World Development, Vol. 23, No. 9, pp.

1475-1494, 1995
Copyright Q 1995 Elsevier Science Ltd
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India and China: Contrasts in Economic

Liberalization?

DEEPAK LAL*
University of California, Los Angeles, U. S. A.
and
International Centre for Economic Research, Turin, Italy

Summary. -It is argued that in both India and China despite some important differences: (a) similar cul-
tural and political imperatives led to similar systems of dirigisme and economic outcomes - with the
Chinese growth higher than the Indian because of higher investment; (b) crises engendered by their
dirigiste regimes impelled reform; (c) their attempts to replace the plan by the market have striking simi-
larities but (d) ultimately because of continuing atavistic attitudes to toward trade and commerce the
reforms remain insecure

1. INTRODUCTION bases for forming objective judgments about eco-

At long last the two Asian giants seem to be on the
move. The 1990s could be the era of economic liber-
alization in India and China, which together account
for over two billion of the worlds 5.3 billion people.
If the economic reforms underway are successfully
completed, these countries could repeat the growth
miracles of much smaller Asian economies, and like
them should be able to eliminate mass poverty. This
would indeed be the Great Transformation. But will
the countries stay the course, and complete what,
judging from Latin American experience (e.g., in
Chile and Mexico), can be an arduous journey through
many rocky shoals, and which could take over a decade?
This paper attempts to answer this question within
a comparative framework. This approach was com-
mon in the 1960s and 1970s but has been rarer since
the beginning of the Chinese reforms in 1978. Unlike
most of the existing comparisons which concentrate
largely on purely economic variables, I am as con-
cerned with culture and politics, as I argue that these
have been important determinants of the past eco-
nomic systems, and are likely to determine the success
of the ongoing liberalization in the two countries. The
focus of the paper is therefore less on the mechanics
of liberalization in the two countries, than on answer-
ing the more nebulous but important question:
whether longstanding atavistic attitudes toward the
market have changed sufficiently in both countries to
allow the current move from the plan to the market to
be completed and to endure?
There is one serious problem in making this com-
parison. The differences in the comparative statistical
nomic performance in the two countries are so marked
that even the most basic questions concerning the size
and growth of national income and population in
China cannot be answered with any great certainty, as
compared with India.* (We take this question up in
greater detail when we try to form judgments on rela-
tive performance.)
Section 2 seeks to show the similar cultural and
political imperatives which led to similar systems of
dirigisme and economic outcomes in both countries,
in the first three decades after their independence in
the late 1940s. Section 3 attempts to delineate the rea-
sons for reform and the stages it has followed and what
the outcome has been in the two countries. Section 4
tries to peer into the future, by attempting to answer
the rhetorical question which forms the subtitle of the
paper.
* This is a substantially revised version of a paper written for
the international conference Liberalizing Indias Economy:
The Cultural Context and Political Constraints, Centre for
Indian Studies, University of Hull, November 1993. The
paper was written while the author was a visitor at the Centre
of Economic Performance, London School of Economics,
during 1993-94, and revised while he was fellow of the
ICER, Turin (199695). The author is grateful to Justin Lin
of the Development Research Centre of the State Council,
and Peking University for organizing a lecture tour of China
in September 1993, and for discussions with numerous
Chinese officials and academics; to Dr. S. N. Rao of the
NCAER, New Delhi for an institutional home in March-
April 1994; and to two anonymous referees of this journal
whose suggestions greatly helped to improve the paper. Final
revision accepted: March 27, 1995.

1475
 1476 WORLD DEVELOPMENT
2. DIRIGISME
There are some striking similarities in the cultural
attitudes and economic history of the two giant Asian
economies both in the more distant and recent past.
Culture consists of the system of concepts or ideas
which guide thought and action. It is transmitted
socially, and at least for historical materialists (which
economists inevitably are) these cultural traits can
change as the environment changes. But such endo-
geneity of cultures remains contested by other social
scientists (see, e.g., Gellner, 1988). For our limited
purposes in this article, it is sufficient to establish that
there are distinct cultural attitudes which have perpet-
uated dirigiste policies in India and China and to
examine whether these have altered sufficiently to
allow a move to the market to be secure in our two
countries.3
(a) Historical cultural stability and economic
stagnation
Both countries were marked at independence in
the 1940s by centuries of cultural stability and eco-
nomic stagnation - the subtitle of my The Hindu
Equilibrium. (On China see Elvin.) The stagnation
was in per capita income, so that with the relatively
modest population growth of the past there was exten-
sive growth (in Lloyd Reynoldss felicitous phrase)
but no obvious signs of intensive growth - which
leads to a secular increase in per capita income.4 This
in turn was due in large part to both countries having
made near perfect adaptations to the environments in
which their respective organic economies (bounded
by the productivity of land) had been placed (see
Wrigley, 1988).5
Both had succeeded, by the middle ages, in creat-
ing economies which maintained what Elvin calls a
high equilibrium trap (for India see Lal, 1988),
which yielded an average level of living for their peo-
ples which was the envy of the contemporary world.
But the forms of cultural stability and political orga-
nization differed, reflecting in part the differing ethnic
compositions of the two countries. Chinas remark-
able ethnic homogeneity contrasts with Indias long
history of maintaining a multi-ethnic society.
Secondly, whereas political instability has been the
norm in India, China has shown a remarkable political
unity under centralized imperial rule for millennia.
These differences did not, however, prevent the
emergence of relatively stable Revenue economies
(Hicks), and what I call predatory states (Lal, 1988,
chapter 13.2) in both countries. The main cultural and
political differences were: the decentralized form of
social control as embodied in the Indian caste system,
and the relatively autarkic village communities, in a
polity which has usually been regionally fragmented
and only rarely encompassed the subcontinent under
Imperial rule (Lal, 1988); compared with the more
centralized social control in an absolutist state - in a
relatively integrated national market - run by
Confucian mandarins in China, which has remained
united politically from Sung to modem times with
only relatively brief periods of disruption between
regimes (McNeill, 1983, p. 49) when the Mandate
of Heaven was transferred from one dynasty to
the next.
Rowe sums up the enduring characteristics of late
imperial China as
an ethos that stressed harmony, social order, continuity,
and community service, all prompted by the State via that
unparalleled vehicle of elite indoctrination, the civil ser-
vice examination system; a fairly successful state monop-
olization of the approved channels of upward mobility;
an emphasis on merit; a customary law of partible inher-
itance, which made downward mobility over generations
an ever present possibility for the elite; and an orthodoxy
that to a greater or lesser extent viewed commerce with
suspicion and disdain. Perhaps paradoxically, the late
imperial Chinese economy was marked by the existence
of comparatively strong property rights and based on
these rights, an agrarian system emphasizing free alien-
ation of land, household-scale proprietorship, and an
elaborate and flexible system of mortgaging and leasing
(1990, p. 243).
Thus unlike India where the land market was cre-
ated by the Raj, the Chinese have supported a dynamic
land market for centuries. In addition, the Chinese
meritocratic acquisition of status contrasts with the
ascription of status through the Indian caste system.
The ancient role of education in acquiring status has
led to a greater emphasis on mass education in China
than in India. In fact, in India, as Weiner (1991) has
argued, when education and status became correlated
- at least since Independence - the upper castes
controlling the state apparatus have thwarted the
lower castes desire for education by soft pedalling the
constitutional commitment for the provision of uni-
versal elementary education.
Both countries had social systems which accorded
merchants and traders a lowly status and their wealth
was not translated into political inBuence.6 Most eco-
nomic historians have noted the importance of the rise
of the merchant in the polities of Western Europe as
an important component in their great transformation
(see Hicks, 1969; North and Thomas, 1973; Jones,
1988; Gellner, 1988). An essential element in this was
the evolution of institutions to bind the state against its
predatory instincts. An important question in judging
the sustainability of the reforms in China and India is
whether their atavistic attitudes toward commerce and
merchants have changed and whether there are signs
that the state has tied itself Ulysses-like to the mast
against these voices from the past.
 INDIA AND CHINA
Neither India or China, however, could escape
from their high equilibrium trap without moving as
the West did from an organic to a mineral-based
energy economy, whose productivity is no longer
bounded by the fixed factor of production - land. Its
centerpiece was the utilization of the capital stock of
stored energy represented by fossil fuels, in particular
coal, through the development of the steam engine,
which provided virtually unlimited supplies of
mechanical energy (Wrigley, 1988, pp. 5-6). Secular
intensive growth which could eradicate mass poverty
had become feasible. This was different, qualitatively,
from the type of intensive growth that Adam Smith
had shown could be generated even within an organic
economy, through the replacement of the mercantilist
system by his form of capitalism and free trade. But
the land constraint would remain binding in this
Smithian form of intensive growth.
For India there is little historical evidence of inten-
sive growth of either type occurring before the mod-
em era, whereas for China there is evidence that the
Smithian variety occurred in Sung China, and that all
the technological ingredients were present for the
emergence of the technologically determined variety
(see McNeill, 1983; Jones, 1988). The subsequent
stagnation of the Chinese economy despite this
medieval creativity is one of the great historical puz-
zles, which goes beyond the remit of this paper. But
there is one set of explanations which is relevant
because of its contemporary resonance.
McNeil1 (1983), Jones (1988), and Lin (1992) for
instance all relate to the so-called Needham problem
to the creation of the Confucian mandarinate, which
was charged with implementing the official doctrine
[which] held that the emperor should consider the
Empire as if it formed a single household (McNeill,
1983, p. 31).8 This household following Confucian
values despised both soldiers and merchants. The
mandarinates task was to manage both, recognizing
that both were needed to maintain the physical
integrity of the Empire. Systematic restraint upon
industrial expansion, commercial expansion, and mil-
itary expansion were built into the Chinese system of
political administration (p. 40). The market increased
the economys flexibility, and the resulting
new wealth and improved communications enhanced the
practical power Chinese officials had at their disposal.
Discrepancies between the ideals of the marketplace and
those of government were real enough; but as long as
officials could bring overriding police power to bear
whenever they were locally or privately defied, the com-
mand element in the mix remained securely domi-
nant. ..in every encounter the private entrepreneur was at
a disadvantage, while officials had the whip hand. This
was so, fundamentally, because most Chinese felt that the
unusual accumulation of private wealth from trade or
manufactures was profoundly immoral official ideol-
ogy and popular psychology thus coincided to reinforce
1477
the advantage officials had in any and every encounter
with merely private men of wealth (McNeill, 1983,
pp. 50-Y).
This form of predatory partnership under the Sung
between government and business in many ways is
echoed in the current liberalization in China (see below).
Just as in Sung times it can be expected to yield inten-
sive growth. But, as this was subsequently aborted in
part because of the reassertion of the atavistic attitudes
toward trade and commerce, and the failure to bind the
state against its predatory rent-seeking, an important
question is whether enough has changed in China
today to prevent a repetition of this historical cycle.
(b) Development strategy
In both China and India, the modem ideologies
under which they sought to foster intensive growth
after their independence - Communism in China,
Fabian socialism in India-did nothing to undermine
these traditional attitudes toward trade and commerce.
Both countries were opened up to the modem world
through the force of Western arms. The nationalism
this provoked has sought to adopt the Wests technol-
ogy, particularly military, without abandoning its
soul. Xenophobia and a suspicion of foreigners
remains endemic in both countries, while both have
sought to promote heavy industries through dirigiste
means. This had more to do with the political impera-
tive of providing the material means for resisting
future military threats to their independence than a
desire to promote economic welfare.
Both have thus found the Soviet model resonant in
their drive for industrialization - though in India, in
the softer tones associated with a democracy. The
resulting development strategy was also by and large
similar as both countries followed hot-house indus-
trialization through the promotion of heavy industry
under the aegis of state enterprises. Both followed
relatively autarkic trade policies accompanied by a
battery of trade and exchange controls, which pro-
gressively cut any link between domestic and world
relative prices. This had well-known deleterious
effects on the economys efficiency and thence pro-
ductivity.
Both also systematically discriminated against
agriculture by taxing it directly or indirectly. But this
policy went much further in China during the Maoist
Great Leap Forward and the establishment of com-
munes. This was a disaster. It led to one of the worst
famines in human history, and set back Chinese agri-
cultural productivity for a decade. This policy was
completely reversed by the establishment of the
household responsibility system in the late 1970s.
By contrast India switched in the late 1960s to various
policies to promote agriculture, which led - in eco-
1478 WORLD DEVELOPMENT

logically suitable parts of the country - to what is
termed the Green Revolution.
Since the late 1970s moreover, both countries have
been gradually trying to escape from the dirigiste sys-
tem of controls of foreign trade and industry that they
had previously set up. We need to briefly outline the
consequences of this dirigisme, which might provide
reasons for this move to liberalization, which is dis-
cussed in the next section.
(c) Relative pe$ormance
A comparison of the relative performance of the
two giant Asian economies is bedeviled by statistical
problems relating to estimates of Chinese GDP and
population. By contrast Indian national income figures
and population data are much more secure. The prob-
lems with the Chinese data - which have sadly been
used even by reputable international organizations
such as the World Bank - can be readily highlighted
by looking at the implications of the World Bank esti-
mates of per capita GNP and its growth rate for
1965-90 in India and China. According to the World
Bank (1992, World Development Report, Table 1) the
average rate of growth of per capita income was 5.8%
for China and 1.9% for India over this period. The
level of per capita income in 1990 was $370 for China
and $350 for India. These figures imply that per capita
incomes in China in 1965 could only have been 41%
of Indias As Srinivasan (1993) rightly comments:
No knowledgeable analyst of the two countries would
subscribe to this relative value of Chinas GNP per capita
in 1965! A plausible explanation for these paradoxical
figures is that the figure of $370 in 1990 as Chinas per
capita GNP reflects the consideration that a more realis-
tic figure might soon make China ineligible for loans
from IDA, the soft loan affiliate of the World Bank (p. 5;
see also Lardy, 1992. Appendix B. and Malenbaum,
1990).
Nor has the scholarly discussion reached any mea-
sure of agreement (see Rawski, 1989; Ma and
Gamaut, 1992; Kumar, 1992; Demberg and Eckaus,
1987; Malenbaum, 1990). For the base period, 1950,
the most plausible inference is Kumars: The per
capita income of both India and China was very low
in 1949 and given the margin of error, it is not worth
arguing about which country was the poorer (1992,
p. 30). Furthermore the distortions in the Chinese rel-
ative price structure where there were few links
between prices and the respective marginal rates of
substitution in consumption or of transformation in
production, make any inferences of Chinese produc-
tive capacity or welfare from its GNP at domestic
prices highly dubious. Purchasing power parity esti-
mates of Chinese GDP have been made however by
Heston and Summers (1991), and by Maddison (1991)
and are summarized in Table 1. Given all the problems
surrounding the basic data and the price comparisons
made, these can at best provide broad orders of mag-
nitude, and of the two, in my judgment, the Maddison
estimates ring truer.
These problems of estimating Chinese GDP are
compounded by problems in estimating its population.
The only proper censuses in China were in 1982 and
1990. All earlier estimates are based on partial sur-
veys. Moreover, the numbers emerging from the
recent 1990 census are marred by the underreporting

Table 1. Comparative growth performance

Heston et al. estimates

(Growth rates, % p.a.)
GDP GDP/POP POP*
China 196&73 4.6 2.3 2.3
1973-80 5.3 3.7 1.6
1980-88 9.2 7.8 1.4
India 1960-73 2.5 0.2 2.3
1973-80 2.3 0.0 2.3
1980-88 5.0 2.8 2.2
Maddison estimates
Per Capita GDP Growth Rates (% pa)t
GDP/POP ($1 GDP/POP GDP
China 1950 415
1973 774 2.76 5.06
1987 1748 3.46 5.06
India 1950 399
1973 513 1.08 3.38
1987 662 1.07 3.21
*POP column derives from Heston et al. estimates as GDP-GDP/POP.
tGrowth rate figures are derived from Maddisons (1991) estimates of GDP/POP ($), and from
POP in (A)
 INDIA AND CHINA
of female births due to the one child population
policy (see Yi et al., 1993).
So what can we conclude on relative performance?
It would appear that until the late 1970s China grew
faster than India. This was largely due to differences
in the rates of growth of industry. The rate of growth
of agricultural output was about the same. In China
during 1952-78 (before the introduction of the house-
hold responsibility system) it was 2.9%, in India dur-
ing 1950-86 it was 2.6%; while grain output grew at
2.4% in China and 2.6% in India (Srinivasan, 1993 p.
20). But the performance of both was well below that
of the Asian newly industrializing countries (NICs) in
terms of industrialization and other developing coun-
tries (e.g., Kenya, Indonesia and Pakistan) in terms of
agricultural growth.
Reported social indicators appear to be better in
China than India, but the overall level of inequality,
particularly in rural areas was about the same (the Gini
coefficient was 0.31 in 1979 for rural China and 0.34
in rural India in 1973-76 (World Bank, 1983, Table
3.19). Though the same sources report a somewhat
higher inequality in urban income distribution in
India, because of the large weight of rural areas in both
countries overall income distribution was roughly
similar (Srinivasan, 1993, p. 18). Despite different
political systems, the overall performance of the two
economies in their dirigiste postindependence phases
was thus not too dissimilar-in particular well below
their respective potential.
3. REFORM
In discussing reforms it is useful to distinguish
between the policy induced distortions created by irra-
tional dirigisme in commodity and factor markets.
China has suffered from marked distortions in all of
these markets. Its complete delinking between world
and domestic prices until the early 1980s the reluc-
tance to change the controlled prices that were set in
the early days of planning in the 195Os, and the com-
prehensive control of trade and foreign exchange
through state monopolies meant that no economic
rationality could be adduced to the resulting domestic
price structure. Though India too had many distortions
in its domestic price structure, they were never likely
to have reached the Chinese extreme. In both cases the
dirigiste system systematically discriminated against
exports.
(a) India
In the relatively more open mixed Indian econ-
omy the bias against exports resulted in periodic bal-
ance-of-payments crises, one of which in 1966 led to
the first abortive attempt at liberalizing the external
1479
sector. From then on, there were long drawn-out and
convoluted attempts to remove the bias against
exports through various forms of indirect subsidiza-
tion of exports. These did have the effect of providing
some modest boost to exports. This process of trade
liberalization was supplemented by some easing of
industrial licensing and fiscal reform in Rajiv
Gandhis early administration. But many of the
promised reforms of the foreign trade system (replac-
ing quantitative restrictions by tariffs), and the public
sector (easing exit of unviable units recommended
in the Economic Survey 1985-86) remained merely
plans, as the government became embroiled in the
Bofors scandal and reform was put on the back burner.
It was not until the macroeconomic crisis of 1991
forced India into the arms of the World Bank and the
International Monetary Fund (IMF) that a more seri-
ous attempt at liberalization was undertaken.
This crisis which threatened international bank-
ruptcy for India, and the response to it, was a replay of
dramas enacted in many parts of Latin America in the
1980s. I have charted the anatomy of this cycle of eco-
nomic repression - macroeconomic crisis - reform
elsewhere, in greater detail (Lal, 1987, 1993; La1 and
Myint, 1995). Two points, however, which are rele-
vant for my present purposes may be noted. First,
these crises are fiscal crises caused by the unsustain-
ability of the vast system of politically determined
entitlements to income streams created by past
dirigisme in the microeconomy.g Second, they arise
when all possible means of financing them seem to be
at an end. One means is through taxation. But tax rev-
enues are less than buoyant both because growth has
been damaged by the productivity-damaging effects
of dirigisme, and because of the inescapable rise of the
black economy as more and more seek to escape the
taxed economy.iO With entitlements growing, at some
stage a fiscal deficit will emerge. This can only be
financed by three means: internal or external borrow-
ing or the levying of the inflation tax. Given underde-
veloped domestic capital markets, internal borrowing
is limited. So the usual option is to increase foreign
borrowing. India did this, and in an echo of China (but
with important differences in the form) tried to tap the
riches of its worldwide diaspora (the nonresident
Indians-NRIs). But as in Latin America this capital
inflow was short-term and hence volatile. With the
continuing political instability and little sign of
improvement in the productivity and hence capacity to
repay of the economy, these investors are at some
stage likely to take fright-as the NRIs did leading to
the balance-of-payments crisis which triggered the
latest Indian reforms. This leaves only the inflation-
ary tax. But this too is unsustainable, as economic
agents take countervailing action-in a democracy as
inflation-shy as the Indian, also through the ballot box.
The ensuing crisis appears as a balance-of-payments
and fiscal crisis, and it provides a small window of
1480 WORLD DEVELOPMENT
opportunity for radical reform. This, at the most basic
level, involves rescinding all the politically deter-
mined entitlements created by dirigisme - and there-
in lies the rub. For the losers already know who they
are, while the gainers from the increased productivity
which results from liberalization are only potential,
i.e., unknown. For this reason I have been an advocate
of a big bang when a crisis presents an opportunity
for reform.i*
India, fuurmieux, did not follow this apparently
politically risky course for a minority government.
Besides success in macroeconomic stabilization, it
made some headway in dismantling the mercantilist
system of industrial licensing, price controls and trade
and exchange controls. But it failed to rescind one of
the major entitlements - secure jobs in the loss-mak-
ing public enterprises, and the bloated bureaucracies
in state and central governments, in parastatals and the
nationalized banking sector. With the passions
aroused by the Ayodhya issue, and the accompanying
political reverberations, the reform process seems to
be stalled. Speculations about its future are left to the
next section.
Of the factor markets - the land market (most of
which is rural) has been virtually free in India. The
major factor market distortions are in the market for
labor in the so-called organized sector, and in the cap-
ital market through the workings of the nationalized
banking sector.
(b) China
By contrast, China had severe distortions in all its
factor markets in addition to those in the commodity
market. Its land market was extinguished with collec-
tivisation. The practice of assigning jobs bureaucrati-
cally for life to urban workers, together with, in effect,
strict controls of migration, froze the labor market. In
the command economy of a Communist country there
was clearly no place for a capital market. Factor mar-
kets require some delineation of property rights.
Under Chinese communism with everyone a ward of
a state which had socialized all property - including
individual labor-there could be no factor markets.
But the extinguishing of land and labor markets in
Chinese agriculture also led to a rapid denouement.
With the establishment of the communes during the
Great Leap Forward, as Li Xiannian is reported to
have told one visitor: the peasants simply downed
tools and turned their bottoms to the sun (cited in
Evans, 1993, p. 250). The resulting famine was the
worst in the world in this century. The setback to agri-
cultural output and productivity was not reversed until
the household responsibility system restored virtual
private property rights in land (see Cheung, 1990).13
Total factor productivity in agriculture did not reach
its 1952 level till 1983 (Lin, 1990a, p. 1246).i4
The start of the Chinese reform process is, thus,
rightly identified with the rural reforms. They began
with the partial dismantlement of the communes in
1962, but did not reach fruition till the household-
based farming system was established in 1979. Their
impetus was a crisis for the state, because of one
important historical lesson of Chinas lOOO-yearhis-
tory of dynastic transitions - the link between food
production and political and social stability. This
political wisdom is capsuled in an often cited motto
wu nong bu wen (without a strong agriculture, the
society will not be stable) in the agriculture policy
debates in China (Lin 1990b, p. 151). The results
were dramatic.
The growthrate of grain in 1952-78 was 2.4 percent per
year, only 0.4 percent above the population growthrate.
The per capita availability of grain, therefore, increased
only 10 percent over a quarter of a century Between
1979-84, agricultural output and grain output, respec-
tively, grew at 11.8 percent and 4.1 percent annually
while population grew at 1.3 percent in the same period.
Although agriculture as a whole still grew at a
respectable rate of 4. I % p.a. after 1984, gram production
has, nevertheless, stagnated after teaching a peak of 407
million tons in 1984 The main reason was the failure
of the government to implement a market-oriented price
reform for grain (Lin, 199Ob, pp. 150-151).
What this suggests is that, the marked rise in the
post-1979 Chinese growth rate was largely the result
of making up ground after the disaster of the Great
Leap Forward. Its basis was the household responsi-
bility contract, which comes very close to what in the
Western world is a grant of private property in land.
The clear, if minor, departure is that the Chinese ver-
sion takes the form of leasehold instead of fee simple;
that is the contract is not in perpetuity (Cheung, 1990,
p. 23). While informants during a visit in 1993
informed me that while the land cannot be sold (as it
belongs to the state), leases can be transferred or sold,
so various forms of tenancy have arisen as the initial
owners of the lease move to other more lucrative occu-
pations. This privatization of land was not resisted by
the cadres because they often end[ed] up with several
responsibility contracts (Cheung, 1986, p. 66).
The liberalization of commodity markets in China
began with the partial trade liberalization of 1972, fol-
lowing Nixons opening to China. Unlike the rural
reforms, however, these were
motivatedlargely by geopoliticaland strategic consider-
ations and not by economic factors. Relations with the
West were improved to enhance Chinas leverage vis-
d-vis the Soviet Union not because there was a high level
political consensus that China should abandon its long-
time policy of self-sufficiency (Lardy, 1992, p. 1 I).
The Cultural Revolution which seems to have
caused more havoc to the party than the economy (see
 INDIA AND CHINA
Evans, 1993), set back this process of opening to the
West. But this political theme was reasserted with
Deng Xiaopings victory over the Gang of Four. The
result was that between 1978 and 1990 the average
annual pace of trade expansion was in excess of 15
percent, over three times the rate of growth of world
trade (Lardy, 1992, p. 11). This raised Chinas share
of world exports, which had fallen from 1.25% in
1952-55 to0.75% in 1978, to 2% in 1991. By contrast
Indias share of world exports declined from over
2% in the early 50s to stabilize around 0.5% in the
80s (Srinivasan, 1993, p. 12). To put these figures in
perspective it may be noted that Korea with a popula-
tion of 43 million in 1990 (compared with 1,134 mil-
lion for China and 850 million for India) exported
more (US $65 billion) than China ($62 billion) and
India ($18 billion).
Given the distortions in Chinese GDP estimates it
is much harder to provide a firm conclusion of the
changing degree of openness of the Chinese as com-
pared with the Indian economy. Lardy after a detailed
discussion concludes that:
if Blocks calculation of Chinas GDP in 1980 is taken as
meaningful . the trade ratio in China rose from 5.8% in
1978 to 9.4% by 1988. If the Summers and Heston esti-
mate is taken as meaningful, the trade ratio rose from
2.1% to 3.4% over the same period (p. 154).
While in the earlier period if the World Bank
(1983) is to be believed the trade ratio in 1980 was the
same as in 1950. By contrast India, for which the data
are more secure,
the share of trade in GDP fluctuated-until the early six-
ties it averaged over 12%. only to decline to a low of less
than 10% in the early 70s and to slowly rise thereafter to
about 16% in 1979-80 (Srinivasan, 1993, p. 12).
From this it appears that despite the media hype,
China remains more of a closed economy than India.
and that its spectacular export performance is only
so judged by a reference point of near autarky! Once
again, as in agriculture, an economy even more highly
repressed than Indias has shown a spectacular perfor-
mance relative to its immediate past only because of
how far it lay inside its production-cum-trade feasibil-
ity frontier.
(c) Growfh effects ofreforms
This raises the question: why is Chinas growth rate
about twice Indias? The answer lies in the rate of
investment, which in 1990 was nearly 40% of GDP in
China as compared with 23% in India. There is little
evidence that the productivity of investment (and
1481
changes in it due to the reforms that have so far taken
place) are all that different in the two countries. Thus
for China, according to the World Bank, total factor
productivity in agriculture and industry combined
declined at an annual rate of - 1.41% between
1957-65, rose at only 0.62% during 1965-76, and in
the reform era (1980-88) grew at 2.4% in the state sec-
tor, 4.63% in the collective sector and 6.44% in the
agricultural sector (World Bank, WDR, 1992 Table
2.3).15Given the statistical difficulties outlined earlier
these can not be taken as hard figures but merely
as indicating trends. For India, Ahluwalias estimates
for industry indicate that total factor productivity in
manufacturing grew at 3.4% in the first half of the
1980s as compared with a decline of 0.3% per annum
in the previous 15 years.
(d) Trade liberalization
This inference about the similarity in the perfor-
mance of the two countries would be made more
secure, if the nature of the trade liberalization that has
taken place in the two countries to date is compared.
Using the phase methodology developed in the
Bhagwati-Krueger study (see Krueger for details),
Srinivasan has categorized the past trade history of
India in terms of the following phases (where higher
order phases categorize more liberalized trade and
payments regimes): 1956-62 (Phase I); 1962-66
(Phase II); 1966-68 (Phase Ill); 1968-75 (Phase II);
1975-85 (Phase Ill); 1985-mid-1991 (Phase Ill con-
tinued); mid-l991-(Phase IV?). For China Lardy
argues in a thorough analysis of its trade reforms that
the trade liberalization that has taken place since the
late 1970s should be taken as
reflectinga transition from a stage one to a stage two lib-
eralization of an import substitution trade regime . The
previous direct monopoly on all trade transactions exer-
cised by the Ministry of Foreign Trade corresponds to
Kruegers stage one in which there is heavy reliance on
quantitative restrictions. Stage two is characterized by
increasingly complex quantitative restrictions rather than
across the board restrictions of phase one Chinas
increasing use of import duties, export subsidies, and
other types of price measures designed to buttress
quantitative restrictions is also common to phase two
(1992, p. 43)
as are the various import entitlement schemes based
on retention of foreign exchange which grew in the
1980s. Given the continuing large divergences
between domestic and international prices (until the
1990s) as documented in Lardys (1992) Table 4.2, it
is more than likely that many of the exports were prof-
itable privately but not socially. Evidence of this exists
for India (see La1 (1980)). For China Lardy believes
this was also the case and that in at least a few cases
1482 WORLD DEVELOPMENT
the value added of energy intensive export products
measured at international prices was negative (p. 96).
Moreover, just as the Phases II and III-type reforms
in India were motivated less by a conversion of the
policy makers to the case for free trade, than by the
exigencies of the balance of payments, Lardys care-
ful analysis suggests that something very similar lay
behind the gradual trade liberalization in China to
date. In the centrally planned Chinese economy, with
a state monopoly of foreign trade, there will not be any
unplanned imbalance between the value of imports
and exports measured in foreign currency. Because of
the separation between domestic and international
prices, however (an airlock system according to the
World Bank, 1985, p. 97) characteristic of the
Chinese command economy pre-1978, there could be
a surplus or deficit on the trade balance in domestic
currency even when in terms of foreign currency it
was in balance. As Lardy shows reforms of Chinas
foreign trade system frequently have been stimulated
by the occurrence of domestic currency losses on for-
eign trade (1992, p. 20).
(e) Foreign capital
Both India and China were wary in the past of pri-
vate foreign capital inflows. An essential element in
their reform programs is a reversal of this policy. An
important part of the opening up of China involved the
creation of special economic zones in Southern China
and the active promotion of direct foreign investment
in joint ventures. These have largely taken place with
nonstate enterprises which represent the extension of
the rural household responsibility system to industry.
These are so-called village, township and collective
enterprises. They and direct foreign investment has
boomed. Here again, like India, China has sought to
mobilize the capital of its international diaspora for its
development.
But the nature of the capital inflow has been differ-
ent because of the differing nature of the two streams
of migrants. Whereas the Indian diaspora (at least of
its more affluent members) has largely consisted of the
professional classes, the Chinese diaspora, particu-
larly to Hong Kong and Taiwan, was of entrepreneurs
- many of whom had migrated from Shanghai and
Canton after the Communist takeover. Thus whereas
India could at best hope to mobilize short-run capital
inflows in the form of bank deposits and bonds, China
was able to get foreign equity from its diaspora. Apart
from the bundle of entrepreneurship, technology and
marketing this brings, it also makes a debt crisis of the
Latin American variety less likely. On the other hand,
given the large distortions in the domestic price struc-
ture, and the accompanying large variance of effective
protective rates, there is likely to be little correspon-
dence between the private and social profitability of
such direct foreign investment (see La1 (1975)).
(f) Property rights and state enterprises
Ike growth of the nonstate enterprise sector in
China, where from all accounts much of recent
Chinese growth outside agriculture has taken place,
has in effect meant the growth of a de facto private
sector. But the property rights of the individuals who
have established these enterprises and are seen to be
their defacto owners are not recognized de jure.16 This
is because of the ideological imperative of preserving
the fiction of state ownership of assets, so that private
property may be practiced in nature, but not in name
(Cheung, 1990, p. 25). This puts a limit on the capi-
talist process whereby individuals rights to income
streams from capital can be traded. This distortion in
the efficient working of the capital market cannot be
removed without giving up the ideological fiction and
converting the de facto into de jure private property
rights in the nonstate sectors.
This fortunately is not a handicap India shares with
China. But the problems of dealing with state enter-
prises are similar. In both countries, though the forms
differ, most state enterprises essentially provide unvi-
able politically enforced entitlements to future income
streams to their managers and workers. In both for
political reasons there has been a reluctance to rescind
them. Instead, there is an attempt to work around them
by, as it were, building a cordon sanitaire around
these enterprises, and ensuring that the problem is
contained rather than reduced or eliminated. The hope
is that with the growth of the rest of the economy, the
share and hence the deadweight cost of these enter-
prises to the economy will progressively decline. But
in the interim, in both countries they continue to hem-
orrhage the fist and cast a shadow over the sustain-
ability of the limited reforms that are currently in
place.
(g) Fiscal reform and macroeconomic policy
(i) China
The problem is particularly deadly in China
because of the Communist fiscal system. In the pre-
reform period, the state enterprises were the prim-
ary tax-collecting vehicle - as in other Communist
countries. Wong (1991) describes this as follows:
The pre-reform fiscal system in China [had] over-
whelming dependence on industry, and a reliance on
profits of state-owned enterprises, along with taxes for
government revenue. Using administrative prices that
systematically discriminate against agricultural and raw
materials producers in favor of industry, artificially high
profits are created in the industrial sector. These are then
captured for government coffers through a combination
of turnover taxes and expropriation of profits (p. IO).
 INDIA AND CHINA
As the process of liberalization proceeds, however,
effective property rights devolve more to the (state
owned) enterprises themselves, and perhaps to a nar-
rowly enfranchised private sector . . . By giving up con-
trol over state propetty, the government in effect gives
away its tax base (McKinnon, 1992, p. 7).
Furthermore, even if the government clings to its
state enterprises, as China has done, the freeing of
commodity markets still erodes the revenue base as:
First, the price system can no longer be rigged to keep
agricultural procurement prices - and thus real product
wages - artificially low so as to transfer an easily cap-
tured surplus to industry. Second, industrial enterprises
-owned by the central or diverse local governments that
had generated monopoly profits - may now face sub-
stantial competition from each other (as amongst town-
ship enterprises in China), from newly enfranchised
private or cooperative enterprises, and (possibly) from
freer imports. The upshot is that the industrial profit base
itself will tend to decline as the monopoly positions of the
old state-owned industrial enterprises are undermined
(McKinnon, 1992, p. 7).
This is borne out by the Blejer et al. (1991) estimate
that the consolidated revenue of the central, provincial
and local governments in China fell from 34% of GNP
in 1978 to only 19% in 1989, and most of the decline
was accounted for by a drop in profit remittances
from state enterprises.
This erosion of its traditional tax base has forced
the government to in effect create a form of tax farm-
ing - with local governments contracting with the
center to share revenues form local nonstate industry.
This has greatly eroded the power of the central gov-
emment.r8 With local governments also increasingly
concerned by the large regional divergences in indus-
trialization and in inflows of private investment, inter-
nal trade barriers to bottle up domestic resources and
to protect local factors of production are reportedly
growing, giving rise to fears (as one informant put it)
of economic warlordism.
The resultant periodic macroeconomic crises that
have beset China on its path to liberalization have
been caused both by the loose budget constraint faced
by the state enterprises and their own unviability at
international prices. With the domestic prices of 90%
of Chinese imports being based on the international
price by 1990 (as compared with 43% in 1984), but
with domestic export prices still being relatively insu-
lated from world prices, the financial losses of the state
enterprises have mounted. In 1990 the total of their
losses amounted to $20 billion, getting on for 5% of
national income (Evans, 1993, p. 312). This has dire
consequences for macroeconomic balance.
The inflations that ensued were cured by the tradi-
tional means of monetary deflation. This in effect
1483
choked off credit to the state enterprises, which are
then unable to finance the unviable entitlements which
the Chinese government is still unwilling to rescind.
There is, thus, a built-in conflict between the needs of
liberalization and the desire to maintain socialist state
enterprises. This is reflected in the continuing debate
between those officials who seek a return to the sys-
tem of centralized foreign exchange planning and for-
eign exchange control on the one hand, and more rapid
movement toward convertibility on the other (Lardy,
1992, p. 111). This debate between the conservatives
and the reformers was supposed to have been settled
at the recent Central Committee meeting. But the
Financial Times concluded that the communique
which was issued traded off some monetary easing
(desired by conservatives keen to preserve state enter-
prises) for a further commitment to deepening reform
(desired by the reformers). It reflected not a consen-
sus but a failure to agree . . . What is lacking . is a
willingness by central and regional officials to allow
enterprises to go bankrupt, to accept that richer
provinces must pay higher taxes, and to obey central
bank
November directives
16, lgg3).tyl Times, editorial,
(ii) India
India, despite its more orthodox and transparent
macroeconomic system of control has also not been
able to tackle the problem of large budgetary subsidies
for fertilizers, energy, the public distribution system,
and those implicit in carrying loss-making public
enterprises and redundant labor in the central and state
bureaucracies.
(h) Labor markets
These continuing unviable entitlements in both
countries are largely related to the labor market. In
prereform China, labor markets were much more rigid
than in India. There was little labor mobility, and the
following features which still characterize state-
owned enterprises applied virtually to the whole econ-
omy (as there were restrictions on rural-urban and
interregional migration). Lardy notes that still
in the state owned sector, most workers continued to be
assigned permanent jobs when they finished their educa-
tion. Workers had no right to quit or leave their assigned
jobs and enterprises had no right to dismiss redundant
labor. Furthermore, workers were dependent on their
work units for their housing, medical care, retirement
pensions, and a range of other benefits (1992, p. I 1I).
With the growth of non-state enterprises, however,
the government has relaxed the requirement that all
employment be assigned by the state. This has led -
at least in Southern China - to the virtual privatiza-
1484 WORLDDEVELOPMENT
tion of the labor market, except for the existing work-
ers in state enterprises who maintain their guaranteed
job security and retirement benefits (see Cheung,
1990, pp. 23-24).
In India, the rigidities in the labor market are
largely confined to the organized sector and are based
on labor legislation which goes back to the 19th cen-
tury, as well as on the implicit commitment of a job for
life in the government and public enterprises (see Lal,
1989). No attempt has been made in India to rescind
these entitlements. As in China the hope is that by
allowing the rest of the nondistorted economy to
grow around this incubus (which itself will not be
allowed to grow), its relative weight will decline over
time. But given the budgetary implications of main-
taining these entitlements in the near future. It is
unclear whether, in either case, reform can continue
without some successful confrontation of these deeply
entrenched vested interests.
(i) Financial sector reform
In both countries nationalized banking systems
need to be reformed to cope with the move from the
plan to the market. The Chinese system has adopted
the form of a market system . . . but not the reality
(Perkins, 1994, p. 42). While commercial banks were
separated from the central bank formally in the early
years of reform, they continued to follow central
direction, and took for granted that the central bank
would bail them out if they got into trouble, which in
turn means that the industrial customers of these banks
faced soft budget constraints (p. 38). There would
seem to be no halfway house from genuine privatiza-
tion of the financial sector, but it is doubtful if ideol-
ogy will permit this. As The Economist noted:
China has freed the farms and almost entirely freed
prices. Its remaining problems - the governments
deteriorating finances, the financial system itself, the
loss-making state firms and the welfare system they
provide for their 107m workers - are all linked
together (August 1, 1993,p. 29).
The problem is again political - and ideological!
Though the privatization of Indian state-owned
banks, and the creation of a fully market-oriented
financial sector would appear to be easier in India, it
will be difficult to institute without taking on the pow-
erful white collar bank workers unions which have
battened on the politically determined entitlements
that the nationalized banking system has provided
them and other politically favored constituents. Nor is
Indias much larger and deeper stock market yet a
fully efficient instrument for financial intermediation,
as the 1992 market-cum-banking scandal, which nearly
brought down the Finance Minister, has demonstrated.
But despite these deficiencies Indias financial sec-
tor is far more developed than the Chinese. Indias
financial institutions-the Reserve Bank of India and
the Bombay stock exchange - were established at the
turn of the century. The Reserve Bank of Indias con-
trol over the money supply may be loose but in China
the banking system appears to have very little control.
The Indian stock exchange had a capitalized value of
US $48 billion in 1991 -greater than Brazil -China
is just learning how to operate a stock market. Thus
despite the continuing problems of financial liberal-
ization, linked primarily to the political problems of
dealing with the entitlements of the nationalized bank-
ing sector, India is much better placed with many of
the institutions for a market economy in place as com-
pared with China.
(i) Conclusion
A crisis is usually the ideal time to deal with such
deep-seated political problems. India has probably left
it too late after its 1991 crisis to deal with the neces-
sary reform of its labor market. The Chinese have yet
to experience a similar macroeconomic crisis. But if
the dynamic process observed in other countries faced
with living with the consequences of dirigisme is any-
thing to go by, such a crisis-which may provide the
Chinese polity the necessary will to deal with these
politically determined entitlements - may not be too
far off.
Summarizing, we have seen that past dirigisme had
created distortions in both commodity and factor mar-
kets in both countries. But they were much more
severe in China - particularly in factor markets,
which had been virtually extinguished. In both coun-
tries the liberalization of commodity markets started
with partial trade liberalization in the early 197Os,and
has followed a tortuous route since then. Despite con-
siderable liberalization of its near autarkic trade
regime, China probably has a less liberal trade regime
today than Indias and a less open economy. In the fac-
tor markets, even though the Indian capital market is
inefficient, it is still way ahead of the Chinese, who are
just beginning the process of setting up an efficient
banking system and stock markets. The land market
has been virtually free in India, while its extinction in
China led to a collapse in agricultural output, which
provided the major impetus for the reforms under
Deng. But unlike India the delineation of property
rights and their legal enforcement is still limited -
partly for ideological reasons. In both countries major
distortions in the labor market, particularly for those
in the public sector remain. Both countries are trying
to circumvent the problem of dealing directly with the
large inefficient public sector, by attempting to allow
the buoyant private economy to grow rapidly and
thence reduce the share of the state sector. But in both
 INDIA AND CHINA
countries, the resulting hemorrhaging of the fist has
led to problems of macroeconomic stability. It was a
macroeconomic crisis which led to Indias latest
attempt at reform. In both countries, their atavistic and
nationalist objections to foreign capital are being
overcome. Both have used the capital of their dias-
pora, but given their differing composition, the
Chinese have been able to obtain more stable flows in
the form of direct investment, whereas the Indians
have to rely on more short-term inflows in the form of
bank deposits. It was their reversal which triggered the
Indian macroeconomic crisis of the late 1980s.
Given these similarities rather than differences in
the course of liberalization and the roadblocks in its
continuation, as well as in the prereform initial con-
ditions, the similar effects - in terms of some boost
in productivity and growth rates - as reform pro-
gresses, which were summarized above, are only to be
expected.
4. FUTURE
What of the future of reform in the two countries?
Again, though the current euphoria in the media and
financial circles about China, in contrast with the
growing despondency about India - beset by various
ethnic and religious conflicts - might suggest that the
course of reform is assured in China but not in India,
appearances can once again be deceptive. As we have
seen, the obstacles in the path of reform are essentially
political in both cases - and involve the dismantling
of systems of unviable entitlements, in particular to
organized labor and the bureaucracy. It might appear
that a dictatorship committed to reform would find it
easier to do so than a democracy. But it is this issue of
commitment which is in question in both countries.
Recently The Economisr summarized the necessary
conditions for successful liberalization that have
emerged from Latin American experience in the catch
phrase, commitment, competence and consensus.
This, it argued, in Latin America involved people at
the top committed to it; other people technically qual-
ified to implement it; a national trauma, such as hyper-
inflation, that lives on in the memory of voters as a
horror to which they never wish to return (The
Economist, November 13.1992, LA survey, p. 14). Of
these conditions the second seems to be met, as there
are undoubtedly competent technical teams in both
countries capable of implementing reform. It is doubts
about the first and third conditions which give one
cause to pause in both countries.
(a) India
Take the condition regarding commitment. What is
the degree of commitment to reform of the current
1485
leaders in the two countries? In India though there can
be no doubt about the commitment of the Finance
Minister Dr. Manmohan Singh, and to date of the
Prime Minister Narasimha Rao, the same cannot be
said of the other members of the ruling political party,
nor of the major opposition parties. This is largely
because of the long ideological shadow that has been
termed, Nehruvianism -a variant of Fabianism -
which still influences the political and intellectual
classes. The press comments by both ministers and
many (but by no means all) press commentators were
hostile to many of the eminently sensible suggestions
made in the July 1993 Bhagwati-Srinivasan report
commissioned by the Minister of Finance. The old
shibboleths - maintaining some form of socialism to
help the poor, for which the public distribution system
as well as parts of the public sector, and a continuing
ban on consumer goods imports are deemed essential
- despite all the countervailing evidence (see e.g.,
Lal, 1988; Bhagwati, 1993) were yet again on display.
The long-standing and atavistic Brahminical disdain
for commerce and trade was also in evidence, as was
the continuance of a prickly nationalism - as some
took umbrage at an official report written by NRI
economists!
This nationalism, however, provides some hope for
the future. One of the important themes of the Lal-
Myint comparative study is the role of nation-build-
ing in explaining the rise of dirigisme and its reform.
For the dirigisme which is invoked to foster order,
leads over time to the unintended consequence of
breeding disorder, as economic agents seek increas-
ingly to escape the official net. Liberalization is then
undertaken by nationalists to restore order in what
seem to have become ungovernable economies.
Heckschers historical work on mercantilism provides
an almost exact parallel in this cycle of dirigisme-dis-
order - liberalization, in post-Renaissance Europe.
The Indian case as I have briefly indicated in the pre-
vious section fits this thesis. Hence if nationalism is
still alive and well in India, it may lead its adherents
to see that further liberalization is essential to acquire
the economic strength without which the nation will
not be safe from disorder, originating from within or
without. The media hype about China has helped in
this context.
Moreover, there has been a remarkable alteration in
the climate of public opinion, where the empower-
ment of the common man against the many tyrannies
of the Permit Raj promised by the reformers, gladdens
many middle-class hearts hankering after Western
style consumerism! Meanwhile the relatively shrink-
ing rewards from public service as compared with
those in the private sector are persuading many of their
children to seek commercial careers. This should help
to undermine the long-standing Brahminical attitudes
against Banias. These cultural attitudes which in the
past favored seemingly selfless mandarins over selfish
1486 WORLD DEVELOPMENT
markets have also been undermined by the contempt
in which nearly all politicians and many bureaucrats
- seen as equally corrupt - are increasingly held by
the public. If both mandarins and markets are now
seen as corrupt (in the Augustan sense - see
Pocock, 1975; Lal, 1985), the ethical preference for
the former is undermined, and the efficacy of the two
alternatives in promoting opulence becomes the
paramount consideration. Even the partial liberaliza-
tion that has so far taken place may have helped to
strengthen this shift to attitudes toward the market.
One straw in the wind is the very different reaction
that Prime Minister V. P. Singhs desire to implement
the Mandal Report on caste reservations in govem-
ment jobs evoked from the universities compared with
the virtual silence that greeted the Rao governments
actual implementation of the report on instructions
from the Supreme Court. Some commentators in India
have suggested that with the liberalization undertaken
in 199 1, job prospects in the private sector look much
brighter to the upper-caste young than in the public
sector, so the policy of reservations is of lesser rele-
vance to their future!
Against these hopeful signs are more dire ones -
based on interest. The major potential losers from the
reform are businesses in previously protected sectors,
and the bureaucracy. Ihe interlocking interests of the
politicians, industrialists and bureaucrats in perpetuat-
ing the rents generated by the Permit Raj which
financed politics, are well known. An alternative
source of electoral finance is still not in place; without
it, the continuing commitment of Indian politicians to
economic liberalization must remain questionable.
The losers among the businessmen are already group-
ing together and lobbying for more gradual reforms as
well as various concessions to allow them to play on
an equal playing field with foreign investors.
Implicit threats are being made that they might finance
the BJP which has played the populist anti-foreign
card, and argued for internal liberalization with no (or
little) liberalization of foreign trade and direct foreign
investment. Interestingly, though, the newer business
groups (e.g., the Ambanis) have lobbied for a faster
process of liberalization as they, unlike their older
brethren, feel they can compete in global markets.
The most recalcitrant group is likely to be the
bureaucrats. It is not the production workers in public
sector enterprises who are the problem - they can be
pensioned off through the National Renewal fund, or
some other severance scheme (see Fiszben, 1992;
Diwan, 1993). It is the white-collar bureaucracy, num-
bering in the millions who are the problem. They all
seek the job security, perks and perquisites of the All
India services, and seek, like them, to enlarge the base
of their respective job pyramids so that there are more
worthwhile jobs on top. In the traditional Indian
casteist framework they want to protect not merely
their incomes but status! They include not only the
officers but also the karamchari unions in nationalized
banks, parastatals, and the central and state govem-
ments. The government has not tackled the thorny
issue that a large number of them will have to be made
redundant, in the interests of both economic efficiency
and the fist. The example of the DGTD, whose func-
tions became redundant with the ending of industrial
licensing, does not augur well for the future. Evident-
ly, even though redundant, the officers of the DGTD
still come to their offices even when there is no work
for them, and continue to draw their pay and perquisites!
Finally, until recently the conversion of the states to
economic liberalization was less in evidence than that
of the center. As the states in India control agriculture,
irrigation, power, road transport, health and education
- amounting together for over half of GDP - this
matters. But more recently prompted by their own fis-
cal crises the states seem to be reforming,20 at a time
when given the easing of the centers fiscal and for-
eign exchange crisis, it seems to be cooling its heels
until the next elections due in 1996.
There are clearly many rocks ahead in the path of
Indian economic reforms. The technical competence
is there, and I have argued that there is also a general
consensus in the country for reform, but the commit-
ment of the politicians and hence the credibility of the
reforms must still remain in doubt.
(b) China
What of China? Here I can do no more than specu-
late on the basis of what little we know of the inner
workings of the Chinese government. (But see
Baums reconstruction of the palace struggles during
Dengs ascendancy.) Unlike India there would seem
(at least as long as Deng Xiaoping is alive) that those
committed to reform in the Chinese polity will remain
on top, purely because Deng has repeatedly reiterated
his continuing support for reform. This raises the
question of why Deng supported liberalization and
how if at all he envisages it to proceed. A few clues are
provided in a recent biography by a former UK
Ambassador to China (Evans, 1993). Three themes
emerge: Deng as a passionate nationalist, a man keen
on preserving the Communist party, and the morale of
its members and, finally, a socialist for whom social-
ism was associated with prosperity [and who] was
ready to try a wide variety of means in the quest for
prosperity (p. 146). He did not have any particular eco-
nomic theory to guide him. Evans reports him as saying:
I am a layman in the field of economics. I have made a
few remarks on the subject, but all from a political point
of view. For example I proposed Chinas economic pol-
icy of opening to the outside world, but as for the details
or specifics of how to implement it, I know nothing
(Evans, 1993, p. 236).
 INDIA AND CHINA
We also learn from Evans that during one of his
periods of disgrace Deng turned to reading Chinese
history and his speeches thereafter reflected this edu-
cation. It is pure speculation, but if he did read the
history of the Sung, could that not have provided him
with the vision of a vigorous China ruled by man-
darins under an imperial dynasty which nevertheless
tolerated a market economy and the prosperity it
begat? It would reconcile
the contradictions many outside China have seen
between Dengs readiness to experiment boldly in the
economic sphere and his political conservatism. Far from
seeing political liberalization as a necessary condition for
economic liberalization, he has seen it as a serious poten-
tial threat to social and political stability and therefore to
development (Evans, 1993, p. 219).
If Dengs commitment to reforms (as long as they
are controlled by the party) is assured, that cannot be
said of the rest of the party. The debates between those
who want to return to planning and those who want to
go further in economic liberalization continue, and
given the past history of the turns in the roulette wheel
in intraparty disputes, it would be foolhardy to predict
what the outcome will be when Deng meets Marx (see
Baum, 1994).
As in India there are conflicting tendencies. First,
the sapping away of both administrative and fiscal
authority from the center has made the regions and
their officials more powerful in determining Chinas
future.* Those in the South have benefited personally
from all forms of effectively privatized enterprise in
which they and their relatives have become partnersz2
Second, the army (from all accounts) has also taken to
joint ventures and commerce in a big way. Thus Baum
notes: According to foreign intelligence estimates,
NOTES
1, For the earlier period see Baran (1957). Malenbaum
(1959). Moore (1966), Raj (1967), lshikawa (1967). Bardhan
(1969). Chen and Uppal (1971). Richman (1972, 1975).
Swamy (1973, 1977). Harris (1974), Bhattacharji (1974).
Desai (1975). Gurley (1975). Weisskopf (197%. 1975b),
Byres and Nolan (1976) and Bergmann (1977). As Matson
and Selden (1992) note these comparisons were mainly used
lo demonstrate the superiority of socialism over capitalism
in mobilizing resources for rapid economic growth and ame-
liorating widespread destitution and poverty in predomi-
nantly agrarian poor colonial societies. After the 1978
Chinese reforms reexaminations of the Chinese experience
have debunked long-standing shibboleths (p. 701). See
Lardy (1983). Harding (1987). Riskin (1987). Feuchtwang,
Hussain and Pairault (1988). Nolan (1988) and Selden
(1988, 1992).
The more recent comparisons of Indian and Chinese
development experience include Malenbaum (1982, 1990),
1487
extra budgetary resources generated approximately
Y 30 billion in military income in 1992 - accounting
for almost half the PLAs total outlays (1994, p. 379).
These constitute important groups whose self-interest
must now lie in continuing reform. This effective
cooption of uppartchih and the army in reform, in
contrast to India, makes the commitment of the polit-
ical elite to reform much more credible.
Though it may seem redundant to discuss any pop-
ular consensus about reform in a dictatorship, Chinese
history is replete with examples where - while
authoritarian dynastic rule has been the norm - a
dynasty could see another replace it if, in the eyes of
the people, it lost the Mandate of Heaven! Here, as in
India, the dirisgiste system established by the
Communists did conform with atavistic cultural atti-
tudes. It is impossible to judge how far the current
dynasty and in particular the reformers have been
tarred with the visible signs of the blatant rent-seeking
and corruption which has accompanied economic
liberalization.23
Finally, as regards competence, the Chinese suffer
from having lost a whole generation of youth to mal-
education during the Cultural Revolution. The only
technically sound economists are very young, and
though there are enough of them now around the
world, it is difficult to judge whether they can be put
together into a team and given their head, as India has
been able to do spectacularly.
Thus for slightly differing reasons, but ultimately
because of problems concerned with politics and cul-
ture the reforms in both China and India remain inse-
cure. So though, as ever, the potential of the two Asian
giants remains immense if only they could be
unshackled from dirigisme, it is not as yet certain that
it will be realized.
Rubin (1986), Demberger and Eckaus (1987). Swamy
(1989). Dreze and Sen (1989). Rosen (1990, 1992). Bhalla
(1992) and Srinivasan et al. (1993).
2. See Malenbaums (1990) review of Demberger and
Eckaus (1987). in which he pointedly notes the inconsistency
in the conclusions the authors draw jointly about the com-
parative performance of the two countries, as contrasted with
that in their individual chapters about each. Thus no matter
stands out more clearly in Chs. 2 and 3 of this study than the
contrasts between Chinas highest level Confucian rate of
growth and Indias bottom level Hindu rate of growth.
Indeed this is the most fundamental difference in the official
economic records of the two nations, 1950-85 (p. 398). and
yet Ch. 1, essentially cancels the extraordinary economic
achievement record of China presented in Ch. 2, while it
retains the official development performance of India, ana-
lyzed in Ch. 3 (p. 404). The authors conclude jointly that
1488 WORLD DEVELOPMENT
the PRC economy in the mid-1980s was in the process of
being overtaken by Indias economy; the change is in
absolute as well as relative terms. This conclusion is consis-
tent with other professional views; mostly, however, Chinas
development achievements have been judged more success-
ful than Indias and by a growing margin (p. 405).
3. A referee has questioned this cultural argument. He
raises several points. First, that while traditional Confucian
values might have bolstered the anti-capitalist mentality of
the Communist regime, it does not provide any useful insight
to argue that the failure of the Communist regime resulted
from its anti-capitalist attitudes. Second, if these attitudes
have continued into the reform period, then Dengs much
repeated statement to get rich is glorious needs to be
explained. Third, why are overseas Chinese (presumably
under the Confucian spell) such great business people?
Fourth, why were so many Chinese on the mainiand quick to
become agricultural and commercial entrepreneurs when
reforms created such opportunities? Fifth, while these atti-
tudes might have reinforced bureaucratic efforts to stifle pri-
vate initiatives, Chinese bureaucrats have been notorious for
using public resources for private profit.
There are answers at several levels to these worries. The
first is a definition of culture. The one most congenial to my
argument is Gellners: A culture is a distinct way of doing
things which characterizes a given community (p. 14). It
underpins the rules of the game in any society, and pro-
vides in Norths (1990) terms the informal constraints on
human interaction (Ch. 5) which in a world of limited infor-
mation and computational ability reduce the costs of such
interaction. Moreover, these behavioral constraints are
socially transmitted a form of transmission which unlike
genetic transmission, does perpetuate acquired characteris-
tics. In fact, culture, consists of sets of acquired characteris-
tics (Gellner, 1988, p. 14). Furthermore as North argues
these informal constraints often survive changes in the for-
mal rules (e.g., constitutions). Hence we find that the same
formal rules and/or constitutions imposed on different soci-
eties produce different outcomes But what is most strik-
ing is the persistence of so many aspects of a society in
spite of a total change in the rules Even the Russian
Revolution perhaps the most complete formal transformation
of a society we know cannot be completely understood with-
out exploring the survival and persistence of so many infor-
mal constraints (North, p. 37).
For an empirical validation of the importance of these cul-
tural factors in determining current outcomes in Italy despite
changes in the environment see Putnam (1993). It should
also be noted that while immigrants may carry over the habits
of their past culture to their new environment, we would
expect that over the generations it is the culture of their host
society (if it has a dominant culture) which is likely to pre-
vail. Hence the recent econometric exercise by Carroll, Rhee
and Rhee (1994) to discover if here are cultural effects on
savings by examining the savings patterns of immigrants to
Canada from different cultures is beside the point.
Second, I am particularly concerned with the atavistic
attitudes found in both countries toward trade and commerce
(also see Lal, 1985). As Gellner notes this was a common fea-
ture of settled agrarian civilizations with their qualitative
division of labor between three orders of men, those who
fight, pray and work (1988, p. 277). As he notes, one dis-
tinctive feature of a market economy is its instrumental
rationality. What defines the market is not that people
exchange things, but that they do so in the spirit of maxi-
mizing economic advantage and above all, that they do it
with a complete disregard of other considerations.. .What
defines a market society is of course not the presence, but the
predominance of such relations (pp. 130-I 31). Traders have
par excellence been agents of instrumental rationality, but in
most agrarian societies, such activity is . ritually circum-
scribed, a small island in a sea of producers of subsistence
(Gellner, 1988, p. 276). My concern in this paper in part is
therefore to examine to what extent this atavistic attitude in
the two countries has been eroded, for that will determine the
sustainability of a market society in the future. While one of
the assertions is that both Chinese Communism and Indian
Fabian socialism reflected and strengthened these atavistic
attitudes.
Third, as regards the specific worries (second to fifth
above) of the referee they can now be easily disposed of.
Dengs exhortation to his people to get rich in fact shows the
continuing prevalence of the opposite cultural attitude -
otherwise why would he bother? You do not find US presi-
dents making similar exhortations to their people! As regards
the overseas Chinese, as noted in the body of the paper, the
relevant groups transforming postreform China were in fact
the class of merchants and traders who fled the Revolution.
They have been acting out their traditional role, while the
predatory bureaucracys relationship with them is much as it
was in medieval China. None of this constitutes by itself a
change in the culture of China in favor of a market society.
The important question is whether the instrumental rational-
ity of the merchant has been accepted by the majority of
Chinese.
Finally, as regards the entrepreneurship shown by the
common people in the reform period in China, this is no sur-
prise because as economists we would expect, ceteris
paribus that the economic principle (viz. people would act
economically; when the opportunity of an advantage was
presented to them they would take it, Hicks, 1979, p. 43) is
universal (also see Schultz, 1990). What we cannot deduce
from this is the extent to which their own entrepreneurial
activity has changed their atavistic attitudes toward trade and
commerce.
The referee in a rebuttal demurs with this view citing
Granovetter who claims that the new institutional economics
- of which I am a subscriber - is based on a contradictory
oversocialized and undersocialized conception of
human behavior. But as Granovetter (1985) notes (though
disapprovingly) both conceptions have in common a con-
ception of action and decision carried out by atomized actors.
In the undersocialized account, atomization results from nar-
row utilitarian pursuit of self-interest; in the oversocialized
one, from the fact that behavioral patterns have been inter-
nalized and ongoing social relations thus have only periph-
eral effects on behavior. That the internalized rules of
behavior are social in origin does not differentiate this argu-
ment decisively from a utilitarian one, in which the source of
utility functions is left open, leaving room for behavior
guided entirely by consensually determined norms and val-
ues -as in the oversociahzed view (p. 485). Social influ-
ences are all contained inside an individuals head, so, in
actual decision situations, he or she can be atomized as any
Homo economicus. though perhaps with different rules for
decision (p. 486). Quite. Thus there is nothing contradictory
for example in the Victorian entrepreneurs relentless pursuit
 INDIA AND CHINA
of profit (undersocialization) and his using the wealth
thereby obtained to buy a landed estate to gentrify himself
and his progeny (oversocialization)! Similarly, I find no con-
tradiction in arguing that Chinese peasants and businessmen
are happy to truck and barter (on the economic principle) but
their attitudes to merchants and commerce in general are
governed by the ascription of relative status by the high cul-
ture. On the usual complaint by sociologists, including
Granovetter, that the new institutional economics falls foul of
some methodological prescription concerning functional-
ism see La1 (1988) pp. 4-7.
4. But as Jones (1988) emphasizes, China did have one
period of intensive growth during the Sung period.
5. An organic economy is defined by Wrigley as an
economy bounded by the productivity of land (1988, p. 5).
In such an economy - and historically this has been the
dominant type over the globe - there is a universal depen-
dence on organic raw materials for food, clothing, housing
and fuel. Their supply is in the long run inevitably con-
strained by the fixed factor - land. This was also true of tra-
ditional industry and transport. Most metal-working
industries were dependent upon charcoal (a vegetable sub-
stance) for smelting and working crude ores. Hence in an
organic economy, once the land frontier is reached, dimin-
ishing returns will take their inexorable toll.
6. Thus as Spear (1965) notes of the growing mercantile
class in Mughal India: The merchants did not dare to display
their wealth like the merchants of London or Amsterdam;
they appeared at court more often as victims of a squeeze
than as respected financial advisers (p. 47). Also see
Chaudhri (1985) who argues that India failed to define the
legal position of the merchant and hence commerce remained
tainted by usury. On China see Feuerwerker (1984). While
Keightley notes: Despite the remarkable commercial activ-
ity that characterized many cities of post-Sung China
merchants in China did not achieve the kind of political, legal
and economic independence that they did in the West. This
is a distinction of fundamental importance whose deep and
ancient roots are partly to be found in a political system that
gave kinship ties and their political extensions priority over
commercial and legal ones (1990, p. 47).
Similarly Pye notes: In China, merchants were assigned
low social status, hence denied power; and they could only
improve the status of their heirs by educating them as
scholar-officials (1985, p. 49). That these are atavistic atti-
tudes cultivated by most stable agrarian societies is argued in
Gellner (1988). For a discussion of how these atavistic atti-
tudes have continued to infect the modem world see La1
(1985).
7. Thus Bloch (1965) has argued that feudalism in the West
was such an institution because of the emphasis it placed on
the idea of an agreement capable of binding the rulers (vol.
2, p. 452). By contrast though there has been interminable
controversy about whether the Hindu social order was a vari-
ant of European feudalism, Rudra (1981) is right and devas-
tating in denying that it was. Imagine two men face to face
says Marc Bloch while describing the ritual of homage; well,
we simply cannot imagine two men face to face in the con-
text of Indian social history (p. 2144). The caste system is
a characteristic product of the Indian genius, just as feudal-
1489
ism was a typical product of the European genius. If it should
be considered laughable to write European history in caste
terms by the same token applying feudalism in Indian history
should be treated as maladroit (p. 2146).
For China, Dull (1990) notes: The Chou period is some-
times referred to as feudal, but whether one has the Western
Chou or the Eastern Chou in mind, the designation is not
applicable Three characteristics of Western feudalism
highlight the differences. First, the relationship between a
lord and his vassals in the West was a legal one in which both
parties were equal before the law; the notion of a legally
binding contract between equals was not present in the Chou
period, nor was it ever to become a feature of later Chinese
law. Second the process of subinfeudation by which [the]
vassalic pyramid was built, although not totally unknown in
China at this time, was not common ___Third, the primary
function of the Western knight was to fight for his lord; in
Chou China there were simply no knights (pp. 59-60)
8. It should be noted that the role of Confucian culture in
promoting anti-market and anti-merchant attitudes remains
controversial Thus some scholars (see e.g., de Bary, 1991;
Weiming, 1990; Redding, 1990) maintain that Confucian
values were not directly anti-market but were against ill-got-
ten and excessive wealth. While aspects of the culture -e.g.,
familialism, a bureaucracy chosen by examinations, and the
importance of education in conferring status through the
mandarinate -have been important for the economic devel-
opment of the neo-Confucian miracle economies of East
Asia (see Hicks and Redding, 1993; Vogel, 1991). While a
referee has suggested that like other absolutist states, whether
in Europe or Asia, the Chinese imperial state established
institutions that restricted trade and expropriated wealth from
its merchant community. In this respect there was nothing
distinctive about China. He argues that it was the Communist
party which translated the Confucian disdain for ill-gotten
and excessive wealth into anti-merchant and anti-market atti-
tudes.
But others see a greater continuity in attitudes and values
between the classical imperial state and the communist one.
Thus Jenner (1994) notes: The communist state is in many
ways a reinvention of the bureaucratic monarchy The
founders of the Communist party were products of Qing
China, educated in its schools and culture and soaked in its
values. To them it was only natural that the state should be
absolute and that a bureaucratic monarchy was the normal
form it should take Attitudes to state power remain heav-
ily influenced by traditional values. The states power
remains absolute and sacrosanct. Though it can often be got
around, it cannot be challenged. Politics at the top is played
by the rules of palace struggles, which owe more to the polit-
ical pundit of the third century BC Han Fei than to Marx
(pp. 35-36).
Baum (1994) provides a detailed reconstruction of these
continuing palace struggles at the top of the Chinese state in
Dengs reform period.
Jenner also notes that the essential feature of the high
culture which has dominated China is one which has pro-
moted the values of a premodem imperial bureaucracy.
There is plenty of evidence that Chinas business cultures
have long been able to flourish if only they were allowed to.
but for over two thousand years states have preferred to keep
business divided, confined and controlled (Jenner. 1994,
p. 178).
1490 WORLD DEVELOPMENT
As regards the role of Confucian familial values in
explaining the success of the overseas Chinese (see Redding,
1990). a recent, important paper by Greif (1994) is relevant.
He examines the institutional responses to the familial (col-
lectivist) cultural beliefs of Maghribi traders and the individ-
ualist ones of Genoese ones in the Mediterranean trading
world of the 1lth century. It was the very familialism of the
Maghribiworld which while accountingfor theircommercial
success, neverthelesspreventedthe institutionalinnovations
- most importantlythe development of contractand com-
mercial law-which emerged as a matter of necessity in the
individualistic Genoese trading world, and which were even-
tually an important factor behind the rise of the West.
Similarly, I would argue, it is the continuing hold of these
atavistic familial values which has prevented those legal
underpinnings of a modem commercialized market economy
from emerging in China.
As regards the success of the overseas Chinese and the
neo-Confucian societies of the East Asian edge, Jenner
(1994) is surely right in stating that their success has little to
do with Chinas past but with European economics, com-
mercial law, science and technology (p. 172). Onlywhen
these alien, Western factors came into play were certain ele-
ments within some inherited East Asian value systems able
to bring about successful capitalist development (p. 170). In
the absence of the dynamic, alien, Western institutions and
forms of economic organization that have transformed
these other countries the familistic values [of the mainland]
are more likely to impede than to support change and devel-
opment. In particular, China is still under the rule of a thinly
disguised, premodem imperial bureaucracy, unlike those for-
mer colonies (pp. 172-173). A similar explanation and
prognosis of the different parts of the Chinese world is pro-
vided by Pye. Also see Morishma, (1982) who also argues
that it is deviations from Japans Confucian past which in
large part explain its extraordinary economic success.
Finally, Vogels argument that the meritocratic bureau-
cratic tradition of China, based on entrance exams has been
an important contributor to East Asias success can be coun-
tered by two counterexamples. India and the United
Kingdom established modem meritocratic bureaucracies,
with considerable social cachet in the late 19th century. They
compare favorably on every dimension with those of East
Asia. But, nevertheless, these mandarins have not been
able to improve the economic prospects of their respective
countries.
9. No comprehensive estimates of the magnitude of these
politically determined entitlements are available. But
Bardhan (1984) has estimated that direct subsidies on food,
fertilizers, and exports, amounted to half the gross capital
formation in manufactuting in the public sector in 198&8 1.
While subsidies granted by the central and state governments
in 1982-83 were 40 times the levels of 1960-61. In addition
were the subsidized losses of public sector units, public ini-
gation works, state electricity boards and state road transport
commissions. The gross domestic product for public admin-
istration rose seven-fold during 1950-80, as compared with
a rise in the. overall gross domestic product of less than three
times during the same period (Bardhan, 1984, pp.62-64).
10. Statistical estimates of the black economy in India,
which is notoriously difficult to measure, vary from about
40-45% of GDP (Mohammed and Whalley, 1984) to
18-21% as estimated in a report of the National Institute of
Public Finance and Policy (March 1985).
11. In Lal(l990) I estimated that the public sector borrow-
ing requirement which was about 8% in 1960, and 7.5%
in 1970, had risen to 12.3% of GDP by 1985-86. Much of
this was due to the rise in nondevelopmentalexpenditure,as
capital expenditures had stagnated at about 10% of GDP
while overall government expenditure rose from about
19% of GDP in 1960 to over 34% in 1985, tax receipts
rose from 11% of GDP in 1960 to about 21% in 1980, and
then stagnated.
12. But see Lin, Cai and Li (1994) for an alternative view,
which seeks to provide a rationale for the more gradualist
approach adopted in China, andfaur mieur in India, as com-
pared with Russia and many East European countries. Their
argument is that with the heavy industry biased development
strategy, the economys production point is far beyond the
Pareto-efficient point (given by comparative advantage)
toward the heavy industry axis on the production possibility
curve of the economy, where all other goods are the other
light industry and agriculture category. As it is difficult to
shiti resources out of the heavy industries speedily, it may be
second best to keep their output frozen and put incremental
resources into the other sectors. Thus over time the econ-
omy will approach its efficient point on the shifting PPP
curve. This they argue will avoid the otherwise unavoidable
losses of output as the heavy industries become unviable
under a big bang.
13. But as Perkins (1994) notes these property rights were
not complete even in the 1990s. The buying and selling of
long term land leases was only allowed in urban areas.
Acquiring rural land for factory use typically involved
laborious negotiations in which the factory guaranteed jobs
and other benefits to displaced farmers in exchange for the
use of their land.Land transfer within rural areas typically
involved guaranteeing a basic grain ration to those giving up
their land use rights (Perkins, 1994, p. 29).
14. Wen (1993) provides a detailed analysis of total factor
productivity (TFP) changes in Chinese agriculture during
1952-89. He finds that the mutual aid groups and elementary
cooperatives of the early and mid- 1950sdid not damage TFP,
confirming Lins (199Oa) conjecture that an institutional
arrangement which allows for free entry and exit does not
damage economic performance. The subsequent period of
the communes raised land productivity but worsened labor
productivity, because of incentive effects. Lin (199Ob)esti-
mates that losses due to poor incentives were as much as 20%
of TFP. The introduction of the household responsibility sys-
tem in 1982 raised both land and labor productivity, accord-
ing to Wen. Since 1985 the growth of crop production has
slowed down but that of noncrop production has continued to
grow. This is partly due to the continuing control of grain
prices, which provided farmers an incentive to shift acreage
to higher valued cash crops, and because with the growth
of rural industry farmers preferred to invest in this highly
profitable new opportunity (see Perkins, 1994).
15. Jefferson, Rawski and Zheng (1992) show that TFP after
reform rose in both the state and nonstate industrial sectors
but it rose faster in the nonstate sector.
 INDIA AND CHINA
16. Yusuf (1994) notes with regards to the collectives which
comprise the bulk of rural enterprises that: on paper these
have remained the property of the community. But in an
increasing number of instances, collectives have either
been established by individuals with their own capital or
leased to local entrepreneurs. Theii ownership claims are
tacitly recognized, although in the formal sense rights are
fuzzy (p. 76).
17. The problem is more severe in China where the state sec-
tor accounts for about 52% of economic activity as compared
with the Indian public sectors sham of about 24%.
Moreover, India is using the national Renewal Fund to pen-
sion off workers in the National Textile Corporation for
instance, so that nonviable firms can be wound up. But India
also has its problem of sick industries. The Indian state
refuses to allow its capitalists to close them down because its
politicians and bureaucrats accuse them of taking public
loans and then running them into the ground. They as a result
continue to deplete the fist.
18. But it should be noted that despite its more centralized
and authoritarian polity, the Chinese Communist state
has provided more economic power to its provinces than
do the states in the democratic federal Indian polity (see
Rosen, 1990, p. 281). Yusuf (1994) claims that: decentral-
ization has a long history in China; traditionally, the nation
was governed by an exceedingly small central bureaucracy
which depended on gentry managed, local administrative
networks to exercise control (p. 73). But he then goes on
to state in a footnote (no. 4): decentralizing tendencies
occurred towards the latter part of each dynastic period
in China. For instance, in the twilight years of the
Ching dynasty in the mid-late-19th century, decentralization
was on the rise and was particularly notable in the first
three decades of the 20th century. Rather than the
relatively decentralized nature of the traditional Chinese
polity, which Yusuf seeks to muddle with the decentrahza-
tion associated with the withdrawal of the mandate of
heaven from a dynasty, what we may now be witnessing is
the latter, and this would naturally be of concern to the
present dynasty!
19. Perkins (1994) notes that though China had a bankruptcy
law in place in the latter half of the 1980s. there were no
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