Ask the Author: Yasheng Huang

In his July/August cover story, “The Next Asian Miracle,” Yasheng Huang argues that the common story we’ve heard about the dramatic rise of China and India is wrong. Naturally, readers had some thoughts of their own. Now, he answers their questions about democracy, growth, and whether governments ought to prioritize schools or skyscrapers.

Q: Isnt the idea that democracy is bad for growth, which you disavow, one that was applicable to India more than any other country? The economic leaders of the past few centuries have mostly been democracies. Has India not been the exception rather than the rule?

Yasheng Huang: True, all the economic leaders are democracies. However, there are two pertinent issues that my article tried to address. One is that there is an active chicken-and-egg debate: Did the current economic leadersWestern countries and Japanbecome economic leaders because they were democracies or are they democracies because they became economic leaders? This is not a trivial distinction. It implies very different policy implications. If you believe that economic growth promotes democracy, then you should be primarily concerned about growth. But if you believe that democracies promote growth, then you should argue for political reforms (in addition to being concerned about growth). I belong to the camp that argues that political liberalism is conducive to growth, not simply a byproduct of it.

The other issue is how to explain the rapid growth in China and in East Asia when those countries seemingly were (and are) authoritarian. The East Asian model gave rise to the idea that authoritarianism promotes economic growth. This is a very influential idea, and my own view is that this is one of the most influential ideas least based on facts in the history of economic ideas. Consider how this idea was derived: Only the successful East Asian countries were selected for the formulation of the idea of the East Asian miracle; the failed East Asian economies were ignored. This is a bit like polling those who come to claim prizes at a lottery office and concluding that the odds of winning the lottery are 100 percent.

For each East Asian authoritarian success story, there is an East Asian authoritarian failure. Taiwan grew rich but authoritarian Maoist China did not. South Korea developed rapidly, but North Korea stagnated. Strong one-man rule in Singapore succeeded, but so did laissez-faire Hong Kong. In its totality, the East Asian experience precisely mirrors what we social scientists have known for a long timeauthoritarian regimes are no more successful economically than democratic regimes. My article, by comparing China with India, is meant to convey this idea.

Q: Thank you for articulating your opinions about the impact of democracy on an economy. Have you examined the intersection of environmental stewardship and economic growth in developing countries like India and China? What do you think such an analysis would find?

YH: I do believe that democracy matters for environmental management, though I cant predict that India will necessarily do a better job in environmental management than China. Today, Chinas environmental challenges are substantial. Sixteen out of the worlds 20 dirtiest cities are located in China. One reason is the underpricing of capital, which encourages energy-intensive and capital-intensive growth and industrialization in China. This is an economic issue, to be sure, but also it is a political issue. The reason is that the noneconomic costs of building huge industrial projects are low in China because the government is free to minimize the political opposition to these large-scale projects.

The Chinese government is widely considered to be very business friendly, especially by foreign firms, and this attitude is widely praised by the likes of the World Bank. The Indian government, on the other hand, is often criticized for its anti-business attitudes.

There are many benefits to a business-friendly approach, but there is also an unintended downside. Because government is always on their side, managers become lazy. They feel no need to upgrade their technology to the cleaner, next-generation level, and they are less concerned about the environmental impact of their production. However, there are hopeful signs in China. I would argue that nongovernmental organizations are most active in the environmental area and that the Chinese government has recognized the need for a more democratic wayas opposed to a command-and-control approachto curb pollution. Keep in mind that East Asian societies became more democratic in the 1980s in part because of the environmental movement.

My view is that India will run into the pollution problem that Americans have, which is that consumers and households generate pollution by their heavy use of cars. India is rapidly moving to a car culture and consumption-heavy lifestyle. The biggest mistake the Indian government has made was to not levy high taxes on gasoline consumption at a time when there were fewer owners of cars. Once the car culture becomes widespread, it will be extremely difficult politically to rein in the habit. Arguably, here, democracy is a hindrance.

Q: Britain was the most powerful country in 1900, and the United States held that spot in 2000. But how do you think the major countries will rank in 2100?

YH: I honestly do not know. I am fascinated by the fascination that many people have about predictions that Chinese or Indian economies will overtake the United States by 2035 or 2050. There are as many estimates of the current size of the Chinese and Indian economies as there are people estimating. Recently, the World Bank reduced its purchasing power parity estimates of Chinese and Indian economies by 40 percent. Just like that.

These data issues aside, the thing that really matters is not the aggregate size of the economy but GDP per capita. The most remarkable story of economic catch-up is that of South Korea, if measured in those terms. In 1960, that country had a per-capita GDP that was comparable to that of many African countries. Today, it is approaching Western levels of living standards. India and China have a long way to go before they achieve what South Korea already has.

Q: In your article, you credit liberalism for Chinas economic successes in the 1980s, and its illiberalism in the 90s for its subsequent decline. While the countrys actions during the 90s were designed to stymie a nascent democratic movement, a growing environment of religious (usually Christian) freedomeven among some communist officialsrescued the economy during this transition and may be the best solution to controlling corruption.

Do you agree that religious freedom can be an even more potent economic force than democracy, regardless of whether it is aided by democratic institutions?

YH: First, let me be clearI did not say that Chinese economy experienced a decline in the 1990s. Its economy continued to grow in the 1990s but the distribution of economic gains became far less equitable and that the country increased its illiteracy rate, even though its GDP powered forward. So the turn from liberalism to illiberalism affected not the growth rate per se but the people who gained and lost from that growth. It is important to draw this distinction between growth and the effects of growthbecause it is this distinction that illustrates the role of the politics most clearly.

I am not sure that religion is the best solution to controlling corruption. It would probably help in reigning in the immoral behavior of officials and businesspeople. But at most, religion, I think, works on the margins to curb corruption. The most important mechanism to reduce corruption is to streamline and constrain the interventionist role of the government in the economy. For both China and India, I believe that there is substantial room for further economic liberalization and reforms. Then we need the rule of law, transparency, and accountability to deal with the residual cases of corruption. Maybe religion and civic values can function as the third-tier defense against corruption, but religion alone would not do much if a government remained highly interventionist and its conduct is not duly constrained.

Q: In your opinion, which other illiberal or politically closed societies would benefit the most economically from a modest liberalization of their political systems?

YH: There are so many but let me focus on one country hereNorth Korea. In the 1950s, North Korea was richer than South Korea. It had a decent industrial base and a lot of raw materials. South Korea today is an industrial powerhouse, and North Korea is languishing in poverty. It is one of the worlds greatest tragedies. For two individual Koreans separated by a completely arbitrary line called the 38th parallel, they have had totally different lives.

The point here is that North Korea has had an equal chance of becoming a rich country as South Korea but it did not. North Korea is beginning to reform a bit, by setting up special economic zones, for example. Some commentators have compared North Koreas reforms to Chinese reforms in the 1980s.

This comparison is factually incorrect (and an insult to the Chinese leaders of the 1980s). As I pointed out in the article, the first moves made by the Chinese leaders in the late 1970s and 1980s were political. They explicitly repudiated the Cultural Revolution and put out a fairly severe criticism of Mao Zedong. (My own opinion is that they should have gone further in their criticism.) That is not what North Korea is doing at all. Today the country is led by the son of the leader who was single-handedly responsible for the economic decline of that country. Can you imagine what China would look like today if the biological and/or the political offspring of Mao ruled the country instead of Deng Xiaoping (a man, I should add, who was purged by Mao no less than three times)? China achieved a noticeable political break from its past in the late 1970s. There is nothing but continuity in North Korea today.

Q: You seem to underestimate the extent to which the process of globalization helped to lift India and China, more so than the shifting sands of their own political systems. Do you think China and India have been shaped by the world economy in the past 25 years more than they have shaped it themselves?

YH: No. If the process of globalization is the explanation, we should see all the poor countries grow simultaneously. In fact, what we see is that some countries grow but others do not. Allowing your economy to be globalized, in and of itself, is a policy decision. As in any policy decision, politics is involved. A fairer question is the impact of globalization vis--vis domestic economic dynamics in the growth stories of these two countries. One could argue that the global economy plays a bigger role than the domestic economy (or vice-versa), but this is an entirely different issue altogether from the question that you asked about the role of the political system.

Q: How long do you think China can sustain the rapid growth of the past decade without making massive investments in human capital, the consequences of which you mention in your article?

YH: I believe that the prospects arent good if they dont substantially reverse the trend. The damage of not investing in human capital is that it makes the country completely dependent on low costs as its competitive advantage. The rise of India may pose a risk to this low-cost economic model (though let me hasten to add that India has done rather poorly in basic education investments itself).

The good news is that the current Chinese leadership has begun to address this issue. (As I argued in the article, the under-investments in human capital occurred mainly in the 1990s.) They are cutting down the tuition costs for the rural school-age children, but they must do far more. One estimate is that China spent only $1 million on eradicating illiteracy in 2006. As I said in the article, the country spent $100 million on a single skyscraper in some cases.

Q: You make the point that building infrastructure has followedrather than precededeconomic growth. But how can you make such a sweeping statement about these patterns when we have only a few years of growth to measure? Surely infrastructure will help finance and grow the next phase of economic development in both China and India?

YH: It is true that the growth of India is a more recent experiencebut not the growth of China. The year 2008 marks 30th anniversary of reforms in China. There, we do have a longer time span to measure the impact of infrastructures. The experience from China is abundantly clearinfrastructure followed growth rather than the other way around. Your point that surely infrastructure will help finance and grow the next phase of economic development in both China and India depends on the opportunity costs of building these infrastructures. If India spends a massive amount of capital on infrastructures at the expense of education, then I dont think that infrastructure will power its next phase of development. I think India requires a huge program to invest in its education, especially its basic education. Once it handles education, it should devote its attention to infrastructure.

So, I want to be clearI am not against building infrastructure. But I want to know how the building of infrastructures is being financed. Does building infrastructures mean sacrificing education or healthcareanother weakness of Indiaor is it being financed in ways that do not conflict with these social investments? That is the reason I view infrastructure building as following growth rather than preceding it. By definition, after a period of growth, a country becomes richer and it has more resources so it can invest in infrastructures but also in education and health. It should not have to make the hard tradeoffs a poor country must make.

Q: You describe the political impediments that hindered Indias growth for years. But how much did Indias stratified social system stunt growth there?

YH: The stratified social system is a drag on growth. No question about it. But as a policy matter, changing a government, while difficult, is probably easier than changing a social system. Social values, habits, and practices are deeply entrenched. Yes, India is constrained by its social stratification but the last thing you want to do is to add a dysfunctional political system on top of an economically inefficient social system. If the Indian political system is unable to change its social arrangements quickly, then the least it should do is not hinder economic growth.

Q: Do you think that the frequent media comparisons between India and China have created an artificial rivalry where one perhaps does not exist? Arent there more apt comparisons to be made between China and Russia, or India and Pakistan? How much does the reality of their circumstances mirror the impression one gets from glancing at the newsstand, where a tension between the two is hard to miss?

YH: When I gave talks around the world about China and India, I was often told the following line, It is not China or India. It is China and India. China has its way to grow and India has its own way to grow. All is happy.

That is an intellectual cop-out, and it evades the real issues. The differences between the economic and political systems of the two countries are vast, and it is incumbent on a scholar to point out these differences and to make a case for their respective merits and drawbacks. The gist of my article is that there is one way to achieve economic growth and that the two countries succeeded and stumbled in ways remarkably similar. There is nothing artificial about demonstrating and evaluating the growth experiences of these two huge countries.

The rivalry is real in an intellectual and policy sense. There is a real question of which political economy model is most conducive to growth. This is not an artificial question at all. As North Korea proves, the political and economic system a country adopts has a real impact on the welfare of its citizenry. And, of course, China and India also compete in a real economic sense. They compete for foreign investment, market opportunities, and, increasingly, energy resources. That is not artificial at all.

As for your suggestion to compare other countries, it depends on what you are trying to achieve in your comparison. If your objective is to compare how central planning and the departure from central planning affected growth, then I agree that a China/Russia comparison is more appropriate. If your objective is to study, say, the role of Islam on growth, an India/Pakistan comparison is definitely more appropriate than a China/India comparison. For my question, which is to study the effect of democracy on growth, I think that a China-India comparison is quite appropriate.

Professor Yasheng Huang, of the Sloan School of Management at MIT, is author of Capitalism with Chinese Characteristics (New York: Cambridge University Press, 2008). He is writing a book on how politics shapes business, education, and entrepreneurship in China and India.