FLAWED GIANTS:

It's India Above China in New World Order: Can India overtake China? That's the title of an influential new article in Foreign Policy magazine. A Q&A with authors Yasheng Huang of MIT and Tarun Khanna of HBS. (Martha Lagace, Mar. 15, 2004, HBS Working Knowledge)

[C]hina and India are the world's next major powers, according to the writers, Yasheng Huang, formerly of Harvard Business School and now a professor at M.I.T. Sloan School of Management, and Tarun Khanna, a professor of strategy at HBS. It is also important because the two countries have embraced very different models of development.

The reasons they have done so are complex but, in general, China has discouraged or actively undermined local entrepreneurship in favor of an foreign direct investment-dependent approach, they say. India, on the other hand, is building an infrastructure—however slowly—that allows entrepreneurship and free enterprise to thrive. By making fuller use of its resources, India's long-term outlook may be far stronger, they suggest. Macroeconomic statistics cited by Huang and Khanna show China clearly in the lead. "But," the authors wonder in Foreign Policy, "the real issue isn't where China and India are today, but where they will be tomorrow."

How these two models play out has great significance not just for Asia but also for other parts of the world that want to benefit from their lessons and avoid their mistakes.

Huang and Khanna recently collaborated on an e-mail interview with HBS Working Knowledge to discuss their Foreign Policy article, Can India Overtake China? [...]

Q: As you think about the future of both countries, what are your main concerns or worries, given these two different models?

A: Our concerns for China are these: how will China give political voice to the public, if at all, along with increasing economic autonomy? We are also concerned about instability caused by migration to cities and the large (though decreasing) role of bankrupt, state-owned enterprises that continue to play a Social Security-like role in China. But the biggest source of worry is the state of China's banking sector, which is technically insolvent. The banking problem is one of the biggest costs of the delay associated with developing a vibrant, domestic private sector.

Here are our concerns for India. How will India rein in its fiscal deficit? How will India discipline its political class? One challenge India faces is deregulation. India is also quite over-regulated compared to other countries at its level of per capita income.

Interesting how the fact that each has over a billion people so often warps the capacity to think clearly about them. Just take the problems they cite in China and consider what you think they'd portend for a nation of 20 million. Now ask yourself, are there likely to be more problems or benefits from trying to manage a billion people? Are these numbers likely to lend stability or exacerbate instability?

Posted by Orrin Judd at March 15, 2004 4:48 PM