What Can Indian Policymakers Learn From China’s Growth Boom?
India can spur broader growth by empowering cities to compete for investment and rewarding local officials for economic results.
China and India began their economic liberalization around the same time, in 1978 and the early 1980s, respectively. Yet very quickly thereafter, China broke out of its Mao-era economic doldrums and grew at an average of 9% every year for over 30 years. By contrast, despite a healthy growth rate for most of the past 35 years – especially after the post-1991 reforms – India’s economy has fallen far short of China’s. In the 1970s, China and India were almost equally poor, but today the average Chinese person is five times wealthier than the average Indian, based on nominal GDP per head.
What allowed China to outperform India? Is there anything Indian policymakers can learn from the China model, given that most analysts still see the peak of India’s demographic dividend ahead of us, rather than behind?
China’s Cadres
Though China is often conceived of as a highly centralized, top-down system, this is only half true. Even during the Mao era — and especially since — China’s system has combined the attributes of centralized, authoritarian decision-making at the highest levels with an extremely fragmented and unwieldy Party-bureaucratic apparatus tasked with actually implementing central directives. Beijing’s policies are often vague enough to allow flexibility in how local cadres produce results, even when there are specific numbers attached to them (such as the top-line GDP growth figure decided in Beijing at the outset of a given year and then mirrored at lower levels).
Given that China’s army of provincial, municipal, and county Party officials and bureaucrats is hard to direct from distant Beijing, one of the most crucial tools the Party uses to ensure compliance with the center’s directives is the cadre promotion system. The promotion of local and mid-level officials — both Party and State — depends on meeting core political and economic key performance indicators (KPIs), much like the employees of a large private sector firm must ace their performance evaluations every year to get a promotion and a raise. Hitting economic growth targets (disaggregated from the headline target GDP figure and set for their own jurisdiction by each level down the administrative hierarchy) has for decades been a KPI for cadre promotion, meaning that they are highly incentivized to encourage growth.
Counties and the prefectural municipalities that oversee them have healthy and less-than-healthy ways to boost economic growth. The less healthy ways include selling land use rights to real estate developers, (over)building infrastructure, and subsidizing unprofitable local firms. But localities have also long competed for FDI and other private sector investment, offering tax incentives or other favorable deals to draw investment and facilitate business growth in much the same ways that U.S. states and cities do.
Even as China’s growth has slowed recently as the country evolves into a mature economy, competing for investment is still a crucial way localities help facilitate economic growth — all the more so now that other engines of on-paper growth, such as real estate development and infrastructure construction, are no longer as viable.
India’s Inertia
India has attracted substantial foreign investment, though most of it has gone to a few high-growth, globally interconnected hub areas such as Mumbai, Bangalore, Chennai, and the Delhi metro area. These areas have posted double-digit growth on and off since the 1990s, but two-thirds of India has lagged behind. Moreover, the post-Global Financial Crisis hangover depressed growth in the 2010s, prematurely slowing India’s economic rise.
China and India have very different political systems. Most obviously, China’s localities are run by Party-State officials accountable to their bosses, while India’s localities are represented by elected officials accountable to their voters. The reasons for India’s laggard growth compared to China are numerous and wide-ranging, such as inadequate rural land redistribution, a bureaucratic culture that punishes risk-taking, a political culture that rewards pandering to narrow interests rather than pushing for public goods, and an economic system — ironically — far more encumbered by red tape and regulation than China’s “market socialism.”
Prime Ministers of different parties have consistently pursued economic growth since the post-1991 liberalization, and the Modi government has vocally courted foreign investment since 2014. Further growth-enabling reforms that improve India’s ease of doing business are a crucial step towards a high-growth economy, but India’s past experience shows how hard overcoming vested interests can be. The country’s recent spate of free trade agreements is a positive step. However, if there is one thing India can learn from China’s experience, it is that getting the incentives right for local officials — both politicians and bureaucrats — is essential.
Decentralize and Incentivize
I asked political scientist and economist Devesh Kapur, an expert on India’s political economy, what India could do differently. He put it this way: “India’s localities — especially its cities — need to be able to compete with each other.” Today, economic policy is decided by both the central government and the states. State governments do engage in competition to attract foreign investment and spur domestic enterprise. However, Indian states are geographically large and highly populated, while cities are the engines of economic growth in an industrial economy. Further devolving decision-making around taxation (and tax incentives), permitting, and infrastructure development to the municipal level would encourage local politicians to compete for the often very visible and concrete gains brought by economic growth: more jobs and rising incomes. Local politicians may also have an easier time twisting the arms of local bureaucrats to accelerate permitting processes, as India’s notorious “license raj” has yet to be fully dismantled even 35 years after liberalization began.
Though India’s political system differs dramatically from China’s, one way for Indian policymakers to encourage economic growth and raise living standards is to examine how China motivates its local cadres. The Chinese formula is essentially this: devolve policy implementation power to the lowest levels, and tie performance to promotion. In the Indian context, devolution would allow politicians to reap the electoral benefits of more economic growth and job creation, ideally creating a virtuous cycle. It would also spur greater economic dynamism in cities across the country, helping India grow in a way that spreads gains across a broader base.
The views and information contained in this article are the author’s own and do not necessarily represent those of The Asia Cable.
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