Is India or China Getting More Bang for Its Buck?

On last week's Foreign Exchange, Fareed Zakaria interviewed two economists about the differences between how China and India are growing their economies. The transcript is now online. Here's a chunk of it.

Fareed Zakaria: India and China are booming of course but investors worldwide are wondering who will boom more loudly in the coming years? And it’s not an easy question because it means going inside two complex developing economies and making projections about the future. But we’re going to do it anyway.

Joining us to talk about this are Yasheng Huang of the MIT Sloan School of Management and Sandeep Dahiya, Professor at the McDonough School of Business at Georgetown and a former Consultant with McKinsey.

So let me ask both of you; the--if we focus in on the issue of Indian companies and Chinese companies, my sense is that you’ll actually find surprisingly that Indian companies are better known certainly around the world. You’ve--you people have heard of the big outsourcing companies like Infosys; people have heard of companies like Tata, whereas there are very few Chinese companies in that category. Let me ask you Yasheng why is that? China’s economy is growing much faster than India’s. It’s been growing faster for a long time, you know probably 15 years longer it’s had a boom and yet there aren’t those many Chinese world-class brand names.

Yasheng Huang: That’s right; I think this is one of the most interesting puzzles about Chinese economy and this is something that I have done research on. One of the main reasons is that the Chinese economic miracle has been created essentially by foreign direct investment. It is not created by the entrepreneurship, local entrepreneurship, indigenous private sector growth, whereas--.

Fareed Zakaria: Explain that; so you mean that it’s been created by Volkswagen coming into China?

Yasheng Huang: That’s right.

Fareed Zakaria: Getting the government to give them a great deal, employing Chinese and making low cost Volkswagens and export them?

Yasheng Huang: Yeah; essentially the Chinese economic miracle is a result of Chinese labor being cheap and very productive rather than the result of the capital accumulated by the Chinese capitalists and--and this is one of the principal reasons why even with eight or nine percentage growth rate every year we do not see the emergence of the world-class Chinese companies coming out of that economy.

Fareed Zakaria: Now what--why is that--because most people would say if you go to China you certainly see this. There’s a very strong entrepreneurial spirit in China, that certainly--

Yasheng Huang: That’s right; yeah.

Fareed Zakaria: You know to the extent that genetics or culture matter, they seem to be fine. I mean you look at Southeast Asia it’s all Chinese entrepreneurs.

Yasheng Huang: Yeah, absolutely; the Chinese entrepreneurs do very well outside of China. China--Chinese have this animal spirit, the business acumen capabilities and let me add a substantial engineering and scientific capability. The main issue is not a lack of these capabilities or entrepreneurial drives; the main reason is the lack of a financial system supportive of these entrepreneurial initiatives and growth. So you can get Chinese company up and running to a certain level; after that they stop growing because you need outside financing; you need outside capital; they can't get bank loans; they can't get listed on the Shanghai Stock Exchange or [Shenzhen] Stock Exchange and from that perspective Indian firms have done much better because they have access to financing; they have access to legal protection in a way that the Chinese entrepreneurs so far have lacked.

Fareed Zakaria: All right; so let’s say that’s the good news about Indian firms--that they are real you know private sector firms. They use capital and they probably use it more efficiently because they don’t get as much of it. But can--can they grow in this environment of a pretty chaotic political system, very little sustained reform taking place? If you look at the Indian Government it keeps announcing reform programs that never get implemented. It keeps announcing infrastructure, roads, buildings and bridges that don’t get built. I mean do--what is your sense? Looking at companies, do they find this a major obstacle or can they find ways around it?

Sandeep Dahiya: You bring up a very interesting point Fareed and this is very true, which is this stop and go reform process in India and the fact that the political process is--is not always geared 100-percent towards making the economy as--as open--as liberalized as some economists would argue. And the world-class firms that we are talking about; what is so peculiar about them is they’re all concentrated in the IT sector. That is one sector which literally grew under wraps. It--the government knew nothing about it and before you knew it--it was a big sector. And that’s saying something about the--the lopsided growth of Indian companies--at least in terms of international recognition.

Fareed Zakaria: Well and the other big difference is--correct me if I’m wrong--but the other big difference is the IT firms are unique in that they don’t need infrastructure since what they transport is transported over the internet. If you’re--if you’re trying to send toys, manufactured toys, you need roads, you need ports, and that’s why it seems to me the Chinese--firms are able to do that so much better because their roads are better--their ports are better. If you’re sending services over the internet you--it’s the one area where you can transport goods without infrastructure.

Sandeep Dahiya: Precisely; it’s very true. About five years ago before the telecom made the communication cost come down a lot you could send people abroad which the IT firms did in the early ‘90s and in the last few years as the--the communication services and--and the capacity to--to work remotely has become much better, but you’re absolutely right. You do not need these busy ports or--or infrastructure.

Fareed Zakaria: But right now wouldn’t it be fair to say China is growing because of the state and India is growing because of its private sector?

Yasheng Huang: Well but you--you can argue about the quality of--of that growth. China invests about 40-percent--actually last year--50-percent of its GDP; India is investing about 20-percent of the--its GDP. The Indian growth rate is inching up to about seven--seven point five; Chinese growth is about nine and--and China is--

Fareed Zakaria: So you think it’s getting a bigger bang for its buck as it were?

Read the rest, including an interview with Azar Nafisi, author of Reading Lolita in Tehran, and a segment on a Spanish entrepreneur trying to turn fast food into healthy food. The latter interview was followed by a surprising chart:

Percentage Overweight/Obese Children:
Russia: 10%
Brazil: 14%
UK: 20%
USA: 26%
Iran: 30%
Spain: 34%
Source: Foreign Policy, World Health Organization