CAN CHINA LEARN FROM INDIA?

Yasheng Huang
MIT Sloan School of Management

Topics
• Rethinking Washington Census?
• FDI and infrastructures: China’s story
• It is finance, stupid: India’s story MIT2
Slide 1

MIT2 especially for domestic private firms. the recent improvements are from a low base.
MIT, 06/22/2004
Rethinking “Washington Census?”

• Level vis-à-vis direction

• An important distinction often lost in policy and academic discussions
– Level: Whether we have achieved “Washington Census.”
– Direction: Whether we are moving to “Washington Census.”
• A more important benchmark:
– Moving away from “Moscow Census.”
• A few illustrations
– Political Washington Census: Democracy
• China is not a democracy but significant political reforms in the
1980s
• India: Freer press now than in the 1970s and privatization of TV
stations
Rethinking “Washington Census?”

• A few illustrations
– Irrelevance of property rights in China: Really?
• The story of Wenzhou
• Right is not given by God in China but by someone more powerful
than God: Deng Xiaoping
• The end of Cultural Revolution=A massive improvement of property
rights security
– Superiority of gradual reforms in China: Really?
• Between 80-90 % of rural households attained private control rights
of land in less than 5 years in the early 1980s
• That period, not the 1990s, brought about the biggest drop of
poverty
• The part of the country with a gradualist strategy is now mired in
massive problems.
What we do need to rethink

• Privileging FDI and infrastructures over the quality of institutions

and over the regulatory environment for DOMESTIC firms

• China with more FDI and more impressive infrastructures

• India urged to learn from China, despite the fact that it has demonstrably
superior financial and political institutions.

• Question, “Can China learn from India?”

• The answer: Plenty

• The evidence, surprisingly, comes from within China
 Economist, March 3rd, 2005: India may be more efficient but China invests more.
”It pays to be profligate. The "so what?" also applies to the argument that India is
much more efficient than China at using capital.”

• Which of these two provinces in China has grown faster in the 1980s and
1990s?
– Province 1
1) FDI/fixed asset investment: 13.6%
2) Investment/GDP ratio: 51.2%
– Province 2
1) FDI/fixed asset investment: 5.7%
2) Investment/GDP ratio: 44.4%
– (Data above: Referring to the 1990s)
Table 1 Profiles of Jiangsu and Zhejiang

Jiangsu Zhejiang : The output 

value of domestic 
Basic Statistics private firms is derived 
--Size of area 100.3 (1,000 km2) 100.2 (1,000 km2) from the total output 
--Length of coastline 1,000 km 2,200 km value minus the sum of 
--Population, 2001 73.6 million 46.1 million that of SOEs, collective 
--# of main seaports, 1987 5 3 firms, and FIEs. The 
--Loading capacity of the main seaports, 1987 163 million tons 30.2 million tons output value of FIEs is 
--Turnover freight traffic per kilometer, 1978 28.4 billion tons 16.4 billion tons netted out from the 
--Primary school enrollment, 1978 97.0% 98.0% denominator as well. 
--Doctors per 1,000 persons, 1978 0.97 0.87 This is a relatively broad 
--Hospital beds per 1,000 persons, 1978 1.89 1.00 measure of private 
Economic Structure output and it includes 
--Industry as % of GDP firms of mixed state and 
1978 47.0 38.0 private ownership, such 
1995 47.9 46.3 as alliances between 
--Urban as % of total employment SOEs, and private firms 
1978 21.0 17.5 and listed companies. 
1995 27.2 20.1 For the latter two 
--Foreign trade as % of GDP categories of firms, 
1981 5.8 4.0 control rights often 
1995 27.2 27.3 reside with the 
--Export as % of GDP government rather than 
1981 5.3 3.7 with private 
1995 8.1 20.0 entrepreneurs. Jiangsu 
--Domestic private firms as % of industrial output has more of these types 
value of domestic firmsa of firms. 
1980 0.53 0.57
1995 10.5 38.7 Sources: Basic 
2001 44.7 69.3 statistics are mainly 
from State Statistical 
Economic Performance Bureau (1989). Economic 
--Nominal GDP (yuan) and social data are 
1978 24.9 billion 12.4 billion based on State Statistical 
2001 951 billion 674.8 billion Bureau (1996) and 
--Nominal GDP per capita (yuan) National Bureau of 
1978 430 331 Statistics of China 
2001 12,922 14,655 (2002). 
--Real GDP growth (annual average 1978-95) 12.9% 14.0%
--Nominal export growth (annual average 1978-95) 9.3% 27.9%
Now the FDI story

• “

• Economist, March 3rd, 2005:

– “In China, provinces compete to lure investment. Paran Balakrishnan, of
India's Telegraph newspaper, once accompanied a party of Indian
businessmen to China and explains that they were flabbergasted, on
approaching the northern town of Datong, to find their bus joined by the
local mayor and given a police escort. Few Indian state officials or
politicians go out of their way to attract foreign investors.”
 The great virtues of FDI: Promoting export
competitiveness
ƒ Which two economies were more successful growth
stories?

45
40
35
30
25 Shares of total
20 exports by
15 MNCs
10
5
0
A B C D

Yasheng Huang, MIT Sloan School of Management

 AN FDI-DRIVEN MODEL

ƒ The contrast between the East Asian model and the Latin American model
ƒ China is far closer to the Latin American model

50
45
40
35
30
25
20
15 Share of exports by MNCs
10
5
0
South Hong Brazil Mexico China
Korea Kong (1969) (1977) (2003)
(1978) (1974)

Yasheng Huang, MIT Sloan School of Management

FDI as a substitute, not a complement to, domestic
entrepreneurship

• Selling China (Cambridge, 2003):

– Substantial external liberalization but coupled
with substantial private sector activities
– Institutional functions of FDI: 1) some property
rights security and 2) alleviating credit
constraints.
– The story of Lenovo and Infosys
• Both have access to good institutions
• But one in Hong Kong; the other in Mumbai
• A thought experiment: Bangladesh and Chinese
banks
FDI as a substitute, not a complement to, domestic
entrepreneurship

• My current book:
– True golden era: 1980s
• Rapid growth and increasing equity
• Biggest drop of poverty in the first five years of the 1980s
• Broad domestic liberalization, especially in the 1980s
• Understated political reforms
– The 1990s: Problematic
• Biased liberalization in favor of FDI
• Huge, massive state-led investments
• Weakening of the financial sector
• Deteriorating social performance
 Increasing role of informal financing
in the 1990s
Formal and Informal Financing in the Startup Capital, 1980-2001

60

50

40 % of firms that had informal

credit in startup capital
Percent

30

20

% of firms that had bank

loans in startup capital

10

0
1980- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
1988
Year
 India’s huge advantage: It is finance, stupid
Table 1 Perception of general financing constraints (GFC ), China, India, and selected
countries

General financing constraints (GFC) based on Question 38a in the WBES:

“Please judge on a four-point scale how problematic are the following
factors for the operation and growth of your business:” 1=No obstacle,
2=Minor obstacle, 3=Moderate obstacle, 4=Major obstacle

Countries % of firms giving a % of firms giving a Per capita dollar (PPP),

score of 4 score of 3 or 4 2001

China 66.3 80.2 4,260

India 25.5 52.1 2,450
South Asia

Bangladesh 37.0 54.5 1,680

Pakistan 47.5 83.1 1,920

East and Southeast Asia

2,940
50.0
Indonesia 41.0 8,340
41.0
Malaysia 22.1 4,390
57.0
Philippines 35.0 24,910
30.3
Singapore 9.1 6,550
75.3
Thailand 41.3

Transitional economies:
Russia 51.8 79.5 8,660
Romania 59.4 80.5 5,980
Belarus 54.9 82.3 8,083
Bulgaria 56.7 73.3 5,950
Croatia 58.7 81.0 8,440
Georgia 58.1 78.3 2,860
Kazakhstan 48.8 79.5 6,370
Kyrgyzstan 64 87.2 2,710
Lithuania 35.9 69.8 7,610

Source: WBES. Per-capita income data are from Table 1 of World Bank (2003).
SUBTANTIAL MICROECONOMIC STRENGTHS OF INDIA

• Global competitiveness report 2005-2006

– Overall ranking: China at 46th place and India at 55th place
– But a huge discrepancy between macro and micro rankings
– Macro ranking (heavily weighted by actual performance): China
at 25th place and India at 52nd place.
– Micro ranking favors India: MSOf

• Business competitiveness index: China at 47th place and India at 30th

place
• Company operation and strategy: China at 39th place and India at 30th
place
• Quality of national business environment: China at 47th place and
India at 32nd place

.
Slide 15

MSOffice8 micro rankings rely on surveys both mncs and local firms. subjective. although hard to compare cross sectionally, the changes over
time of these rankings mean something. also other ranking scheme such as clsa yield the same results.
, 02/28/2006
SUBTANTIAL MICROECONOMIC STRENGTHS OF INDIA

• Worsening micro foundation in China and improving micro

foundation in India
– Business competitiveness index
• China: 42th in 1998 but 47th in 2004
• India: 44th in 1998 but 30th in 2004
– Company operations and strategy
• China: 35th in 1998 but 39th in 2004
• India: 50th in 1998 but 30th in 2004
– Quality of national business environment
• China: 44th in 1998 but 47th in 2004
• India: 42nd in 1998 but 32nd in 2004.

.
 Table 1 Three-year cumulative dropout rates among seventeen rural junior secondary schools,
2001-2003 (%)
Junior Northeast North Southeast Central South Unweighted
secondary average of all
schools 17 schools
1 30.0 4.54 9.38 20.52
2 73.23 39.05 50.47
3 70.91 48.96
4 54.36 39.34
5 28.93 41.97
6 69.61
7 55.92
8 74.37
9 18.11
Unweighted 52.83 21.8 38.02 20.52 42.92
average
Source: Narrowing the gap.

Table 2 Three-year cumulative droput rates among six economically representative counties
in China, 2001-2003
Average of all Average of all schools
schools in both Urban areas (County Rural areas
urban and rural seat)
areas
County A in southeast 3.78 0 4.24
County B in northeast 54.05 9.61 60.82
County C in northeast 28.06 0.97 29.09
County D in north 3.66 0 3.99
County E in southwest 35.55 59.54 12.41
County F in southwest 20.97 3.14 22.16
 Table 1 Summary of various reporting of dropout ratios of Chinese middle schools, 2004-2005
dates of Location of the school Reported Other reported dropout Per capita income
Cumulative indicators of the city
dropout ratios (provincial
average), 2001
a on dropout Nationwide 2 to 9 %
2003 from
tements by
Education
November 9, 2005 Wei County of Xintai city, 60-70% (Official: 6,155 yuan (8,741
Hebei province 2%) yuan)
November 9, 2005 A junior secondary school in 90% 6,155 yuan (8,741
Wei County of Xintai city, yuan)
Hebei province
Research Website Lingshou County of 20% 7th grade: six sections; 12,156 yuan
w.ccrs.org.cn), Shijiazhuang city, Hebei 8th grade: four sections; (8,741 yuan)
28, 2005 province 9th grade: two sections
h Daily, February A middle school in Guzehn 7th grade: Four sections 5,066 yuan (4,771
county, Bangpu City of 8th grade: Two sections yuan)
Anhui province 9th grade: One section
h Daily, February A middle school in Guzehn 52 students of the 9th 5,066 yuan (4,771
county, Bangpu City of grade dropped out in yuan)
Anhui province the second term (out of
312 students)
h Daily, September L township in Lingquan 40% In two middle schools, 2,269 yuan (4,771
county, Fuyang city of Anhui 800 students in 7th grade yuan)
province but only 300 in 9th grade
ning News, June A township in Xinhua 30 to 50% A quote from a student: 4,507 yuan (6,201
county, Loudi city, Hunan She had 73 classmates in yuan)
province 7th grade but only 36 in
9th grade.
m Forum, March A middle school in Bing 8% (Official: 2%) 10,270 yuan
County, Harbin city, (9,486 yuan)
Heilongjiang province
m Forum, March A middle school in Ningling 20% (Official: 3,944 yuan (5,818
county, Shanqiu city, Henan 9%) yuan)
province
ning News, June Unspecified locations A teacher in Jilin 7th grade: 110 students.
province is 8th grade: 100 students.
quoted as saying, 9th grade: 30 students.
“It is common
knowledge that
dropout ratio is
30 to 40%.”
ily, electronic Unspecified locations 40%
vember 18, 2005
y by