/A Tale of Two Nations

A Tale of Two Nations

I’ve just spent two weeks traveling all over Asia.

China, as always, continues to impress me. Even with a real estate bubble ever present, and a relative slowdown in their economy, I continue to see positive changes, improvements, or to put it bluntly evidence that clearly points to China coming closer to par with Japan, Europe or the U.S! Per capita GDP continues to rise; and everywhere there are signs of increased efficiency and higher productivity. In an industrial context, plants that once operated with 400 employees are now operating with 14! The continuous change, the ongoing transformation, is simply incredible. The streets are clean, there are no homeless people crashing on sidewalks … even the back street food is sanitary!

India on the other hand continues to underwhelm. Was it the cows sleeping on the middle of a busy roadway in Goa – stopping busses, taxis, cars? Or the massive number of stray dogs in Downtown Delhi? Or the tuk-tuks (scooter taxis) cutting in front of regular cars in busy traffic in Mumbai? There are endless people sleeping on sidewalks, you can’t trust the food or water…you walk through areas that smell like shit constantly (as if people are literally shitting on sidewalks) and no one cares. China was like this25 years ago, but has come out of it. But India is far behind. Oh, don’t get me wrong, India is ‘coming along’ nicely posting positive year-on-year growth rates. But it’s not transformational … its evolutionary.

Only 26 years ago (1990), India and China had essentially the same population and gross economic size (i.e. GDP). Actually for a long-time, India superseded China in terms of GDP! But today, China’s economy is almost a factor of 7 larger than India’s. And China is truly rising to challenge any first world economy.

So you have to ask yourself how did this happen? What did China do right and India do wrong?

My research has shown that the fundamental key to this transformation in China is linked to massive improvements in productivity. Productivity = Prosperity. This one factor alone, explains almost everything. While it seems like a very simplistic notion, in fact many elements feed into productivity improvement. And many economic, social and even political elements are impacted as productivity improves. Productivity as a single measure of national performance is “king”.

As productivity increases, wages improve, and with wage improvement labor very naturally moves from low value added work to higher value added work – which in turn leads to massive changes – on every level! Social, political, economic. And China, it would appear, has successfully navigated through all this.

But how do you put in place key elements that will impact productivity? What did China do that India did not?

First and foremost, productivity shifts when there is true economic liberalization. There has to be open, even brutal competition. No business, no sector can (or should) is protected when an economy liberalizes. Protectionism leads to sub-par economic or business performance. Competition leads to high performance outcomes. Competition creates immediate improvements in productivity. By having an export driven economy, China essentially opened up its businesses to ‘global competitors’. If they wanted to export, they needed to provide superior value in the markets they targeted. This made Chinese companies very competitive. India on the other hand has been internally focused. India needs to allow free and open investment by foreign entities. Ironically, virtually all industry and commerce in China (prior to economic liberalization was state owned), yet, the government itself allowed foreign companies to compete with their own companies. India, on the other hand, is protecting its ‘private’ industry (that is performing on a subpar level). Thisreally serves no public purpose. It allows mediocrity to continue to the disadvantage of consumers and the country as a whole. Interestingly, if for any strategic reasons the government wants to ‘support’ a specific industry there are other indirect ways (beyond direct protectionism) to do so – like for example research grants, military contracts and subsidized loans driving economic development.

Secondly, while liberalizing its economy, India should simultaneously invest in improving its infrastructure and public sector as a whole (like for example public housing). People need to come out of shanty towns and pavements. The situation in India is simply unacceptable. The sidewalks need to be cleaned up! This needs to occur across the board in India in every city, but perhaps could be started on an experimental basis in one city, and expanded. But there is a need for huge infrastructure improvements. Roads are congested, and poorly maintained. China on the other hand, has spent lavishly on infrastructure. And you never see homeless people on the streets in China.

Thirdly, some very simple – even basic – ‘code enforcement’ would go a long way towards cleaning India up. How can Cows sit on a busy road way and NOT have their owners fined for letting them loose? How can people just set up homes on streets and sidewalks? Some of it – just doesn’t make sense. And it cries out for increased and more consistent regulatory enforcement.The issue, as we all know, is that while India does have a regulatory framework, the regulators themselves are corrupt. So regulation is never properly enforced. And politicians fear taking on these corrupt officials for fear of not getting re-elected. China, on the other hand, has a centralized, brutal government that fears no-one. I am not advocating for a brutal dictatorship in India, but surely there is cause for better regulatory enforcement.

And, the lessons here for Iran, are very simple. While the Mullahs and the regime’s instruments (like the Revolutionary Guards) dominate 80% of Iran’s economy, there can be NO real, substantive improvement in iran’s economic performance. There must be free, open and fair competition in order to