Transcript of an IMF Book Forum
China's and India's Recent Experience With Reform and Growth

Thursday, May 18, 2006

Moderator:
WANDA TSENG, International Monetary Fund

Presentations:
NICHOLAS LARDY, International Institute for Economics
ARVIN PANAGARIYA, Columbia University
JERRY SCHIFF, International Monetary Fund

MS. TSENG: [In progress] --experiences and their prospects. I just came back from India myself, and visitors to India cannot help but be struck by the extent to which Indians themselves are measuring their performance against China's amazing success. More recently, I think policy makers in China have come to see that there is much to be learned from India's experience.

I am pleased to note, however, that when we organized the conference on which this book is based, we were quite early in this process. I think we were one of the very first international conferences on the reforms of India and China, so we had an early start in this China-India cottage industry.

I am very pleased to have today two very distinguished contributors to that conference. I think they need no introduction to this audience, but let me just mention that Nick Lardy is a Senior Fellow at the Institute for International Economics here in Washington. Previously he was a Senior Fellow at the Brookings Institution, Director of the Henry M. Jackson School of International Studies at the University of Washington, and a Professor at Yale University.

Arvin Panagariya is the Jadish Bhagwati Professor of Indian Political Economy and Professor of Economics at Columbia University, and in the past he was a Professor at the University of Maryland where he was my teacher, and the Chief Economist at the Asian Development Bank.

Nick's chapter discusses the role that trade liberalization has played in the Chinese economic growth experience, while Arvin looks broadly at the strengthening of the reform process in India in the 1980s, and in particular, in the 1990s. These authors emphasize the opening of China and India to the global economy where there have been similarities, but perhaps of greater interest, important differences, notably, China's far greater reliance on trade to generate its rapid growth and employment generation. I think we will all look forward to hearing them discuss these and other issues, and in particular, what the different reform paths of China and India imply for their respective futures.

We also have with is Jerry Schiff. He is an Assistant Director in the Asia Pacific Department of the IMF. For the last 2-1/2 years he has been the Division Chief for India and several other South Asian countries. He is currently ending a book, "India's Emergence on the Global Economic Stage," and we expect to have that book out in September. While at the Fund, he has also published articles on labor market reforms in transition economies, and on tax and expenditure policy.

Finally, I would like to mention that this conference we had in Delhi some 2 or 3 years ago was the first of a two-part series. We also had a second conference in Beijing last year, and a book on that will be coming out in the fall during our Annual Meetings in Singapore. So we hope that we will be able to see you again at another forum on the reform experiences of China and India.

Without further ado, let me introduce Nick Lardy to make his presentation. Each presentation will last about 10 to 15 minutes, after which we will be very happy to take your questions. Thank you.

MR. LARDY: Thank you very much, Wanda. I was happy to have a chance to participate in the conference and then to come here to the Book Forum.

What I would like to do, I am going to spend some time talking about the contents of my chapter on China's Openness, the Role of Foreign Trade, but since I am the first speaker, I am going to say a few quick things in the China versus India comparison. I sometimes find I get into discussions with people and there is not much of a sense of the difference in terms of scale, and I would say that although the two economies are converging in terms of their rates of economic growth, that is, Indian growth has accelerated fairly dramatically over the last decade, that it is still important to keep in mind that China is a much, much bigger economy than India. It is about $2.2 trillion at current exchange rates, and India is about $700 billion, so China is three times as large, and of course as to their populations, China is only slightly ahead of India.

Secondly, China's foreign trade is six times that of India's. China's last year was about $1.4 trillion, India's was in the neighborhood of about $230 billion, so China is a much, much bigger trading economy.

Thirdly, China's foreign exchange reserves are about 5-1/2 times those of India. At the end of last year, China was at about 820, they have another $60 billion since then, and India was about 147. Because China's size is larger and its trade is much larger, China is a much larger contributor to global growth. If you take the Goldman Sachs estimates when they are doing their analysis of the so-called BRICs economies, their calculation over the last 5 years is that China accounts for 15 percent of global economic growth, India accounts for about 5 percent. So China looms much larger in terms of its contribution to global economic growth. And, of course, I would say, finally, China is a much more significant or at least appears to me to be a much more significant factor in terms of its influence on global commodity prices, and the big run-up in prices of a lot of the metals, oil, and so forth in recent years is at least in part a result of China's very substantial increased imports of those products.

I would like to continue in the comparative vein and talk a little bit about how even though the growth rates of these two economies are converging, India is doing much, much better than its historical pattern, that I still tend to think that China will continue to have a growth advantage for the next 3 to 5 years, or something like that. Let me mention six factors, including the external openness that I think underlie this judgment.

I would start by recognizing that China's savings rate is roughly twice that of India. In the most recent data, China's is about 47 percent of GDP national savings rate. India has come up quite a bit over the last few years, but is still in the mid-twenties, at 24 or 25 percent. So China has the capability of financing a substantially higher rate of investment, replicating the capital stock or expanding the capital stock more rapidly than India does.

The second factor that I would say is important is that China's female literacy rate is still about twice that of India's. India's has come up, but according to the most recent data that I have seen, China is at 87 percent, India is at about 48 percent. And when you look at the growth of the manufacturing sector in China, particularly the very rapid growth of the foreign sector which I will talk about in a minute, a very large portion of it is processing, and a very large, indeed, the overwhelming portion of the labor force in that sector, is female. These are unskilled workers that are recruited from the countryside, brought into the modern sector, and one of the reasons that they can become relatively productive relatively quickly is a high level of literacy. They can read instruction manuals, they can quickly be trained to operate and do all the factory processes. If you talk to people in the manufacturing sector, a lot of people have the misunderstanding that they think China's low wages are attracting all this foreign investment. Wages in India on average are significantly those in China, but in China there are some advantages that offset that, and one is the ability to create a relatively productive work force, a female work force in particular, in various kinds of assembly and processing activity which have become so important in the manufacturing sector.

I would emphasize this because the reason China is still growing more rapidly than India is primarily because its manufacturing sector grows so rapidly. China's manufacturing sector regularly is growing at 15, 16, to 17 percent per year. I do not know the rate of growth of the Indian agricultural sector, but I think Arvin probably will tell me if I am wrong. I have the impression that the agricultural sectors of these two economies have very, very similar growth rates. The thing that really differentiates China from India is that its manufacturing sector is bigger, as I will say in a minute, but also it is growing much more rapidly.

The third factor is one that is widely commented on and I think is true, and that is infrastructure. China's investment in infrastructure is currently running at about seven times that of India, its economy is three times as big, so you can see relative to the size of the economy, China is spending a great deal more, something on the order of about 7 percent of GDP, as opposed to India's something on the order of about 3-1/2 percent of GDP. Lack of adequate infrastructure in India has been a major handicap in developing the manufacturing sector.

The fourth factor is foreign direct investment. China is regularly getting 10 to 12 times more foreign direct investment than India. In India the numbers have come up. They will probably come up more. But in the most recent year, China got about $60 billion, and I think India got about $5 billion. India will probably go up, China seems to be plateauing off, but there is still a very large differential.

That is not important, at least in China, in terms of financing investment because only about 5 percent of all capital formation is financed with foreign direct investment, but it is very important for the introduction of modern technology, management, know-how, marketing skills, and so forth, which are big contributors to economic growth.

The fourth factor, and, again, this is what my chapter on the book focuses on, and that is the external side, what I would say is I believe China has a much more competitive manufacturing sector than India and that this derives primarily from China's greater degree of openness than India. That does not mean that India does not have many world-class manufacturing companies, it certainly does, but on average, the competitive environment in China is much stronger because its tariff rates are much lower. I will give you a few numbers.

The applied tariff rates, that is, if you look at the tariff schedule, China is at about 10 percent, India is in the high twenties, almost 30 percent. But more importantly, if you look at what revenues are actually collected on imports, that is, import tariff revenues relative to the value of imports, the differences between the two countries are quite a bit larger. In China, a very large fraction of imports are exempt from all duties. For example, if foreign firms want to being in capital equipment for their joint ventures, they do not pay any duty. By the time you take these exemptions into account, the actual tariff rates in China are about 2 percent. More importantly, they have been in the neighborhood of 2 to 3 percent since the mid-1990s. In other words, China has had for more than 10 years an effective protection rate of around 2 percent. The most recent calculation the WTO has done for India puts the actual tariff collections as a percentage of value of imports at about 18 percent. So, roughly speaking, we are talking almost a 10 to 1 differential in the effective rate of protection of imports. Imports in China are much larger as a percentage of its economy than in India, about 30 percent versus about 20 percent. The number has come up quite a bit in India in recent years, but it is still about two-thirds the Chinese level.

There is one final factor and it relates to what I have already mentioned on the competitiveness, and that is that foreign firms produce a very significant share of manufactured goods' output in China. Today it is about one-third of all manufactured goods are actually produced by either wholly foreign-owned companies or joint-venture companies. Many people in the United States, particularly many who have been elected to the Senate or the House of Representatives, think that China is just an export platform for foreign firms that have moved there, but in fact, a little over half of all these foreign manufactured goods that are produced in China are sold in China. That adds further to the competitive environment, because domestic firms in China not only have to compete with imports that on average have a very low tariff rate, but they have to compete against goods that are produced by foreign firms in China, and those firms presumably have whatever advantages they bring to bear, whether it is technology, management skills, marketing or whatever. So the combination of a 30 percent import ratio plus a substantial additional competitive component being introduced by the domestic sale of goods produced in China by foreign companies makes it a very competitive environment.

This is very important, for example, for U.S. firms. Today it is the case that U.S. firms operating in China sell more output that they produce in China, in China, than American firms producing in North America export to China. So it is a very big number, particularly for U.S. firms.

My final point, and I know I am running out of time, is that I would say, and Arvin and Jerry may disagree, that I think China's structure of output is more favorable for long-term economic growth at the current level of economic development. To put it another way, I think India's small-scale reservations policy which restricts entry of modern firms still today into a significant number of manufactured goods has led to a country that has prematurely become services-dominated. China in manufacturing is 40 percent of GDP, in India it is 25 percent. So India has a very small manufacturing sector for a low-income economy. Of course, there are opportunities for rapid growth in services, but the ones that we read about all the time, business process outsourcing and software, and if you read Tom Friedman's book you get the idea that everybody in India is involved in these activities, these activities account for 3 percent of India's GDP. So even if they are growing very rapidly, and they are growing very rapidly, there is no reason not to believe they will continue to grow very rapidly, that is not a big enough component of the economy to really accelerate the growth that the economy at least now for the short- or medium-term future.

On the other hand, as I said, China has a manufacturing share that is 40 percent of GDP, it is growing extremely rapidly on the basis of a substantial foreign presence and a substantial availability of unskilled female workers who can contribute to rapid productivity growth.

On the export there is also a huge difference. If you take the whole software industry in India, its exports in the most recent data I have seen are running at about $17 billion. If you take what China is doing on assembly just in the electronics sector, IT hardware, telecommunications products, their exports last year about $270 billion, this year they will be in the neighborhood of probably $325 billion or more. So this is a very big sector, it counts for a big chunk of Chinese manufacturing, it employs a lot of people, and, again, it goes back to the openness and the foreign direct investment and so forth.

I will just leave you with one final thing on the openness, and that is it continues to be the case that even though India has become much more open, that the increase in China's exports every year is bigger than India's. Let me state that over. The increase in China's trade, imports plus exports, every year is bigger than India's total trade. I think I mentioned, last year India's total grade was about $230 billion, but China's trade increased by about $300 billion last year. The same thing will be true this year. They started out at $1.4 trillion, and they're growing still at roughly 25 to 30 percent in terms of import and export growth, so we will see again this year a huge increment to China's global participation, probably something on the order of $350 to $400 billion. Again, that increase will dwarf India's total trade.

So as I have studied China, particularly its external sector over the years, I have become more and more persuaded that openness can be a big driver of productivity growth and be one of the most important elements in a government's economic policy for promoting rapid economic growth.

MS. TSENG: Thank you, Nick, for that very valuable perspective of the relative scales of China and India. Now let me ask Arvin to give his presentation.

MR. PANAGARIYA: Thanks, Wanda. Thanks for that nice introduction, also.

Let me say in a way actually I pretty much agree with a lot of what Nick has said. I will come from a slightly different perspective, but I want to nod in agreement, first, that, indeed, I have been looking actually for a paper that I am doing currently on the comparison between India and China's external trade, and if you are not an Indofile, this has been a bit of a humbling experience. China does really look like on a different scale than India is, and I will try to show you some pictures. Nick has already I think very dramatically pointed out a number of statistics that testify to that. But let me very briefly step back a little and talk about what I did do in this chapter, and then connect that to this India-China discussion that we are having.

My own chapter in this book tried to do two things. One, a debate at the time was just beginning on India's own economic reforms, and there were claims made, I will come to that, that in the end the reforms that India in the 1990s were really not the main drivers of growth, and the issue was being raised whether these reforms actually were worth the effort that they involved, and so the first part of my chapter dealt with that issue. I think this was the first kind of defense that was offered of the reforms of India and an argument made supported by a lot of the evidence that, indeed, 1990s reforms were actually quite critical to the growth process in India.

The second half of my chapter dealt with a bit of India-China comparison, and there I argued that in the end the major problem India faced in terms of the transformation of the economy had to do with its relatively slow growth of industry, or industry in general, but manufacturing in particular, and that is a theme to some degree that has already been put on the table by Nick. I will have a slightly different take from Nick's on that, but generally in agreement and reinforcing.

Let me first very briefly dispose of the first issue. The way the debate had started was that Bradford DeLong at the University of California, Berkeley, wrote a paper arguing that everybody seems the beginning of the reforms in 1991, but if I looked, meaning Bradford DeLong looked at the data, growth had started earlier. He was very vague about actually where he thought the growth had started, sometimes saying it was the early to mid-1980s, but sometimes then going into the late-1980s. In the same volume that Dani Rodrik actually edited in which Bradford DeLong's article came, Dani then picked up on that theme and played up this whole issue that Nehruvian policies had already contributed quite a bit to the growth process of India, and if I do the calculation of how much growth impetus came from the 1991, and in general the 1990s reforms, I do not find very much. So it was against that backdrop of that discussion that had been going on that I wrote this paper.

Where I stand on this issue really is, and this part of it was articulated not in quite the terms that I am going to put it now, in this paper that the 1980s growth was fragile, but let me show you a bit of the numbers as they look. These are my calculation, not different people, distinguish growth rates, but differently. But I am currently doing a major book on India and the first part deals with growth, and the way I divide India's 55 year history is into these four phases. In the first 15 years, India grew at 4.1 percent. In fact, this was a big break for India in the sense that if you look at the previous 50 years, the India economy grew at less than 1 percent a year, so this was certainly a clear break from the past.

I argue in the book that I am writing that actually this was a relatively phase in the Indian economy, even though this is the period during which the licensing regime was being constructed, built and so forth. But still if you look at it, the 1950s are actually quite liberal. If begins to tighten up in the late-1950s, and with a lag then you get the big impact on the growth.

As we go into the second phase, of course, this is the Mrs. Gandhi phase, and this is the phase during which actually India becomes incredibly preoccupied. If you read the history carefully, the near obsession or two obsessions, one is with equality, and that leads to the adoption of lots of these rigid policies including small-scale industry, licensing gets extremely, extremely actually repressive, you get the labor laws during this period, the land laws you get in this period, nationalization of banking you get in this period.

There are also external shocks happening actually, but the story, of course, is that on the whole whereas Korea which also grew at about 4 percent in the first phase around until the mid-1960s, it takes off to about 8 or 9 percent during this second period, about 1965 to 1981, and India actually dips down to 3.2 percent. So that is the worse phase actually for the Indian economy.

What happened during the 1980s? If you look very carefully and do the proper data analysis, even to 1988 actually you get some shift back, so you get to 4.8 percent. This is really not a big jump, but it is returning back in my view to what had been achieved actually in the 1950s and early-1960s. It is a little bit higher than that, but basically that is all you did in the first about 7 or 8 years of the 1980s. This whole notion, which a lot of the scholars from India actually love to say this, that India has been growing at 6 percent since 1980 or 1981, somewhere there, 6 percent we have been growing for about 26 to 27 years. That just does not actually hold out in the data. The growth actually in the first 7 or 8 years, 1981 to 1988, is only 4.8 percent, which is not dramatically higher than what had been achieved actually. So what we did was to return back to where we were.

Then I think in the last 3 years of the 1980s show tremendous growth, about 7.6 percent, and this whole notion that in the 1980s we grew rapidly actually gets built up because you build these last 3 years of the 1980s at 7.8 percent, if you completely are captive to the calendar and, therefore, you add that to the first 7 years, of course you get a growth rate of 5.6 percent. So that begins to look high, but the point is that that is the last 3 years.

The real actually growth phase, therefore, in my judgment is 1980 to 2004, and this is about 6.1 percent, and the last 2 years have been about 7 to 8 percent. So that is how I parcel that story. Then you can connect all this very nicely to the economic policies, including the 1980s shift which some slow reforms had already begun under Rajiv Gandhi that accelerated actually, and that is documented in this paper that I have the chapter in the book, and, nevertheless, these last 3 years of growth was also fueled by a lot of external borrowing that had happened by fiscal expansion, and, therefore, large deficits that had happened, so it eventually led to the crisis. Therefore, actually growth could not be sustained, and you get to 1991, the 3-year growth of 7.6 percent could not be sustained and ended actually in crisis, and that is where the reforms had to come in to bring it back to the level that had been achieved and then sustained all the remaining 13 or 14 years. So that is my story on the growth.

Now very quickly turning to India and China, in my judgment, and this Nick has already pointed, this is the story I build there actually and I have been writing about this for the last 4 or 5 years, that it is manufacturing where we have the serious problem. Manufacturing has been growing. If you take industry as a whole, it is 25 percent, where manufacturing is in fact even 17 or 18 percent, not very large, and that has been growing only about 6-1/2 percent per year. In the last 2 years it has shifted up to 8 or 9 percent. This contrasts to about 15 percent with China.

This matter is huge actually. If India has to be transformed actually into a modern economy from the current rural kind of farm economy, there is no way to get around it. I like to talk in terms of walking on two legs. One leg of India is the IT leg, the information technology and software industry, and you have to actually strengthen that leg as well. But the other leg has to do its work, and the other leg is the manufacturing leg, and that is the leg that is actually not doing its job yet.

If you look at what India looks like today, you have about 77 percent of India's population based on census 2001 in the rural areas, 60 percent of the work force is actually on the farm, and if you are going to transform it into a modern economy, what sector is going to generate jobs and employment which can pay relatively high wages? It is ultimately industry, it is manufacturing. And it is the labor-intensive industry and manufacturing, and that is where India's problem is, that the labor-intensive industry actually is doing even more poorly than the capital intensive and the skilled labor- intensive industries.

Very quickly, a few slides I'll race through. This is the per capita GDP of India and China. This where I was saying putting the two countries on the same scale does humble you in fact if you are an Indofile. You can see India and China start about roughly per capita incomes that are similar in 1982, and where China takes off, India goes much more slowly into the later 1990s, and later it picks up a bit faster. Exports of goods and services as a portion of the GDP, again, China does start out a little bit higher than India initially, but then of course it takes off much faster, and today India's exports to GDP ratio is less than half of China's.

This connects the growth of GDP exports. I am going to quickly jump back. This is the share of exports of goods and services in the world markets. You can India's share has been growing as a result of the openness policies, but when compared to China you can guess the bigger bar is China and the smaller one is India. You can see the difference is large. It is just dramatically large. The share of services, that is much higher in India and here the bigger bar is India actually not China, and share of services and India's exports is lower. Correspondingly, of course, manufacturing is much, much lower in India. That is where this whole issue of not only there is a big difference in the volume of trade, but then also the share of manufacturing within those exports is smaller in India.

These are the top three exports of India, and do not forget to look at the numbers. The top number that appears, $12 billion, and the highest one that is going, this is gems and jewelry for India, by the way. The products gems and jewelry is the leading then. Then you have textiles, and then you have apparel. So those are the top three exports of India. The highest one here is gems and jewelry, and this is about $11 billion. This does not include merchandise exports, this is the top three of India.

The top three of China is dramatic. You would think that these are textiles, apparel, clothing, footwear, et cetera. None of that. These are two-digit SITC products. And look at the scale, that is $90 billion up there where I had in the Indian case, if you recall, this was on a different scale, so this is $10 to $11 billion, but look at China, $90 billion there. This is 2004, so I sure it has not crossed $90 billion, but two-digit level, the top one is office machines and automatic data processing, you have telecommunications, and then you have electrical machinery, apparatus and appliances. There is no footwear here, there are no toys here, there are no textiles and clothing here. It is quite amazing and dramatic, and these are the top three exports. Just look at the way it rises very sharply in the last 4 or 5 years of these data. It is quite amazing actually.

Here you put India and China on the same slide and look way at the bottom, these are India [off mike] these are the top two Chinese exports, and we are clearly on a very, very different scale here. This is textiles and apparel for the same products for both countries, but, again, look at in India [off mike] quite rightly. So those are my slides.

I do not have here the second set of three products from India. After the top three you take out, then comes the iron and steel, petroleum products, and the third one which is coming which is more labor intensive is miscellaneous manufacturers which probably has things like sporting goods, et cetera. But the point is that manufacturing is what has not grown rapidly in India. I think the big bottle neck here, I do not think a lot of the things that Nick pointed out are that crucial. Savings, for example. The savings rate is endogenous. It rises actually. It is already up to 28 percent in India now. With income levels, we do not understand fully why, savings does rise, and you can see that. In any country's data you can look at Korea, you can look at India, you can look at China, it rises. So I am not pessimistic on savings.

Female education, it is much lower in India, but that is not the big kind of constraint on India right now. There are enough educated females in India if you want to employ, so this is not a major kind of constraint as I see it. FDI. Again, that is endogenous. FDI is not rising so rapidly in India because domestic investment is not rising so rapidly in India either, especially in the labor-intensive manufacturing. So when you look at what is rising, it is the capital-intensive goods, I pointed out several of these here, you have textiles, you have gems and jewelry which is kind of semiskilled labor, but that is not what is going to employ the farmers or workers on the farm back into the urban areas. And then you have iron and steel, you have petroleum, all very capital-intensive kinds of products. By the way, you hear a lot about auto and auto parts, and you also hear a lot about pharmaceuticals, but when you look at the export data, you do not show very much yet actually in the data.

So what is missing? Openness also. I think India today on services is more open than China is. On manufacturing it is less open, but not by far. The top tariff rate in India today is 12.5 percent, and the tariff revenue data that you are looking at if I am correct actually, I know that the India data at least includes the countervailing duties. Domestic taxes are also imposed on imports, and India counts these things into the revenue. So the actual custom revenue is much smaller than what is reported as the tariff revenue. So I do not think any of that is so crucial now. I would like to see India open up further more actually and I would like to see it go free trade, but that is where the big story is.

The big story in my judgment is not small-scale industries as a division of course is behind a lot of the numbers that we see here because it was very effective, none of the labor-intensive industries were open, now they are open, but most of them are open. You still have a few products left on the small-industries as a division. But what is I think lacking is labor markets in India. They are extremely inflexible. That is where the big, big problem is. Nobody today, even either big Indian firms or certainly not the multinationals want to establish large labor-intensive industries, the large-scale labor-intensive industry is still missing from the Indian scene currently, and without that you cannot bring India's workers out of the farm into the urban sector. So if you need to do that, labor laws have to change. And it not just this hiring and firing policy that we talk about which is, of course, the first barrier to be removed, but I think there is much more to the inflexibility of the labor markets in India. Even when you want to reassign a worker from one task to another, it is a virtual impossibility actually if this is a permanent worker of the Indian labor force. So I think that is one more important constraint.

The other one I see is the power, and that is another sector. I think the power sector problem has been much harder to solve. Telecommunications got solved very nicely. The same could not be done, at least so far has not been done successfully with the power sector. I think that is the that needs to be fixed up.

On the IT sector, I think that is the second leg that I talk about, walking on two legs. You have the higher education system which is turning into a big constraint which is the reason you see this huge turnover in the IT industry and the Bangalor labor force. At least "The Economist" reports turnover rates in these jobs of 30 to 40 percent, and the wages have been rising at 12 to 13 percent per year. Very soon, India wages in the IT sector will catch up with the American wages, and that will be the end of the growth boom in the IT industry. What really needs to do is also fix the higher education system. I will conclude with that. Thank you.

MS. TSENG: Thank you very much, Arvin, for the India growth story. So we seem to have the story of the tortoise and the hare. Now Jerry is going to come and give us a presentation. I think he is going to be focusing more on the recent developments in India and what are the challenges ahead for India.

MR. SCHIFF: Thank you very much. I wanted to look a bit more at India's experience with reform and growth. I also had planned to make some comparison's with China's experience, but I think I will downplay that a bit partly because it has been covered very well by the previous speakers, and also I feel that it is kind of setting a very high bar for India. Most countries or any other country, if you showed similar charts as have been shown would not look like that strong a performer, and we should not allow that to deflect attention from the fact that India's performance recently has been very strong. Having said that, I am starting with an India-China comparison.

[Laughter.]

MR. SCHIFF: This is to show pre and post the years that are generally considered the beginnings of reform and trying to make the point that China seems to have had a bigger bang for their reform buck, so to speak, and perhaps in the Q and A we can talk a bit more about why that is.

This is the point that both speakers have made. You can see in India from 1980 to 2004-2005, agriculture has shrunk as a share of GDP, but most of that has ended up in some sense in the services sector which, as has been mentioned, is a very atypical pattern of development. For China we see something quite different, where, again, agriculture has shrunk quite dramatically. It already started with higher industry, but it has gone into services and industry.

More recently, India seems to have achieved some sort of takeoff, and both services and industry are growing rapidly. Looking at the left-hand side, the pink line showing services and the purple line showing industry, there is a linear version of those two, and they are both currently growing at around 8 to 9 percent which by any sort of non-China standard is quite an impressive growth rate. This growth has recently been supported by very rapid growth in bank credit. You can see a real takeoff in 2003 to 2004, and credits growing much more rapidly than deposits, and banks holdings of government paper have declined quite dramatically. This credit growth is pretty broad-based. Initially actually it was largely for household credit, but more recently we see a lot more credit going to industry and infrastructure. This has led to a pick-up in investment after a lull in the late-1990s, but, again, you see some significant lag with China.

I think that holding interest rate development constant we would expect to see a lot more scope for further increases in investment. This is not exactly capacity utilization, it is percent of respondent to surveys who report that capacity utilization is close to above optimal, and you can see in the most recent survey it is pretty much everyone saying that their capacity is very stretched compared to 2002 where it was more like 70 percent. So there is a large need for expansion of capacity, and one would tend to expect to see continuation of the incipient investment boom that we have seen in the last couple of years.

This kind of growth in domestic demand is also seen in the external current account which in the last seven or eight quarters has turned pretty sharply negative. In all the discussion of global imbalances, I think it is interesting that India is one of the Asian countries that is actually contributing to a rebalancing by running a fairly sizable current account deficit and relying more heavily on domestic demand than exports for its growth.

Looking at the longer-term, India's demographics are potentially quite favorable in the sense that the percentage of the overall population that would be of working age, as you can see by the purple line there, will continue to grow for many years, even after a number of the other major emerging markets begin to decline. So other things equal, one would expect India's long-term prospects to be quite strong. Of course, having so many labor-market entrants also raises the stakes on creating jobs, and that brings into a play a number of points being made about manufacturing. The services sector, the IT sector, even growing as rapidly as they are, generates a relatively small number of jobs. Broad estimates are that in the next decade, more than 100 million Indians will join the labor force and it will be a major challenge to find jobs for those people.

Looking ahead to sustain rapid growth or even move to more rapid growth than the eight or so percent that India is achieving now, it would need continued integration into the global economy. I think I will not say much more about that because it has been a theme of the previous two speakers. There you see foreign direct investment with quite dramatic differences. It was interesting, we looked more closely at FDI and our prior was that a major explanatory variable would be India's restrictions by sector on FDI, but I think after looking at it more closely, our view changed and we came to the conclusion that it was more broad business climate issues rather than any FDI-specific policies, although those may have contributed as well.

Here is the point about the need to close the infrastructure gap that Arvin mentioned with some comparative data. You can see electricity production is very low per capita, air transport freight is very low, and goods transported by roads. I think, if anything, these infrastructure constraints are getting greater as India grows more rapidly. Here we see peak shortages in electricity supply. This also gets to Arvin's point about the power sector. Also, businesses pay unusually high tariffs for power. So if anything, this problem seems to have been getting worse.

Similarly, if you look at ports, you can see more and more of the Indian ports are at more than 100 percent capacity, and measures of how long ships need to wait at ports are growing. On the one hand you have tremendous momentum for growth, but on the other hand, those are increasingly bumping up against infrastructure problems.

To address these infrastructure problems, India needs to spend money. Some of this can be done through public-private partnerships, but much of it will need to be done via the government. India already has general government deficits in excess of 7 percent of GDP which will make the task more challenging and really puts an onus on fiscal reforms.

Even beyond infrastructure there are potentials for large gains. One way to look at this is there are lots of problems. I guess, the most optimistic way is to say there are lots of ways to gain, even putting infrastructure. You can see that infrastructure is the most problem for businesses in India, but others are also familiar ones of inefficient of bureaucracy, restrictive labor relations, et cetera.

Then I wanted to put this last chart in as food for thought. I do not vouch for these data since I did not put them together, but these show very, very long-run distribution of world income, and you can see that in 1700, China and India had close to half of the world's income. Then it declined to about 9 percent, and now it is up to about 15 to 16 percent in 1995. So I guess by now it is significantly higher than that, I will just leave that up there as food for thought. Thanks.

MS. TSENG: Thank you, Jerry, for that.

[End Side A. Begin Side B.]

MS. TSENG: [In progress] --challenges for India. I would like to open up the discussions and take any questions you might have. When you ask a question, can you please identify yourself and your affiliation? I will try to direct the question to the appropriate panelist. Are there any questions from the floor?

MS. STEVENSON: Sheri Stevenson [ph] from [off mike] we always hear that there are new possibilities in today's modern economy because you might be able to leap-frog the normal progression in terms of levels of development from agricultural to rural [off mike] into services by jumping with the appropriate educational investments directly from a more rural economy into services. But are you suggesting in fact that [off mike] it doesn't work? Is it only that it does not work in India because India is too large and you have so much labor to absorb in that context [off mike] or it because that is something that thought we could teach as to the potential of services [off mike]

MS. TSENG: Arvin, I think this is your question now, your two-legged approach to growth.

MR. PANAGARIYA: I think that should be a part of the strategy, but that cannot be the main strategy to transform the economy.

Just a few facts. If you look at the age group from 18 to 24, in India only about 12 percent, probably it is even less, but let's be generous and say we percent of that population is actually in colleges, and if you look at the higher education system in India, it is dire straits. You see the IITs, the Indian institutes of technology and the Indian institutes of management, students say India is really top class, but when you look further below down there is nothing.

The state where I went to college in Rajistan, some recent surveys I saw were putting the attendance in class in the colleges at 7 percent. Professors are absent, so they are each guessing that students are guessing is the professor going to be there in the class, the professor is guessing are the students going to be there in the class, and they both say probably not, and they do not show up. There are no private universities in India. A couple of states have just barely begun to give entry, but it has to be tackled at the central level. The central government, the federal government, has to actually, which means the Indian Parliament has to pass a new law where you let the private universities in.

The tuition fees are virtually nonexistent. Maybe one dollar per month is the tuition fee at most colleges. You look at the university buildings, you would not want to go and use the rest rooms in those buildings. The infrastructure is a shambles.

So I think if you are going to back the strategy on IT, you have to educate these workers who are currently on the farm for about 16 years before they can be brought into the IT industry, and I just do not see that there is capacity for that.

MS. TSENG: Other questions? Mr. Misra [ph]?

MR. MISRA: I am the Executive Director for--let me start by stating that my first visit to China was in November as part of the--and I was so impressed, so let me start with that. The development has been absolutely fantastic by any yardstick. But I saw two presentations and Mr. Lardy's--are all logical. But no one seems to be giving any importance to the kind of governance that you have, let me not talk of democracy, but let me say that one government structure continues for 30 or 40 years, improves on it. The other one, the governments and coalitions in 3 years' time, so you start anew. Some of that seems to be missing in everything as if that does not count. And I do feel that that is a major factor without taking even a single point out of your main argument which is correct that India has not done well as it should have.

One of the major factors is this, not this component unless you build in--when you say that the investment climate is not good, in other states it may be good, in 18 other states it is bad, but different political structures are there in the same country. And the fact that the government, every 3 years you have an election, whereas here you see a particular structure continuing for 30 to 40 years. I am slightly disturbed about that as if that does not count at all. A long time back there was an article in The Economist--that the only country who has developed fast with democracy was the USA, because the U.K.'s industrial revolution came at a particular time when democracy was--in all the other countries.

So I thought that ought to be playing some part, why not growing sustainably, you are to 4 percent and come back to 8 percent. In fact, some people ask me here after some lectures like this, do you think India's growth will be sustainable, and I say no. I know that it will not be sustainable, for the simple reason that here is one government which says let me grow at this rate, let me reform, and the other government comes and says, no, look, you are harming the labor--thank you.

MS. TSENG: Thank you, Mr. Mustraf, for that question. In fact, it was on my mind as well because I think the one thing that everyone points out especially when they look at the future is the differences in the political system, and I would like to have our speakers comment on that question. Maybe Nick can start.

MR. LARDY: I certainly do not want to say anything to defend the broad parameters of Chinese governance, but I do think there has been a lot more change in the nature of governance than is commonly recognized. Twenty years ago in China, even 15 years ago in China, the government/party claimed to have the answers to all questions on public policy, and to a large extent they have abandoned that position. This began really with an administrative law that was passed in the early-1990s that allows people to sue the government, and thousands and thousands of Chinese citizens have sued the government, have won cases, and have received some monetary compensation for the government's failures.

Similarly, we now have governments at every level holding hearings on how to deal with public policy issues. This started at lower levels, but last year for the very first time, the National People's Congress, the highest legislative body, held a public hearing on how to reform the personal income tax. These hearings are not about how to reform the political system or how do introduce industry in China, they tend to be very focused on very concrete what I would call public policy issues, and they had an enormous response. I think I read something like more than 5,000 individuals and organizations applied to present their views about how the income tax should be reformed, and they were able to hear from some small subset of that. But this is a very dramatic change, at least to my way of thinking. As I say, 15 to 20 years ago, the party and the government claimed to know the answers to all public policy questions and they were going to do what they thought needed to be done, and they certainly were not soliciting any input from members of the public. So we have a very, very long way to do, but I do think the system has had some significant change particularly over the last 15 years.

MR. PANAGARIYA: If you are looking for reasons why India is growing slower, then surely the fact that India is a democracy and, therefore, it takes longer to build consensus and it takes longer to introduce new policies. Whereas, in China obviously it is an authoritative regime and what it decides it goes and carries it out. It is true. I would be the first one to agree to that. Is it worth having it? Of course, every bit of democracy you have in India is worth having it.

You could speculate further down the road how the PC and CP are going to come together in the end, PC meaning the personal computer, and the CP being the communist party, and in the end are they compatible or incompatible or not. And could there be an implosion down the road when ultimately China also has to transition to democracy. There may well be, and so in the long-term, India might come out ahead. So, fine, I grant you all that.

But on the other hand, you have to be also careful playing too much up that particular argument because, remember, the political regime was the same in India over the last 55 years, and the same in China. So the same authoritarian regime in China for 30 years could not produce a great deal of results, as probably on the other hand, because of the authoritarianism there were periods when it produced huge amounts of misery. And, likewise, India, actually with its democracy could not produce a great of results for many, many decades, but now it has, and so this discussion is about policies. What are the good policies that countries can adopt? Are they politically feasible? That is the next question you ask, but first you have to understand what are the right policies and then build up support for that if you are a democracy. If you are authoritarian, of course you go ahead and implement them as China does. But if you are a democracy you have to build support for them.

But if Mahatma Gandhi had sat back and said this is hard to fight the British, this is such an authoritarian regime, how do I deal with it, we would have never gotten independence. But he worked out a strategy that here is an enemy I have to fight, here is my strategy, this is what I am going to do. So the governments that want to do even within a democratic structure have to strategize and walk the mine field to ultimately bring about the reforms, and I think India has done well. It is slow so we all get kind of agitated every once in a while, but if you look at the 25 years of history, India is a changed country. In 1980 there were plenty of observers who were saying that this is a lost cause, this is a basket case. What are we going to do about a billion people? Nobody would have predicted where India is today. Nobody did predict where India is today. Things change dramatically, policies matter, and which is why we debate about these policies.

MR. SCHIFF: I would just add a few points. Certainly, I agree with Arvin and Mr. Misra that politics do help explain quite a bit. I would maybe make a few more optimistic points.

One is that despite many, many changes in government since 1991, the general direction of reform has not really changed. Even in some states that are headed by the communist parties, we see policies that are virtually indistinguishable from those being followed at the center, so I may be more optimistic about whether the growth is sustainable in a political sense.

The other thing is that there are wide variations in policies across states, and those are clearly reflected in differences in economic performance. So we do have an economic laboratory where one can see what has worked well in India and what has not, and perhaps in the end that will turn out to be a strength.

MS. TSENG: Thank you.

QUESTION: I am--with the IMF. My question is about FDI. I think we all see that FDI has been helped in China's growth a lot, but recently I read some article about that, and for China, FDI actually is a double-bladed sword. While--but on the other side, the FDI has negative impact on China's manufacturing. So at this point some scholars are saying that at this time China and other countries should be more restricted under FDI. What is the opinion from the panelists?

MS. TSENG: Let me ask both Nick and Arvin to comment on that, too, because I think FDI is now a big issue, especially opening up FDI in India. Nick?

MR. LARDY: There certainly is a very strong debate in China about the advantages of disadvantages of FDI, and the critics point to several factors to suggest that foreign direct investment has not been very helpful and perhaps has been of some disadvantage to China's economic growth. The main thing that these critics focus on, they focus on several things, but two or three things are most important. One is that they say domestic value added is low, that many of these assembly industries that foreign firms run, all the high-value parts and components come from the outside of China, they are brought in, they are assembled and exported, but there is no local value added other than labor, and that the profits are being captured by foreign companies and not by Chinese companies. So there is low value added and no profits going to Chinese companies. It is not quite so simple, but it has elements of a labor exploitation argument.

Numerically it is true that local value added is low, and, secondly, it is true that foreign firms do earn a significant amount of profit on their activities in China and it has been going up, particularly for the last 5 or 6 years. But I think when you start to look more closely, you find that local value added has been going up over time. If you take the processing activities in the early- to mid-1990s, local value added was about 15 percent. Today it is about 30 percent. I am convinced it will go higher because foreign firms are very, very market oriented. If they can buy the parts or components from a domestic manufacturer more cheaply than they can import them, the minute that happens if the quality is the came, they will start sourcing locally rather than domestically. That is what we have seen over the last decade or 15 years. We are beginning to see more and more domestic companies producing the higher-value components that go into this assembly activity.

I think you cannot look at the numbers for some early year and then decide this is a bad path, that foreign companies are capturing too much, you have to be a little bit more forward looking. And given the kind of competitive environment that China has created, I think we will find more and more what I call indigenous companies, companies without any foreign ownership will become successful producers of the parts and components that go into these assembly activities, that the domestic value added will rise, and that indigenous companies will capture significant profits and so forth.

I think in the mean time, this whole process has the tremendous advantage of employing very large numbers of people. This is a point that Arvin mentioned, to reabsorb a lot of labor, and both India and China are low-income labor surplus countries that foreign direct investment provides a way of accelerating the transformation of the labor force. I think that is a very positive development. The OECD in its most recent study says that labor productivity in the modern sector in China is 16 times what it is in agriculture.

MS. TSENG: Thank you. Arvin?

MR. PANAGARIYA: I completely with what Nick has said actually. On the average, if you look at the wages paid by the multinationals and the wages paid by the local firms in similar employment, multinationals typically pay easily 10, to 15, to 20 percent higher wages, so the exploitation thesis I do not think holds much water.

On the value added in the exports, I am a trade theorist and--theorem actually tells you that exporting higher-value added products is better than lower-value added products. You go and specialize in the particular activities in which you have competitive advantage, and always remember that exporting a thousand pair of shoes which are 100 percent domestic value added on the one hand, versus exporting 10 million pairs which each pair having only 10 percent value added, you know which one is a better deal. Then you have the issue of precisely employment, labor and all. Even though capital for domestic value added is small, you still have the domestic labor force employed there.

If you think of it, the way the Chinese, Taiwanese, and Hong Kong investors initially, and this is part of the work that Wanda has herself done at some point, they really brought in all these links to the world markets that they have developed already. They brought in good management, so this foreign investment is not just about bringing capital and exploiting the domestic labor. It is also about actually having that activity be there or be not there, at least in the initial stages. Then of course it changes and the domestic firms really catch on.

So at least in the Indian context, I would love to see lots and lots of multinationals come in, and especially in these labor-intensive manufacturing activities. Even if they come in with a very tiny domestic value added, I think it will be a big boost to the wages as well as to the employment of workers.

QUESTION: My question is the following. I wanted to know what your thoughts were on as in the cases of China and India, one is biased towards IT services and manufacturing, and the other affects TFP in the long-run. For one it seems from the numbers that Arvin gave that India has not taken advantage of all the structural changes that China has since a lot of its labor is still employed in agriculture. And in the context of leap-frogging, focusing directly on IT services, in the volume that you edited, FDI contributed 2.5 percent of TFP growth and I was wondering in the medium-term which one do you think will contribute more to TFP growth, and what are the effects of the bias to IT for India and manufacturing for China?

MS. TSENG: Jerry, do you want to first take that question on TFP, especially in the services industry in India?

MR. SCHIFF: I am not aware of any rigorous analysis of that issue yet, partially because I guess the data are not available. It seems pretty clear that even while employment in the IT sector is growing very fast, the total factor of productivity must be extremely rapid. I guess one question is to what extent there are spill-overs to the rest of the economy. I do not know the answer to that, but I suspect that so far it has been quite small and that many of these high-tech firms are enclaves with not that many links to the manufacturing sector. So that, along with the relatively poor performance in FDI in general relative to China, has some negative implications for total factory productivity growth, but this is kind of conjecture on my part, I think.

MR. LARDY: Let me just make one comment on the China-India comparison, and that is the share of the labor force employed in agriculture, the difference between China and India, is actually quite small. China is about 50 percent. I think, Arvin, you mentioned 50 versus 60.

MR. PANAGARIYA: Sixty.

MR. LARDY: Sixty versus fifty, so they are not really very different. It is a large number. China has come down. It has gone from 70 to 50, roughly, the stylized numbers, over the last 25 years. But I think the biggest difference is employment in services in China is relatively smaller than in India, so they have more people employed in manufacturing where productivity is much higher than it is for most services.

I may be wrong, but I think it is a myth that the service sector is so productive. A very small part of it is, but a lot of services in any economy are low productivity and low potential for productivity growth, restaurants, personal services, hair cuts and things like that. My impression is that if you look at the mass of India's service sector, that is what most of it is. It is not business process outsourcing and software where there is enormous potential for productivity growth.

MS. TSENG: Arvin?

MR. PANAGARIYA: I will just repeat. I want to be two-legged, so both industry, meaning manufacturing and services, have to go hand in hand. So from a policy perspective, which one has a higher productivity contribution is kind of a moot question to me. We need to break the bottlenecks for both sectors.

I agree with what Nick just said which is why the reason I have been saying manufacturing is very important is precisely because most of the services that we are talking about here are not these high-productivity services. If you look at things like telecommunications, banking, insurance, IT, they are together probably is less than 10 percent of Indian GDP, all of that taken together, and I am being generous I am pretty sure.

So most of the rest of the services, 40 percent or so, is trade, construction, the fellow who sits on the road and makes the tea for you when you get out--things like that, so it is really not a hugely productive sector.

QUESTION: [Off mike.]

MR. PANAGARIYA: I had pointed out actually earlier two key factors that I think are the bottlenecks. First, you need to realize that the small-scale industries' reservation--it is still not ended actually. There are still a couple of hundred products or maybe three-hundred products still left on that list. But if you go 5 years ago or even 3 years ago, all these products that China exports to the U.S., the toys, the footwear, the apparel, you name it, everything was on the small-scale industries' reservation list. What that meant was that you if you wanted to produce that product, you could produce it only on a scale that involved an investment of less than $2 or $3 million, some ridiculously low limit, and that was that--none of the scale that China has had you could have.

Most of these labor-intensive products are off that list now, but still I think, and this is a big debate, there is no unanimity on this, there is no consensus on the view, but my take is that the labor laws in India in general are just very unfriendly to the businessman. One particular provision that is out there is that if you are a firm with 100 workers or more, you cannot fire a worker. Even if you close down the factory, you have to use your profits from elsewhere from your other activities to actually sustain the labor force and pay them the wages. If you want to be labor intensive, you do not want to enter that activity in the first place so that you do not get into this situation then of having to pay the workers.

It also has a very detrimental effect on the willingness of the workers to work. They know that they cannot be fired, and, therefore, a lot of the companies end up actually hiring a parallel labor force which is mostly casual workers or contract workers who do most of the work.

I pointed out some of these big exports from India that are coming. In India, textiles does better than apparel. Why should that be? Because textiles is more capital intensive, you deal less with workers, in apparel you have to deal with workers. In China under a single roof you have thousands of workers actually producing apparel. In India you have tailor shops which have maybe 50 tailors in one establishment, and that is big for India. So those are the kinds of things. This is not just this particular labor law, but the others also in general even for the smaller enterprises to actually fire workers is a damn tough thing to do.

QUESTION: I had an energy-related question. I am not sure if this is beyond the scope of today's discussion or not. With oil prices continuing to go higher, I would be curious at what point do the higher energy prices in China particularly, and maybe even in India, curtail the sustainment of the high growth rate right now. Specifically, I think earlier in the year the IEA lowered their demand forecast because subsidies were pulled back in some of the other Eastern Asia countries and it seems like there was a much more elastic demand there when those subsidies come off, and I would be curious about the sustainment of high growth in China when the subsidies come off.

MR. LARDY: I am of the view that rising prices for raw materials, energy and so forth, will not be a major detriment to continued rapid economic growth in China, and I say that for a couple of reasons. First of all, yes, they are very dependent and have a growing dependence on imported oil, but it is still only about 40 or 50 percent of the total and oil is only about, I cannot remember exactly, 15 to 20 percent of their total energy requirements. China has huge quantities of coal, 75 percent of all their energy demand is met by coal, and so oil is not that big a factor in their overall economy.

Secondly, more from a macro point of view, China, for the most recent year I have seen the data which is 2004, was only spending 4 percent of GDP on all imported energy sources, and minerals and metals. This is a pretty small amount. It looks roughly the same as what you would have seen in Korea, Taiwan or Japan in the late-1960s or early-1970s before the oil price shocks, so China already in 2004 was at the level of those countries. I think it could go up and China can afford to pay a lot more.

MS. TSENG: Jerry, do you want to comment on the impact of oil prices on India?

MR. SCHIFF: Sure. I would say so far in the past year or year-and-a-half, the impact has been I think less than we had initially anticipated partly because a significant share of the increase has not been passed along and has not been felt by the domestic economy, and, instead, has been borne as a fiscal or quasi-fiscal cost.

India is also not yet that energy intensive, and here maybe their services orientation is actually a plus at least in the short-term. Clearly, the ability to buffer the domestic economy from increases is becoming smaller and smaller, and we do anticipate there will be some additional pass-through. I do expect it would have some modest impact on the economy maybe directly, and also indirectly if it feeds into inflation and requires some further tightening of monetary policy. I do not think we are anticipating a dramatic slowdown, but certainly it would shave off some percentage points of potential growth in India.

MS. MULLEN: My name is Mary Mullen [ph], and I wanted to briefly ask you a question about the human rights of the workers in both countries. I recently saw a "Frontline" program that was explaining how China was preparing for the 2008 Olympics, how it was recruiting people from the countryside but not paying them, and these people were committing suicide and forth. There were tremendous problems. Does business, especially foreign business, have any say as to the human rights of the workers in either country? I was wondering if you could respond to any of that.

MR. LARDY: I think the short answer is that in general, foreign businesses do not have much influence or say on these matters, although as Arvin pointed out, in India and it is also true in China, foreign firms tend to pay higher wages, they tend to have safer working conditions, and other terms of employment are invariably better than the average of most Chinese workers. Particularly the big multinationals that go to China bring with them their global standards on safety and exposure to bad things, whether it is chemicals or whatever. So workers tend to fare better in foreign plants, particularly plans that are run by OECD type countries than anywhere else.

In terms of the abuse, the biggest abuses are in contract workers, mostly in the construction sector, mostly people coming from the countryside on a temporary basis who work on very large construction projects and frequently are exploited, they do not get their wages paid or they get their wages paid with only a substantial delay, and there are other problems associated with them. So there are huge, huge problems of labor abuse, exploitation, whatever you want to call it, but they are preponderantly problems of indigenous rather than foreign firms.

MS. MULLEN: And in India and child labor, I know there are laws against it and also the human rights. I know that you said that the workers cannot be fired, but do they have any other rights besides that? I know that that is a hinderance you assigned to their development, but is there any way of changing labor laws or giving labor some incentives that would help in India?

MR. PANAGARIYA: Do not be misled. It is organized labor that has all those rights. It is the unorganized labor like in the U.S. who do not have that many rights either. And the abuses, of course, as in the U.S., if you look at the Human Rights Watch report that was done 3 years ago, are rampant here, and so also in other countries.

Child labor, of course, I have no problem with that until poverty is reduced if the option is to send the children to actually go out and commit crimes versus--you do not have schools out there that can actually have all the children. You have one estimate that one of the NGOs in India puts out is that it requires about $20 billion per year for several years to come if all the children are to be sent to school. So would you rather have them working and at least doing some productive activity and helping their poor parents make their ends meet, or just send them out so that some of them will actually turn to prostitution and others will turn to criminal activity? That is the kind of tradeoff you are facing. It is a very different way of looking at it.

You know that the experience that haka [ph], meaning Bangladesh and Nepal had in the early-1990s that the U.S. was threatening to cut off their exports, not the U.S. government, but the NGOs in the U.S. were carrying out this movement to put an end to the exports that are coming out of Bangladesh into the U.S. markets. For Bangladesh, more than 50 percent of the export revenues from the apparel exports. They are very sensitive to that so they immediately actually laid off everybody who was below 16 years of age from the factories, and in the end a lot of these children ended up in employment that was much worse than in the textiles and clothing industry, and some of them ended up in prostitution. In the end, UNICEF and ILO had to be brought.

The point is that you have to have a proper architecture, you have to have educational institutions built up as you go, and you have income levels that are such that the parents can themselves afford to send the children to schools. It is not a matter of children working versus children having a decent education. Also it is an issue of parents actually being able to make their ends meet. If the option is child work versus starvation, I think child work is what most parents choose. It is not out of goodness that the parents of the poor countries do not love their children enough and, therefore, they send them to work.

In the Indian context, of course, the biggest thing is that there is an incredibly vibrant NGO movement that is out there, so any kind of abuses actually get checked reasonably quickly. There are 2 million NGOs by the accounts that I have seen in "The Economist." It is a vibrant democracy, and so you have checks and balances. India does not have the kind of China does actually in this respect where there are no NGOs, the NGOs that would actually raise their voices and the land grabs can happen. You do not hear of land grabs in India simply because you have the NGOs and a vibrant democracy so there are processes to which you can turn. And the judicial system generally works. It is slow because the courts are backed up and there are lots of usual problems that developing countries have, but certainly it is an independent judiciary that is at work. So there are a lot of good things.

MS. TSENG: One last question.

MR. MORRESY: I am Dr. Morresy [ph] from the University of Maryland University College. I will compliment your talks. They were terrific.

I am interested in what you might say about the trade patterns between these two countries, particularly as it portends for opportunities in the future. China is so large and so dominant. Is it a competitive threat in every way? Or are there complementarities between the two countries? Language, education, technology and so forth, does that lead to perhaps the hope of maybe a more symbiotic relationship between the two countries which are apparently trying to work together a closer relationship and they comprise 40 percent of our world? Thank you.

MS. TSENG: I'll ask both Nick and Arvin to respond on this question on India-China economic relations.

MR. LARDY: This is not something I have studied in any detail at all, so I will give you my impression. My impression is, 4 to 5 years ago, maybe even as recently as 3 years ago, Indian manufacturers were terrified that China was a huge competitive threat. I think that has changed quite substantially over the last couple of years. Maybe there are still some sectors where there is a lot of competition, but China is the third-biggest importer in the world, they are buying lots of things from India, iron ore, resources, other kinds of goods, so I think India sees things in a somewhat more balanced picture now that there are opportunities of selling to China. Of course, there is competition in some sectors, so I think now the Indian government is much more interested in pursuing policies that will increase trade and economic relations in general. I should preface all of this by saying the actual level of bilateral trade between the two countries is fairly small.

MR. PANAGARIYA: Trade actually between these two countries has grown extremely rapidly, and trade flows have actually now gone to about $12 to $13 billion which from the Chinese perspective, of course, is small, but from the Indian perspective is quite large, a China probably is the second-highest destination of Indian goods. So for India actually, China has become an important market.

Those of you who have followed this debate on multilateralism versus regionalism would know that I have been very much on the multilateralist side of it and have written critically for the last more than 10 years. But in this case actually I went out and at least wrote a press piece calling for actually having an India-China free trade agreement. The genesis of that was that India has been doing these agreements with Sri Lanka and then talking with Bangladesh or Nepal, SAFTA, the South Asian Free Trade Area and all. So I said if you really want to seriously pursue this regional route, so and sign one with China. I think if that were to happen, that could actually change a lot of the equation. You have two large countries in Asia. If these two large countries come together and have a common market, the rest of Asia I think very quickly will fall into place meaning that they would very quickly run to join. In the way that everybody is rushing to sign off with NAFTA and everybody wants to get entry into the European Union, if you could actually get these two countries to do a free trade area agreement, I think Asia will actually very quickly join in.

It is not something I like investment I basically am a multilateralist and this kind of discriminatory blocs are not the way to go, but if in the end if you are going to do these tiny little things which are much more trade diversionary, from the India perspective certainly this scope for trade creation is a hell of a lot more when you go with a superefficient supplier of the products. On the other hand, my personal view is that India is quite competitive actually. It can easily withstand competition with China. In a way it has actually, and two-way trade has been growing quite rapidly. So I think that is something to watch out.

MS. TSENG: Thank you very much. I would like to thank all of you for coming to our Book Forum and to thank our speakers, Arvin, Nick, and Jerry. I hope that you will come for our next forum when we publish our second book on China and India, certainly a very rich field for further discussions. Thank you very much.

[Applause.]

[END OF RECORDED SEGMENT.]



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