Debating The J Curve

The Best Case for India
New books dissected over email.
Oct. 17 2006 1:08 PM

Debating The J Curve

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Bill,

We must disagree a little, for the sake of this format, so let me try. I do take the long view when I say that the United States has prodded closed societies open over the last 50 years—but I think it's warranted. The dynamic goes something like this: We tolerated and even encouraged anti-Communist dictatorships in the 1950s, '60s, and '70s, including Greece, Spain, South Korea, and others. But when some of these countries developed economically and the engagement with America got broader, their closed systems became an obstacle to deeper relations with America. Another way I think of it is that it's quite possible for a friendly dictator to have close state-to-state relations with Washington. But if that country wants a society-to-society relationship—which is the most durable kind of long-term alliance with America—a closed and repressive political system becomes a problem. If a country remains almost completely closed, say Saudi Arabia, it's easier to maintain the realpolitik relationship—or at least it was until five Septembers ago. But when a country is developing and as a result opening up, as was South Korea in the 1970s and '80s, American pressure can be a strong force for change. (In that case, Washington was, by the late 1970s, playing a key role in restraining the military.) I know that there are many exceptions to this basic trend, but I would argue that this push toward openness is one of the distinctive characteristics of the modern era and is a direct result of the successive hegemonies of Britain and the United States, both open, liberal, Protestant, and proselytizing societies.

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On the India-China comparison, I was particularly interested in your views because you have a keen eye for all this, having accurately predicted Japan's decline in the early 1990s and now (again accurately, in my judgment) predicted its revitalization this year. So, while I basically agree with your analysis, let me lay out the best case for India.

China does better than India on the macro front; that is, its government is more reformist, has opened itself up to the world, and has adjusted policy to face that global competition. But India does much better in its micro foundations for growth. It has a real, broad, and deep private sector, populated by thousands of enterprising firms. They use capital efficiently (because they get much less of it than China), and they understand capital markets, branding, and sales. The banking system is clean and efficient, secured by British law. That's why, despite being much smaller and slower-growing as an economy, India has many more world-class firms than China. India will do well because its growth is bottom-up, organic, and spread throughout the country. It is not the product of commands, special zones, and sweetheart deals to multinationals. And, while China has solved the many small problems that developing economies need to solve—infrastructure for example—India has solved the one big problem, how to handle political change. China's system is more brittle because this fundamental issue is utterly unresolved.

Now, as I say, I tend to agree with you that, at the end of the day, all this may be true, but China has a remarkably pro-growth orientation that has made it much more open to the world economy than India is. Even if China stumbles for a few years because of bad politics, it's unlikely to change the long view, which is the rise of China as a massive force in the global economy. So, my case for India is probably more a caveat to your account than a contradiction. I would rate India's prospects better than you seem to (many more than a few million will prosper), but it will not easily achieve the breakthrough pace of growth that genuinely alleviates mass poverty unless it embarks on a major set of reforms.

So, it seems that we agree that India's internal openness, its democracy, when uncoupled from external openness, can be a bad thing—producing competitive populism. What does that tell us about Bremmer's book? Probably that while internal (political) openness does produce greater stability, external (economic and trade) openness produces greater efficiency and growth. When the two kinds of openness are combined and mastered, that's the magic formula for success—South Korea today—but, alas, in the real world that happens infrequently. The rest of the time, we're still analyzing, discussing, and ranking countries that lie within a murkier gray zone. I guess it gives the pundits something to do.

Best,
Fareed

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