Ajay Shah: India & China - The gap is narrowing

Recent perceptions of the two countries may have something to do with the narrowing of the gap in FDI flows.

There is considerable interest in India on the subject of how to increase government effectiveness, and how to improve governance. The World Bank has released an update on its cross-country governance measurement effort led by Kaufmann, Kraay and Mastruzzi. To a significant extent, these numbers are drawn from surveys. They reflect some mixture of both perception and reality. A comparison of India and China in this data is revealing.

The table shows percentiles for each of the six measures, for both India and China for 1996 and 2005. For example, a value of "61" means that the country was ahead of 61 per cent of the countries of the world. 

Measure	India		China
	1996	2005	1996	2005
Voice and accountability	52.2	58.2	4.6	4.8
Political stability	14.9	22.1	34.6	33.2
Government effectiveness	50.7	54	66.8	55.5
Regulatory quality	44.4	48.3	54.1	46.3
Rule of law	61	57.1	48.1	45.2
Control of corruption	40.3	52.9	56.3	37.9
Simple average	43.9	48.8	44.1	37.2

India has improved significantly on all dimensions other than the "Rule of law". The Chinese score was flat or worsened on all the measures. The most important difference which leaps out of the table, of course, is the strength of India on "Voice and accountability", where the Chinese Communist Party tolerates none.

Traditionally, there has been a sense that Chinese government effectiveness was superior to that of India. That was certainly how surveys saw things in 1996: China was at 66.8 while India was at 50.7. By 2005, perceptions had shifted""India had moved slightly to 54 and China had dropped sharply to 55.5. A closer look at this time-series shows that India achieved a high of 57.8 in 2003, and has dropped after that.

Did governance in India improve significantly between 1996 and 2005? In many areas of economic governance, looking back at India of 1996 suggests that far-reaching changes have taken place. In 1996, telecom was dominated by the DoT. There was no NHDP. The growth of private ports or airports had not happened. The NSE and BSE had begun electronic trading but there was "badla", equity derivatives trading was banned, and there was no NSDL. The capital controls were much worse. The fiscal problem was alive and well: there was no FRBM and the 12th Finance Commission had not yet blocked the growth of deficits at state level. The reforms of tax policy and tax administration, which have finally got India into a phase of high growth of tax revenues, had not yet begun. Tariffs were high, and the surge of manufacturing competitiveness had yet to come about. There was no New Pension System.

Economic governance in India in 2005 is, of course, deeply flawed; but there is an unmistakable sense of progress when compared with 1996. However, the most important foundation of governance is law and order and the judiciary. In that area, it looks like India has made little progress between 1996 and 2005.

The "Political Stability and Absence of Violence" measure pertains to "perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism". This survey evidence, which reflects the views of worldwide experts and practitioners, places India's political stability at 22.1 and China's at 33.2. Most people in India are very comfortable about India's "political stability". The World Bank's measurement suggests that India does not look so stable to the external observer, and presumably penalises India for domestic violence and terrorism, which includes the breakdown of law and order in many districts.

In the key areas of education and health, there has been no progress in India between 1996 and 2005. On issues like teacher absenteeism, or the flight from public schools by parents of all income classes, or the breakdown of population-wide health programmes such as immunisation or sanitation, India has lost ground in the last decade. The gaze of politicians continues to be on welfare programmes, where the attempt is to use public resources to give out dole to favoured constituencies. The re-engineering of the state to shift focus to effectively delivering public goods""which benefit everyone and not narrow sections of the population""has not yet begun.

The puzzle about India is the mismatch between a high score on Voice and accountability, which has not yet translated into a state which is focused on providing public goods. Perhaps there are threshold effects; perhaps when India gets up from the 58.2 percentile to a 75th percentile, accountability through the political system will then manage to rein in the state, and force it to deliver on public goods.

On a related note is the issue of corruption: where India appears to have made substantial progress (from 40.3 to 52.9), at a time when China has worsened from 56.3 to 37.9. Once again, there may be threshold effects here: perhaps Indian-style Voice and accountability is at a point where improvements in corruption are starting to come about. The processes of political accountability are now able to identify and block corruption, but are not yet strong enough to force the State to shift away from welfare programmes and focus on public goods.

Broadly speaking, in 1996, China looked better than India on all the measures other than "voice and accountability" and the "rule of law". In 2005, the picture changed a bit. The simple average of the six measures was 44.1 for China in 1996 vs. 43.9 for India. In 2005 this was 37.2 for China vs. 48.8 for India. This partly reflects the relative progress of the two countries but it also reflects shifting perceptions about these questions in the eyes of the outside world.

The Chinese are not happy at the message this is putting out to the world. Nine of the 24 executive directors of the World Bank have written to its new president, Robert Zoellick, challenging the release of "controversial indicators". Such unhappiness is, of course, futile, for even if the World Bank is pressured to stop this exercise, the key people will be able to carry this work to a university and find funding to sustain it.

Even if the World Bank's measurement of governance indicators purely reflects perceptions and not reality, such measurement is important, for India's ability to participate in globalisation is critically linked to perceptions of the country in the eyes of global firms and governments. As an example, these shifting perceptions of India versus China may have something to do with the narrowing of the gap between the two countries in receiving FDI in recent years.