Why Is China Ahead?

An article in The Economist is Aug, 2010 touted Indian and Chinese rise in tandem as the contest of this century. China has been leading this contest until now and this article investigates into the reasons for the same.

Why is China ahead?

1. Earlier Economic Reforms: China began its economic reforms in late 1978, which was 12 years before India and hence, had a head start. However, even after normalizing for that, China has grown faster than India.

2. Demographic Dividend: China benefitted from a "demographic dividend" earlier due to its one-child policy. India's demographic dividend is yet to come.

3. Focus on improving infrastructure: China focused on attracting investment that would leverage its main strength - a vast and inexpensive labor pool. It focused on upgrading

a. Human Development Factors like education, health etc.

b. Infrastructure

Both of these were important for attracting foreign investment necessary to tap into the labor pool. On the other hand, India still has poor Human Development Rankings and its infrastructure level is no way near China's infrastructure level.

4. Investment-centric development vs Consumption-centric development: China development has been investment centric as opposed to India's which has been consumption centric. It is relatively easier to control investment driven growth and thus, grow rapidly over a short to medium term than it is to control consumption.

5. Cultural and Business ties to Hong Kong and Taiwan: Due to this, China got the capital and jobs it needed for economic development while Honk Kong and Taiwan businesses could massively scale up their operations.

6. One Party System vs Democracy: China is ruled by the Chinese Communist Party, which has full control over assets and asset allocation within the Chinese economy. Hence, China government's freedom in determining economic policies is higher since it requires the consensus of probably 20 people in power. By contrast, the strong institutional framework (rule of law, civil liberties, independent judiciary, elected government, laissez faire capitalism and free enterprise) are stuff that restrain the economic freedom of India Government.

7. Property Rights: Chinese have very limited property rights, thus making it easy for the Government to move people out from buildings and provide them with alternative housing elsewhere. Indians have much more clearly defined and guaranteed property rights which makes it harder for the Government to act decisively when it comes to infrastructure.

8. Mercantilist Policy: China is also posting high growth through a "mercantilist" policy of "beggar thy neighbor" by maintaining a currency regime that

a. increases