What India, China owe their young

Comparisons of India and China are inevitable, and will keep being made. They are both fast-growing population giants, but with many differences. Comparisons also tend to imply a degree of competition. Competition can be zero-sum, as when one supplier displaces another for a fixed market, or when one buyer locks in a given supply of a natural resource at the expense of another. India and China will both be subject to these kinds of competition. On top of this economic competition, there is political competition, for global power and prestige. This can also be couched in utilitarian terms, of risk reduction or providing a stronger base for access to resources and markets. But emotions and ideologies can also be a major factor in political competition. Territorial disputes are clearly zero-sum, although they become embedded in a larger arena of competition, with egos and image entering the mix.

For centuries, the European powers, followed by the US, carved up the rest of the world for its natural resources to fuel their industrial growth. They also fought with each other, often with horrible consequences. Yet they became, and still are, so much richer than either India or China. The lever of these riches (to use economic historian Joel Mokyr's metaphor) was innovation. In my last column, I made the case that entrepreneurship drives the harnessing of technological progress for economic betterment. This was Joseph Schumpeter's original insight. If innovation and entrepreneurship are key drivers of growth, how do India and China stack up?
On the fundamental measure of ease of doing business, China is not a world leader, ranking only 89th. Yet this is far better than India's rank of 133. Looking at the components of the overall ranking, China does much better on trading across borders, which is no surprise. China is also relatively more business-friendly in ease of closing a business. But it also outperforms India in registering property and enforcing contracts. If entrepreneurship is starting small businesses, but ones that have a formal legal status so that they can expand easily, India puts itself at a huge disadvantage. It will be critical for the current set of reforms on company law, land acquisition and related matters that affect entrepreneurship, to move forward, if India is to remove its handicaps.
India's poor governance is also a matter of concern. There are good reasons for improving governance that have nothing to do with business or material well-being, though ultimately, good governance should help citizens to lead better lives. Measures of governance along several dimensions also exist. Indians enjoy much more political freedom than Chinese. India also does better, or no worse, than China on corruption, rule of law and quality of regulation. While China is ahead of India in 'government effectiveness'. This dimension of governance is subjectively measured, but it includes of the quality of public services, the civil service, policy formulation and implementation, and of the credibility of the government's commitment to such policies. India is a messy democracy, but there is no reason it cannot do better on these criterion, especially for those of its citizens (businessmen or not) who are outside the elite. Better public infrastructure and services will also have an impact on the ease of doing business, complementing needed legal and regulatory reforms.
Not everything can be reduced to numbers and rankings. Other areas that are important for innovation include the efficiency of the tax system, specific incentives and legal protections for intellectual property, attitudes towards risk and failure, and capabilities. Capabilities depend on everything from childhood nutrition to higher education—India's failures here go back to poor government effectiveness. India also lags in the quality of its tax system, though this should quickly change for the good, with pending reforms. The reward system for innovation has not yet received enough explicit attention, but India has the potential to outstrip China on this front.
Perhaps the place where India has the greatest opportunity is in its youth. India's youth, beyond the elite, are beginning to have confidence to compete globally. And there will be many more of them than in China. In the US, the baby boomers created social upheaval in the 1960s, but also drove the great wave of innovation in the 1980s and 1990s. The Facebook and Twitter generation is piggybacking on the changes wrought by their parents. The young are naturally more innovative, but they need the environment and infrastructure in which to succeed. They need education, jobs and opportunities to be creative. In 1914, Europe's leaders sent millions of their youth to die needlessly in trenches, and solved nothing. Another World War then had to be fought. Surely, India and China will figure out how to do better. Their leaders owe it to their young people.

The author is professor of economics, University of California, Santa Cruz