China and India-A Note on the Influence of Hierarchy vs. Polyarchy on Economic Growth

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1. Introduction

Communist countries seem to have an advantage in the early stages of development: they seem to be able to shake up their atrophied social structures and mobilize all resources and start upon a fast lane of growth. However, this strategy puts up inflexible structures and soon meets obstacles it cannot overcome. As a result the frontrunners are overtaken by the former laggards, the open market economies that were slower to take off. This, at least, was how post World War II European experience appeared, where Communist states have managed to sprint into development and growth faster than similarly placed democratic market economies: see Table 1. Yet all European communist economies arrived at a ceiling that stopped their growth and let the market economies overtake them and leave them far behind. (3) Most of them tried to change course and introduce more decentralization and flexibility into their economy without weakening their centralized political structures--but failed. They found it impossible to change their economic regime without ditching the communist party's centralized control. The question arises: can a communist economy leave its economic trajectory, open up and join the new fast lane, without giving up its political institutions? On the face of it the comparison of the paths taken by China and India would seem an ideal response to the riddle, with a resounding positive answer: Yes, the communist development model can be left at will at a convenient junction and transition to market-led growth may be costless. It seems that such a switch by a communist state is much easier than a policy change and an opening up in a democratic country, the largest one that exists, India. My aim in this note is to examine the role of system and policy in this story, where arguably the most important policy decision is the decision about system change. Clearly, the factors discussed below may add to existing explanations of the paths taken by these two countries, and cannot claim to comprehend the myriad of factors that have shaped their development.

China, as a communist state, the first to liberalize its economy without letting go of the tight political control, has become a role model for the few remaining socialist countries. Ever since the accession of Deng Xiaoping to China's leadership slow, hesitant yet consistent steps were taken to permit the entry of non-state entrepreneurship, and later even allowing the privatization of large chunks of its state-owned sector (Economist, 1996d, 1997a, 1997c, 2000; Boltho, 2009). The response of the economy has been remarkable, with an accelerated and enviable rate of growth. A comparison with India may lead to the idea that its success can be credited to the centralized control of the Communist Party of China that may have given it advantages that India lacks because of its democratic and federal structure.

India among the non-communist states is also an exception. It did not follow the development paths of the group of Asian states to its east. India's original growth model relied on import substitution in a closed economy and on an effort to preserve traditional sectors and technologies, while some of its neighbors, the Asian tigers, opened their economies and darted forward. (4) These countries, much smaller than the Indian elephant, managed to sprint ahead to arrive at relatively high levels of affluence during recent decades, while India was lagging behind. Its growth started late and has been accelerating only in the last few years. Was this due to policy choices or to system changes, namely the modification of economic institutions?

My aim in this paper is to examine this question from the point of view of an economic comparativist, and to look at the systemic and policy differences and similarities between these two giant countries and how they affected their development. To point out, in particular, those elements of the systemic institutions of India and China that shape the incentive of entrepreneurs, both inside and outside of the countries, and lead them to take very different choices in each country. …