Arnold Kling  

China and India

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Pranab Bardhan writes,


The Indian informal sector (including both farms and household enterprises outside agriculture), much larger than that in China, has been mostly privately owned; even now it employs nearly 94 percent of the labor force. But many of these tiny enterprises, often family owned, cannot quite be described as capitalist business; if market prices are imputed for the inputs they use (such as family labor) their business income is often persistently negative. They operate in the interstices of a low-productivity "involuted" economy, the capitalist parts of which cannot absorb them.

That is from Awakening Giants, Feet of Clay, which looks at China and India. It's a short book, but I am getting a lot out of it. China comes off better than I thought, in part because I did not previously understand the extent to which government there is decentralized and even competitive. India comes off not well, but I cannot say I am surprised. Between Naipul's view of India's culture and politics (in A Million Mutinies Now) and the description of India by William Lewis in The Power of Productivity, I was prepared for the dysfunctionality that Bardhan describes there.

One issue is why there is so much more formal manufacturing in China than in India. Bardhan cites some potential institutional factors, such as restrictive labor laws in India, but he questions their significance. I wonder if the barriers are not more cultural. Maybe there are many in India who are not comfortable in non-family enterprises. Maybe it is easier for Chinese workers to develop a strong attachment to the factories that employ them, but Indian workers are more inclined to quit if some minor issue comes up.

Perhaps India's elite is more dependent than China's on globalization. At an elite level, Indians can move fairly adeptly in the global corporate world, in part because of their knowledge of English and familiarity with western business practices.

Anyway, the book has none of my uninformed cultural speculation. It is filled with facts and useful analysis.



COMMENTS (6 to date)

Arnold

There is a vibrant Indian blogosphere out there that includes many recently converted libertarians. Labor laws are extremely restrictive. It is infact the major factor explaining why firms don't scale up, especially manufacturing firms which are usually crony deals with the government, and/or in some 'Special Economic Zone' where the regular rules don't apply.

If the firm reaches 100 employees or so, the book is thrown at them.

Doc Merlin writes:

I would like to see a log size v frequency plot for us businesses. I suspect that the scaling laws will result in kinks in the curve near size of 50 and 100 due to special rules for small businesses. I also suspect that the very largest businesses wont fit the curve perfectly either.

Arnold, Doc

Check out our own NYT
for some choice examples.

MernaMoose writes:

Pranab Bardhan writes

Good thing he writes, because I'm sure I can't pronounce his name correctly.

Sad that India is this way. But what do you expect, with Gandhi and other socialists so prominent in the not so distant past.

China may come off better, but their government is still largely in the grips of the socialist ethos. And if anything I've read is even half way accurate, their financial sector is a slow motion train wreck.


So am I the only one who dreams of a nation ruled by people who finally get it, and start letting go of the economic reins? The nation that does this could become an economic power house in short order.

Odds of this happening in my life time: very low. Reason: major educational systems, the world over, are dominated by Euro-socialist philosophy. Because everybody knows that western Europe is so advanced and sophisticated and they know everything. So everybody, including the US, copies and reproduces the worst elements of their ideologies.

Loof writes:

I haven’t read Professor Bardhan’s book, the title though, Two Awakening Giants, Feet of Clay, suggests something. I suppose the “feet of clay” (fundamentally flawed) is in reference to market reforms relative to an implicit objective capitalist theory of value in lockstep with the subjective theory of value with much ado about libertarian selfishness and utility – and how to get filthy rich in business globally. These two feet are looking somewhat clayey, mixed with some iron, as they try to march along and socially stomp about.

If that type of lack in market reform was the giant's "feet of clay", did Bardhan miss China’s pragmatic free and quite fair market reform relative to a phenomenon strikingly similar to an objective labor theory of value? Not communism's complicated centrally planned LTV that has repeatedly failed; the grassroots one more like Smith’s LTV that became an astonishing success in China. This domestic free market reform for agrarians didn’t make anyone rich that I’m aware; but, it’s causal to a remarkable reduction of human poverty over two decades: from 260 million (1978) down to 40 million (1998).

Loof writes:

Did Bardhan refer to China’s Household Responsibility Program of 1978? Or, the Dragon Head programs now? No clay feet there with such a strong footing.

In 1978, 300 million village households were liberated economically, as each Household became a Firm, to entrepreneur and grow what each thought best and freed to market as they saw fit. It looks like the greatest free market reformation in history - and, based on a labor theory of value, not capitalism.

What’s fascinating now is how China is objectively using labor and capital in partnership to compete in high-value markets. The present Dragon Head free enterprise programs now have about 100 million households involved in vertical integration for efficient processing, manufacturing and marketing. The programs, analogous to the old farmers’ co-ops in North America, partners labor with capital investors, who are getting relatively high returns.

Thai farmers are getting badly beaten. Thailand made a free trade deal with China for tariff free treatment on almost 200 agricultural products. Other Asian countries are now much more cautious dealing with China.

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