Managing Globalisation: Lessons from India and China

Lee Kuan Yew
Minister Mentor, Singapore Cabinet
(Former Prime Minister of Singapore)

Renaissance spreads in Asia

An enormous transformation is underway in Asia. Across the region, countries are reforming their methods of governance and the way they decide public policies. They want to catch up and prosper with the rest of the developed world.

The original four Asian Tigers – Hong Kong, Taiwan, South Korea and Singapore - followed Japan. They led the pack followed by Malaysia, Thailand and Indonesia. The Japanese called this the ‘flying geese’ pattern of economic development, with each new follower gaining technology from the leader and passing it on eventually to the next group of followers. But this formation of countries is not large enough to move the world.

China and India will shake the world. Together, they are home to 40 percent of the world’s population. Both are among the world’s fastest-growing economies: China, 8-10 percent; India, 6-7 percent. China is the factory of the world; India the outsourcing services centre first in call centres and now moving to more sophisticated business process operations and clinical research activities of global corporations.
The Chinese and Indians are learning not just from Japan and the Asian NIEs, but also from the advanced countries. They are selectively adopting and adapting different models and principles of governance to propel them into the front ranks. In some industries, they have already leapfrogged the rest of Asia. The outcome will be a major rebalancing of the world.

Evolution of my views on China and India

I have taken a deep interest in both China and India ever since I started my political life in 1950. Like all democratic socialists of the 1950s, I have tried to analyse and forecast which giant would make the grade. I had hoped it would be democratic India, not communist China.

By the 1980s I had become more realistic and accepted the differences between the two. It is simplistic to believe that democracy and free markets are the formula that must lead to progress and wealth. However, I am convinced the contrary axiom is true that central planning and state-owned or nationalised enterprises lead to inefficiency and poor returns, whether the government is authoritarian or democratic. Moreover, even if China and India were both democratic, or authoritarian or communist, their performance would be different. I now believe that, besides the standard economic yardsticks for productivity and competitiveness, there are intangible factors like culture, religion and other ethnic characteristics and national ethos that affect the outcome.

At the start after World War II, China was behind India. China’s infrastructure and population were devastated by the Japanese occupation from 1937-45. Then a civil war followed. After the Communist victory in 1949, China adopted the system of governance and economic policies of the Soviet Union.

At independence in August 1947, India had ample sterling balances, a good system of governance and many top-class institutions. It had functioning institutions for a democracy, the rule of law, a neutral highly trained civil service, defence force and proficiency in the English language.

The situation deteriorated over time. India adopted central planning with results nearly as damaging as those of China. India’s political leaders are determined to reform but the Indian bureaucracy has been slower and resistant to change. Regional jostling and corruption do not help. Furthermore, populist democracy makes Indian policies less consistent, with regular changes in ruling parties. For example, Hangzhou and Bangalore are comparable cities. Hangzhou’s new airport opened in 2000; Bangalore’s has been on the drawing board for years and only given the go ahead by the state government in December 2004.

China, the economically more backward country in 1950, caught up with India and has now surpassed India in several sectors. How did communist China catch up, and why did democratic India lose its lead?

Comparison of the Chinese and Indian public sector

Did China pull ahead because it had better systems of governance and methods of determining public policies? Tax system. Ten years ago, China had a complicated tax system. There were provincial and municipal sales taxes, provincial border taxes, excise duties and levies. By imposing a single Value Added Tax on manufactured goods, China has made tax collection efficient and effective.

India has made several unsuccessful attempts to introduce a national VAT, the last on 1 April 2005, when 20 states switched to VAT but eight are still holding out.

Corruption bedevils both, but bureaucratic red tape has lowered India’s efficiency and effectiveness more than China’s. It takes 88 days to secure all the permits needed to start a business in India, compared to 46 in China. Insolvency procedures take 11 years, as against 2.6 in China. In spite of the disasters of the Great Leap Forward in 1958 and the Cultural Revolution, 1966-76, China pulled itself up after its open door policy from 1978.

Comparison of the Chinese and Indian private sector

On the other hand, India’s private sector is superior to China’s. Indian companies, although not on par with the best American or Japanese companies because of India’s semi-closed market, nevertheless has several near world-class companies, like Tata Consultancy Services, Infosys and Wipro. Indian multinationals are now acquiring western companies in their home markets. Moreover Indian companies follow international rules of corporate governance and offer higher return-on-equity as against Chinese companies. And India has transparent and functioning capital markets.

China has not yet created great companies, despite being the third-largest spender in the world on R & D. Also Chinese corporate fraud is on a much larger scale.

China and India: studying and learning from each other

The Chinese and Indians realise they have much to learn from one another. China and India are going to assiduously study each other’s experiences, and try to acquire the strong points of the other. They will spur each other to excel.

What both must avoid is to be placed in opposing camps one with the US and the other against.

What can China and India learn from each other?

The Chinese are learning English with great enthusiasm. They may catch up with India, even though they may never have that layer at the top, like the Indians do, who are steeped in the English language and its literature. But the Chinese will have enough English to network easily with businessmen and scholars in America and Europe. In technical and technological skills, China is following India’s lead and has started to supply software engineers to multinational corporations like Cisco.

India has grown quite rapidly over the last decade with far lower investment rates than China. China must learn to be as efficient as India in utilising its resources.

The Chinese are keen to develop a services sector like India’s. For example, they have contracted an Indian company to train 1,000 Chinese software project managers from Shenzhen in etiquette, communications and negotiations skills. Huawei, a leading Chinese technology company invested in Bangalore to tap its software skills. The Chinese want to attain international standards for the software outsourcing industry and learn how to deal with US and European clients as India is doing.

India wants to be as successful as China in attracting foreign and domestic investments in manufacturing. India must emulate the effective way in which China has built up its extensive communications and transportation infrastructure, power plants and water resources and implements policies that lead to huge FDIs in manufacturing, high job creation and high growth. India’s spectacular growth has been in IT services, which do not generate high job creation. But it has now drawn up a massive highway construction programme that is more than half completed.

Challenges facing China and India

China and India have their specific advantages but also face similar challenging social, economic and political problems. China has to restructure its state-owned enterprises, fix its weak banking sector and ensure its economy continues to grow fast enough to absorb the still huge army of unemployed. India has poor infrastructure, high administrative and regulatory barriers to business, and large fiscal deficits, especially at the state level, that are a drag on investment and job creation.

In fifty years, China and the rest of Northeast Asia (Japan, Korea, Taiwan) will be at the high-end of the technology ladder, Southeast Asia mainly at the lower and middle-end of the value-added ladder where there will still be large opportunities for efficient competitors. On the other hand, India will have certain regions at the high-end of the technology ladder but it may have vast rural areas lagging behind, like the Russian hinterland during the Soviet era. To avoid this India has to build up its infrastructure of expressway across the sub-continent, faster and more railway connections, more airports, expand telecoms and open up its rural areas.

Why are the Chinese ahead?

The Chinese are more homogeneous: 90% Han; one language and culture; one written script, with varying pronunciations. Having shared a common destiny over several millennia, they are more united as a people. And they can swiftly mobilise resources across the continent for their tasks.

China’s Deng Xiaoping started his open door policy in 1978. In the 28 years since China has more than tripled its per capita GDP, and the momentum of its reforms has transformed the lives of its people thus making its market reform policies irreversible.

India’s one billion people are of different ethnic groups with different languages, cultures and traditions. It recognises 18 main languages and 844 dialects and six main religions. India has to make continuous and great efforts to hold together different peoples who were brought together in the last two centuries into one polity by the British Raj that joined parts of the Mogul empire with the princely states in the Hindi-speaking north and the Tamil, Telegu and other linguistic/racial groups in the south.
India began liberalising in 1990, and then in fits and starts. However India’s system of democracy and rule of law gives it a long-term advantage over China, although in the early phases China has the advantage of faster implementation of its reforms. As China develops and becomes a largely urban society, its political system must evolve to accommodate a large, better educated middleclass that will be highly educated, better informed and connected with the outside world, one that expects higher quality of life in a clean environment, and wants to have its views heard by a government that is transparent and free from corruption.

China and India are to launch FTA negotiations that may be completed in a few years. Premier Wen Jiabao Visited India recently, soon to be followed by President Hu Jintao. Their closer economic will have a huge impact on the world. ASEAN and Singapore can only benefit from their closer economic links. Many Indians are in influential positions in Wall Street, in US MNCs, World Bank, IMF and research institutes and universities. This network will give India an extra edge. More Chinese are joining this American based international network but they do not yet have the same facility in the English language and culture. And because of Sino-US rivalry, there will be greater reserve when Americans interact with them.

For a modern economy to succeed, a whole population must be educated. The Chinese have developed their human capital more effectively through a nationalised education system. In 1999, 98% of Chinese children have completed 5 years of primary education as against 53% of Indian children. India did not have universal education and educational standards diverge much more sharply than in China. In some states like Kerala participation in primary schools is 90%. In some states it is less than 30%. Overall in 2001, India’s illiteracy rate was 42%, against China’s 14%.

India had many first-rate universities at independence. Except for a few top universities such as the Indian Institutes of Technology and Indian Institutes of Management that still rank with the best, it could not maintain the high standards of its many other universities. Political pressures made for quotas for admission based on caste or connections with MPs. China has repaired the damage the Cultural Revolution inflicted on their universities. Admission to Chinese universities is based on the entrance examination.

China has built much better physical infrastructure. China has 30,000 km of expressway, ten times as much as India, and six times as many mobile and fixed-line telephones per 1,000 persons. To catch up, India would have to invest massively in its roads, airports, seaports, telecommunications and power networks. The current Indian government has recognised this in its budget. It must implement the projects expeditiously.

The Chinese bureaucracy has been methodical in adopting best practices in their system of governance and public policies. They have studied and are replicating what Japan, Korea, Taiwan, Singapore and Hong Kong have done. China’s coastal cities are catching up fast. But China’s vast rural interior is lagging behind, exposing serious disparities in wealth and job opportunities. The central government is acutely aware of these dangers and have despatched some of the most energetic and successful mayors and provincial governors to these disadvantaged provinces to narrow the gap.

China’s response to these looming problems is proactive and multi-faceted. For example, to meet energy needs, China National Petroleum Corporation and China National Offshore Oil Corporation (CNOOC) have moved into Indonesian oil and gas fields. Chinese companies have even gone to Venezuela, Angola and Sudan.

India signed a recent agreement with Myanmar to import gas by pipeline via Bangladesh. The Indian government plans to consolidate their state-owned oil companies and act proactively like China’s CNOOC. The ASEAN-China Free Trade Agreement is an example of China’s pre-emptive moves. China moved faster than Japan by opening up its agricultural sector to ASEAN countries. India is also negotiating a Closer Economic Cooperation Agreement with ASEAN, but China has gotten there first.

Caveat

The Financial Times, 29 March 2005, wrote: “The lack of a robust capital market is likely to have a strong influence on the future shape and development of Chinese capitalism. Cheap manufacturing might be China's current competitive advantage but, in the long run, Beijing planners want the country to move more into lucrative high-technology sectors that provide better-paying jobs. China will need a dynamic private sector, run by entrepreneurs who have the drive to build innovative companies. Yet it is exactly these sorts of companies that are being squeezed out by an equity market that caters mostly to state-controlled groups. Private-sector companies can get bank financing, especially if they have good political connections. Yet the lack of an equity-funding route is likely to curtail China's ability to develop a strong private sector. In this area, many argue that India is already ahead, as most of its biggest companies come from the private sector and have grown through raising capital on the equity and bond markets. China needs a robust stock market to stave off a looming pensions crisis. One of the by-products of the one-child policy introduced 25 years ago is that in a decade or so many more people will be retiring than entering the workforce.” This is China’s big negative, its rapidly aging population as a result of its severe one-child family policy. There is no precedent for a country to grow old before it has grown rich. India – average age, 26, compared to China’s 33 and still with much faster population growth – will enjoy a bigger demographic dividend, but it would have to educate its people better, or else the opportunity will turn into a burden.

Beyond China, India and Southeast Asia

To increase our understanding of the systems of governance that work and can improve the lives of people, we must compare European and US patterns of governance and public policy formulation with those of China, India and Southeast Asia.

Singapore’s own experiences with governance and public policies may illuminate some of the key factors that made for its successful development by borrowing and modifying policies and ideas from Europe and America.

All said and done, it is the creativity of leadership, its willingness to learn from experience elsewhere, to implement good ideas quickly and decisively through an efficient public service, and to convince the majority of people that tough reforms are worth taking, that decides a country’s development and progress. Whether China or India will prove to be the better model for other developing countries we will know by the middle of this century.

(Exceprted from Keynote Speech by Minister Mentor Lee Kuan Yew at the Official Opening of the Lee Kuan Yew School of Public Policy on April 4, 2005)

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