18:52
TEDGlobal 2011

Yasheng Huang: Does democracy stifle economic growth?

Filmed:

Economist Yasheng Huang compares China to India, and asks how China's authoritarian rule contributed to its astonishing economic growth -- leading to a big question: Is democracy actually holding India back? Huang's answer may surprise you.

- Political economist
Yasheng Huang asks us to rethink our ideas about China and other large emerging economies. Lately he’s been asking, Does democracy hinder or promote economic growth? Full bio

My topic
00:15
is economic growth in China and India.
00:17
And the question I want to explore with you
00:20
is whether or not
00:23
democracy has helped or has hindered
00:25
economic growth.
00:28
You may say this is not fair,
00:30
because I'm selecting two countries
00:32
to make a case against democracy.
00:35
Actually, exactly the opposite
00:38
is what I'm going to do.
00:41
I'm going to use these two countries
00:43
to make an economic argument for democracy,
00:45
rather than against democracy.
00:48
The first question there
00:51
is why China has grown so much faster
00:53
than India.
00:55
Over the last 30 years,
00:57
in terms of the GDP growth rates,
00:59
China has grown at twice the rate of India.
01:02
In the last five years,
01:06
the two countries have begun to converge somewhat
01:08
in economic growth.
01:11
But over the last 30 years,
01:13
China undoubtedly
01:15
has done much better than India.
01:17
One simple answer
01:20
is China has Shanghai and India has Mumbai.
01:22
Look at the skyline of Shanghai.
01:25
This is the Pudong area.
01:28
The picture on India
01:30
is the Dharavi slum of Mumbai
01:32
in India.
01:34
The idea there
01:36
behind these two pictures
01:38
is that the Chinese government
01:40
can act above rule of law.
01:42
It can plan
01:44
for the long-term benefits of the country
01:46
and in the process,
01:48
evict millions of people --
01:50
that's just a small technical issue.
01:52
Whereas in India, you cannot do that,
01:55
because you have to listen to the public.
01:57
You're being constrained by the public's opinion.
02:00
Even Prime Minister Manmohan Singh
02:02
agrees with that view.
02:05
In an interview
02:07
printed in the financial press of India,
02:09
He said that he wants to make Mumbai
02:11
another Shanghai.
02:14
This is an Oxford-trained economist
02:16
steeped in humanistic values,
02:19
and yet he agrees
02:23
with the high-pressure tactics of Shanghai.
02:25
So let me call it the Shanghai model of economic growth,
02:29
that emphasizes the following features
02:32
for promoting economic development:
02:36
infrastructures, airports,
02:38
highways, bridges, things like that.
02:40
And you need a strong government to do that,
02:43
because you cannot respect private property rights.
02:46
You cannot be constrained by the public's opinion.
02:49
You need also state ownership,
02:52
especially of land assets,
02:54
in order to build and roll out infrastructures
02:57
very quickly.
03:00
The implication of that model
03:02
is that democracy
03:04
is a hindrance for economic growth,
03:06
rather than a facilitator of economic growth.
03:08
Here's the key question.
03:12
Just how important are infrastructures
03:14
for economic growth?
03:17
This is a key issue.
03:19
If you believe that infrastructures are very important for economic growth,
03:21
then you would argue a strong government is necessary
03:25
to promote growth.
03:28
If you believe
03:30
that infrastructures are not as important as many people believe,
03:32
then you will put less emphasis
03:35
on strong government.
03:37
So to illustrate that question,
03:39
let me give you two countries.
03:41
And for the sake of brevity,
03:43
I'll call one country Country 1
03:45
and the other country Country 2.
03:47
Country 1
03:49
has a systematic advantage over Country 2
03:51
in infrastructures.
03:54
Country 1 has more telephones,
03:56
and Country 1 has a longer system of railways.
03:59
So if I were to ask you,
04:02
"Which is China
04:05
and which is India,
04:07
and which country has grown faster?"
04:09
if you believe in the infrastructure view,
04:11
then you will say, "Country 1 must be China.
04:14
They must have done better, in terms of economic growth.
04:17
And Country 2 is possibly India."
04:19
Actually the country with more telephones
04:23
is the Soviet Union,
04:26
and the data referred to 1989.
04:28
After the country reported very impressive statistics on telephones,
04:31
the country collapsed.
04:36
That's not too good.
04:39
The picture there is Khrushchev.
04:41
I know that in 1989
04:43
he no longer ruled the Soviet Union,
04:45
but that's the best picture that I can find.
04:47
(Laughter)
04:50
Telephones, infrastructures
04:52
do not guarantee you economic growth.
04:54
Country 2, that has fewer telephones,
04:56
is China.
04:59
Since 1989,
05:01
the country has performed at a double-digit rate
05:03
every year for the last 20 years.
05:05
If you know nothing about China and the Soviet Union
05:08
other than the fact about their telephones,
05:11
you would have made a poor prediction
05:14
about their economic growth
05:16
in the next two decades.
05:18
Country 1, that has a longer system of railways,
05:20
is actually India.
05:23
And Country 2 is China.
05:25
This is a very little known fact
05:28
about the two countries.
05:31
Yes, today China has a huge infrastructure advantage
05:33
over India.
05:35
But for many years,
05:37
until the late 1990s,
05:39
China had an infrastructure disadvantage
05:41
vis-a-vis India.
05:43
In developing countries,
05:45
the most common mode of transportation
05:47
is the railways,
05:50
and the British built a lot of railways in India.
05:52
India is the smaller of the two countries,
05:55
and yet it had a longer system of railways
05:58
until the late 1990s.
06:01
So clearly,
06:03
infrastructure doesn't explain
06:05
why China did better before the late 1990s,
06:07
as compared with India.
06:10
In fact, if you look at the evidence worldwide,
06:12
the evidence is more supportive of the view
06:16
that the infrastructure are actually the result of economic growth.
06:19
The economy grows,
06:23
government accumulates more resources,
06:25
and the government can invest in infrastructure --
06:27
rather than infrastructure being a cause
06:30
for economic growth.
06:33
And this is clearly the story
06:35
of the Chinese economic growth.
06:37
Let me look at this question more directly.
06:40
Is democracy bad for economic growth?
06:42
Now let's turn to two countries,
06:45
Country A and Country B.
06:47
Country A, in 1990,
06:50
had about $300 per capita GDP
06:52
as compared with Country B,
06:55
which had $460 in per capita GDP.
06:57
By 2008,
07:00
Country A has surpassed Country B
07:02
with $700 per capita GDP
07:05
as compared with $650 per capita GDP.
07:08
Both countries are in Asia.
07:12
If I were to ask you,
07:14
"Which are the two Asian countries?
07:16
And which one is a democracy?"
07:18
you may argue,
07:20
"Well, maybe Country A is China
07:22
and Country B is India."
07:24
In fact, Country A
07:26
is democratic India,
07:28
and Country B is Pakistan --
07:30
the country that has a long period
07:33
of military rule.
07:35
And it's very common
07:37
that we compare India with China.
07:39
That's because the two countries
07:43
have about the same population size.
07:45
But the more natural comparison
07:48
is actually between India and Pakistan.
07:50
Those two countries are geographically similar.
07:52
They have a complicated, but shared common history.
07:55
By that comparison,
07:59
democracy looks very, very good
08:01
in terms of economic growth.
08:03
So why do economists fall in love
08:06
with authoritarian governments?
08:09
One reason is the East Asian Model.
08:12
In East Asia,
08:14
we have had successful economic growth stories
08:16
such as Korea, Taiwan,
08:19
Hong Kong and Singapore.
08:21
Some of these economies
08:23
were ruled by authoritarian governments
08:25
in the 60s and 70s
08:27
and 1980s.
08:29
The problem with that view
08:31
is like asking all the winners of lotteries,
08:33
"Have you won the lottery?"
08:36
And they all tell you, "Yes, we have won the lottery."
08:39
And then you draw the conclusion
08:41
the odds of winning the lottery
08:43
are 100 percent.
08:46
The reason is you never go
08:48
and bother to ask the losers
08:50
who also purchased lottery tickets
08:52
and didn't end up winning the prize.
08:54
For each of these successful authoritarian governments
08:58
in East Asia,
09:01
there's a matched failure.
09:03
Korea succeeded, North Korea didn't.
09:06
Taiwan succeeded, China under Mao Zedong didn't.
09:09
Burma didn't succeed.
09:12
The Philippines didn't succeed.
09:14
If you look at the statistical evidence worldwide,
09:16
there's really no support for the idea
09:19
that authoritarian governments
09:22
hold a systematic edge over democracies
09:24
in terms of economic growth.
09:27
So the East Asian model
09:29
has this massive selection bias --
09:31
it is known as selecting on a dependent variable,
09:33
something we always tell our students to avoid.
09:36
So exactly why did China grow so much faster?
09:40
I will take you to the Cultural Revolution,
09:45
when China went mad,
09:47
and compare that country's performance with India
09:49
under Indira Gandhi.
09:52
The question there is: Which country did better,
09:54
China or India?
09:57
China was during the Cultural Revolution.
09:59
It turns out even during the Cultural Revolution,
10:01
China out-perfomed India
10:03
in terms of GDP growth
10:05
by an average of about 2.2 percent every year
10:07
in terms of per capita GDP.
10:10
So that's when China was mad.
10:13
The whole country went mad.
10:15
It must mean that the country
10:18
had something so advantageous to itself in terms of economic growth
10:20
to overcome the negative effects
10:24
of the Cultural Revolution.
10:27
The advantage the country had
10:29
was human capital --
10:31
nothing else but human capital.
10:34
This is the world development index indicator data
10:36
in the early 1990s.
10:40
And this is the earliest data that I can find.
10:42
The adult literacy rate in China
10:45
is 77 percent
10:48
as compared with 48 percent in India.
10:50
The contrast in literacy rates
10:53
is especially sharp
10:56
between Chinese women and Indian women.
10:58
I haven't told you about the definition of literacy.
11:01
In China, the definition of literacy
11:05
is the ability to read and write
11:08
1,500 Chinese characters.
11:10
In India, the definition of literacy,
11:13
operating definition of literacy,
11:16
is the ability, the grand ability,
11:18
to write your own name
11:21
in whatever language you happen to speak.
11:23
The gap between the two countries in terms of literacy
11:27
is much more substantial
11:29
than the data here indicated.
11:31
If you go to other sources of data
11:34
such as Human Development Index,
11:36
that data series,
11:38
go back to the early 1970s,
11:40
you see exactly the same contrast.
11:43
China held a huge advantage
11:45
in terms of human capital
11:47
vis-a-vis India.
11:49
Life expectancies:
11:51
as early as 1965,
11:53
China had a huge advantage in life expectancy.
11:55
On average, as a Chinese in 1965,
11:59
you lived 10 years more
12:02
than an average Indian.
12:04
So if you have a choice
12:06
between being a Chinese and being an Indian,
12:08
you would want to become a Chinese
12:10
in order to live 10 years longer.
12:12
If you made that decision in 1965,
12:15
the down side of that
12:17
is the next year we have the Cultural Revolution.
12:19
So you have to always think carefully
12:21
about these decisions.
12:24
If you cannot chose your nationality,
12:26
then you will want to become an Indian man.
12:29
Because, as an Indian man,
12:32
you have about two years of life expectancy advantage
12:34
vis-a-vis Indian women.
12:37
This is an extremely strange fact.
12:40
It's very rare among countries
12:43
to have this kind of pattern.
12:46
It shows the systematic discrimination and biases
12:48
in the Indian society
12:51
against women.
12:53
The good news is, by 2006,
12:55
India has closed the gap
12:57
between men and women
12:59
in terms of life expectancy.
13:01
Today, Indian women have a sizable life expectancy edge
13:04
over Indian men.
13:07
So India is reverting to the normal.
13:09
But India still has a lot of work to do
13:12
in terms of gender equality.
13:14
These are the two pictures
13:16
taken of garment factories in Guangdong Province
13:18
and garment factories in India.
13:21
In China, it's all women.
13:24
60 to 80 percent of the workforce in China is women
13:26
in the coastal part of the country,
13:29
whereas in India, it's all men.
13:31
Financial Times printed this picture
13:34
of an Indian textile factory
13:36
with the title, "India Poised to Overtake China in Textile."
13:38
By looking at these two pictures,
13:42
I say no, it won't overtake China for a while.
13:44
If you look at other East Asian countries,
13:48
women there play a hugely important role
13:50
in terms of economic take-off --
13:54
in terms of creating the manufacturing miracle
13:56
associated with East Asia.
13:59
India still has a long way to go
14:01
to catch up with China.
14:03
Then the issue is,
14:05
what about the Chinese political system?
14:07
You talk about human capital,
14:09
you talk about education and public health.
14:11
What about the political system?
14:13
Isn't it true that the one-party political system
14:15
has facilitated economic growth in China?
14:18
Actually, the answer is more nuanced and subtle than that.
14:22
It depends on a distinction that you draw
14:26
between statics of the political system
14:29
and the dynamics of the political system.
14:32
Statically, China is a one-party system,
14:34
authoritarian -- there's no question about it.
14:37
Dynamically, it has changed over time
14:40
to become less authoritarian and more democratic.
14:43
When you explain change --
14:46
for example, economic growth;
14:48
economic growth is about change --
14:50
when you explain change,
14:52
you use other things that have changed to explain change,
14:54
rather than using the constant to explain change.
14:57
Sometimes a fixed effect can explain change,
15:01
but a fixed effect only explains changes
15:04
in interaction with the things that change.
15:07
In terms of the political changes,
15:10
they have introduced village elections.
15:12
They have increased the security of proprietors.
15:14
And they have increased the security
15:18
with long-term land leases.
15:21
There are also financial reforms in rural China.
15:23
There is also a rural entrepreneurial revolution in China.
15:26
To me, the pace of political changes
15:29
is too slow, too gradual.
15:32
And my own view is the country
15:34
is going to face some substantial challenges,
15:36
because they have not moved further and faster on political reforms.
15:38
But nevertheless,
15:42
the system has moved in a more liberal direction,
15:44
moved in a more democratic direction.
15:47
You can apply exactly the same dynamic perspective on India.
15:51
In fact, when India was growing
15:55
at a Hindu rate of growth --
15:57
about one percent, two percent a year --
15:59
that was when India was least democratic.
16:01
Indira Gandhi declared emergency rule in 1975.
16:04
The Indian government owned and operated
16:08
all the TV stations.
16:11
A little-known fact about India in the 1990s
16:13
is that the country
16:16
not only has undertaken economic reforms,
16:18
the country has also undertaken political reforms
16:21
by introducing village self-rule,
16:24
privatization of media
16:27
and introducing freedom of information acts.
16:30
So the dynamic perspective
16:34
fits both with China and in India
16:36
in terms of the direction.
16:38
Why do many people believe
16:40
that India is still a growth disaster?
16:43
One reason
16:46
is they are always comparing India with China.
16:48
But China is a superstar
16:51
in terms of economic growth.
16:53
If you are a NBA player
16:55
and you are always being compared to Michael Jordan,
16:57
you're going to look not so impressive.
17:00
But that doesn't mean
17:02
that you're a bad basketball player.
17:04
Comparing with a superstar
17:06
is the wrong benchmark.
17:08
In fact, if you compare India
17:10
with the average developing country,
17:12
even before the more recent period
17:14
of acceleration of Indian growth --
17:17
now India is growing between eight and nine percent --
17:19
even before this period,
17:22
India was ranked fourth in terms of economic growth
17:24
among emerging economies.
17:27
This is a very impressive record indeed.
17:30
Let's think about the future:
17:34
the dragon vis-a-vis the elephant.
17:36
Which country has the growth momentum?
17:39
China, I believe, still has
17:42
some of the excellent raw fundamentals --
17:45
mostly the social capital,
17:48
the public health,
17:50
the sense of egalitarianism
17:52
that you don't find in India.
17:54
But I believe that India has the momentum.
17:56
It has the improving fundamentals.
17:58
The government has invested in basic education,
18:00
has invested in basic health.
18:03
I believe the government should do more,
18:05
but nevertheless, the direction it is moving in
18:07
is the right direction.
18:09
India has the right institutional conditions
18:11
for economic growth,
18:14
whereas China is still struggling
18:16
with political reforms.
18:18
I believe that the political reforms are a must for China
18:20
to maintain its growth.
18:23
And it's very important to have political reforms,
18:26
to have widely shared benefits of economic growth.
18:28
I don't know whether that's going to happen or not,
18:31
but I'm an optimist.
18:33
Hopefully, five years from now, I'm going to report to TEDGlobal
18:35
that political reforms will happen in China.
18:38
Thank you very much.
18:40
(Applause)
18:42

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About the Speaker:

Yasheng Huang - Political economist
Yasheng Huang asks us to rethink our ideas about China and other large emerging economies. Lately he’s been asking, Does democracy hinder or promote economic growth?

Why you should listen

MIT and Fudan University professor Yasheng Huang is an authority on how to get ahead in emerging economies. The China and India Labs he founded at MIT's Sloan School of Management specialize in helping local startups improve their strategies. His book Capitalism with Chinese Characteristics (2008) chronicles three decades of economic reform in China and documents the critical role that private entrepreneurship played in the Communist nation’s “economic miracle.”

Huang believes that China is moving away from Marxism (public ownership) but not Leninism (ideology of state control) -- and that strong social fundamentals are the key reason for its growth. He is a vocal critic of US foreign policy in China, calling on American leaders to rethink their messages, which often do not resonate with the Chinese public, and to use technology to broaden their reach, overcome stereotypes and quash conspiracy theories. He says: "For too long the US has not paid attention to an important force in the Chinese economy: the rise of indigenous entrepreneurs. This is in sharp contrast to the US approach in India."

In early 2013 Huang sparred with Eric X. Li in Foreign Affairs about the merits of China's one-party system. Li's article became the basis for his TEDGlobal 2013 talk, which Huang then responded to on the TED Blog.

More profile about the speaker
Yasheng Huang | Speaker | TED.com