model is the appropriate innovation that needs to be implemented.