India vs China: Which is the best role model for the developing world? Read more: http://business.time.com/2010/10/29/india-vs-china-which-is-the-best-role-model-for-the-developing-world/#ixzz2J5y4CrWw

China is the Michael Jordan of emerging economies. Just as every up-and-coming basketball hopeful wanted to “be like Mike,” every up-and-coming poor nation wants to “be like China.” And why not? China has boasted an incredible record of alleviating poverty, building industry, creating jobs, and translating economic power into political power. The rise of China has made the West doubt the continued validity of its cherished principles of democratic, fee-market capitalism. Instead, some believe that China’s state-heavy, semi-market economy — or “state capitalism” — is better suited to the demands of the modern world. The old “Washington Consensus,” based on a devotion to free markets and free enterprise, is being replaced by the “Beijing Consensus.”

But is China’s Beijing Consensus really the winning formula for poor nations? Larry Summers, Obama’s assistant on economic policy, raised the idea in a recent speech that India’s political-economic model, which he labeled the “Mumbai Consensus,” may in the end win the day:


And perhaps – perhaps – in 2040, the discussion will be less about the Washington Consensus or the Beijing Consensus, than about the Mumbai Consensus – a third way not based on ideas of laissez-faire capitalism that have proven obsolete or ideas of authoritarian capitalism that ultimately will prove not to be enduringly successful. Instead, a Mumbai Consensus based on the idea of a democratic developmental state, driven not by a mercantilist emphasis on exports, but a people-centered emphasis on growing levels of consumptions and a widening middle class.

So what’s a better model for the developing world – the Mumbai Consensus or the Beijing Consensus?

In the inevitable comparisons between the world’s two largest countries and two fastest-growing economies, India usually ends up on the losing end. India’s economic growth has consistently trailed China’s, and India hasn’t eradicated poverty as quickly as China, even when adjusting for the fact that India started its pro-growth reforms a dozen years after China. That’s led to a potentially dangerous level of frustration among India’s poor. India has struggled to compete with China in large-scale, export-oriented manufacturing, and doesn’t attract as much foreign investment as China. The fractured government in India acts more slowly than China’s to implement policy or build much-needed infrastructure. Just compare Beijing’s ultra-organized 2008 Olympics to New Delhi’s embarrassing 2010 Commonwealth Games.

But at the same time, India’s economic system has some often ignored advantages over China’s:

More balanced growth. Whenever economists talk about China, they focus on the need to “rebalance.” That means China is too dependent on exports and investment for its growth, and needs to increase the role of private consumption to make its growth more balanced. India is already where China wants to be. Consumer spending plays a much bigger role in India’s economy than in China’s. Thus India doesn’t have to implement policies that distort the global economy (like China does with its currency regime). India, in fact, buys more from the rest of the world than it sells. India’s growth is thus less susceptible to shocks from the international economy.

More rational companies and banks. Under China’s “state capitalism,” the state-owned banking system and big companies can easily fall victim to government mandates and policy priorities, leading to problems like asset bubbles, excess capacity and a weakened financial system. India’s companies are more focused on profitability than China’s (as you can see from this chart). Historically India’s banks tend to have lower levels of bad loans, and though China’s nonperforming loan ratio has improved dramatically in recent years, serious concerns remain that the big government-sponsored credit boom of 2009, aimed at boosting growth during the Great Recession, could eat into Chinese banks’ balance sheets in coming years. The private sector in India also has a lower level of debt. According to data kindly provided to me by Fitch, bank credit to the private sector in China reached 148% of GDP in 2009 compared to only 54% in India. I admit I’m making a sweeping generalization here — China does have its share of smart companies, from industrial giants like Geely to start-ups like Tencent. But I think it’s fair to argue that India’s corporate and banking sectors are more professional and healthier than China’s.

Democracy. Few things annoy me more than having to sit through mindless praise of China’s authoritarian political system, especially from Westerners who don’t live under one. Many businessmen believe that authoritarianism in China has been a necessary factor behind the economy’s rapid growth. But India proves that countries don’t need dictators to create rapid development and gains in human welfare. India’s raucous democracy has been able to produce one of the world’s best records of economic growth over the past two decades – and preserve people’s civil liberties in the process. I’m certain to get comments on this post complaining that India doesn’t have a true democracy, that it’s all corrupt and unjust. But people do vote and governments do change in India, and that means the vote of the average person does count. Perhaps the convoluted nature of India’s democratic policymaking is one reason why the economy doesn’t grow as quickly as China’s. But would you sacrifice human rights for the sake of an extra percentage point or two of GDP growth? (I wouldn’t.)

This isn’t to say that India doesn’t have problems that need fixing. Its state-owned enterprises are a mess and badly need privatization. Policymakers need to find way of spreading India’s growth miracle to parts of the nation still relatively untouched. But at the same time, it is hard to argue that the Mumbai Consensus isn’t a serious rival to the Beijing Consensus.

Read more: http://business.time.com/2010/10/29/india-vs-china-which-is-the-best-role-model-for-the-developing-world/#ixzz2J5xzPfTC