India and China should join hands to grow together: Justin Yifu Lin

At this stage you have an abundant supply of young laborers. And competitively, the wage rate in India is less than high medium income countries

Justin Yifu Lin is a professor of economics at Peking University and former chief economist at the World Bank. During his recent visit to Delhi to attend the Kautilya Economic Conclave, Lin spoke to Asit Ranjan Mishra about the power play between the two Asian giants — India and China — and Beijing’s anti-competitive practices. Edited excerpts:

Q: What are the lessons India can learn from China's economic transformation?

We can learn many lessons from each other. We can also learn from India. China has been growing so fast. China has been able to eliminate poverty. That is the common aspiration between China and India. China did not grow dynamically before the transition to a market economy in 1978. At that time, India’s per capita GDP was about 30 per cent higher than China’s. And now the per capita GDP in China is about five times that of India. So, that means China has grown much faster. The reason China was able to do that was because Beijing changed from an inward-looking country to an outward-looking country. To transit from a planned economy to a market economy, China adopted a very pragmatic approach. China continued to provide some necessary support to old sectors, but the Chinese government liberalized entry to new sectors, and the new sectors were aligned with China's competitive advantages. At that time, we were poor, wages were low, and that's how we developed very intensive manufacturing, by attracting foreign direct investment (FDI), by encouraging domestic investment. The government actively promoted investment, built up infrastructure like industrial parks, and special economic zones (SEZs) to facilitate lots of sectors. That was the reason why China was able to grow so fast by relying on our competitive advantages in a very pragmatic manner.

Q: So, what are the comparative advantages that India can exploit?

At this stage, you have an abundant supply of young labourers. And competitively, the wage rate in India is less than high-medium income countries. That should be your advantage. And if you can develop labour-intensive manufacturing in the formal sectors, their productivity will be high. Their wage rate can be higher than the informal sectors, and then that will be the best way to reduce poverty.

Q: Does that mean that India's focus on some cutting-edge technology sectors like semiconductor is misplaced? Do you think we should only focus on labour-intensive sectors?

That's an aspiration you want to achieve some day. But first, the investment in those areas are very capital-intensive, and overall capital is limited in India. If you allocate capital to those sectors, you will have less capital to invest in labour-intensive sectors. Secondly, those sectors do not generate employment, and what you need the most is jobs for making abundant labour become an asset instead of a liability for development. Because if you do not provide jobs to the young people, it can create a headache, and they can only go to the informal sectors. But the productivity in the informal sectors is very low. Their wage rate will not be high, and their contribution to the growth will be limited.

Q: India-China relationship has deteriorated in the last few years. How do you see the relationship unfolding in coming years?

We are neighbours, and we will be neighbours, no matter whether we like it or not. So, it's better to be good neighbours, right? I know there are some kinds of frictions. We may have some territorial disputes, but China does not have territorial ambition, and I think it's very important to distinguish between disputes and ambition. To resolve a dispute, the best way is to sit down and find a solution, which is agreeable to both sides. And other than that, I don't think we have any direct conflict. Certainly, we are all developing countries, and we all have aspirations to grow to benefit our people. We have many complementarities to each other, so it's better to join hands to grow together.

Q: But India and many other countries will dispute that China doesn't have territorial ambitions. India will consider that China's claim on Arunachal Pradesh is a territorial ambition. Other Southeast Asian countries say your claim on the South China Sea is territorial ambition. Isn’t it?

That's not true, because if you look into the South China Sea, after the Second World War (WWII), the US, the UK, and the OECD countries, they all agreed China has claims on those islands. Now it became a dispute only because of the rivalry between the great powers. China engaged in five wars after WWII, including one with India. But every time, after the end of the war, China withdrew all the troops. You cannot see that in other countries.

Q: India and several developed countries have often blamed China for heavily subsidizing production and dumping of goods. How do you see it?

That’s unfair. For example, car exports. They say that we have overcapacity, and the overcapacity was subsidized by the Chinese government. But let's look into the facts. First, China produced 30 million cars and it only exported 5 million, which is only 16 per cent. Germany produces 5 million cars, and exports 4 million, that is 78 per cent. Which country has over capacity? Secondly, China is not rich enough to subsidise the consumption of the importing country. We do not have the intention to subsidise car consumption in high-income countries.

Q: New Delhi has also often blamed China for putting non-trade barriers against exports from India. The processes are very complicated in China for anybody from India to export. What’s your take?

If you want to export to China, you certainly need to produce products that are high quality and more competitive than Chinese products. Otherwise, we will not import. Certainly you need to compete. Just like when we want to export to the US, we have to compete with the US producers and producers of other countries. That's the market principle. But China does not intend to erect barriers for import. China is the only country to have an import exposition each year. We encourage foreign producers to hold exhibitions in China in order to inform the Chinese customers what is available in other countries. So, we don't have the barrier. But certainly you need to compete in the Chinese market. Just like when we come to India, we have to compete in the Indian market.

Q: China's economy is slowing down despite the recent government measures. What impact do you think it could have on India and the rest of the world?

Well, it's a part of the global growth slowing down. China is the largest exporting country. When the developed economies slow down, China also slows down, because we are in a globalised world. The slowdown is partly domestic and partly global. China grew at about 5.2 per cent last year. China contributed about 30 per cent to the global growth. So, again, China still is a driver of global growth, despite the slowdown.