India vs. China

Is India more of a competitive threat to America's economy than China? You would think that's true considering how many more articles you read about outsourcing a few hundred thousand white collar jobs to Indian than the loss of millions of blue collar jobs to China. A reader offers a different perspective:

The article below fits with the dual paradigm of China and India. This is the model where China dominates "blue collar" trade via manufacturing and India targets "white collar" trade via services. There is only one problem with this theory. It is wrong. The reality is very different. A few notes:

1. China's success in manufacturing trade dwarfs India's results in knowledge industries. China's goods exports are roughly 20 times larger than India's service revenues. There is simply no comparison.

2. China's economic growth has dwarfed that of India. China has sustained 8-10% GDP growth for decades, since the shift to capitalism started. India has only attained similar rates of growth in the last few years. It is not yet clear if India can sustain its growth because of how narrowly based it is. Note that the narrow base in this case is agriculture, not information services. India's recent growth spurt has been rural, not urban.

3. China has created vastly more jobs than India. The migration of Chinese workers from the hinterland to the coastal cities is the largest movement of people in the history of the world, all in the last 20 years. And those Chinese workers aren't living in shantytowns, selling cigarettes, and looking for a real job. By contrast, India's IT sector employs roughly 1 million workers.

4. Many countries have created equal or better educational systems than India. China, with 16 million university students, is only one example. Tawain, Korea, Malaysia, Singapore, Thailand, etc. have all attained higher levels of literacy and higher education than India.

What then can be said about India's quite real successes in knowledge work? Essentially, they are a product of failure. The knowledge industries aren't a failure of course. However, their success is a consequence of the failure of India's economy to "soak up" its college graduates in a broadly based developing economy. For example, Korea produces any number of brilliant engineers. However, in Korea Samsung, Hyundai, LG, SK and a zillion smaller companies provide lucrative employment opportunities for these folks. In India, you either get a job with Wipro, Infosys, etc. or you starve.

To state this directly, India's success in IT is a reflection of India's failure in manufacturing. Why has India failed in manufacturing? There a number of reasons. However, the post-WWII socialist government of India imposed draconian restrictions on private investment, supposedly to protect small scale village producers (look up "homespun" and "License Raj" for some tragic examples). These restrictions have only been very slowly and partially removed. A good article on the subject can be found here. India has also failed to create the physical infrastructure needed for development as a consequence of low national savings and high budget deficits.

It is worth noting, that most (almost all) Indian's agree. They reject the idea that India can develop via services and deeply envy China's success in manufacturing. A common statement is "we must either import China's goods or China's methods". However, India has failed to undertake the reforms needed to make either choice possible.