Comparing the Indian and Chinese governments

Business Standard, 18 July 2007

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 their 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.

Measure India-1996 India-2005 China-1996 China-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 54.0 66.8 55.5
Regulatory quality 44.4 48.3 54.1 46.3
Rule of law 61.0 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
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% of the countries of the world.

India has improved significantly on all dimensions other than `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. NSE and BSE had begun electronic trading but there was `badla' and 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 the 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 Indian political stability at 22.1 and China 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 programs such as immunisation or sanitation, India has lost ground in the last decade. The gaze of politicians continues to be on welfare programs, 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.

Corruption and the lack of focus on public goods are both manifestations of the same principal-agent problems between citizen and State. What is conventionally termed `corruption' (civil servants and politicans capturing money for themselves) is not that different from the sectarian welfare programs in the Indian State (civil servants and politicians capturing money for a group of supporters). The processes of political accountability may be coming to the point where they are able to block the former, but they are not yet strong enough to block the latter.

Broadly speaking, in 1996, China looked better than India in all the measures other than `voice and accountability' and `rule of law'. In 2005, the picture has 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 pressurised to close down this effort, 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 India 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 India and China in FDI flows that has taken place in recent years.

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