Voice

An Unnecessary War

In the full-court press for war with Iraq, the Bush administration deems Saddam Hussein reckless, ruthless, and not fully rational. Such a man, when mixed with nuclear weapons, is too unpredictable to be prevented from threatening the United States, the hawks say. But scrutiny of his past dealings with the world shows that Saddam, though cruel and calculating, is eminently deterrable.

Should the United States invade Iraq and depose Saddam Hussein? If the United States is already at war with Iraq when this article is published, the immediate cause is likely to be Saddam's failure to comply with the new U.N. inspections regime to the Bush administration's satisfaction. But this failure is not the real reason Saddam and the United States have been on a collision course over the past year.

The deeper root of the conflict is the U.S. position that Saddam must be toppled because he cannot be deterred from using weapons of mass destruction (WMD). Advocates of preventive war use numerous arguments to make their case, but their trump card is the charge that Saddam's past behavior proves he is too reckless, relentless, and aggressive to be allowed to possess WMD, especially nuclear weapons. They sometimes admit that war against Iraq might be costly, might lead to a lengthy U.S. occupation, and might complicate U.S. relations with other countries. But these concerns are eclipsed by the belief that the combination of Saddam plus nuclear weapons is too dangerous to accept. For that reason alone, he has to go.

Even many opponents of preventive war seem to agree deterrence will not work in Iraq. Instead of invading Iraq and overthrowing the regime, however, these moderates favor using the threat of war to compel Saddam to permit new weapons inspections. Their hope is that inspections will eliminate any hidden WMD stockpiles and production facilities and ensure Saddam cannot acquire any of these deadly weapons. Thus, both the hard-line preventive-war advocates and the more moderate supporters of inspections accept the same basic premise: Saddam Hussein is not deterrable, and he cannot be allowed to obtain a nuclear arsenal.

One problem with this argument: It is almost certainly wrong. The belief that Saddam's past behavior shows he cannot be contained rests on distorted history and faulty logic. In fact, the historical record shows that the United States can contain Iraq effectively -- even if Saddam has nuclear weapons -- just as it contained the Soviet Union during the Cold War. Regardless of whether Iraq complies with U.N. inspections or what the inspectors find, the campaign to wage war against Iraq rests on a flimsy foundation.

Is Saddam a Serial Aggressor?
Those who call for preventive war begin by portraying Saddam as a serial aggressor bent on dominating the Persian Gulf. The war party also contends that Saddam is either irrational or prone to serious miscalculation, which means he may not be deterred by even credible threats of retaliation. Kenneth Pollack, former director for gulf affairs at the National Security Council and a proponent of war with Iraq, goes so far as to argue that Saddam is "unintentionally suicidal."

The facts, however, tell a different story. Saddam has dominated Iraqi politics for more than 30 years. During that period, he started two wars against his neighbors -- Iran in 1980 and Kuwait in 1990. Saddam's record in this regard is no worse than that of neighboring states such as Egypt or Israel, each of which played a role in starting several wars since 1948. Furthermore, a careful look at Saddam's two wars shows his behavior was far from reckless. Both times, he attacked because Iraq was vulnerable and because he believed his targets were weak and isolated. In each case, his goal was to rectify Iraq's strategic dilemma with a limited military victory. Such reasoning does not excuse Saddam's aggression, but his willingness to use force on these occasions hardly demonstrates that he cannot be deterred.

The Iran-Iraq War, 1980–88
Iran was the most powerful state in the Persian Gulf during the 1970s. Its strength was partly due to its large population (roughly three times that of Iraq) and its oil reserves, but it also stemmed from the strong support the shah of Iran received from the United States. Relations between Iraq and Iran were quite hostile throughout this period, but Iraq was in no position to defy Iran's regional dominance. Iran put constant pressure on Saddam's regime during the early 1970s, mostly by fomenting unrest among Iraq's sizable Kurdish minority. Iraq finally persuaded the Shah to stop meddling with the Kurds in 1975, but only by agreeing to cede half of the Shatt al-Arab waterway to Iran, a concession that underscored Iraq's weakness.

It is thus not surprising that Saddam welcomed the Shah's ouster in 1979. Iraq went to considerable lengths to foster good relations with Iran's revolutionary leadership. Saddam did not exploit the turmoil in Iran to gain strategic advantage over his neighbor and made no attempt to reverse his earlier concessions, even though Iran did not fully comply with the terms of the 1975 agreement. Ruhollah Khomeini, on the other hand, was determined to extend his revolution across the Islamic world, starting with Iraq. By late 1979, Tehran was pushing the Kurdish and Shiite populations in Iraq to revolt and topple Saddam, and Iranian operatives were trying to assassinate senior Iraqi officials. Border clashes became increasingly frequent by April 1980, largely at Iran's instigation.

Facing a grave threat to his regime, but aware that Iran's military readiness had been temporarily disrupted by the revolution, Saddam launched a limited war against his bitter foe on September 22, 1980. His principal aim was to capture a large slice of territory along the Iraq-Iran border, not to conquer Iran or topple Khomeini. "The war began," as military analyst Efraim Karsh writes, "because the weaker state, Iraq, attempted to resist the hegemonic aspirations of its stronger neighbor, Iran, to reshape the regional status quo according to its own image."

Iran and Iraq fought for eight years, and the war cost the two antagonists more than 1 million casualties and at least $150 billion. Iraq received considerable outside support from other countries -- including the United States, Kuwait, Saudi Arabia, and France -- largely because these states were determined to prevent the spread of Khomeini's Islamic revolution. Although the war cost Iraq far more than Saddam expected, it also thwarted Khomeini's attempt to topple him and dominate the region. War with Iran was not a reckless adventure; it was an opportunistic response to a significant threat.

The Gulf War, 1990–91
But what about Iraq's invasion of Kuwait in August 1990? Perhaps the earlier war with Iran was essentially defensive, but surely this was not true in the case of Kuwait. Doesn't Saddam's decision to invade his tiny neighbor prove he is too rash and aggressive to be trusted with the most destructive weaponry? And doesn't his refusal to withdraw, even when confronted by a superior coalition, demonstrate he is "unintentionally suicidal"

The answer is no. Once again, a careful look shows Saddam was neither mindlessly aggressive nor particularly reckless. If anything, the evidence supports the opposite conclusion.

Saddam's decision to invade Kuwait was primarily an attempt to deal with Iraq's continued vulnerability. Iraq's economy, badly damaged by its war with Iran, continued to decline after that war ended. An important cause of Iraq's difficulties was Kuwait's refusal both to loan Iraq $10 billion and to write off debts Iraq had incurred during the Iran-Iraq War. Saddam believed Iraq was entitled to additional aid because the country helped protect Kuwait and other Gulf states from Iranian expansionism. To make matters worse, Kuwait was overproducing the quotas set by the Organization of Petroleum Exporting Countries, which drove down world oil prices and reduced Iraqi oil profits. Saddam tried using diplomacy to solve the problem, but Kuwait hardly budged. As Karsh and fellow Hussein biographer Inari Rautsi note, the Kuwaitis "suspected that some concessions might be necessary, but were determined to reduce them to the barest minimum."

Saddam reportedly decided on war sometime in July 1990, but before sending his army into Kuwait, he approached the United States to find out how it would react. In a now famous interview with the Iraqi leader, U.S. Ambassador April Glaspie told Saddam, "[W]e have no opinion on the Arab-Arab conflicts, like your border disagreement with Kuwait." The U.S. State Department had earlier told Saddam that Washington had "no special defense or security commitments to Kuwait." The United States may not have intended to give Iraq a green light, but that is effectively what it did.

Saddam invaded Kuwait in early August 1990. This act was an obvious violation of international law, and the United States was justified in opposing the invasion and organizing a coalition against it. But Saddam's decision to invade was hardly irrational or reckless. Deterrence did not fail in this case; it was never tried.

But what about Saddam's failure to leave Kuwait once the United States demanded a return to the status quo ante? Wouldn't a prudent leader have abandoned Kuwait before getting clobbered? With hindsight, the answer seems obvious, but Saddam had good reasons to believe hanging tough might work. It was not initially apparent that the United States would actually fight, and most Western military experts predicted the Iraqi army would mount a formidable defense. These forecasts seem foolish today, but many people believed them before the war began.

Once the U.S. air campaign had seriously damaged Iraq's armed forces, however, Saddam began searching for a diplomatic solution that would allow him to retreat from Kuwait before a ground war began. Indeed, Saddam made clear he was willing to pull out completely. Instead of allowing Iraq to withdraw and fight another day, then U.S. President George H.W. Bush and his administration wisely insisted the Iraqi army leave its equipment behind as it withdrew. As the administration had hoped, Saddam could not accept this kind of deal.

Saddam undoubtedly miscalculated when he attacked Kuwait, but the history of warfare is full of cases where leaders have misjudged the prospects for war. No evidence suggests Hussein did not weigh his options carefully, however. He chose to use force because he was facing a serious challenge and because he had good reasons to think his invasion would not provoke serious opposition.

Nor should anyone forget that the Iraqi tyrant survived the Kuwait debacle, just as he has survived other threats against his regime. He is now beginning his fourth decade in power. If he is really "unintentionally suicidal," then his survival instincts appear to be even more finely honed.

History provides at least two more pieces of evidence that demonstrate Saddam is deterrable. First, although he launched conventionally armed Scud missiles at Saudi Arabia and Israel during the Gulf War, he did not launch chemical or biological weapons at the coalition forces that were decimating the Iraqi military. Moreover, senior Iraqi officials -- including Deputy Prime Minister Tariq Aziz and the former head of military intelligence, General Wafiq al-Samarrai -- have said that Iraq refrained from using chemical weapons because the Bush Sr. administration made ambiguous but unmistakable threats to retaliate if Iraq used WMD. Second, in 1994 Iraq mobilized the remnants of its army on the Kuwaiti border in an apparent attempt to force a modification of the U.N. Special Commission's (UNSCOM) weapons inspection regime. But when the United Nations issued a new warning and the United States reinforced its troops in Kuwait, Iraq backed down quickly. In both cases, the allegedly irrational Iraqi leader was deterred.

 

Saddam's Use of Chemical weapons
Preventive-war advocates also use a second line of argument. They point out that Saddam has used WMD against his own people (the Kurds) and against Iran and that therefore he is likely to use them against the United States. Thus, U.S. President George W. Bush recently warned in Cincinnati that the Iraqi WMD threat against the United States "is already significant, and it only grows worse with time." The United States, in other words, is in imminent danger.

Saddam's record of chemical weapons use is deplorable, but none of his victims had a similar arsenal and thus could not threaten to respond in kind. Iraq's calculations would be entirely different when facing the United States because Washington could retaliate with WMD if Iraq ever decided to use these weapons first. Saddam thus has no incentive to use chemical or nuclear weapons against the United States and its allies -- unless his survival is threatened. This simple logic explains why he did not use WMD against U.S. forces during the Gulf War and has not fired chemical or biological warheads at Israel.

Furthermore, if Saddam cannot be deterred, what is stopping him from using WMD against U.S. forces in the Persian Gulf, which have bombed Iraq repeatedly over the past decade? The bottom line: Deterrence has worked well against Saddam in the past, and there is no reason to think it cannot work equally well in the future.

President Bush's repeated claim that the threat from Iraq is growing makes little sense in light of Saddam's past record, and these statements should be viewed as transparent attempts to scare Americans into supporting a war. CIA Director George Tenet flatly contradicted the president in an October 2002 letter to Congress, explaining that Saddam was unlikely to initiate a WMD attack against any U.S. target unless Washington provoked him. Even if Iraq did acquire a larger WMD arsenal, the United States would still retain a massive nuclear retaliatory capability. And if Saddam would only use WMD if the United States threatened his regime, then one wonders why advocates of war are trying to do just that.

Hawks do have a fallback position on this issue. Yes, the United States can try to deter Saddam by threatening to retaliate with massive force. But this strategy may not work because Iraq's past use of chemical weapons against the Kurds and Iran shows that Saddam is a warped human being who might use WMD without regard for the consequences.

Unfortunately for those who now favor war, this argument is difficult to reconcile with the United States' past support for Iraq, support that coincided with some of the behavior now being invoked to portray him as an irrational madman. The United States backed Iraq during the 1980s -- when Saddam was gassing Kurds and Iranians -- and helped Iraq use chemical weapons more effectively by providing it with satellite imagery of Iranian troop positions. The Reagan administration also facilitated Iraq's efforts to develop biological weapons by allowing Baghdad to import disease-producing biological materials such as anthrax, West Nile virus, and botulinal toxin. A central figure in the effort to court Iraq was none other than current U.S. Defense Secretary Donald Rumsfeld, who was then President Ronald Reagan's special envoy to the Middle East. He visited Baghdad and met with Saddam in 1983, with the explicit aim of fostering better relations between the United States and Iraq. In October 1989, about a year after Saddam gassed the Kurds, President George H.W. Bush signed a formal national security directive declaring, "Normal relations between the United States and Iraq would serve our longer-term interests and promote stability in both the Gulf and the Middle East."

If Saddam's use of chemical weapons so clearly indicates he is a madman and cannot be contained, why did the United States fail to see that in the 1980s? Why were Rumsfeld and former President Bush then so unconcerned about his chemical and biological weapons? The most likely answer is that U.S. policymakers correctly understood Saddam was unlikely to use those weapons against the United States and its allies unless Washington threatened him directly. The real puzzle is why they think it would be impossible to deter him today.

Saddam With Nukes
The third strike against a policy of containment, according to those who have called for war, is that such a policy is unlikely to stop Saddam from getting nuclear weapons. Once he gets them, so the argument runs, a host of really bad things will happen. For example, President Bush has warned that Saddam intends to "blackmail the world"; likewise, National Security Advisor Condoleezza Rice believes he would use nuclear weapons to "blackmail the entire international community." Others fear a nuclear arsenal would enable Iraq to invade its neighbors and then deter the United States from ousting the Iraqi army as it did in 1991. Even worse, Saddam might surreptitiously slip a nuclear weapon to al Qaeda or some like-minded terrorist organization, thereby making it possible for these groups to attack the United States directly.

The administration and its supporters may be right in one sense: Containment may not be enough to prevent Iraq from acquiring nuclear weapons someday. Only the conquest and permanent occupation of Iraq could guarantee that. Yet the United States can contain a nuclear Iraq, just as it contained the Soviet Union. None of the nightmare scenarios invoked by preventive-war advocates are likely to happen.

Consider the claim that Saddam would employ nuclear blackmail against his adversaries. To force another state to make concessions, a blackmailer must make clear that he would use nuclear weapons against the target state if he does not get his way. But this strategy is feasible only if the blackmailer has nuclear weapons but neither the target state nor its allies do.

If the blackmailer and the target state both have nuclear weapons, however, the blackmailer's threat is an empty one because the blackmailer cannot carry out the threat without triggering his own destruction. This logic explains why the Soviet Union, which had a vast nuclear arsenal for much of the Cold War, was never able to blackmail the United States or its allies and did not even try.

But what if Saddam invaded Kuwait again and then said he would use nuclear weapons if the United States attempted another Desert Storm? Again, this threat is not credible. If Saddam initiated nuclear war against the United States over Kuwait, he would bring U.S. nuclear warheads down on his own head. Given the choice between withdrawing or dying, he would almost certainly choose the former. Thus, the United States could wage Desert Storm II against a nuclear-armed Saddam without precipitating nuclear war.

Ironically, some of the officials now advocating war used to recognize that Saddam could not employ nuclear weapons for offensive purposes. In the January/February 2000 issue of Foreign Affairs, for example, National Security Advisor Rice described how the United States should react if Iraq acquired WMD. "The first line of defense," she wrote, "should be a clear and classical statement of deterrence -- if they do acquire WMD, their weapons will be unusable because any attempt to use them will bring national obliteration." If she believed Iraq's weapons would be unusable in 2000, why does she now think Saddam must be toppled before he gets them? For that matter, why does she now think a nuclear arsenal would enable Saddam to blackmail the entire international community, when she did not even mention this possibility in 2000?

What About A Nuclear Hand-Off?
Of course, now the real nightmare scenario is that Saddam would give nuclear weapons secretly to al Qaeda or some other terrorist group. Groups like al Qaeda would almost certainly try to use those weapons against Israel or the United States, and so these countries have a powerful incentive to take all reasonable measures to keep these weapons out of their hands.

However, the likelihood of clandestine transfer by Iraq is extremely small. First of all, there is no credible evidence that Iraq had anything to do with the terrorist attacks against the World Trade Center and the Pentagon or more generally that Iraq is collaborating with al Qaeda against the United States. Hawks inside and outside the Bush administration have gone to extraordinary lengths over the past months to find a link, but they have come up empty-handed.

The lack of evidence of any genuine connection between Saddam and al Qaeda is not surprising because relations between Saddam and al Qaeda have been quite poor in the past. Osama bin Laden is a radical fundamentalist (like Khomeini), and he detests secular leaders like Saddam. Similarly, Saddam has consistently repressed fundamentalist movements within Iraq. Given this history of enmity, the Iraqi dictator is unlikely to give al Qaeda nuclear weapons, which it might use in ways he could not control.

Intense U.S. pressure, of course, might eventually force these unlikely allies together, just as the United States and Communist Russia became allies during World War II. Saddam would still be unlikely to share his most valuable weaponry with al Qaeda, however, because he could not be confident it would not be used in ways that place his own survival in jeopardy. During the Cold War, the United States did not share all its WMD expertise with its own allies, and the Soviet Union balked at giving nuclear weapons to China despite their ideological sympathies and repeated Chinese requests. No evidence suggests Saddam would act differently.

Second, Saddam could hardly be confident that the transfer would go undetected. Since September 11, U.S. intelligence agencies and those of its allies have been riveted on al Qaeda and Iraq, paying special attention to finding links between them. If Iraq possessed nuclear weapons, U.S. monitoring of those two adversaries would be further intensified. To give nuclear materials to al Qaeda, Saddam would have to bet he could elude the eyes and ears of numerous intelligence services determined to catch him if he tries a nuclear handoff. This bet would not be a safe one.

But even if Saddam thought he could covertly smuggle nuclear weapons to bin Laden, he would still be unlikely to do so. Saddam has been trying to acquire these weapons for over 20 years, at great cost and risk. Is it likely he would then turn around and give them away? Furthermore, giving nuclear weapons to al Qaeda would be extremely risky for Saddam -- even if he could do so without being detected -- because he would lose all control over when and where they would be used. And Saddam could never be sure the United States would not incinerate him anyway if it merely suspected he had made it possible for anyone to strike the United States with nuclear weapons. The U.S. government and a clear majority of Americans are already deeply suspicious of Iraq, and a nuclear attack against the United States or its allies would raise that hostility to fever pitch. Saddam does not have to be certain the United States would retaliate to be wary of giving his nuclear weapons to al Qaeda; he merely has to suspect it might.

In sum, Saddam cannot afford to guess wrong on whether he would be detected providing al Qaeda with nuclear weapons, nor can he afford to guess wrong that Iraq would be spared if al Qaeda launched a nuclear strike against the United States or its allies. And the threat of U.S. retaliation is not as far-fetched as one might think. The United States has enhanced its flexible nuclear options in recent years, and no one knows just how vengeful Americans might feel if WMD were ever used against the U.S. homeland. Indeed, nuclear terrorism is as dangerous for Saddam as it is for Americans, and he has no more incentive to give al Qaeda nuclear weapons than the United States does -- unless, of course, the country makes clear it is trying to overthrow him. Instead of attacking Iraq and giving Saddam nothing to lose, the Bush administration should be signaling it would hold him responsible if some terrorist group used WMD against the United States, even if it cannot prove he is to blame.

Vigilant Containment
It is not surprising that those who favor war with Iraq portray Saddam as an inveterate and only partly rational aggressor. They are in the business of selling a preventive war, so they must try to make remaining at peace seem unacceptably dangerous. And the best way to do that is to inflate the threat, either by exaggerating Iraq's capabilities or by suggesting horrible things will happen if the United States does not act soon. It is equally unsurprising that advocates of war are willing to distort the historical record to make their case. As former U.S. Secretary of State Dean Acheson famously remarked, in politics, advocacy "must be clearer than truth."

In this case, however, the truth points the other way. Both logic and historical evidence suggest a policy of vigilant containment would work, both now and in the event Iraq acquires a nuclear arsenal. Why? Because the United States and its regional allies are far stronger than Iraq. And because it does not take a genius to figure out what would happen if Iraq tried to use WMD to blackmail its neighbors, expand its territory, or attack another state directly. It only takes a leader who wants to stay alive and who wants to remain in power. Throughout his lengthy and brutal career, Saddam Hussein has repeatedly shown that these two goals are absolutely paramount. That is why deterrence and containment would work.

If the United States is, or soon will be, at war with Iraq, Americans should understand that a compelling strategic rationale is absent. This war would be one the Bush administration chose to fight but did not have to fight. Even if such a war goes well and has positive long-range consequences, it will still have been unnecessary. And if it goes badly -- whether in the form of high U.S. casualties, significant civilian deaths, a heightened risk of terrorism, or increased hatred of the United States in the Arab and Islamic world -- then its architects will have even more to answer for.

Feature

Can India Overtake China?

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.

Walk into any Wal-Mart and you won't be surprised to see the shelves sagging with Chinese-made goods -- everything from shoes and garments to toys and electronics. But the ubiquitous "Made in China" label obscures an important point: Few of these products are made by indigenous Chinese companies. In fact, you would be hard-pressed to find a single homegrown Chinese firm that operates on a global scale and markets its own products abroad.

That is because China's export-led manufacturing boom is largely a creation of foreign direct investment (FDI), which effectively serves as a substitute for domestic entrepreneurship. During the last 20 years, the Chinese economy has taken off, but few local firms have followed, leaving the country's private sector with no world-class companies to rival the big multinationals.

India has not attracted anywhere near the amount of FDI that China has. In part, this disparity reflects the confidence international investors have in China's prospects and their skepticism about India's commitment to free-market reforms. But the FDI gap is also a tale of two diasporas. China has a large and wealthy diaspora that has long been eager to help the motherland, and its money has been warmly received. By contrast, the Indian diaspora was, at least until recently, resented for its success and much less willing to invest back home. New Delhi took a dim view of Indians who had gone abroad, and of foreign investment generally, and instead provided a more nurturing environment for domestic entrepreneurs.

In the process, India has managed to spawn a number of companies that now compete internationally with the best that Europe and the United States have to offer. Moreover, many of these firms are in the most cutting-edge, knowledge-based industries -- software giants Infosys and Wipro and pharmaceutical and biotechnology powerhouses Ranbaxy and Dr. Reddy's Labs, to name just a few. Last year, the Forbes 200, an annual ranking of the world's best small companies, included 13 Indian firms but just four from mainland China.

India has also developed much stronger infrastructure to support private enterprise. Its capital markets operate with greater efficiency and transparency than do China's. Its legal system, while not without substantial flaws, is considerably more advanced.

China and India are the world's next major powers. They also offer competing models of development. It has long been an article of faith that China is on the faster track, and the economic data bear this out. The "Hindu rate of growth" -- a pejorative phrase referring to India's inability to match its economic growth with its population growth -- may be a thing of the past, but when it comes to gross domestic product (GDP) figures and other headline numbers, India is still no match for China.

However, the statistics tell only part of the story -- the macroeconomic story. At the micro level, things look quite different. There, India displays every bit as much dynamism as China. Indeed, by relying primarily on organic growth, India is making fuller use of its resources and has chosen a path that may well deliver more sustainable progress than China's FDI-driven approach. "Can India surpass China?" is no longer a silly question, and, if it turns out that India has indeed made the wiser bet, the implications -- for China's future growth and for how policy experts think about economic development generally -- could be enormous.

The Stifling State

The fact that India is increasingly building from the ground up while China is still pursuing a top-down approach reflects their contrasting political systems: India is a democracy, and China is not. But the different strategies are also a function of history. China's Communist Party came to power in 1949 intent on eradicating private ownership, which it quickly did. Although the country is now in its third decade of free-market reforms, it continues to struggle with the legacy of that period -- witness the controversy surrounding the recent decision to officially allow capitalists to join the Communist Party.

India, on the other hand, developed a softer brand of socialism, Fabian socialism, which aimed not to destroy capitalism but merely to mitigate the social ills it caused. It was considered essential that the public sector occupy the economy's "commanding heights," to use a phrase coined by Russian revolutionary Vladimir Lenin but popularized by India's first prime minister, Jawaharlal Nehru. However, that did not prevent entrepreneurship from flourishing where the long arm of the state could not reach.

Developments at the microeconomic level in China reflect these historical and ideological differences. China has been far bolder with external reforms but has imposed substantial legal and regulatory constraints on indigenous, private firms. In fact, only four years ago, domestic companies were finally granted the same constitutional protections that foreign businesses have enjoyed since the early 1980s. As of the late 1990s, according to the International Finance Corporation, more than two dozen industries, including some of the most important and lucrative sectors of the economy -- banking, telecommunications, highways, and railroads -- were still off-limits to private local companies.

These restrictions were designed not to keep Chinese entrepreneurs from competing with foreigners but to prevent private domestic businesses from challenging China's state-owned enterprises (SOEs). Some progress has been made in reforming the bloated, inefficient SOEs during the last 20 years, but Beijing is still not willing to relinquish its control over the largest ones, such as China Telecom.

Instead, the government has ferociously protected them from competition. In the 1990s, numerous Chinese entrepreneurs tried, and failed, to circumvent the restrictions placed on their activities. Some registered their firms as nominal SOEs (all the capital came from private sources, and the companies were privately managed), only to find themselves ensnared in title disputes when financially strapped government agencies sought to seize their assets. More than a few promising businesses have been destroyed this way.

This bias against homegrown firms is widely acknowledged. A report issued in 2000 by the Chinese Academy of Social Sciences concluded that, "Because of long-standing prejudices and mistaken beliefs, private and individual enterprises have a lower political status and are discriminated against in numerous policies and regulations. The legal, policy, and market environment is unfair and inconsistent."

Foreign investors have been among the biggest beneficiaries of the constraints placed on local private businesses. One indication of the large payoff they have reaped on the back of China's phenomenal growth: In 1992, the income accruing to foreign investors with equity stakes in Chinese firms was only $5.3 billion; today it totals more than $22 billion. (This money does not necessarily leave the country; it is often reinvested in China.)

The Mogul as Hero

For democratic, postcolonial India, allowing foreign investors huge profits at the expense of indigenous firms is simply unfeasible. Recall, for instance, the controversy that erupted a decade ago when the Enron Corporation made a deal with the state of Maharashtra to build a $2.9 billion power plant there. The project proceeded, but only after several years of acrimonious debate over foreign investment and its role in India's development.

While China has created obstacles for its entrepreneurs, India has been making life easier for local businesses. During the last decade, New Delhi has backed away from micromanaging the economy. True, privatization is proceeding at a glacial pace, but the government has ceded its monopoly over long-distance phone service; some tariffs have been cut; bureaucracy has been trimmed a bit; and a number of industries have been opened to private investment, including investment from abroad.

As a consequence, entrepreneurship and free enterprise are flourishing. A measure of the progress: In a recent survey of leading Asian companies by the Far Eastern Economic Review (FEER), India registered a higher average score than any other country in the region, including China (the survey polled over 2,500 executives and professionals in a dozen countries; respondents were asked to rate companies on a scale of one to seven for overall leadership performance). Indeed, only two Chinese firms had scores high enough to qualify for India's top 10 list. Tellingly, all of the Indian firms were wholly private initiatives, while most of the Chinese companies had significant state involvement.

Some of the leading Indian firms are true start-ups, notably Infosys, which topped FEER's survey. Others are offshoots of old-line companies. Sundaram Motors, for instance, a leading manufacturer of automotive components and a principal supplier to General Motors, is part of the T.V. Sundaram group, a century-old south Indian business group.

Not only is entrepreneurship thriving in India; entrepreneurs there have become folk heroes. Nehru would surely be appalled at the adulation the Indian public now showers on captains of industry. For instance, Narayana Murthy, the 56-year-old founder of Infosys, is often compared to Microsoft's Bill Gates and has become a revered figure.

These success stories never would have happened if India lacked the infrastructure needed to support Murthy and other would-be moguls. But democracy, a tradition of entrepreneurship, and a decent legal system have given India the underpinnings necessary for free enterprise to flourish. Although India's courts are notoriously inefficient, they at least comprise a functioning independent judiciary. Property rights are not fully secure, but the protection of private ownership is certainly far stronger than in China. The rule of law, a legacy of British rule, generally prevails.

These traditions and institutions have proved an excellent springboard for the emergence and evolution of India's capital markets. Distortions are still commonplace, but the stock and bond markets generally allow firms with solid prospects and reputations to obtain the capital they need to grow. In a World Bank study published last year, only 52 percent of the Indian firms surveyed reported problems obtaining capital, versus 80 percent of the Chinese companies polled. As a result, the Indian firms relied much less on internally generated finances: Only 27 percent of their funding came through operating profits, versus 57 percent for the Chinese firms.

Corporate governance has improved dramatically, thanks in no small part to Murthy, who has made Infosys a paragon of honest accounting and an example for other firms. In a survey of 25 emerging market economies conducted in 2000 by Credit Lyonnais Securities Asia, India ranked sixth in corporate governance, China 19th. The advent of an investor class, coupled with the fact that capital providers, such as development banks, are themselves increasingly subject to market forces, has only bolstered the efficiency and credibility of India's markets. Apart from providing the regulatory framework, the Indian government has taken a back seat to the private sector.

In China, by contrast, bureaucrats remain the gatekeepers, tightly controlling capital allocation and severely restricting the ability of private companies to obtain stock market listings and access the money they need to grow. Indeed, Beijing has used the financial markets mainly as a way of keeping the soes afloat. These policies have produced enormous distortions while preventing China's markets from gaining depth and maturity. (It is widely claimed that China's stock markets have a total capitalization in excess of $400 billion, but factoring out non-tradeable shares owned by the government or by government-owned companies reduces the valuation to just around $150 billion.) Compounding the problem are poor corporate governance and the absence of an independent judiciary.

Dollars and Diasporas

If India has so clearly surpassed China at the grass-roots level, why isn't India's superiority reflected in the numbers? Why is the gap in GDP and other benchmarks still so wide? It is worth recalling that India's economic reforms only began in earnest in 1991, more than a decade after China began liberalizing. In addition to the late start, India has had to make do with a national savings rate half that of China's and 90 percent less FDI. Moreover, India is a sprawling, messy democracy riven by ethnic and religious tensions, and it has also had a longstanding, volatile dispute with Pakistan over Kashmir. China, on the other hand, has enjoyed two decades of relative tranquility; apart from Tiananmen Square, it has been able to focus almost exclusively on economic development.

That India's annual growth rate is only around 20 percent lower than China's is, then, a remarkable achievement. And, of course, whether the data for China are accurate is an open question. The speed with which India is catching up is due to its own efficient deployment of capital and China's inefficiency, symbolized by all the money that has been frittered away on SOEs. And China's misallocation of resources is likely to become a big drag on the economy in the years ahead.

In the early 1990s, when China was registering double-digit growth rates, Beijing invested massively in the state sector. Most of the investments were not commercially viable, leaving the banking sector with a huge number of nonperforming loans -- possibly totaling as much as 50 percent of bank assets. At some point, the capitalization costs of these loans will have to be absorbed, either through write-downs (which means depositors bear the cost) or recapitalization of the banks by the government, which diverts money from other, more productive uses. This could well limit China's future growth trajectory.

India's banks may not be models of financial probity, but they have not made mistakes on nearly the same scale. According to a recent study by the management consulting firm Ernst & Young, about 15 percent of banking assets in India were nonperforming as of 2001. India's economy is thus anchored on more solid footing.

The real issue, of course, isn't where China and India are today but where they will be tomorrow. The answer will be determined in large measure by how well both countries utilize their resources, and on this score, India is doing a superior job. Is it pursuing a better road to development than China? We won't know the answer for many years. However, some evidence indicates that India's ground-up approach may indeed be wiser -- and the evidence, ironically, comes from within China itself.

Consider the contrasting strategies of Jiangsu and Zhejiang, two coastal provinces that were at similar levels of economic development when China's reforms began. Jiangsu has relied largely on FDI to fuel its growth. Zhejiang, by contrast, has placed heavier emphasis on indigenous entrepreneurs and organic development. During the last two decades, Zhejiang's economy has grown at an annual rate of about 1 percent faster than Jiangsu's. Twenty years ago, Zhejiang was the poorer of the two provinces; now it is unquestionably more prosperous.

India may soon have the best of both worlds: It looks poised to reap significantly more FDI in the coming years than it has attracted to date. After decades of keeping the Indian diaspora at arm's length, New Delhi is now embracing it. In some circles, it used to be jokingly said that NRI, an acronym applied to members of the diaspora, stood for "not required Indians." Now, the term is back to meaning just "non-resident Indian." The change in attitude was officially signaled earlier this year when the government held a conference on the diaspora that a number of prominent nris attended.

China's success in attracting FDI is partly a historical accident -- it has a wealthy diaspora. During the 1990s, more than half of China's FDI came from overseas Chinese sources. The money appears to have had at least one unintended consequence: The billions of dollars that came from Hong Kong, Macao, and Taiwan may have inadvertently helped Beijing postpone politically difficult internal reforms. For instance, because foreign investors were acquiring assets from loss-making SOEs, the government was able to drag its feet on privatization.

Until now, the Indian diaspora has accounted for less than 10 percent of the foreign money flowing to India. With the welcome mat now laid out, direct investment from nonresident Indians is likely to increase. And while the Indian diaspora may not be able to match the Chinese diaspora as "hard" capital goes, Indians abroad have substantially more intellectual capital to contribute, which could prove even more valuable.

The Indian diaspora has famously distinguished itself in knowledge-based industries, nowhere more so than in Silicon Valley. Now, India's brightening prospects, as well as the changing attitude vis-a-vis those who have gone abroad, are luring many non-resident Indian engineers and scientists home and are enticing many expatriate business people to open their wallets. 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.

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.