Readings: Politics and Economics

The Broad Impact of the Gulf War

By: New York Times
IT'S been a year since Iraq invaded Kuwait -- and half a year since the United States and its coalition
partners defeated Iraq in a land war that lasted 100 hours. This seems like a good time to assess the
effects of the Persian Gulf war on the American economy.
This was a unique war in American history in terms of its effect on the budget and the economy, both
because it was fought out of inventories and because America's allies paid for the war, at least in the
short run. Indeed, the United States made a "profit" on the war during the fiscal year 1991, which ends on
Oct. 1.
Total pledges from coalition partners to the United States came to $54 billion. Thus far, the amount
received has been $46.6 billion, of which $41.8 billion was in cash and $5.4 billion in kind, especially fuel.
The Office of Management and Budget expects that by the end of this year, cash contributions will reach
$48.2 billion, bringing the combined cash-and-kind grants to the $54 billion pledged.
The Congressional Budget Office estimates that United States incremental costs for Operations Desert
Shield and Desert Storm came to $15 billion. Hence, with cash receipts expected to total $48 billion this
year, it says the United States will have received $33 billion more than the incremental costs of the war
this year.

However, Richard G. Darman, director of O.M.B., has testified that the total costs to the United States of
stopping Iraq were $61 billion, implying that American outlays exceeded foreign contributions by at least
$7 billion. But the Darman figure includes transfers from already budgeted military outlays to the gulf
operations plus estimated future costs of replacing equipment lost in the war.
One issue is how much lost equipment should be replaced, given American plans to scale back military
expenditures. The inflow of foreign capital not only offset America's budget costs but also helped reduce
the United States balance-of-payments deficits. America's foreign balance swung from a $23.4 billion
deficit in the fourth quarter of 1990 to a $10.2 billion surplus in the first quarter of 1991.

The gulf crisis either triggered or aggravated the American recession. Just before the invasion, Alan
Greenspan, chairman of the Federal Reserve, warned of the dangers of recession and said the Fed was
prepared to ease credit, if necessary, to prevent a recession. But other economists said, before the crisis
erupted, that the Fed had been too tight and was endangering a weak economy.
But when Iraq's invasion came, the Fed did not ease off, caught between uncertainties of whether to fight
the looming recession or an inflation aggravated by climbing oil prices. The oil shock of 1990 proved
much less severe than the two oil shocks of the 1970's. After the loss of Iraqi and Kuwaiti supplies, oil
prices initially soared from a pre-invasion average price around $18 a barrel to slightly above $40 by the
late fall. But they fell back to roughly $21, as greater shipments came in from other producers, and world
oil demand lagged.
Still, some industries were hard hit. The airlines saw the cost of jet fuel, which had been 60 cents a gallon
before the invasion, soar to $1.40 a gallon by mid-October. Even after fuel prices began to ease, the
outbreak of a ground and air war created a severe reenue problem for the airlines because traffic fell.
Trans-Atlantic traffic dropped 50 percent.
The gulf crisis hurt consumer confidence and snagged business spending on new plant and equipment.
The slide into recession, together with the steep costs of bailing out the savings and loan associations,
deepened the Federal budget deficit. The Congressional Budget Office this week estimated that the
budget deficit in the coming fiscal year would reach $362 billion, up from $279 billion in the fiscal year
1991. The ballooning deficit will come down painfully slowly, and it aggravates the nation's savings,
investment and growth problems.
Symmetrically, Michael J. Boskin, chairman of the President's Council of Economic Advisers, says, as the
gulf crisis tipped the economy into recession, its end helped stop the recession and start the recovery.
The council is forecasting 3.6 percent real economic growth in 1992. The Congressional Budget Office
puts next year's growth rate at 3.3 percent, and the consensus of private economists polled by Blue Chip
Economic Indicators sees 2.7 percent growth next year.
Even with a slower-than-usual recovery, the expected swing in inventories from an annual rate of decline
of $30 billion in the final quarter of 1990 and the first half of 1991 to a positive rate of $20 billion in
inventory building, required to maintain existing inventory-to-sales ratios, would give the economy a $50
billion lift. And, with the gulf war fading into memory, and fears of inflation shrinking, the Fed is freer to
nourish the recovery with easier money and credit.

North Korea vs. South Korea, a natural economic experiment

By: Various Internet Sources
South Korea ranks 35th out of 179 nations on the Heritage Foundations 2011 Index of Economic
Freedom: Business freedom remains strong and serves as a source of vibrant economic growth. The
competitive regulatory framework facilitates dynamic entrepreneurial activity. Business formation and
operating rules are efficient and allow innovation. Private property is secure, and expropriation is
highly unlikely
And nation number 179? That would be North Korea: The state continues to regulate the economy
heavily through central planning and control. Entrepreneurial activity remains virtually impossible.
Property rights are not guaranteed. Almost all property, including nearly all real property, belongs to the
state, and the judiciary is not independent. As the main source of employment, the state determines
wages.
So what we have here is a natural economic experiment. Markets vs. State. Freedom vs. Oppression.
Capitalism vs. Communism. And here are the results:

Economy overview

South Korea over the past four

decades has demonstrated
incredible growth and global
integration to become a high-tech
industrialized economy. In the
1960s, GDP per capita was
comparable with levels in the
poorer countries of Africa and Asia.
In 2004, South Korea joined the
trillion-dollar club of world
economies, and is currently the
world's 12th largest economy.

North Korea, one of the world's most

centrally directed and least open
economies, faces chronic economic
problems. Industrial capital stock is
nearly beyond repair as a result of
years of underinvestment, shortages
of spare parts, and poor
maintenance. Large-scale military
spending draws off resources
needed for investment and civilian
consumption. Industrial and power
output have stagnated for years at a

Initially, a system of close

government and business ties,
including directed credit and import
restrictions, made this success
possible. The government promoted
the import of raw materials and
technology at the expense of
consumer goods, and encouraged
savings and investment over
consumption. The Asian financial
crisis of 1997-98 exposed
longstanding weaknesses in South
Korea's development model
including high debt/equity ratios and
massive short-term foreign
borrowing. GDP plunged by 6.9% in
1998, and then recovered by 9% in
1999-2000. South Korea adopted
numerous economic reforms
following the crisis, including
greater openness to foreign
investment and imports. Growth
moderated to about 4% annually
between 2003 and 2007. South
Korea's export focused economy
was hit hard by the 2008 global
economic downturn, but quickly
rebounded in subsequent years,
reaching 6.3% growth in 2010. The
US-Korea Free Trade Agreement
was ratified by both governments in
2011 and went into effect in March
2012. Throughout 2012 and 2013
the economy experienced sluggish
growth because of market
slowdowns in the United States,
China, and the Eurozone. The
administration in 2014 is likely to
face the challenge of balancing
heavy reliance on exports with
developing domestic-oriented
sectors, such as services. The
South Korean economy's long term
challenges include a rapidly aging
population, inflexible labor market,
dominance of large conglomerates
(chaebols), and heavy reliance on
exports, which comprise about half
of GDP.

fraction of pre-1990 levels. Frequent

weather-related crop failures
aggravated chronic food shortages
caused by on-going systemic
problems, including a lack of arable
land, collective farming practices,
poor soil quality, insufficient
fertilization, and persistent shortages
of tractors and fuel. Large-scale
international food aid deliveries have
allowed the people of North Korea to
escape widespread starvation since
famine threatened in 1995, but the
population continues to suffer from
prolonged malnutrition and poor
living conditions. Since 2002, the
government has allowed private
"farmers' markets" to begin selling a
wider range of goods. It also
permitted some private farming - on
an experimental basis - in an effort to
boost agricultural output. In
December 2009, North Korea carried
out a redenomination of its currency,
capping the amount of North Korean
won that could be exchanged for the
new notes, and limiting the exchange
to a one-week window. A concurrent
crackdown on markets and foreign
currency use yielded severe
shortages and inflation, forcing
Pyongyang to ease the restrictions
by February 2010. In response to the
sinking of the South Korean warship
Cheonan and the shelling of
Yeonpyeong Island, South Korea's
government cut off most aid, trade,
and bilateral cooperation activities,
with the exception of operations at
the Kaesong Industrial Complex. In
preparation for the 100th anniversary
of KIM Il-sung's birthday in 2012,
North Korea continued efforts to
develop special economic zones with
China and expressed willingness to
permit construction of a trilateral gas
pipeline that would carry Russian
natural gas to South Korea. The
North Korean government often
highlights its goal of becoming a
"strong and prosperous" nation and
attracting foreign investment, a key
factor for improving the overall

standard of living. In this regard, in

2013 the regime rolled out 14 new
Special Economic Zones set up for
foreign investors, though the initiative
remains in its infancy. Nevertheless,
firm political control remains the
government's overriding concern,
which likely will inhibit changes to
North Korea's current economic
system.

GDP
(purchasing
power parity)

$1.666 trillion (2013 est.)

$1.62 trillion (2012 est.)
$1.587 trillion (2011 est.)
note: data are in 2013 US dollars

$40 billion (2012 est.)

$40 billion (2011 est.)
$40 billion (2010 est.)
note: data are in 2012 US dollars;
North Korea does not publish reliable
National Income Accounts data; the
data shown here are derived from
purchasing power parity (PPP) GDP
estimates for North Korea that were
made by Angus MADDISON in a
study conducted for the OECD; his
figure for 1999 was extrapolated to
2011 using estimated real growth
rates for North Korea's GDP and an
inflation factor based on the US GDP
deflator; the results were rounded to
the nearest $10 billion.

GDP - real
growth rate

2.8% (2013 est.)

2% (2012 est.)
3.7% (2011 est.)

1.3% (2012 est.)

0.8% (2011 est.)
-0.5% (2010 est.)

GDP - per
capita (PPP)

$33,200 (2013 est.)

$32,400 (2012 est.)
$31,900 (2011 est.)
note: data are in 2013 US dollars

$1,800 (2011 est.)

$1,800 (2010 est.)
$1,900 (2009 est.)
note: data are in 2011 US dollars

GDP composition
by sector

agriculture: 2.6%
industry: 39.2%
services: 58.2% (2013 est.)

agriculture: 23.4%
industry: 47.2%
services: 29.4% (2012 est.)

Population
below poverty
line

16% (2009 est.)

NA%

Household
income or
consumption
by percentage
share

lowest 10%: 6.4%

highest 10%: 37.7% (2011)

lowest 10%: NA%

highest 10%: NA%

Inflation rate
(consumer
prices)

1.1% (2013 est.)

2.2% (2012 est.)

NA%

Labor force

25.86 million (2013 est.)

12.6 million
note: estimates vary widely (2012
est.)

Labor force by occupation

agriculture: 6.9%
industry: 23.6%
services: 69.4% (October 2013
est.)

agriculture: 35%
industry and services: 65% (2008
est.)

Unemploymen
t rate

3.2% (2013 est.)

3.2% (2012 est.)

NA%

Budget

revenues: $296.1 billion

expenditures: $287.2 billion (2013
est.)

revenues: $3.2 billion

expenditures: $3.3 billion (2007
est.)

Industries

electronics, telecommunications,
automobile production, chemicals,
shipbuilding, steel

military products; machine building,

electric power, chemicals; mining
(coal, iron ore, limestone, magnesite,
graphite, copper, zinc, lead, and
precious metals), metallurgy; textiles,
food processing; tourism

Industrial
production
growth rate

2.5% (2013 est.)

0.5% (2013 est.)

Agriculture products

rice, root crops, barley, vegetables,

fruit; cattle, pigs, chickens, milk,
eggs; fish

rice, corn, potatoes, soybeans,

pulses; cattle, pigs, pork, eggs

Exports

$557.3 billion (2013 est.)

$3.954 billion (2012 est.)

$547.9 billion (2012 est.)

$3.703 billion (2011 est.)

Exports commodities

semiconductors, wireless
telecommunications equipment,
motor vehicles, auto parts,
computers, display, home
appliances, wire telecommunication
equipment, steel, ships,
petrochemicals

minerals, metallurgical products,

manufactures (including armaments),
textiles, agricultural and fishery
products

Exports partners

China 24.5%, US 10.7%, Japan

7.1%, Hong Kong 6%, Singapore
4.2% (2012 est.)

China 63%, South Korea 27% (2012

est.)

Imports

$516.6 billion (2013 est.)

$519.6 billion (2012 est.)

$4.828 billion (2012 est.)

$4.367 billion

Imports commodities

machinery, electronics and

electronic equipment, oil, steel,
optical instruments, transport
equipment, organic chemicals,
plastics

petroleum, coking coal, machinery

and equipment, textiles, grain

Imports partners

China 15.6%, Japan 12.4%, US

8.3%, Saudi Arabia 7.6%, Qatar
4.9%, Australia 4.4% (2011 est.)

China 73%, South Korea 19% (2012

est.)

Debt - external

$430.9 billion (31 December 2013

est.)
$425.1 billion (31 December 2012
est.)

$3 billion (2012 est.)

Exchange
rates

South Korean won (KRW) per US

dollar 1,107.3 (2013 est.)
1,126.47 (2012 est.)
1,156.1 (2010 est.)
1,276.93 (2009)
1,101.7 (2008)

North Korean won (KPW) per US

dollar (market rate)
157 (2013 est.)
155.5 (2012 est.)
145 (2010 est.)
3,630 (December 2008)
140 (2007)

Fiscal year

calendar year

calendar year

GDP (official
exchange rate)

$1.198 trillion (2013 est.)

$28 billion (2009 est.)

Taxes and
other
revenues

24.7% of GDP (2013 est.)

11.4% of GDP
note: excludes earnings from stateoperated enterprises (2007 est.)

Budget
surplus (+) or
deficit (-)

0.7% of GDP (2013 est.)

-0.4% of GDP (2007 est.)

The Lingering Effects of the Khmer Rouge/ Cambodian Massacre in 21st Century Cambodia
By: regionalgeography.org
Everyone has a story. The tour guides, the landlords, the waiter at every restaurant on every street. If
you are a citizen of Cambodia, you have a story about the horrors that happened to you or your family
during the Khmer Rouge. Sometimes, people are open to sharing their stories. While in the Mondolkiri
jungle with us one day, our tour guide Mot recounted how his father was digging his own grave during the
Khmer Rouge, only to be saved by volunteering to climb up a coconut tree and extract the fruit.
Sometimes, they are not. When pressing Tras landlord for details on what happened to her during the
Khmer Rouge, all she would tell me was that she went to the countryside, and then came back. Either
way, the Khmer Rouge is a time period for Cambodia that every surviving citizen remembers, however
unwillingly. The memories are not the only remnants of the Khmer Rouge period, however. It has only
been 34 years since the Vietnamese overthrew Pol Pot and his Khmer Rouge regime, which was the
ruling party from 1975 through 1979. In this blog post, I will further explore how the Khmer Rouges reign
continually affects the Cambodia and its peoples demographically, economically, and culturally.
Demographically, Cambodia is currently experiencing the effects of a lost generation. Anywhere from
1.7 to 3 million people died during the Khmer Rouge. That is one eighth of the entire population at that
time. About half of these deaths were by executions, while the other half were from starvation and
disease that occurred as a side effect of the Khmer Rouge. Two major issues in modern-day Cambodia
arise from these deaths. Firstly, the elderly who survived Khmer Rouge now have no one to care for them
in their old age, since their children were killed. In Cambodian culture, it is a matter of course to take in
your parents once they can no longer support themselvesin fact, having children is seen as insurance
towards your future survival. Because of the Khmer Rouge, however, a substantial amount of the
generation of caretakers is dead, and parents who outlived them now have nowhere to live and no money

to support themselves. Therefore, the amount of homeless, elderly Khmer people on the streets has
increased dramatically.

Bones and teeth of the lost generation from a mass grave outside of Phnom Penh.
The second issue that arises because of this lost generation is tied in to the economic impacts of the
Khmer Rouge; that is, there is a loss of skilled workers. When Pol Pot was elected, he immediately rolled
out his Year Zero manifesto, demanding that Cambodia return to an agrarian, pre-industrialized society.
Because of this demand, Pol Pot ruthlessly killed professors, doctors, lawyers, artisans, economists, and
the like, to ensure that their intellect would not threaten his powers. In the present day Cambodia, this
genocide means that there are not enough seasoned, educated professionals in the workplace to
adequately balance and manage the number of rising intellectuals. In the words of the CIA World
Factbook, The major economic challenge for Cambodia over the next decade will be fashioning an
economic environment in which the private sector can create enough jobs to handle Cambodias
demographic imbalance. The Khmer Rouge killed who would have managed the rising number of new,
educated workers in 2013s Cambodia. Because of the lack of private sector jobs, it is much easier for
young Cambodians to employ themselves in garment factories, where it is nearly impossible to
experience upward mobility within the company, therefore perpetuating the Cambodian cycle of poverty.

Young people gathering outside the palace in Phnom Penh

During the Khmer Rouge, the governments main goal was to increase the amount of agricultural
production of rice. The Khmer Rouge emphasized the importance of farming, and did not support cities or

urban life. Now, 34 years later, this attitude still affects Cambodias infrastructure, specifically, its roads.
As people and the constitutional monarchy attempt to rebuild their lives after the Khmer Rouge, they have
not been able to prioritize the necessary monetary funds it takes to keep up the building of roads and
highways in Cambodia as quickly as the amount of vehicular transportation grows. Therefore, the best
roads in Cambodia are those that either the Chinese built for their own private purposes (exemplified as
the road from Phnom Penh to Mondolkiri), or those that run from Phnom Penh to any other major city,
such as Sianhoukeville or Siem Riep. These connecting roads are essentially cleared dirt or gravel paths,
usually only large enough for two lanes. The quality of roads is either vastly inferior or nonexistent when
concerning any other places besides these major cities.

A typical Cambodian road

The effect of the lack of infrastructure on modern Cambodians is great transporting ones self to and
from work becomes long, expensive (in having to pay a driver monthly), and dangerous, especially when
you must commute in a van that fits tens more people in it than intended. Besides commuting to and from
work, lack of proper roads also leads to inefficiency in the countrywide distribution of goods and food.
When cities in the same country cannot rely on each other for trade in food and goods, the overall country
suffers, as each city must fend for themselves, making prosperity and an escape from poverty unlikely.
Another economic issue that spurred from the Khmer Rouge reign is the weakness of the Cambodian
monetary unit, the riel. During the Khmer Rouge, Pol Pot banned the use of money, and even printed its
own banknotes (which never caught on as currency yet we saw at the Landmine Museum in Siem Riep).
In 1980, after the Khmer Rouge, the riel was re-introduced as a form of currency, yet with nothing to
back the currency, inflation quickly took hold. Comparing the 1979 6th issue of the riel, in denominations
of 0.1 Riel, 0.2 Riel, 0.5 Riel, 1 Riel, 5 Riel, 10 Riel, 20 Riel, 50 Riel, to the 12 th issue of the riel (20012008) issuing only 50 Riel, 100 Riel, 500 Riel, 1000 Riel, 2000 Riel, 5000 Riel, 10,000 Riel, 20,000 Riel,
50,000 Riel, it is easy to see that inflation is enormous and their money, weak. Therefore, the U.N
flooded the Cambodian economy with US Dollars in 1993, and today the USD is used as their primary
form of currency for anything over 1USDriel is used essentially as change. When a country does not
even have a strong currency, how is it expected to successfully function on a local, let alone global,
scale? The lack of a successful, self-backing Cambodian currency is a direct result of the Khmer Rouge.

Banknotes printed by the Khmer Rouge

The Khmer Rouge affected Cambodian peoples culturally not only by giving them a shared experience of
trauma and genocide. Firstly, it executed musicians and artists, which therefore caused Cambodia to lose
many of its traditional songs, dances, musical instruments, and myths. Oral tradition and other skill not
written down were wiped out. Even if tradition was recorded, the Khmer Rouge burned thousands of
books as a symbol against intellectualism.
On a greater scale, the Khmer Rouge wiped out ethnic minorities. As Pol Pot longed to reestablish the
great Angkor Empire that once ruled Southeast Asia, he executed many ethnic minorities, as the only
pure Cambodian race, as seen by the Khmer Rouge, was of course, the Khmer peoplebelieved to
be direct descendants from the Angkor Empire. Today demographically, the Khmer people make up 90%
of the population, with Vietnamese at 5%, Chinese at 1%, and other Cambodian ethnic minorities at 4%,
collectively. Cambodia is the least ethnically diverse country in Southeast Asia because of Pol Pot. Much
like the Native Americans in America today, ethnic groups in Cambodia such as Muslim Chams, are
regarded by the majority race as less than, and are subject to discrimination and social isolation.
Because of the poor attitude the Khmers have about ethnic minorities, they are less likely to get hired by
Khmer, further isolating the minority and lessening their chance for economic prosperity and an escape
from the cycle of poverty.

Scenes from an ethnic village in Mondolkiri

Despite the Khmer Rouges horrific effect on Cambodia, the Khmer people continue to improve their
country every day. According to the CIA World Factbook, Since 2004, garments, construction,
agriculture, and tourism have driven Cambodias growth. GDP climbed more than 6% per year between
2010 and 2012. Things are looking up for Cambodians. More and more citizens are able to leave their
villages in order to get work in the cities. There is free public schooling, an increase in tourism and

therefore economic boosts, and a worldwide increase in acknowledgement and education about the
Khmer Rouge period.
I will conclude my final blog post with a memory: During my second day in Cambodia, as we rode in a tuk
tuk towards the garment factories, Dr. Rallis pointed towards the shallow pool of dirty swamp water that
ran alongside our road. In the brown water grew lotus flowers, which he informed us were considered by
Cambodians to be the most beautiful flower. Dr. Rallis stated that Cambodians consider the lotus flower
to be a metaphor for the Khmer people. The lotus flower grows in harsh conditionsdirty, muddy water.
However, it rises above its environment and blooms into a beautiful and usefully edible plant. While
Cambodia still faces many struggles as it rebuilds, its important to note that the country has already
made incredible strides and its future, while challenging, is hopeful.

Acknowledging the past, yet looking towards the future.

China and India: The Pattern of Recent Growth and Governance in a Comparative Political
Economy Perspective
By: Pranab Bardhan

The two largest countries of the world with ancient agrarian civilizations, with many centuries of
dominance in the world economy in the past and recently with impressive economic growth performance,
draw obvious comparison. Over the last more than sixty years the two neighboring countries having
adopted sharply divergent political and economic systems also provide a point of reference in any study
of comparative systems. In this short essay we shall first briefly describe their patterns of economic
growth primarily in the last three decades and their implications for the massive poverty and inequality in
the two countries, and then move on to discuss the nature of governance both in public and private
spheres, which shape those patterns.
In 1820 the two countries contributed about half of world income (measured in 1990 prices), in 1950 they
contributed less than 10 per cent (the preceding century in the case of China and nearly two centuries in
the case of India included rather unpleasant encounters with the international powers), and the very rough

projection is that in 2025 the two countries will contribute about one-third of world income (China much
more than India).
In the 1870s as well as the 1970s per capita income in comparable prices was somewhat higher in India,
but since then China has shot far ahead. Even accounting for some possible overstatement in the
Chinese official rates of growth, per capita income has grown at least twice as fast in China than in India
over the last three decades.
In the sectoral pattern of growth China has excelled particularly in manufacture, India more in services.
China is widely regarded as the manufacturing center of the world (although this is not yet quite true in
manufacturing value added, the share of US or EU in world manufacturing value added is still much
higher than that of China). In India there has been dramatic growth in the modern service sub-sectors like
software, communication, and finance, but nearly 60 per cent of the service sector income is still
generated in the informal sector (only a small part of which is linked with the formal sector). In terms of
sub-sectors Chinese expansion, at least in the initial years, has been more in labor-intensive activities
(production of clothing, shoes, toys, furniture, etc.) which employed large numbers of the unskilled poor,
not in India, where the expansion has been more in skill-intensive and capital-intensive activities (like
software, pharmaceuticals, or cars and car parts).
All the service sector activities enabled by information technology employ only about half of one per cent
of the total labor force in India. Contrary to popular impression, in both countries the growth has not been
mainly externally driven. The mainspring of growth in China has been domestic investment, and in India
domestic investment and consumption. Even though foreign trade and investment have led to significant
technological and managerial upgrading in China, their growth has contributed only modestly to
aggregate economic growth. Even during the high global expansion of trade in the period 2002-07, the
increase in exports (in domestic value added terms) contributed only a little above a quarter of total real
GDP growth in China in the period, substantially less than the contribution of domestic investment.
Chinese domestic saving and investment rates are significantly higher than in India. Household saving
rates may be slightly higher in India, but enterprise and public saving rates are much higher in China. The
consequent lower cost of capital (along with more decentralized financing and management, better cost
recovery from user fees, and more peremptory land acquisition) have enabled China to build growth
enhancing infrastructure (highways, railways, ports, power plants, etc.) at a much faster pace than India.
According to World Bank estimates, taking a crude but common poverty line (like say $1 a day per capita
at 2005 prices), the percentage of people below that line was about 73 per cent (probably an
overestimate) in 1981 in China (42 per cent in India); it went down to 7 per cent in 2008 in China (21 per
cent in India)--a dramatic decline in China, a significant one in India. There is statistical evidence to
suggest that most of the dramatic poverty reduction in China has been due to agricultural growth and
public investment in rural infrastructure, not globalization (as is commonly believed). The non-income

indicators of poverty (in terms of basic health, nutrition and education) continue to be dismal in India. In
some of these indicators India today is where China was at the beginning of 1970s (a beneficial part of
the socialist legacy in China). The environmental consequences of growth (like air and water pollution),
which the poor bear the brunt of, may be larger in absolute terms in China, simply because of faster
industrialization and urbanization there, but broad estimates of proportional damage and depletion (in
terms of annual percentage of national income) seem to be similar in the two countries.
Whether the Chinese central Governments energetic countermeasures in limiting environmental
degradation launched in recent years will succeed in making a big dent on the problems needs to be
seen. The Indian countermeasures have yet not reached the Chinese scale, but the environmental
movement is more active as a watchdog in India. Inequality has gone up in both countries, partly a result
of the sectoral transformation (as the less unequal agricultural sector declines in importance in terms of
income but not commensurately in terms of people whose livelihood still depends on it), and partly a rise
in skill premium in wage and rental income from land and other appreciating assets. Contrary to popular
impression globalization may not be the most important factor in raising inequality. For example,
inequality within China is less in more globally exposed coastal areas than in the interior areas.
Urban-rural disparity is higher in China than in India (within China wider in interior areas than in the
coastal areas). More than income inequality, one may be ethically and politically more interested in
inequality of opportunity. We do not have direct measures of this inequality, but in these two countries it is
likely to depend on inequality in distribution of land, education and social status. Most estimates suggest
that inequality in land and education is much worse in India than in China (largely because of the much
larger population of landless and illiterate or semi-literate in India). The level of inequality of social status
is also likely to be worse in India, partly on account of the legacy of the caste system in India (but the
trend over time is in the positive direction with movements toward political equality brought about by
democracy leading to changes in social status and occupational distribution). The picture of gender
inequality is mixed: in terms of gender imbalance in survival of children it is worse in China (in the 0-5
age-group, for 100 girls there are now 122 boys in China, 109 boys in India), but in terms of female
literacy, maternal mortality or female participation in the labor force China is far ahead. In matters of
governance the dominant issue in public discussion in both countries is the rampant corruption of public
officials and politicians.
It is, of course, difficult to get reliable estimates of comparative corruption. There are some reasons why
incentives for corruption may be somewhat less in China: the punishment is severe (in many cases,
execution);Chinese politicians, unlike their Indian counterparts, do not have to procure funds for the
increasingly expensive general elections; since career advancement of local officials depends on localarea economic performance (unlike in India where promotion is mostly seniority-based, and with frequent
transfers there is no incentive to develop a stake in the local economy), so the Chinese local official, even
while stealing, may take care not to steal too much. On the other hand, democratic India has more
institutionalized mechanisms for checking corruption (the Right to Information Act, free media and a more

vigorous tradition of investigative journalism, an active NGO movement as watchdog, etc.). In fact the
connection between business and politics being tighter and less subject to public scrutiny in China, crony
capitalism is much more evident there. In India in the allocation of scarce public resources (land, mining
rights, telecommunication spectrum, etc.) there have been many accusations of official corruption.
But with powerful political families controlling some of the monopoly state-owned enterprises in China and
princelings running private enterprises and real estate companies, Chinese politicians have got away
with more opportunities for converting their political oligarchic power into massive wealth. The Sanghaibased Hurun Report suggests that in 2011 the 70 richest delegates to the National Peoples Congress
(Chinas equivalent of Parliament) had a net worth of about $90 billion. Just to get an idea of comparative
scale, if you look at the accounts of (declared) assets of the members of the Indian Parliament, the
corresponding total wealth of the 70 richest of them will be much less than half a billion dollars. While
crony capitalism is not absent in India, the Indian private corporate sector has a longer tradition of
vigorous autonomous development and is comparatively less dependent on political rent-seeking.
As the state-owned and politically-connected private firms in China become too big to fail, it may hurt
productivity by blocking entry and exit of firms. At the local level of governance, decentralization has been
more effective in China in both social service delivery and local business development. The incentives
and resources to subnational governments to pursue local development projects are much stronger in
China than in India. Of the total government expenditure more than 50 per cent is spent at the subprovincial level in China, the corresponding percentage in India is nearer 5 per cent.

Inter-area competition and market integration through development of infrastructure and trade are much
stronger in China. But capture of local governments by locally powerful elite is pervasive in both countries.
Except in a small number of states in India, the local landed interests and local middlemen and
contractors often divert much of the money coming from above away from the intended beneficiaries of
development projects. In China local officials in collusion with local business often hurt the poor through
arbitrary land acquisition, toxic pollution and violation of safety regulations in factories and mines. In both
countries this is possible because of accountability failures (largely due to lack of democratic processes in
China, weak subprovincial democracy in most regions in India).
The issue of accountability brings us directly to the question of the relation between democracy (or lack of
it) and development. For some years now it has been the conviction of the Chinese elite (often termed as
the Beijing Consensus) that authoritarianism is good for development. This is a false and pernicious
idea. Examples are easy to show that authoritarianism is neither necessary nor sufficient for
development. The relation between democracy and development is more complex than is made out in
much of the simplistic discussion both in China and the West.

Democracies make fewer catastrophic mistakes (of the kind China has made much too often in the last
fifty years), they manage social conflicts (of which India with a more heterogeneous population has more
of) better, and with popular social movements they keep capitalist excesses somewhat in check. But the
Indian experience suggests that democracies easily lend themselves to a form of competitive populism
where much of the scarce resources are frittered away in short-run subsidies and handouts (promise of
free water and electricity is a frequent electoral gesture in many Indian state elections), which hurt the
cause of long-run pro-poor investments (like in roads, irrigation, water and electricity). The pragmatic and
professional Chinese leadership often shows the ability to take quick and decisive actions more than the
Indian leaders, but in the face of crisis or political shocks they often over-react, suppress information and
act heavy-handedly, which raise the danger of instability. For all its apparent messiness the Indian
democratic governments are in a deeper sense less fragile, as they draw their strength from legitimacy
derived from democratic pluralism. In the long run democracies may also foster more innovativeness
through inducing more free flow of information and creativity.
Both China and India have had impressive economic performance in recent decades, but they are both
hobbled by their different types of structural weaknesses and accountability failures.