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Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India ReviewThis review first appeared on DayOnBay.ca"Although both China and India have done much better in the past quarter century than they did in the past two hundred years in the matter of economic growth, and although both polities have shown a remarkable degree of resilience in their own ways, one should not underestimate their structural weaknesses and the social and political uncertainties that cloud the horizon for these two countries. It will indeed be a sign of "vain perplexity" to pronounce judgment on how and when these clouds will clear." (pg 159)
In order to present a picture of India and China that is more accurate than the idealistic view often peddled in the financial press, Pranhab Bardhan in his book Awakening Giants, Feet of Clay: Assessing the Economic Rise of India and China calls upon the vast amount of academic literature written about the countries to prove that there are a number of structural and institutional problems (mostly economic) that are inhibiting growth in these countries. In comparing India and China, which are sure to drive global economic growth in the years to come, Bardhan presents two countries at very different stages in their development, which must tackle a number of similar problems, as well as a number of problems unique to each country.
Contrary to the "myths popular in the media and parts of academia that have accumulated around the significant economic achievements of the two countries," Bardhan looks at a variety of shortcomings in India and China in relation to the following: economic growth, agriculture, infrastructure, the financial sector, the operation of free markets, poverty and inequality, the public sector, and finally, the environment. Awakening Giants, Feet of Clay assumes that readers have considerable prior knowledge of economics; this is clear when phrases such as "gini coefficient" and "dynamic competitive advantage" are used with no explanation.
Findings
Bardhan focuses on the last twenty-five years in comparing the economies and structural issues of India and China. What emerges from his work is a picture of a relatively vibrant and dynamic Chinese economy compared to a sluggish India. What is surprising, however, is the fact that this difference can in many ways be accounted for by the fact that China, a communist country, embodies free-market principles such as competition more so than India does, especially in its governance.
Some early instances of China encouraging competition and using incentives to spur economic growth can be found in the proliferation of Township Village Enterprises (TVEs) in the 1980s and 1990s which helped spur industrialization in rural areas. Controlled by local governments, these enterprises effectively responded to incentives presented in a market economy without privatizing ownership. These institutions, until their privatization in the mid-1990s, were not backed by the state (whereas State Owned Enterprises were), so they encouraged regional competition between TVEs. This notion of regional competition for public sector entities pervades throughout Chinese government. For example, the Communist Party of China (CPC) builds in career incentives (i.e., advancement within the CPC) for local officials based on interregional competition. As well, the CPC encourages institutional experimentation on a regional level, so that innovative ideas can be extended into other regions. In contrast, Indian bureaucrats at a regional level often only serve for short periods of time, and generally shy away from `rocking the boat' because they are unlikely to reap benefits if a project succeeds, and will face blame if it fails. As well, regional experimentation in India is low because local governments would face great pressure from the electorate to bail out unsuccessful projects.
"China's progress in building highways has been simply phenomenal. In 1988, China had barely one hundred kilometers of expressways; within ten years, the total length of China's expressways had become second only to that of the United States, and rose to 60 thousand kilometres by 2009." (pg 57)
A key indicator of future growth and competitiveness is the infrastructure of a country; in this regard, China eclipses India in a number of areas. For one, the generation, transmission, and distribution of power in China have kept pace with economic growth. On the other hand, severe underpricing and power theft in India have led state-owned power firms to suffer enormous financial losses; as a result, the cost of power to manufacturers in India is upwards of 35% more expensive than in China. The same can be seen in urban infrastructure where, because of political pressure to keep user charges on water/sewage/waste low, "India is ill-equipped to cope with the already mounting demands arising from urban growth". However, the author does note that in one critical area of infrastructure, telecommunications, India enjoys a cost advantage over China. This occurs because of the vigorous private sector in this space, and speaks to the potential for privatization to help solve India's infrastructure problems.
Particularly relevant to those interested in finance, Bardhan, in one of his best chapters, compares the state of the financial markets in the two countries; in this regard, India is seen as much farther ahead than China. The author contrasts the successful National Stock Exchange (NSE) of India (the third largest stock exchange in the world by number of transactions) with Chinese equity markets (highly speculative and suffering from rampant insider trading). Bardhan concludes that India's system is more balanced compared to China's, where "allocation of capital remains severely distorted, particularly working against private enterprise".
Awakening Giants, Feet of Clay also raises the alarm on the environmental problems which both countries are facing. In a fascinating chapter, Bardhan points out that environmental performance scores for India and China are "significantly worse than the average scores in their respective income group of countries". Even more alarming is the fact that according to the World Health Organization, air pollution can be attributed to 500,000 premature deaths in India and even more in China. Unsurprisingly, it appears both of these countries are investing in green energy (e.g., China has surpassed the US in terms of installation of wind turbines).
Evaluation
Awakening Giants, Feet of Clay accomplishes exactly what it sets out to do - provide readers with a sense of how these two emerging economies have developed, and what structural/institutional problems they must overcome to continue this development. Bardhan is able to draw upon a vast array of academic literature and use complementary graphs in a way that is accessible to readers who know little about either country prior to reading the book.
Bardhan paints a realistic picture of these two emerging economies, a picture that is often skimmed over by the financial press. By highlighting a number of severe problems in these economies, problems which could impede growth in the years ahead, the book serves as a warning for any investors who believe that "this time is different" in these two emerging markets. After reading this book it is likely one will be able to better understand pieces in the financial press written about India and China, and better yet, understand what overly optimistic authors tend to not mention about these countries.
In terms of writing style, Bardhan is academic and to-the-point, with occasional moments of flair to keep the book interesting. At the end of each chapter the author summarizes what was said, which reinforces the book's key arguments.
What is disappointing in some respects is the way in which Bardhan concludes the book. The chapter entitled "Looking to the Future: Through the Lens of Political Economy" shines in a lot of ways (e.g., the discussion of communism vs. democracy in India and China's developments) but feels somewhat incomplete. Bardhan's focus in the final chapter is largely on the political aspects of these countries, rather than economic ones, which may leave readers thirsting for a more economic evaluation of these two countries' futures. Given the preceding chapters, which equip readers with a solid understanding of the economic issues facing these countries, Bardhan should have used his conclusion to draw upon what readers have learnt to predict the economic future of these countries.
Overall, the book is excellent. For those interested in learning about the two economies that are sure to take centre stage in the 21st century, Awakening Giants, Feet of Clay is a phenomenal starting point. While the author admits that the book "does not represent new frontiers of research," it successfully brings the vast swathe of academic literature about these countries together to paint a clear picture of India and China's economic development.Visit DayOnBay.ca for more reviews of books about finance and economics.
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