It's India Above China in New World Order

HBSWK Pub. Date: Jul 28, 2003

Can India overtake China? That's the title of an influential new article in Foreign Policy magazine. A Q&A with authors Yasheng Huang of MIT and Tarun Khanna of HBS.

by Martha Lagace, Senior Editor, HBS Working Knowledge

Comparing India and China is to embark on an old puzzle that has fascinated smart people for centuries. The newer question of economic leadership, however?Which country will overtake the other in the foreseeable future?" ?s an urgent and important one, according to a provocative article in the July-August issue of Foreign Policy magazine.

It is urgent and important because China and India are the world's next major powers, according to the writers, Yasheng Huang, formerly of Harvard Business School and now a professor at M.I.T. Sloan School of Management, and Tarun Khanna, a professor of strategy at HBS. It is also important because the two countries have embraced very different models of development.

The reasons they have done so are complex but, in general, China has discouraged or actively undermined local entrepreneurship in favor of an foreign direct investment-dependent approach, they say. India, on the other hand, is building an infrastructure?owever slowly?hat allows entrepreneurship and free enterprise to thrive. By making fuller use of its resources, India's long-term outlook may be far stronger, they suggest. Macroeconomic statistics cited by Huang and Khanna show China clearly in the lead. "But," the authors wonder in Foreign Policy, "the real issue isn't where China and India are today, but where they will be tomorrow."

How these two models play out has great significance not just for Asia but also for other parts of the world that want to benefit from their lessons and avoid their mistakes.

Huang and Khanna recently collaborated on an e-mail interview with HBS Working Knowledge to discuss their Foreign Policy article, "Can India Overtake China?"

Lagace: "China and India are the world's next major powers," you both write. "They also offer competing models of development." What are the most important differences you see in the ways China and India are evolving?

Yasheng Huang and Tarun Khanna: In terms of similarities, both are conscious of their role in the world economy. Both seek to play a bigger political role on the world stage. China is already doing that as a permanent member of the U.N. Security Council. The differences include the fact that China is taking tangible but slow steps towards embracing private entrepreneurship, a big departure from the past. India is continuing to struggle with making things easier for multinationals. So the differences are arguably narrowing; but our view is that the first-order effect of all this is still "a big difference."

The biggest source of worry is the state of China's banking sector, which is technically insolvent. ?asheng Huang and Tarun Khanna

Q: As you think about the future of both countries, what are your main concerns or worries, given these two different models?

A: Our concerns for China are these: how will China give political voice to the public, if at all, along with increasing economic autonomy? We are also concerned about instability caused by migration to cities and the large (though decreasing) role of bankrupt, state-owned enterprises that continue to play a Social Security-like role in China. But the biggest source of worry is the state of China's banking sector, which is technically insolvent. The banking problem is one of the biggest costs of the delay associated with developing a vibrant, domestic private sector.

Here are our concerns for India. How will India rein in its fiscal deficit? How will India discipline its political class? One challenge India faces is deregulation. India is also quite over-regulated compared to other countries at its level of per capita income.

Q: How does foreign direct investment affect the economic outlook for both countries?

A: In general, FDI has been positive to both economies. It has, after all, provided goods and services that did not otherwise exist. It has also introduced competition into moribund sectors. We do not buy the old, inward-looking economic ideology of the 1960s and 1970s that advocated protecting domestic markets. For China, however, the government liberalized its external sector way ahead of its internal sector. The government should speed up its reforms in the internal sector rather than scale back external sector reforms.

Q: On the influence of ?igr?, you write, "With the help of its diaspora, China has won the race to be the world's factory. With the help of its diaspora, India could become the world's technology lab." Tell us briefly how and why you believe Chinese and Indian ?igr? have come to perpetuate such different roles. Do you see these roles changing?

A: The different composition of the Chinese and Indian diasporas has to do with the different time periods during which each diaspora settled overseas and the different circumstances under which it did so. The Indian diaspora consists more of professionals; the Chinese consists more of entrepreneurs outside China. The implications of the differential structure of the diasporas is only now being appreciated, at least in the commercial arena. India has been particularly unreceptive?xcept until very recently?o embracing the diaspora.

Q: How is your message about the pace of India and China being received by economists, policy specialists, or business people?

A: We think they see it as a new and intriguing way to look at a centuries-old comparison. The best endorsement for our article is the way in which it has been disseminated. In India, it has spread by word of mouth and been reprinted in numerous newspapers and magazines. In China, one is hard pressed to find public discussion of the article; though the message is being discussed, we've been told, in other, less transparent forums. This is, in some sense, part of the very point of the article!

Q: How will you continue to delve into this area of research? What's next for you?

A: We are writing a book on China and India, eventually. We hope to use this to jump-start further research.

Yasheng Huang is an associate professor at the Sloan School of Management at the Massachusetts Institute of Technology. He is the author most recently of Selling China: Foreign Direct Investment during the Reform Era (Cambridge University Press, 2002).

Tarun Khanna is a professor at Harvard Business School.