Why India will overtake China
Despite recent growth, political oppression will keep the Asian tiger on a tight leash.
By Cait Murphy, Fortune assistant managing editor

NEW YORK (Fortune) -- On behalf of thousands of peasants from his native village, Ma Wenlin, a self-taught lawyer in northern China, sued the local government in 1997 to recover taxes that had been illegally assessed.

His chances didn't look too bad: Neighboring peasants had just won a similar case, a result that the Chinese press trumpeted as proof of the progress in the country's legal system.

In Ma's case, though, the courts refused even to hear the suit. Many of his clients were harassed and imprisoned for their presumption. When Ma persisted, going as far as petitioning the highest authorities in Beijing, he was arrested, taken into custody, beaten, and convicted of "disrupting social order."

His sentence: five years hard labor.

Ma Wenlin's story, told in Wild Grass: Three Stories of Change in Modern China by Ian Johnson, is first of all a specific human tragedy, both for him and for his overburdened clients, who scrape a mean living from the soil of the Loess Plateau, only to have their savings confiscated by corrupt, greedy and unaccountable officials.

But it also evokes a larger question: Are the impulses that animate the repression against the likes of Ma a comparative economic disadvantage for China?

And if so, might India, with its radically different traditions of democracy and freedom, eventually surpass China as an economic force?

At first glance, the answer to the latter question seems obvious: no. In 1980, China and India had roughly the same income per head; now China's is about double, fueled by a growth rate (9 percent) half again as brisk as India's. China gets more than 10 times as much foreign direct investment, and has five times India's share of world trade.

China has higher literacy and better infrastructure. It takes a month to start a business in China, and three in India. China has more savings, less debt and less poverty.

"If this is a race, India has already been lapped," concluded the Economist in a survey of the two Asian giants.

Political infrastructure

And yet beneath the surface there are trends that suggest that India can close the gap, and over time, even move ahead. Why? Because its democratic political system is more stable and better at accommodating change than China's autocracy.

But wait, even many Indians blame democracy for the country's poor economic performance for so long. They're wrong. India made a lot of poor economic decisions not because it was democratic but because, well, people made bad decisions.

At least India's democracy never did anything quite so mad as launch a Great Leap Forward (30 million dead) or the Great Proletarian Cultural Revolution (millions more).

The inspirational first generation of Indian leaders was, unfortunately, soaked in the thinking of the Fabian socialists (if only Nehru had gone to, say, Chicago, in the 1930s rather than London, how different India's history might have been!). They believed that growth comes from government plans, not profits, and that capitalism was the cause of poverty.

India adopted this outlook, added a dash of autarky, and created a mixed economy that managed only the "Hindu rate of growth" (about 3 percent) for two generations.

In 1991, impelled by crisis, India broke out of this mind set. Since then, India has undergone a peaceful cultural revolution. The Fabians are in retreat; entrepreneurs are social heroes; and the country has a newfound confidence that it can excel in the global economy.

In short, India is nearing a tipping point of economic transformation. The pace of change is not steady, but its direction is inexorable. Consider the current government, a coalition in which the Communist parties are crucial partners (and India's communists are considerably more economically orthodox than the Chinese variety). Even so, the recent budget managed to continue privatization, open pensions and mining to foreign investment, and cut corporate taxes and tariffs.

It is hard to argue that investment, competition and deregulation are bad, or anti-poor, or somehow un-Indian when the deregulation of the telecom industry helped to create the brilliant Indian IT industry.

Demonstrable success

These early successes have created momentum for more change, and a virtuous circle is beginning to close. Now it is obvious, even to the communists, that the parts of the Indian economy that are humming, such as drugs, auto parts and IT, are the ones that are most open and that this is no coincidence. Outsiders are beginning to notice.

In 2003, a survey by the Federation of Indian Chambers of Commerce and Industry found that 40 percent of companies were "positive" on India as an investment destination; last year, that figure rose to 73 percent.

China's hardware - in the form of bridges, roads, ports and the like - is incomparably better than India's. Anyone who has ever been to both Shanghai and Bombay, the countries' respective commercial capitals, does not need any convincing that Shanghai is the more modern and efficient city.

But in important ways, India's economic software is superior. India's banks report about 10 percent non-performing loans; China admits to 20 percent and the true figure could be double that.

India's capital markets work the way they should; China's are a rigged casino. India has more engineers and scientists; its domestic entrepreneurs have made a bigger mark.

And while no one in his right mind wants to go near the creaky, backlogged Indian civil courts, India is a country that does try to govern by the rule of law. China, ultimately, is a country that will break the rule of law whenever the party feels like it or deems its power to be threatened even if that "threat" is a few thousand poor peasants and their lawyer.

It is also worth noting that China's one-child policy means that it will face the costs of a rapidly aging population much sooner than India.

Since 1992, when Deng Xiaoping decided to gun for growth, China's economy has been running flat out. Over the same period, India's has accelerated from a crawl to a brisk jog; in a good year, it can deliver 8 percent growth. But with the example of positive change behind it, plus a reasonable monsoon and the willingness to learn from China's successes, it is not hard to imagine India growing at China-like speed.

It is at that point that its institutional strengths (a much richer civil society and a government that can be held accountable) give it a decided advantage.

At some point, a market economy requires a reasonably open and flexible political order. In China, that implies the end of the Communist Party's monopoly of power, or at least the chance to challenge it without being imprisoned. China's rulers are nowhere near countenancing that.

For all the advances in personal freedom in China over the past 15 years - and these have been enormous - the Communist Party's clenched grip on power has not relaxed. It's a whole lot less traumatic for a democratic country to open its economy, as India is doing, than for a dictatorship to open its politics, as China is not doing.

And that's why, a generation or so down the line, it is India that is going to be the Asian tiger that everyone watches.

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