K R Narayanan Birth Centenary Lecture

Can India become stronger than China? Yes, it can

K R Narayanan was one of India’s most distinguished citizens. After a sterling career as a diplomat, he also served as India’s 10th President from 1997 to 2002. I was truly honoured to be invited to deliver the fifth and final lecture of the K R Narayana Birth Centenary Lecture series on 5th August. I decided to choose a challenging topic, namely, “Can India become stronger than China? Yes, it can”.

The lecture can be watched here:

A copy of the text of my lecture is attached below for your information. 

Sadly, the country with the biggest gap between its potential and its performance is India. I hope that my lecture will help to narrow that gap. 

With warm regards,

Kishore 

Lecture by Prof Kishore Mahbubani at the K R Narayanan Birth Centenary Lecture, 5th August 2021

Can India become stronger than China? Yes, it can

Introduction

Can India become stronger than China? What do I mean by becoming stronger? Simple: have a bigger economy. The goal of this lecture is to explain why I believe India can have a bigger economy (indeed the biggest economy in the world) and how India can set about achieving it. 

I will divide my lecture into three parts. In part I, I will explain why I am confident that India can have the largest economy in the world. In part II, I will explain the principles India can take to become number one. In part III, I will also suggest some concrete steps India can take to develop an economy bigger than China’s. 

Part I: Why I am confident

There are two reasons why I am confident. The first reason is historical evidence. As British historian Angus Maddison has documented, from year 1 to 1820, the two largest economies of the world were always China and India. 

What happened after 1820? The British arrived. As Shashi Tharoor, a distinguished citizen of Kerala, has documented, when the British arrived, India’s share of Global GNP (nominal) was 23 percent. When they left in 1947, the share fell to around 3 percent. Today, India’s share remains at about 3 percent. India’s share of the global population is 18 percent. Hence, its share of global GNP should also be 18 percent, if you assume that the average Indian is as intelligent and capable as the average human being. 

This is the second reason why I am confident. The average Indian is clearly as intelligent and as capable as other human beings. I hope that this is an uncontroversial statement. But I would also like to make a controversial statement: the average Indian can outperform the average citizen of other communities. You can see why such a statement is inherently controversial. Hence, let me back it up with some evidence. 

The most competitive human laboratory in the world is the USA. In an article I wrote for McKinsey, I said, “It’s so easy to grasp the gap between India’s potential and its performance because you can see the potential of what an ethnic Indian can do in the most competitive human laboratory in the world, which is the United States of America. And when the Indians arrived in America, they thought they might be number five or number six in terms of per capita income. They ended up being number one.”

Today, the average per capita income of the Indian residing in the US is US$ 55,298. If Indians in India can achieve the same per capita income, the total GNP of India would be around US$ 71 trillion, making it the largest economy in the world, larger than the US at US$ 21 trillion or China, at US$ 15 trillion. If this figure is unimaginable, let’s imagine that the average Indian in India is half as smart as the average Indian in the US. Then India would still have a GNP of US$ 35 trillion, still larger than that of the US at US$ 21 trillion and China at US$ 15 trillion. 

Why do I highlight all these figures? I do so because I only want to emphasize one big point at the beginning of my lecture: the country with the biggest gap between its economic potential and its economic performance is India. India’s GNP today is US$ 2.6 trillion. It should be at least ten or twenty times larger. 

Let me deal with one objection immediately. The argument can be made that the super-smart Indians ended up in the US. Hence, they ended up with super-high per capita incomes. Even if I acknowledge this as true, how about comparing the per capita income of Indians in India with Indians in other countries? I don’t have the data for all overseas Indian communities. However, I have travelled all around the world and met Indians in all corners of the world. Without fail, in almost every country I have visited, the overseas Indian communities have done well and are thriving. 

So, why are they thriving? The answer could be complex but let me mention one key factor: Indians are naturally competitive economic animals and thrive in economic competition. In this regard, they are very similar to the Chinese. This brings me to the second important point I want to emphasize in my lecture: the economic fortunes of the Chinese turned after the key reformist leader of China, Deng Xiaoping, asked a very simple question: why were the Chinese people successful in every economy except in China itself? The answer was a simple and obvious one: the Chinese were allowed to compete economically in every country in the world except China. Hence, Deng Xiaoping did the obvious thing: he opened up the Chinese economy and allowed all Chinese, 1.4 billion of them, to compete. 

So what were the results? Deng Xiaoping started to open up the Chinese economy in 1980. 1980 is a significant year. In 1980, the size of the Chinese economy (US$ 191 billion) and the Indian economy (US$ 186 billion) were about the same. Today, the size of the Chinese economy is US$ 15 trillion, over five times the size of the Indian economy at US$ 2.6 trillion. 

So how did India go from having an economy the same size as China’s to having an economy one-fifth that of China? The answer is amazingly simple. China opened its economy to global economic competition and allowed 1.4 billion Chinese to compete. Since the Chinese thrive in economic competitions, the Chinese economy thrived and surged ahead. 

By contrast, the 1.3 billion Indians have been deprived of economic competition. Since they have been deprived of economic competition, they cannot thrive. Hence, India’s economy has fallen behind. 

Let me add another important point here. India’s economy has also fallen behind other regions and countries. I come from Southeast Asia. Of the ten ASEAN states, nine have an Indic cultural base. Hence in some ways, we are cultural satellites of India. The total population of ASEAN is 650 million, half that of India’s. But the combined GNP of ASEAN in 2020 was about $3 trillion, slightly larger than that of India ($2.8 trillion). 

Another statistic is more shocking. In 1971, when India helped Bangladesh to become an independent country, many commentators said that Bangladesh was a hopeless country which would become an economic basket-case, according to Henry Kissinger. Indeed, when I was Ambassador to the UN from 1984 to 1989 and from 1998 to 2004, Bangladesh was a member of the Least Developed Countries (LDCs). India was never a member of LDCs. Yet, by 2020, the per capita income of Bangladesh (US$ 1968) became larger than that of India (US$ 1900). 

So why have the ASEAN countries and Bangladesh outperformed India in the economic realm? The simple answer is that ASEAN and Bangladesh plunged into global economic competition. India didn’t. 

All this brings me to part II of my lecture: what principles should India follow to become the largest economy in the world? My broad answer, of course, is that India needs to unleash the vibrant animal spirits of the 1.3 billion Indian people by exposing them to global economic competition. However, this broad answer has to be implemented with some concrete steps. I will try to spell out some of them. 

Part II: Key principles to follow

Before spelling out the principles that India can take to become more competitive, let me confirm at the outset that it will not be easy. There will be many political, economic, bureaucratic, psychological, vested interests and so on, obstacles to overcome. Indeed, China didn’t have an easy time either. I was present at the World Economic Forum, Davos meeting in 2017 when President Xi Jinping admitted that the process of opening up the Chinese economy was a difficult one. This is what he said: “There was a time when China also had doubts about economic globalization, and was not sure whether it should join the World Trade Organization. But we came to the conclusion that integration into the global economy is a historical trend. To grow its economy, China must have the courage to swim in the vast ocean of the global market. If one is always afraid of bracing the storm and exploring the new world, he will sooner or later get drowned in the ocean. Therefore, China took a brave step to embrace the global market. We have had our fair share of choking in the water and encountered whirlpools and choppy waves, but we have learned how to swim in this process. It has proved to be a right strategic choice.”

Hence, India should have no illusion that changing course will be easy. Like China, India will also struggle to swim when it plunges into the ocean of globalization. What will make it even more difficult is that India will have to follow two contradictory principles in trying to open up its economy to global competition. The first principle is to have a radical change of mindset and decide that an open Indian economy will do better than a closed Indian economy. The second principle is that when opening up the Indian economy, India should do it carefully and pragmatically. It should not try either a big bang approach or shock therapy as the experiences of Russia and East Europe have shown that big bang approaches don’t work. In short, India will have to follow two contradictory principles. But both are equally important. Hence I will explain both. 

The radical change of mindset is important because the general assumption in India is that the best way to protect the poor in India is to keep the Indian economy as closed as possible. Hence, the intentions of those who kept the Indian economy relatively closed was noble: to protect the poor. However, the record of recent history shows that poverty reduction happens faster when economies open up faster. The best evidence of this is provided by Vietnam which had a typical Soviet style protected economy. However, as soon as the Cold War ended, it joined its fellow East Asian countries in opening up its economy and the results in poverty reduction were spectacular. As then-World Bank President Jim Yong Kim pointed out in 2016, Vietnam’s average annual growth rate of nearly 7% over the previous 25 years had enabled the country “to leapfrog to middle-income status in a single generation.” And during the same period, Kim noted, Vietnam had managed the “especially remarkable achievement” of reducing extreme poverty from 50% to just 3%. 

Let me use a simple metaphor to explain why opening up India’s economy helps the poor. The main reason why I emphasized the super-performance of Indian overseas is to point out we should view Indians differently. We should see them as 1.3 billion economic tigers, poised to perform well. What is the best way to get tigers to perform well? Keep them in cages where they have limited competition and limited room to grow? Or release them into a wild jungle where they can roam freely and become strong and fierce?

I am using the metaphor of economic tigers to drive home the essential point that generations of Indian policymakers have made a major mistake by underestimating the ability of Indians to compete. This is why, relative to most East Asian economies, the Indian economy is relatively closed. For those who doubt my statement that India’s economy is relatively closed, let me provide some statistics: A relatively open economy trades more with the world. A relatively closed economy trades less with the world. Here is the data: China and India have about the same population. Yet China’s total trade with the world ($4.5 trillion) is more than five times that of India ($800 billion). Even more shockingly, the population of ASEAN is half that of India. Yet the total trade of ASEAN ($2.8 trillion) is more than three times that of India. 

Here, let me acknowledge one important point. When India opens up its economy, there will be “creative destruction” (as pointed out by the famous economist, Joseph Schumpeter). And “creative destruction” is good. It destroys the inefficient parts of the economy and strengthens the efficient part of the economy. This is exactly what happened to China. Before China joined the WTO in 2001, the State-Owned Enterprises (SOEs) made up two-thirds of China’s economy. Now its down to one-third. In short, there was a lot of “creative destruction” of Chinese SOEs.

Let me add that there was also a lot of trepidation in China when it opened up its economy. This is a story told by the former Foreign Minister of Singapore, Mr George Yeo. As Mr George Yeo recounts, “I was in Doha when China was admitted to the WTO in November 2001. There was great celebration, but the Chinese at the time felt bruised by the negotiating process. The US, working in concert with the Europeans and the Japanese, extracted the maximum from China. And I remember a few years later suggesting to China that they join the TPP. The commerce minister held up his hands and said, we have given so much we can't afford to do this. No one expected, that from 2001 to end of 2019 before COVID, the Chinese economy will grow seven times in PPP terms, nine times in Renminbi terms and 11 times in US dollar terms.”

Since this lecture is named after Mr K.R. Narayanan, I want to pause here and quote a sentence from him. As you all may know, one of the most important government memos he wrote was on the long-term implications of the explosion of a nuclear bomb by China in 1964. In that memo, he had a striking comparison between the economies of China and India. He said: “The left-wing of the CPI [Communist Party of India] has already begun to highlight before the people the spectacular progress made by 'socialist China' as compared to 'capitalist India’.”

In 1964, it was absolutely true that India was capitalist and China wasn’t. 57 years have passed. Today, China has become more capitalist than the US. This is not my opinion. It is the opinion of an economist called Dr Shan Weijian, who received his PhD in Economics. This is what he said: “[Americans] don’t know how capitalist China is. China’s rapid economic growth is the result of its embrace of a market economy and private enterprise. China is among the most open markets in the world: It is the largest trading nation and also the largest recipient of foreign direct investment, surpassing the United States in 2020. The major focus of government expenditure is domestic infrastructure. China now has better highways, rail systems, bridges, and airports than the United States does… [The Chinese] don’t know how socialist it [America] is, with its Social Security system and its policies to tax the rich by collecting capital gains taxes. China is still in the process of building a social safety net that is largely undefined and underfunded, and it has no tax on personal capital gains. In 2020 China had more billionaires than the U.S. did, and it outpaces the U.S. three to one in minting them.”

This also explains why it is almost inevitable that China will overtake the US and become the number one economy within ten years. It also explains how India can overtake both China and the US and become the number one economy in twenty or thirty years. It should open up its economy, trade more with the rest of the world and, as a result, allow more creative destruction to take place at its inefficient sectors. 

Hence, the theoretical direction that India should take to make its economy stronger is clear. However, as I indicated earlier, theory is one thing. Practice is another. Russia and a few East European countries thought that they were doing the right thing by opening up their economies with a “big bang”. They were seduced by a famous statement which said “You cannot cross a chasm in two leaps”. Janos Kornai, a Hungarian economist, said that reform would be “a good deal better if the price system had undergone one brave surgery”. Włodzimierz Brus, a Polish economist, said that China should “cross the river as fast as possible to reach the other shore.” Sadly, the Russians and some East Europeans fell into a chasm by trying to take one big leap. 

The Chinese reformers were wiser. They heeded the advice of Deng Xiaoping, who advised that China should “grope for stones to cross the river steadily”. However, the most important point here is not that the river must be crossed cautiously. Instead, the key point here is that the river must be crossed and India must reach the other side.

Part III: Some concrete steps

It’s sometimes easy to spell out big principles to follow in economic reforms. It’s harder to spell out the concrete steps to take. So let me conclude this lecture by suggesting three concrete but cautious steps India can take to start the process. Fortunately, to use another metaphor, there are some low-hanging fruit India can pick. Of course, there will be some risks associated with each step. However, any sober calculation will show that the risk of not taking the steps to cross the river will be even greater. India will continue to fall behind the fast-growing East Asian states.

The first step is an easy one: join the Regional Comprehensive Economic Partnership (RCEP) immediately. Why join the RCEP? Many reasons. Firstly, in today’s world, Europe represents the past, America represents the present and East Asia represents the future. By joining RCEP, India will be betting on the future, not the past. Secondly, with a total population of 2.3 billion and a combined GDP of $38 trillion, RCEP can provide the biggest markets for Indian products. Here’s one statistic that explains how markets are growing faster than the rest of the world. In 2009, the size of the retail goods market in China was $1.8 trillion while that of the US was $4 trillion. Yet, by 2019, two years after Trump’s trade war, China’s market had become bigger at $6 trillion while that of the US was $5.5 trillion. 

Thirdly, and most importantly, India spent over six years negotiating entry into RCEP. Many of its concerns have already been addressed. So, why didn’t India join? I don’t know the exact answer. But I would make an educated guess that some vested interests felt threatened. If this is true, it shows why a radical change of mindset is necessary in India. Is it more important for India to protect a few vested interests? Or is it more important for India to expose 1.3 billion Indian economic tigers to global economic competition? And, to put things more harshly, if India cannot even compete as well as the ten Southeast Asian states, who can it compete with? Certainly some Indian industries will struggle to compete with RCEP. However, even the most basic economic calculations will show that the Indian economy overall pays a far heavier price (and therefore the poor Indians suffer) when it is not subject to economic competition.

The second concrete step that India can take is to make the South Asian region (including all the SAARC members) as open as the Southeast Asian region. Most countries grow by opening up their economies to their neighbours. Just look at the European Union (EU) and the North American Free Trade Agreement (NAFTA). Now South Asia can never be as open as the EU or NAFTA. These are very high-level and complex agreements. However, there is no reason why South Asia cannot be as open as Southeast Asia. 

Here, let me emphasize one important point. In deciding how to open up the region, India doesn’t have to reinvent the wheel. All that it does have to do is to pick up a copy of the ASEAN Free Trade Area agreement and share it with all its neighbours. After doing so, India should make a commitment to work with its neighbours and agree to sign a similar agreement among all the SAARC members. 

Let me add here that I am not naive. I am aware that there are problems between India and some of its neighbours, especially between India and Pakistan. Both countries don’t even have normal trade with each other. Here too one Southeast Asian story is relevant. India and Pakistan fought their last major war in 1971. China and Vietnam (who have been suspicious of each other for 2,000 year, longer than India and Pakistan) fought their last major war in 1979. Yet, after Vietnam joined ASEAN (with whom it had been quarrelling for decades, in 1995), it then also joined the China-ASEAN FTA in 2002. Since the mid-1990s, trade between Vietnam and China has grown 3,000 times. Therefore trade between India and Pakistan can also grow 3000 times. The biggest beneficiaries of this increased trade will be the poor people of India and Pakistan.

The third concrete step India can take is to open the doors to Foreign Direct Investment (FDI) as much as the ASEAN countries have done so. Here is one statistic that Indians should reflect on. The combined GNP of the three dynamic North East Asian economies (namely China, Japan and South Korea) is $21 trillion. By contrast, the combined GNP of the ten relatively poorer 10 ASEAN economies is only $3 trillion. Logically, since $21 trillion is more than $3 trillion, there should be more American investment in Northeast Asia rather than Southeast Asia. Instead, the figure is the opposite. In Northeast Asia, it is $287 billion and in Southeast Asia it is $335 billion.

Let me add an important geopolitical point here. Given the growing tensions between the US and China (which I have documented in my book, Has China Won?), many American manufacturers are looking for a China plus one investment destination. Many want to invest in India for geopolitical reasons. However, as soon as they arrive in India and encounter Indian bureaucracy, they get discouraged. So here too there is a simple solution. Many of the Southeast Asian countries, including Indonesia and Vietnam, Malaysia and Thailand, have produced simple and clear investment brochures. Each state in India should compete to produce investment brochures as good as those in ASEAN. Then they will find that the best and easiest way to boost economic growth is to attract FDI.

In short, it will not take rocket science to make India’s economy the largest in the world and larger than even that of China and the US. It will only take simple common sense. There’s no need to invent anything new. All India has to do is to copy and learn from Southeast Asian countries who have had close relations with India for two thousand years. Prime Minister Manmohan Singh called on India to “Look East”. Prime Minister Narendra Modi called on India to “Act East”. My message to you is a much simpler one: please come to Southeast Asia and learn from the East.