cultural variety, India does well in sectors where product differentiation is required and less well in industries that require scale.

THE ECONOMIC SITUATION IN CHINA

According to Nicholas Lardy of the Peterson Institute for International Economics, scale is a key difference between the two countries. Contrary to popular impression, China and India are not comparably sized global giants. China’s trade is six times larger than India’s. Even more striking, the increase in China’s trade level in 2007 ($433 billion, valued using MER) was greater than India’s total trade. India’s share of the global economy today is still less than half of what it was at independence in 1948. India’s economy is expanding rapidly; but its trade is still less than 1 percent of the global total, whereas China’s trade is the second or third largest. A similar disparity exists in foreign investment.

For these reasons, Lardy expressed more optimism about China’s growth than about India’s. The competitive environment in China is more favorable and intense than it is in India, where certain sectors are protected from import competition. In China, with reduced tariffs domestic firms face competition not just from foreign imports but from foreign firms operating in China. China spends three times as much on infrastructure as India.

China’s main challenge is to rebalance its growth strategy, moving toward one that relies more on domestic demand and less on exports. Currently, household consumption is only 36 percent of GDP, whereas in India that figure is 50-60 percent. For sustained economic development, India needs more manufacturing, a more liberalized trade environment, and more flexible labor markets.

The conventional wisdom is: “India does software; China does hardware. Those are their paths to expansion.” But China’s hardware exports are growing much faster than India’s software exports, which make up less than 5 percent of India’s GDP. India will need to take advantage of relatively low wage rates to build up its labor-intensive manufacturing sectors.

COMPARING THE TWO COUNTRIES

Sean Dougherty of the Organisation for Economic Co-operation and Development (OECD) Secretariat presented findings from two recent OECD surveys of China and India, highlighting sources of growth, productivity, and regulatory reforms.

Rooted in the dramatic shifts of the 1980s, growth in both countries is sustainable, but Dougherty drew some distinctions between them. Total Factor Productivity (TFP) growth rates are important. Capital deepening—that is, an increase in capital intensity, usually measured as capital stock per labor hour, also plays a dramatic role in growth, especially in China, and is the “major explanatory factor” in the differences between the two countries’ per capita annual growth. India averaged 4.8 percent between 2000 and 2005, about half of China’s 8.1 percent annual per capita GDP growth rate (Figures 1 and 2). This difference is also seen in the R&D expenditure differences: R&D intensity in India is <1 percent; in China it is 1.4 percent (Figure 3).

Research outputs are a better measure of performance than inputs. Although there are no good measures of scientific outputs, and there is considerable uncertainty about international comparisons, a common output measure is publications in leading peer-reviewed journals with contributions worldwide. In 10 years from 1995 to 2005 Chinese articles in high-impact scientific journals increased more than 16 times, while Indian articles merely doubled (Figure 4).

India has competitive costs and wage levels, but it needs larger-scale firms to compete successfully. Dougherty confirmed the observation that labor market restrictions in India are that country’s greatest challenge. At the state level, though, India is deregulating and making labor markets more flexible. In China, where private firms are more productive than public firms, there is a great need to extend privatization. China is restructuring rapidly and deepening regional specializations.

India’s financial markets are more developed than China’s but India has a greater need to reduce regulatory restrictions in financial product markets. Currently, India has



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