'Mumbai should be like the Shanghai of 1930s'

Yasheng Huang is an associate professor of International Management at the Massachusetts Institute of Technology Sloan School of Management. He was also an assistant professor at the University of Michigan, an associate professor at the Harvard University, and a consultant to the World Bank.

Huang's research focusses on international business, political economy, and institutional issues. Unlike many other studies on foreign direct investment in China, his recently published book examines the institutional drivers of FDI in China and shows some of the inefficiencies of China's financial and legal institutions.

He is currently working on projects on private sector development in China and India and is writing several papers on the institutional determinants of foreign ownership and FDI.

He was recently in Chennai to address the Tamil Nadu industry leaders on 'Policy Frameworks and Development Strategies for India and China.'

In this interview with Shobha Warrier, he talks about the differences and similarities between China and India and where the two countries will be after a few years.

Do you agree that the 21st century will belong to the Asians?

Yes, and no. In terms of products and services, India and China are going to have a huge presence in the world -- India more in services and China more in products. But if you look at consumption, I believe that in the next 20-30 years, it is going to be more in the West.

So, yes, China and India are going to be huge producers, but we are going to depend on the West for consumption.

Some in India argue that soon we will see Asia rising and the West declining. Do you agree with this?

No, I don't see the West declining. Because Indian companies are producing efficient software products and services, because Chinese firms are exporting many products to the West, we are making the West stronger!

They are able to spend less money on software products, they are able to spend less money on Christmas trees, so they spend more money on other things; maybe in developing an aircraft carrier or something like that.

I don't see how the rise of China and India is going to make the West weaker; on the other hand, it is going to make them stronger.

Today, India and China are competitors trying for the same market. Do you see them working together for the larger interest of Asia?

I don't see that happening. I think competition is going to make both countries stronger, and it is inevitable that China and India are going to compete for many, many labels.

My personal view is that India should improve its performance in labour-intensive manufacturing industries. When India does that, it will compete with China.

And, China should do better in upgrading the products and moving to high value-added products. When China does that, it will compete with India. It is almost a certainty that the two countries are going to compete with each other.

We have been told time and again by everyone that China is ahead of India because it gets more FDI and its infrastructure is better. But you said that growth in China happened much before the FDI flowed in. How did other economists receive your viewpoint which is contrary to what they say?

I have made presentations at the World Bank and other international conferences. I think in academia there is greater diversity of views than there is in industry and government.

The logic I laid out is fairly compelling, so the academia look at the logic and they say, there is something there. But the important thing is not to convince academics; it is to convince the countries and policy makers.

In the case of China, it is to convince them that their success in the past came from social investments, not from building high rises. And, it is also important to convince the business and political leaders in India on the importance of rural education and basic education. So, my presentation is meant to say that both countries need to draw lessons from each other.

What should China learn from India?

The importance of an efficient financial system, and the importance of domestic private sector development, and the importance of rule of law. Also, there is no conflict between political democracy and economic prosperity. India has shown that it is able to develop vibrant industries, services and now manufacturing even with a chaotic political system. These are the lessons China needs to learn from India.

You spoke about social investment. A case is point is the way Kerala started primary schools and health centres in all the villages, which was applauded by the World Bank as the successful Kerala model. But Kerala's success story ended with social investment, and there was not much growth in the state after that.

Kerala is a very interesting phenomenon. Yes, it has invested in education and health, but if you look at China in the 60s and the 70s, they were also investing heavily in education, and China was not growing in the 60s and the 70s.

What I mean to say is that investing in social sectors doesn't lead to high growth; there has to be a combination of right economic policies. That's why in the 1980s, you began to see China growing very fast.

Like you said in the presentation, growth happened due to the economic policies and not due to FDI. . .

The economic policy of the 1980s changed dramatically from a tight centrally run economy to a more multifaceted economy, and substantial liberalisation in the rural side, financial reforms, and gradual reforms of FDI and foreign trade.

Growth mainly happened because of the policy changes, and policy changes are only going to matter if you have social foundation. It alone is not going to make an economy grow if you have bad policies.

Good policies alone will not make the economy grow as fast if you don't have the right social foundation.

I see that India has the right economic policies but what the social foundation is lacking.

China's infrastructure is ten times more than India's. It gets more FDI. It is growing faster than India. Still you say that India can overtake China. Why?

Those huge buildings have reduced the competitiveness of the Chinese firms, have led to fall in productivity growth, and have created financial constraints.

Tell me one country that has become rich because of FDI. Maybe Singapore. That is the only country I can think of. Most other countries have not succeeded only by relying on FDI. So, I would always emphasise the importance of domestic private sector. FDI is important, but you shouldn't neglect the domestic private, sector.

You said innovations started in China only in the 1980s when there was personal security. Where do India and China stand as far as innovations are concerned?

The good Indian firms are very good in organisational innovations and product innovations. Good Chinese firms are also good, maybe in the process innovations and maybe at organisational innovations. But I don't really see the two countries as different in terms of their innovative capacities.

The two countries differ in the following way. The innovative firms in India can have capital to grow, but innovative firms in China have difficulties in getting the finance. India has a good financial system. That is a very important advantage India has.

It is always said that China is ahead of India in manufacturing and India is ahead of China in information technology. Do you agree with this observation?

I disagree. I think there is no reason why Chinese firms cannot compete very efficiently in the service industries.  I also don't see why Indian firms cannot compete with Chinese firms in labour intensive low-end manufacturing.

But at present the labour intensive manufacturing firms cannot compete with the Chinese firms. . .

Yes, at present, they cannot. You have to understand why. They are not competitive because of labour market regulations in this country are hurting the labour intensive firms and lack of investments in social sector.

So, if I were the Indian government, I would do everything I could to reduce labour market controls and increase investments in education.

A few years from now, where do you see India and China in the world market?

I think it is very hard to say because it is going to critically depend on what the two countries do. If India is going to liberalise its labour regulations, I don't see why Indian firms cannot be competitive in shoe-making, shirt-making, etc.

If China has a better financial system, I don't see why Chinese firms cannot be competitive in sophisticated pharmaceuticals and automotive industries. I think that both countries have tremendous potential.

What differentiates these countries from other developing countries is that both have very deep human talent. Yes, there is plenty of poverty in both countries. On the other hand, they have a lot of skilled, smart people.  I think it is a cliché but in the end it is people who will make the difference, and not natural resources.

You said the often-asked question -- 'why can't Mumbai be like Shanghai' -- should not arise at all. What should the question be?

I will put it this way. Mumbai should be more like the Shanghai of the 1930s. Shanghai of the 1930s was the centre of all economic activities in Asia; the financial centre of Asia, like Hong Kong is today.

I would argue that the institutions in India -- the Bombay Stock Exchange, and the ICICI Bank -- have the viable chance of becoming the leading financial service providers in Asia. And, then Mumbai will be more like the Shanghai of the 1930s. Mumbai shouldn't be the Shanghai of 2006. Just having skyscrapers is not going to matter!