Economist explains why India can never grow like China

Summary

This video explores why China's economy surged ahead of India's post-1980s despite similar starting points. It delves into China's effective use of basic education, investment-led growth, and foreign direct investment, contrasting it with India's challenges due to understaffed local governments, the caste system, and its status as a precocious democracy. The script suggests India may not replicate China's growth but remains optimistic about its potential for a unique, albeit slower, economic rise.

Takeaways

• 📈 China's economy grew significantly faster than India's after the 1980s, becoming roughly five times larger due to various economic reforms and strategies.
• 🏭 China attracted numerous foreign factories in the 80s and 90s, which required a workforce with at least basic education, enabling a transition from an agricultural to a manufacturing powerhouse.
• 🎓 The superior basic education level of Chinese workers in the late 1970s was a key factor that enabled them to follow instructions in factories and later start their own companies.
• 💼 China's economic liberalization in the 1980s allowed private entrepreneurs and foreign firms to operate, which was a necessary but not sufficient condition for its economic miracle.
• 📊 China followed an investment-led growth model, directing credit to infrastructure and manufacturing, which was crucial for its economic transformation.
• 💡 India attempted a similar investment-led growth model but faced challenges due to unproductive spending by well-connected tycoons, leading to a heavily indebted banking system.
• 🌐 India's failure to attract a significant amount of Foreign Direct Investment (FDI) compared to China hindered its ability to turbocharge local knowledge and obtain necessary foreign currency for imports.
• 🏙️ The functioning of local governments in China was more conducive to economic growth, with incentives aligned towards attracting investment and improving infrastructure.
• 🤝 India's local governments were understaffed and faced challenges due to the caste system and being part of a precocious democracy, which affected their ability to implement reforms and attract investment.
• 🔄 Despite these challenges, India has made progress in education, infrastructure, and digital advancements, positioning it as a potential alternative to China for foreign companies.
• 🚀 There is optimism for India's economy in the long term, with the potential for a unique, albeit slower and messier, growth path compared to China's rapid economic miracle.

Q & A

Why did China's economy grow much faster than India's in the 1980s and 1990s?

China's economy grew faster due to a combination of factors including better basic education for workers, attracting foreign factories, and implementing an investment-led growth model with directed credit to infrastructure and manufacturing.

What role did basic education play in China's economic growth?

Basic education was crucial for Chinese workers to follow instructions in factories and later start their own companies, which helped propel China's economy to the next level.

How did China's investment-led growth model contribute to its economic boom?

The investment-led growth model involved massive investments in infrastructure and productive assets, which were funded through directed credit from state-owned banks, fueling rapid economic growth.

Why did India fail to attract the same level of foreign direct investment (FDI) as China?

India struggled to attract FDI due to understaffed local governments, a complex regulatory environment, and local officials who did not have the same incentives to promote investment as their Chinese counterparts.

What impact did Professor Raghuram Rajan have on India's economy?

Professor Raghuram Rajan, as the head of India's central bank, helped clean up bad debts and contributed to the recovery of India's banking system, improving the investment climate.

How did the caste system in India affect the functioning of local governments?

The caste system influenced local government functioning by affecting incentives, potentially leading to unfilled vacancies due to caste considerations, and causing friction in implementing central government policies.

What is the term 'precocious democracy' and how does it relate to India?

A 'precocious democracy' is a country that became democratic before it was perhaps ready, leading to potential dysfunction in public services and governance. In India, this has resulted in a reluctance to raise taxes, a preference for visible public goods, and a focus on rewarding specific voter groups rather than investing in public services.

What are some of the reasons for optimism regarding India's future economic growth?

Reasons for optimism include improvements in basic education, upgrades in infrastructure, the potential to attract more FDI as an alternative to China, and the possibility of closer cooperation between the central and local governments.

How does the script suggest India could potentially achieve its own growth miracle?

The script suggests that while India may not replicate China's growth model, it could achieve its own unique growth miracle through a focus on improving local government capabilities, enhancing the investment climate, and leveraging its democratic institutions.

What is the role of foreign companies in the context of India's potential economic growth?

Foreign companies play a significant role as they are increasingly looking for alternatives to China, and India, with its large market and improving infrastructure, is well-positioned to attract these companies, potentially boosting its economy.

How does the script relate the potential for improvement in India's local government capabilities to its economic growth?

The script suggests that improvements in local government capabilities, such as better staffing and more effective implementation of programs, could lead to better public services and an enhanced environment for economic growth.

Outlines

00:00

📈 China's Economic Growth and India's Potential

The script discusses the historical comparison between China's and India's economies, highlighting how China's rapid economic growth in the 1980s and 90s significantly outpaced India's. It raises the question of whether India could replicate China's growth miracle, especially with China's economy slowing down and Western companies looking to relocate. The video aims to provide insights from renowned economists on why China's economy took off post-liberal reforms while India's did not, and the unique challenges India faces in its political structure that hinder its growth potential.

05:02

🎓 Education and Investment as Drivers of Economic Growth

This paragraph delves into the importance of basic education and investment-led growth models as key factors in China's economic transformation. It explains how China's better-educated workforce in the late 1970s facilitated the transition from an agricultural to a manufacturing society, attracting foreign factories and enabling workers to later start their own companies. The script also discusses the role of state interventions in directing credit to productive sectors and the challenges India faced in implementing a similar model, including issues with its banking system and corporate debt.

10:05

🏭 The Role of Foreign Direct Investment in Economic Development

The script examines the significance of foreign direct investment (FDI) in economic growth, using China's success in attracting FDI as a case study. It contrasts this with India's struggle to attract a similar level of investment, attributing this to differences in local government functionality and incentives. The paragraph also explores how China's local governments were incentivized to promote investment and streamline processes for foreign investors, unlike in India where local governments often hindered such efforts due to complex regulations and lack of capacity.

15:07

🏛 Dysfunctional Local Governments: A Barrier to Growth

This section of the script identifies the understaffing and inefficiency of India's local governments as a major impediment to economic growth. It discusses the impact of the caste system and the structure of local governance in India, which has resulted in a lack of capacity and incentives at the local level to invest in education, infrastructure, and to attract FDI. The script also touches on the historical reasons for this situation and how it contrasts with China's more centralized and effective local governance.

20:09

🗳️ Democracy and Its Impact on Local Governance

The script explores the concept of 'precocious democracy' in India, suggesting that India's early adoption of democracy has had mixed effects on its economic development. It outlines how local governments in India may be trapped in a cycle of poor service delivery and low tax collection, exacerbated by caste and religious divisions among elected officials. The paragraph also points out that India's democracy has led to a preference for visible, short-term public goods over long-term investments in education and infrastructure.

💡 Optimism for India's Economic Future

Concluding the script, this paragraph expresses optimism for India's economic future despite the challenges outlined in the previous sections. It acknowledges improvements in education and infrastructure and the potential for India to attract FDI as an alternative to China. The script suggests that closer cooperation between the central and local governments in a more democratic context could lead India towards a unique, albeit slower, growth path, similar to that of the United States. It also highlights the gradual improvement in local government capabilities and the importance of basic education for India's long-term growth prospects.

Keywords

💡Economic Growth

Economic growth refers to the increase in the production of goods and services of an economy over a period of time. It is a central theme in the video, as it discusses the comparative growth trajectories of China and India since the 1980s. The script mentions China's rapid economic growth due to liberal reforms and contrasts it with India's slower growth, highlighting the divergence in their economic paths.

💡Liberalization

Liberalization in an economic context means the relaxation of government controls on the economy, allowing for more private enterprise and foreign investment. The video script discusses how both China and India underwent liberalization in the 80s and 90s, but China's strategy was more successful in attracting foreign factories and investment, contributing to its economic boom.

💡Infrastructure

Infrastructure encompasses the basic physical and organizational structures needed for the operation of a society or enterprise, such as roads, bridges, and factories. The script explains that China's investment-led growth model focused on building infrastructure to support economic development, while India struggled to achieve the same level of investment and growth in this area.

💡Foreign Direct Investment (FDI)

Foreign Direct Investment is an investment made by a firm or individual in one country into business interests located in another country. The video emphasizes the importance of FDI in China's growth, as it attracted manufacturing and brought in foreign money for crucial imports, while India was less successful in attracting FDI due to various systemic issues.

💡Education

Education is the process of acquiring knowledge, skills, values, and habits. The video script notes that China had a better level of basic education in the late 1970s, which was a key factor in its ability to transition from an agricultural society to a manufacturing powerhouse, in contrast to India's situation.

💡Caste System

The caste system is a social stratification system that divides people into a hierarchy of social categories based on their birth. The script discusses how the caste system in India has had a negative impact on local government functionality and economic development, contributing to understaffing and misaligned incentives.

💡Local Governments

Local governments are administrative authorities that manage the affairs of a particular locality or region. The video script points out that China's local governments had the right incentives and capacity to stimulate local investment and FDI, unlike India's local governments, which were understaffed and influenced by the caste system and democratic politics.

💡Investment-Led Growth Model

The investment-led growth model is an economic strategy where a country focuses on investing heavily in infrastructure and productive assets to stimulate rapid economic growth. The script explains that China adopted this model successfully, while India did not manage to replicate it effectively due to various challenges.

💡Decentralization

Decentralization refers to the distribution of powers and responsibilities from a central authority to local authorities. The video script mentions that both China and India have decentralized systems, but the effectiveness of local governments in implementing economic reforms varied greatly between the two countries.

💡Precocious Democracy

A precocious democracy is a political system where a country has adopted democratic practices before it may have been fully ready for them. The script suggests that India's status as a precocious democracy has contributed to the dysfunction of its local governments and the slower pace of economic reforms and growth.

💡Democracy

Democracy is a system of government where power is vested in the people, who exercise it directly or through elected representatives. The video script contrasts the democratic processes in India with those in China, suggesting that while democracy can be beneficial, India's specific circumstances have posed challenges to its economic development.

Highlights

China's economy grew to be roughly five times the size of India's after the 1980s despite starting at similar sizes.

China's economy is slowing down, prompting Western companies to seek alternative manufacturing locations, possibly benefiting India.

India's potential to replicate China's growth miracle is a topic of global interest.

The video summarizes key insights from Professor Raghuram Rajan and Professor Davesh Kapur on China's economic growth and India's challenges.

China's growth took off after the liberal reforms of the 80s and 90s, while India's did not, due to differences in implementation.

India's political structure, with understaffed local governments catering to local interests, hinders growth similar to China's.

Chinese workers in the late 1970s had a better level of basic education, which was crucial for the transition to a manufacturing powerhouse.

Basic education enabled Chinese workers to follow instructions in factories and later start their own companies.

China's economic liberalization in the 1980s attracted foreign factories and allowed private entrepreneurship.

India's liberalization in the 1990s and 2000s did not yield the same growth rates as China's reforms.

China followed an investment-led growth model, investing heavily in infrastructure and productive assets.

India's state banking system lent to well-connected tycoons, but the money was not spent productively, leading to debt issues.

China attracted foreign direct investment (FDI) by creating an environment conducive to foreign factories.

India struggled to attract FDI due to local government dysfunction and complicated regulations.

China's local governments had incentives to grow their local economy and were part of the Chinese Communist Party's promotion system.

India's local governments are understaffed and do not have the same incentives to promote investment and FDI as China's.

India's caste system and its impact on local government functionality is a significant barrier to growth.

India's status as a precocious democracy, becoming democratic before it was ready, contributes to local government dysfunction.

Despite the challenges, there are reasons to be optimistic about India's economy, including improvements in education, infrastructure, and digital advancements.

India's potential to attract FDI is seen as a pathway for growth, especially with foreign companies seeking alternatives to China.

The election of a more democratic coalition government in India could lead to closer cooperation with local governments and reforms.

Local government capabilities in India are slowly improving, as seen in the implementation of various programs like bank accounts and sewage systems.

While a China-style growth miracle is not expected soon, there is optimism for India's potential for a unique, slower, but potentially more successful growth path.

Transcripts

This graph shows that while in the 1980s China's and India's economies

started at roughly the same size.

China soon left India in the dust, becoming roughly five times its size.

However, now, with China's economy slowing down and Western

companies seeking to move their factories elsewhere.

Could it be that it is now India's turn to replicate China's growth miracle?

That is the question that has been keeping up both India

and the world lately.

However, to avoid cliche answers like it needs to reduce corruption,

liberalize its economy even more, or increase education and infrastructure.

In this video, I've turned to two of India's most eminent economists

its central bank president, Professor Raghuram Rajan and Johns Hopkins

Professor Davesh Kapur, and summarized their vast bodies of research

into key insights about exactly one why China's

economy took off after the liberal reforms of the 80s and 90s.

While India did not.

Why China's growth path will never work for India.

And finally,

whether or not India will soon be able to pull off its own growth miracle.

And I'm happy

to report that in their research, I found some really surprising insights

about how India's real problem is not that it didn't know what to do,

but rather that it failed to properly implement China's strategy

due to its own unique political structure, in which understaffed local governments

often cater to local interests rather than to the public, a structure

that means that while there are other growth models for India to follow,

the country could not and still can never grow like China.

But to see why that is the case,

we first need to answer why China outgrew India in the first place.

In other words, what caused this massive divergence between

India and China in the 1990s and early 2000?

To answer that question, I first turned to the work of Professor Raghuram

Rajan, who has highlighted that already in the late 1970s,

Chinese workers had a better level of basic education

than their Indian counterparts, a better level of basic education

enables two key elements of how China transitioned from an agricultural society

to the manufacturing powerhouse that it is today.

The first element is that to supercharge economic growth, China

started attracting

a lot of foreign factories in the 80s and 90s, factories that typically required

at least a basic education from their workers so that they could follow

simple instructions.

The second element is that a basic education, especially in accounting,

enabled a lot of these workers to then later start their own companies,

which propelled China's economy to the next level in the 2000s.

But given that there were plenty of countries

with a better level of basic education in China in the late 1970s,

better education alone cannot explain why China was able to attract

foreign factories and enable its workers to start their own factories.

Well, India was not.

Indeed, as I discussed in my video about China's economic miracle.

Besides being able to attract

foreign factories to learn from them, there are two other key ingredients

that allowed China to transform its economy

into the manufacturing superpower that it is today.

The first and most often discussed ingredient is that in the 1980s, communist

China liberalized its economy both by allowing private entrepreneurs

to start companies and by allowing foreign firms to come into China.

In my opinion, this was indeed a necessary condition

for the Chinese economic miracle to happen.

But given that there are plenty of more, liberalized economies

cannot explain China's rapid growth by itself.

India is a prime example of that.

Following China, India

also carefully liberalized its socialist economy in the 1990s,

and this was then followed by more radical liberalization in the 2000.

But while India's economy certainly grew faster after these reforms,

it never quite reached China's double digit growth numbers.

Of course, you could

then argue that India just didn't liberalize enough, and that may be true,

but China is also still a highly restrictive place to do business

today, scoring very similar points to India when we compare

the two countries, for example, using the Index of Economic Freedom.

Therefore, to explain this massive divergence between the two countries,

I believe that we need to talk about the second and third

ingredient of the Chinese growth miracle ingredients that India

was never able to reproduce despite the best intentions.

Okay, the second key ingredient of the Chinese growth

miracle is that it followed what Peking University professor

Michael Pettis calls the investment led growth model.

This is the growth model that was at the heart of miracle growth in countries

like the United States, Germany and Japan and then was later adopted by China.

Essentially, the idea of investment led growth is that in poor countries

like China and India in the 1980s, they have a huge underinvestment problem

while they have a population that could potentially be very productive.

They are held back by a lack of

infrastructure, knowledge and productive assets such as machinery.

So to grow at a miracle level speed, a poor country simply needs to invest

at miracle level speed in infrastructure and other productive assets.

But where does that money come from?

You know, in a poor country, perhaps surprisingly for a non economist,

a lack of money in even the poorest countries is never the real problem.

After all, in a fiat money system, local money is infinitely available

since a central bank can just print as much as it likes and use that money

to spur unemployed workers into action.

However, because the central government of these massive countries alone

cannot really hope to spend all of that money productively to prevent inflation,

they have essentially outsourced most money creation to commercial banks

who create money as debt, that money that will not produce inflation

and will not increase debt to GDP as long as it is used to grow the economy.

So to make sure that China's banks invest in productive infrastructure

and factories, China ordered its local and state owned banks

to direct credit, mostly to infrastructure and manufacturing.

Other low interest rates.

And while these state interventions can now explain why

China has too much infrastructure and even too much factory capacity,

it worked extremely well when China was still a developing country.

But what about India?

Why didn't India try to follow the investment led growth model

and supercharge investments in factories and infrastructure?

Well, actually it did well.

It liberalized its corporate sector.

It kept its banking system largely in the hands of the state, just like China

and just like China.

That banking system

then went on a lending spree to well-connected business tycoons.

However, unlike China's successful entrepreneurs,

India's well-connected tycoons did not spend the money productively,

which meant that around 2013, while China's corporates

increasingly conquered the world, India's corporates were failing

and heavily indebted to a state's banking system that was close to collapse.

Although I have to say that since then, India's investment has gotten much better.

A recovery that was partially made possible by Professor Rajan himself,

who as head of India's central bank, helped clean up a lot of these bad debts.

A lot of credit also goes to Modi, who has since coming to power in 2014,

made a lot of new investments in India's infrastructure.

But while Indian investment and growth has not been bad at all,

it has not been as miraculous as that of China.

Therefore, I think it's now time that we revisit the third key

ingredient of China's growth miracle attracting foreign factories,

which is also known as attracting foreign direct investment or FDI for short.

FDI gets its name from the fact

that if you build a factory somewhere, you are directly investing there.

When it comes to FDI, while China became the factory of the world, India

simply failed to attract anywhere close to the same amount of FDI.

But why is it attracting FDI so important

and why was China able to do it while India failed miserably?

To answer these questions, let's go back to India and China in the 1980s.

They were not just like infrastructure and machines.

They were also lacking the knowledge about how efficient factories operate.

Knowledge that you cannot learn in school.

Knowledge that you instead accumulate by working in efficient factories.

This is why attracting foreign factories to turbocharge

local knowledge was the third key ingredient for China's growth.

Miracle.

On top of that, while local money is in theory infinite

as it can be created by local banks and central banks, foreign money U.S.

dollars is needed for crucial imports, such as, in China's case, German machines.

So attracting foreign direct investment is a key ingredient

of most growth miracles, because it can be used to supercharge local knowledge

and to obtain the US dollars needed for crucial imports.

And as we've discussed, China's basic education

really helped create the right environment for FDI.

But according to Professor Rajan, there's actually a deeper difference

between China and India, and that is how well their local governments function.

You see, because both the Chinese and Indian economies

are decentralized systems on a massive and I mean massive scale.

It's really important to note that getting education, investment

and FDI right is really not something that is determined at the top.

You need government at the local level to actually implement these changes,

and for that they need the right incentives.

And if we zoom in to how China's local governments work,

we can see that they had the right incentives to stimulate

both local investment and foreign direct investment.

First of all, local governments were all part of the Chinese Communist Party,

and they would be promoted or demoted, not based on how well

like they were by the local population or how loyal they were to the boss,

but rather by how much they were able to grow their local economy.

On top of that, a large part of local government revenue

was to be generated through land sales.

And given that

the value of land appreciates when the right infrastructure is built.

If local governors wanted to further their career in the party,

one of their best options was to build infrastructure such that

they could get more revenue and increase the GDP of their province or city.

And okay, maybe also skim a little bit off the top in the process.

Importantly, these incentives meant that local Chinese governors

were really keen to make things as easy as possible for foreigners

that wanted to invest in their city.

For example, as Professor Rajan describes in this book,

when an Indian businessman wanted to invest in a middle sized city in China,

he was met at the airport by the deputy major, taken to visit a possible site

on the same day, and then immediately taken to the Major's office,

where all the necessary paperwork had already been filled out

and any problems he raised could be dealt with by the local government.

Similarly, when Elon Musk came to China, he was able to have his Shanghai

factory up and running in record time because the local Shanghai

government officials cleared all legal obstacles for him.

Contrast this to India, where while the central government

assured citizens that it was now a great destination for FDI,

its local government often actively frustrated the arrival of foreign firms

by strictly upholding India's difficult regulations

and making it time consuming to get around them.

In summary, following the insights from Professor

Rajan, China was able to outgrow India

initially because it had a better level of education.

And while both countries liberalized their economies, only China was able

to successfully invest on a colossal scale and attract enough

foreign direct investment to supercharge its economic growth.

Finally, it's not that India's central government was not aware

that it needed to invest more and attract FDI.

No, the deeper reason why India was not able to keep up with

China is that its local governments did not play along.

Whereas in China, local governors had the right incentives

to promote both local investment and FDI.

And sadly, if we next turn to the work of Professor Davesh Kapur,

I'm afraid it will become clear that not only did

dysfunctional local governments hold India back in the past, they also mean

that even today, India can never grow like China.

Okay.

To understand why India's local governments are failing

to unleash a China style miracle, let's now turn to Professor Kapoor,

who has identified the three most plausible explanations.

The first explanation is really straightforward.

India's local governments

are terribly understaffed, especially when compared to China,

which greatly increased its local government capacity during its growth.

Miracle.

Indeed, if we look at this graph, we can see that the structure

of India's government employee count is basically

the opposite of that of China and the United States.

Whereas in the US and China, by far most government employees

work at the local level and only some at the state or federal level.

In India it is the other way around.

Most of India's government employees work at the state and to a lesser extent,

federal level, whereas only a few work at local level.

This can explain why India's local governments were not able to invest

or help foreign investors around the rules

on the same scale as their Chinese counterparts did.

But if just local capacity was the only problem, then it could simply be solved

by giving the local governments more money to hire more people, right?

Well, sadly, that will likely not completely fix the problem.

You see, there is something really strange going on

with India's local governments despite high unemployment.

Many local governments have thousands of unfilled open positions.

Even worse, some of India's poorest local governments

do not even spend all the money that they get from the central government.

So what else is going on?

Well, this brings us to Kapur's second explanation of why in this,

local governments are not living up to their potential.

India's infamous caste system, which divides people

into a hierarchy of social categories based on their birth.

But before getting into

how we should note that the caste system has effectively been outlawed.

However, despite that, in many parts of the country

it is still very much a political reality.

The caste system can explain

India's dysfunctional local governments in three different ways.

Firstly, realizing that the caste system was still strong at the local government

level, India's founders on purpose made sure that local governments

were not too powerful which can explain why this graph looks the way that it does.

Secondly, even if a local government has adequate capacity,

they might not have the right incentives, meaning that they may frustrate

the implementation of well-meant central government policies

because it is not in line with a caste system.

As an example, Professor Kapoor mentions that quite a few federal education

programs where schools were built to improve the education of girls

failed at the local level because and I'm quoting,

what happens within the classroom is affected

by caste and gender norms.

Thirdly, in some extreme cases, the caste system, even leads

to government vacancies potentially being left open

because they only have candidates from higher costs.

For example, in their book

The Narrow Order,

Professor Acemoglu and Robinson describe how in one of India's poorer states Bihar,

the state had thousands of vacancies for engineers that were not filled

despite high unemployment.

Why not?

Well, because those qualified to be engineers are typically from higher costs.

But because the province's reigning governor, Lalu Prasad

Yadav, was from a lower caste, he refused to fill these positions.

Of course, as a consequence,

everyone suffered

because the government of the here was so severely understaffed that it could

not even spend all the money it got allocated

from the central government to upgrade the local infrastructure.

But okay, that is an extreme case which may not be applicable to all states,

but it is applicable to all of any of though is the third reason

why its local governments are not enabling businesses

like their Chinese counterparts, and that is that India is a democracy.

Now, I want to stress that in itself, this is not a problem at all.

Sure, in China, the incentives of a promotion in the party

meant that local governments could override local concerns

to build infrastructure and go out of their way to attract foreign firms.

However, in well-functioning democracies, this does not need to be a problem,

since there the democratic process itself could give local governors

the incentive to invest in their cities and to attract foreign firms.

After all, if you as a local governor grow your economy,

you know, then you're more likely to be reelected as local governor again.

Indeed, democracy has produced the vast majority of growth miracles, ranging

from West Germany to Italy to Japan and to the United States.

However, unlike these countries, Professor Kapur claims that India is a so-called

precocious democracy, meaning that a country became democratic

before it was perhaps ready to become democratic again.

Professor Kapur discusses

three reasons why this is holding India's local governments back.

The first is that a precocious democracy can get into a vicious cycle

in which it delivers poor public services like schools and health care at a time.

But it is established as a consequence.

Wealthier people will exit the public system

and start using private schools and hospitals instead.

And therefore they are now less willing to pay taxes,

making local government services even more dysfunctional.

Indeed, as Professor Kapur notes, local governments in India in particular

seem to be very hesitant to raise their taxes,

the taxes that they need to improve their cities.

But sadly, there's more.

The second reason why being a precocious democracy is holding India back

is that because India's so divided local government officials

that were elected by their specific caste or religious group or,

you know, any other interest group tend to prefer rewarding their voters

by giving them subsidies or other specific benefits,

rather than to invest in public services that can be enjoyed by all.

Finally, in precocious democracies, politicians will tend to emphasize

public goods that are highly visible and relatively easy to provide.

For example, they may prefer to invest in hyper modern metros

rather than to invest in improving the education system,

of which the results will only be seen after a few years.

Of course, this, you know, happens in any democracy, but more so in

precocious democracies is is what Professor Kapoor argues.

So on the surface,

India did not grow as fast as China because it lacked basic education.

They didn't invest as much and didn't attract as much FDI.

But the deeper reason is that India's local government

did not have the capacity, nor the right incentives to improve

education, invest a lot and to attract FDI

due to a lack of personnel and wrong incentives

provided by the caste system and India being a precocious democracy necessarily.

Despite a lot of good intentions by the Modi government,

all of these causes of India's local government dysfunction are still in place

and this is why I am confident to say that India can never grow like China,

especially now that Modi, who became increasingly autocratic

in recent years, lost his majority in parliament.

So does that mean that there is no hope for India to ever catch up to China? No.

I'm actually quite optimistic

because there are still a few reasons to be optimistic about India's economy.

First of all, if we compare India to the place it was in the 1980s,

we will see that well may not have gone through miracle growth.

People are now better educated and its infrastructure has received

a major upgrade, especially on the digital and financial side.

And given that foreign companies are increasingly

looking for an alternative to China, India is, in theory,

really well positioned to attract a lot of foreign direct investment.

Now, of course, FDI in India has not yet been anything to write home about

due to the fact that the local governments do not have the capacity

or incentives to help foreign firms navigate its complicated rules.

However, now that India has elected a more democratic coalition government,

some have argued that this could mean that Modi now has to work more closely

together with local governments to push through reforms.

Closer cooperation in a divided nation will never put in there

on the path of China, but it could put it on the path to the United States.

A big, divided nation that went through a slow, messy.

But what, in the end

turned out to be the most successful growth miracle of all time.

Finally, perhaps more importantly, as Professor Kapur notes,

a successful implementation of various programs such as opening bank

accounts, gas connections, and toilets that connect to the sewage system.

This demonstrates that slowly

but surely, local government capabilities are improving.

But yeah, I don't expect a China style miracle anytime soon,

but I am still optimistic about India's potential to grow in the upcoming decades.

But yeah, that is my take.

Do you agree with me that India can never grow like China,

but that it is now actually well positioned for its own unique,

messy, slower, but perhaps ultimately more successful growth miracle?

Let me know in the comments below.

Finally, given that primary education is often a local government

responsibility and that this capacity has recently increased,

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