I stumbled upon a fascinating piece by Nobel Laureate Paul Krugman called 'The Myth of Asia's Miracle: A Cautionary Fable'. It was written in the early 90s — therefore, it can be interpreted with the luxury of hindsight. Krugman analysed two earlier economic races: one between the US and Soviet Union (1950s through to the 1980s), and another between the US and Japan (1970s and 1980s). He cited plenty of popular commentary from those days, which read ominously like today's obituaries.
By way of example, he quoted economist Calvin Hoover (1957) who had predicted that “a collectivist, authoritarian state was inherently better at achieving economic growth than free-market democracies (and) the Soviet economy might outstrip that of the United States by the early 1970s”. Others asserted that “Japan would overtake the US in real per capita income by 1985, and total Japanese output would exceed that of the US by 1998”.
According to Krugman, these predications were bound to fail because they ignored the intangible force-multipliers of innovation, technology and competitive efficiency. He added that similar predictions were also being made then (do remember that 'then' were the early-90s!) about the US and China. 'The World Bank estimates that the Chinese economy is currently about 40 per cent as large as that of the US. If China can grow at 10 per cent annually, by the year 2010 its economy will be a third larger than ours.' Of course, at that time Krugman concluded that this comparison, too, could fail. Today we are in 2010, and we know that Krugman was right. Forget about being a third larger, the Chinese economy continues to be less than 40 per cent of the US even today.
Krugman's fallacies have a crucial bearing on who will ultimately breast the tape: China's hare or India's tortoise. Perhaps the answer won't be quite as simple as who is investing more and growing faster today. You will have to put your arms around a few intangibles: who has superior innovation? Who has more entrepreneurial savvy? Who is grappling with and expanding in intensely competitive conditions?
China's spectacular sweep, compared to India's relatively mild rise, could tempt an easy answer. But it'd be wise to remember that history unfolds over several decades, perhaps even in fractions of centuries. So it truly may be too early to call this match. Do also remember that China and India were the quickest to bounce back after the Lehman crisis of 2008. China's rebound, however, was accompanied by huge debt and deflation, as prices (and therefore demand) were weak. India's turnaround was sturdier, caused by lower debt and modest inflation.
So in economic terms, India's nominal GDP grew twice as fast as China's for a few quarters on the trot-the first time that this happened in nearly three decades. This is what economists call a 'lead indicator'. In simple language, it could be the one swallow which makes the summer — an early signal of change. But before we spring to quick conclusions again, do remember that China is so far ahead that India's fledgling momentum could easily get snuffed out. The imponderables are far too many; China's ambition and confidence are, unfortunately, equalled by India's poor governance and self-doubt. China could yet re-write economic theory, and India could yet blow its chances.
As with all good games of chance, there's a joker in the pack. What if India were to graft some of China's ambition and determination? Or, what if China were to adopt some of India's democracy? Now the game gets really interesting, because the odds then move, from comparing economic structures, to figuring out which country can do what more easily. Can India fix its governance more easily than China can repair its politics? Whoever gets this one right will win the biggest wager of the 21st century.
Raghav Bahl is founder and editor of Network18. His book Superpower: The Amazing Race Between China's Hare and India's Tortoise (Penguin Allen Lane), will be published in August. The views expressed by the author are personal