Reflections on “Can India Overtake China?”

Editor’s note: The U.S.-China Perception Monitor recently interviewed Professor Yasheng Huang of MIT, a fellow at Woodrow Wilson Center, on his new book The Rise and Fall of the EAST. In that interview, we asked: You have done a lot of comparative research on China and India, including coauthoring an article called “Can India Overtake China” more than 20 years ago. Looking at where China and India are today in the 3rd decade of the 21st century, do you still think India will eventually surpass China economically? If yes, why? Professor Huang responded to the question through this essay.

There is a lot of misunderstanding surrounding what we said in that article.  (The article was co-authored with Tarun Khanna of HBS. My views expressed here are just my own and I use “I” here because Tarun and I may differ on retrospective views on our article.) The main point of that article is that the two countries chose to pursue different development strategies: China relied heavily on foreign capital; India relied more heavily on the domestic private sector. Here is the central claim of that article: “What’s the fastest route to economic development? Welcome foreign direct investment (FDI), says China, and most policy experts agree. But a comparison with long-time laggard India suggests that FDI is not the only path to prosperity. Indeed, India’s homegrown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets.” This is the central thesis of the article, and at the time we wrote the article, India was universally viewed as a growth disaster, and foreign capital was viewed as the best route to economic success.

Nowhere in that article did we claim (let alone offer a timeline) India will overtake China in GDP growth. Most people do not read beyond the title of the article, which was given by the editors, as commonly practiced in journalism. Here is the only part of the article that touches on the broader growth prospects of the two countries, and it is careful and tempered, not at all a firm prediction: “China and India have pursued radically different development strategies. India is not outperforming China overall, but it is doing better in certain key areas. That success may enable it to catch up with and perhaps even overtake China. Should that prove to be the case, it will not only demonstrate the importance of homegrown entrepreneurship to long-term economic development; it will also show the limits of the FDI-dependent approach China is pursuing.”

We discussed democracy in the context of India’s development strategy, and there is not a single sentence in the article that says China will collapse because it is an autocracy. (For the record, I am an author of an article titled, “Why China Will Not Collapse.”) In the 2003 article, we say: “China and India are the world’s next major powers.” If you interpret a collapse scenario in that sentence, you should have your eyes checked.

Twenty years have passed, and it is time to reassess some of the claims we made. I will be direct and honest. I got some things right, but I also got some things wrong.

The central claim of the article—that domestic private sector is a vital engine of growth—is right on target. Do you know who agreed with that claim? Chinese leaders, and I might have had a minor contributing role. This insight on China in that article came from a book I published in 2003, Selling China, which argued that the financial discrimination against private firms created a lot of investment opportunities for foreign firms. The book was translated into Chinese and published in China in 2005. The publisher told me—although I do not have direct confirmation—that a deputy director of the China Development and Reform Commission (CDRC) assigned the book to the senior staff of the CDRC as a part of their review of China’s FDI policies. (CDRC was the most important agency in China in charge of economic policies.) In 2007, China passed the landmark legislation equalizing the tax treatments between foreign and domestic firms, a position I advocated in the book. (I am not claiming credit, and I was among many who had that view, but most of the advocates were from the business community. It is safer to say that very few scholars at that time advocated that position and wrote a whole book on the subject that had detailed data and analyses.)  One of the problems we identified in the 2003 article—China’s discrimination against domestic firms—declined in its severity.

The other point that we got absolutely right was about India’s financial system vis-à-vis the Chinese financial system. The financial problems in the Chinese system are well known now and are weighing down the growth prospects of the Chinese economy. Back in 2003, we saw something in India that eluded many international investors—that its stock market was better regulated and supportive of genuinely efficient businesses as opposed to the SOEs in China. The massive discrepancy in stock market performance between China and India—and that was true even before the recent stock market meltdown in China—amply validate our viewpoint. India’s stock market has outperformed the Chinese stock market by a long shot, and I do not think many people in 2003 saw that coming. We made that prediction.

Let me say that I also got certain things wrong, again speaking for myself only. One thing I did not take into account in 2003 is policy change; for example, the change in private sector policy that China began to implement in 2007. This is a general hazard of making economic predictions. We make predictions on the basis of the information we have at the moment, assuming certain conditions are in place, and we need to remember that making economic predictions is also making predictions of economic policies. For those of us working in academia, we do not have a unique insight into the policy making process, and we need to keep in mind that constraining condition. A more careful statement should be, “Conditional on certain policies in place, this is our prediction.”

Second, both in my 2003 book and in our 2003 article, my understanding of foreign capital was too narrow. I was thinking of foreign capital building factories in China rather than foreign capital funding Chinese businesses, especially high-tech start-ups in China. This is a crucial distinction. I did not have that knowledge in 2003 that Alibaba was funded by Softbank and other foreign funds. (Alibaba was not widely known at the time.)  In this case, foreign capital, instead of competing with domestic entrepreneurship, is a funder and facilitator of domestic entrepreneurship. In my later writings, I gave ample recognition to this crucially important role of foreign capital.  

Third, in our 2003 article we urged India to be bolder to embrace foreign capital. I have to say, I am surprised by the slow pace of globalization of India’s economy, and this may very well be a downside of any democracy—its tendency to be captured by vested incumbent interests.  

Fourth, I have gained a deeper appreciation for the ability of a country to scale activities—delivering education and health, building factories, prototyping new technologies, and scaling manufacturing. However, I also appreciate the risk of scaling too much as to undermine creativity, multiplicity of ideas, and above all carrying out bad policies to excess. How to balance these competing considerations is not easy, but we have to pay attention to the right combination of uniformity and diversity, an issue I wrote at great depth in my recently published book, The Rise and Fall of the EAST: How Exams, Autocracy, Stability, and Technology Brought China Success, and Why They Might Lead to Its Decline.

Fifth, at least for me, I regretted proposing this thesis first in media rather than in a more academic venue. There is a lot of subtlety that does not come out in a journalistic piece. The most precise way to ask that question, “Can India overtake China?” is not comparing GDP growth rates of the two countries. Rather, it is about comparing GDP growth rates of the two countries relative to their growth fundamentals.  They sound similar but they are two very different ways of looking at the world. I rate India’s overall growth fundamentals low relative to China, especially its basic education and health, so the fact that the country is capable of growing at 5, 6, or even 7 percent is incredibly impressive. For the past 20 years, India was among the fastest growing emerging economies in the world.

In the book project I am working on , I will offer my broader take of these two countries, but I have said repeatedly that there is one scenario in which India can overtake China in economic growth, and this is a scenario in which China itself stumbles and pursues bad policies. I am afraid that we are closer to this scenario now than any other time in history. I say this even with the conviction that China still possesses superior broader growth fundamentals, such as the quality of its human capital, the drive of its entrepreneurs, manufacturing depth, and its ability to scale technologies. I purposely left out infrastructure on that list because I think infrastructure is more a result of economic growth rather than its cause.

Finally, as a human being, not just as an academic, I have the deepest hope that both countries will get their economic policies and systems right and that both economies will perform and will continue to lift people out of poverty and improve the welfare of the Chinese and Indian people. China vis-à-vis India is an academic construct, meaningful and interesting as a debate, but we should cheer both countries when they do well and criticize them if they make mistakes.