China believes foreign direct investment is the fastest route to economic development. But India's reliance on homegrown entrepreneurship may put that country in a position to catch up with, and possibly surpass, its northern neighbor. India, not China, is the rising economic power to watch. That argument set the tone for a potent essay authored by Yasheng Huang and Tarun Khanna in Foreign Policy. The arguments are compelling ones and ones that I believe holds a lot of water in the long run.

Sanjaya Baru, editor of The Financial Express took used the argument further yesterday by arguing in a well written column that there is no need for Indians to lose too much sleep over China. And that India is on the right trajectory. I've reproduced below the full text of Baru's column. Makes for very interesting reading.

Don't despair about democracy

The lives, the aspirations, the dreams, the fears, the joys and the toils of 1.3 billion citizens of the People’s Republic of China are conveyed everyday to over a billion Indians by one reporter of the Press Trust of India in Beijing. Period. And we say we have been civilisational neighbours for ages!

So it was not surprising to see so many in Prime Minister Atal Behari Vajpayee’s entourage to China going there for the first time and sending news despatches like they discovered a new planet! Discovering Pudong, the new extension of Shanghai, five years after it officially came into being, is excusable. But trying to unravel the secret of China’s growth a decade after the world came to take note of it? We have a right to be better informed.

If you can count the number of Indian journalists reporting daily from China on one finger, you can count the number of Indian sinologists on one hand, if one were to exclude the government’s China hands, in service or retired. Where are the funds that can send Indian scholars regularly to China? Where is the investment in the study of that country that makes it attractive for a young Indian to learn the language and dedicate her life to a career in sinology? So we continue to view our neighbour largely from western eyes? The sterile and dated debate on whether it is democracy or dictatorship that makes all the difference between China and India came up again during Vajpayee’s visit and many who felt apologetic about India’s less impressive economic performance came back with the view that a little bit of dictatorship may not be such a bad thing after all. And this, 28 years after the Emergency!

India may well have paid an economic price for democracy and may do so for some time, but that is the only political system that can define this Republic and our nation. India is India because it is a pluralistic, secular democracy. Anyone who tries to alter that, either the pluralism or the secularism, will be responsible not just for killing democracy but our nation as we have come to know it over the past century. So don’t waste your time with the democracy debate.

Consider the upside of democracy. Pluralism and free enterprise. Yasheng Huang of the Sloan School of Management at MIT and Tarun Khanna at Harvard Business School have done that in the latest issue of the prestigious strategic affairs journal, Foreign Policy (July-August 2003). In their essay “Can India Overtake China?”, they hypothesise that what makes India really different from China is private enterprise, homegrown! The Mahatma called it “homespun”! The sahukar, not the cautious one that finance minister Jaswant Singh said he learnt his business economics from in his childhood in Rajasthan, but the “uncautious sahukar”, the risk-taking entrepreneur like the late Dhirubhai Ambani, whose first death anniversary was commemorated yesterday.

India has its Ambanis, Brars, Narayana Murthys, Anji Reddys and Venu Srinivasans and many more “entrepreneurs”. China has foreign multinationals. Of course, there is the Chinese diaspora that has made a major difference in manufacturing, but the Indian diaspora is making the difference in services. Over time, the two should cancel each other out, with the Indian diaspora finally contributing to India what the Chinese diaspora has to China. When that external fillip is accounted for, India still has the advantage of a hundred years of private enterprise that makes its presence known every now and then in one way or another.

An Ambani in the 1980s, a Narayana Murthy in the 1990s, a Venu Srinivasan in the 2000s. Yasheng and Khanna place emphasis on “entrepreneurship” over “investment”. Investment can be made by nationals or foreigners, by the state or by multinationals, but entrepreneurship is driven by individuals who are the product of a system that encourages the freedom of enterprise. It’s a very Schumpeterian view of industrial development, and a credible one. Make no mistake, Yasheng and Khanna recognise that China has done better than India in recent years and all the statistics show that to be the case. The question they pose is: What next? The Chinese model of industrial development, they suggest, is “top-down”, with the state and foreign investors doing all the investment. The Indian approach has been “bottom-up”, with domestic enterprise being at the cutting edge. Conclude Yasheng and Khanna, “China and India have pursued radically different
development strategies. India is not outperforming China overall, but it is doing better in certain key areas. That success may enable it to catch up with and perhaps even overtake China. Should that prove to be the case, it will not only demonstrate the importance of homegrown entrepreneurship to long-term economic development; but it will show the limits of the foreign direct
investment (FDI) dependent approach China is pursuing”.

Those who see government policy having stifled industrial growth in the pre-liberalisation era don’t give credit for the entrepreneurship it fostered. Even the public enterprise and small scale reservation policy fostered first generation enterprise. But when the policy served its “greenhouse” role, the time had come for an opening up to the forces of competition and that is what the Narasimha Rao-Manmohan Singh policies of the early 1990s enabled.

Indian enterprise was a product of the “greenhouse” of protected industrialisation but learnt that survival depended on global competitive ability. China acquired that ability by mixing multinational enterprise with cheap yet skilled labour. India can utilise the same endowment with local enterprise. It is this “creative enterprise” that will take India forward. What the government must do is to create and foster a policy environment, including investment in education at all levels, in infrastructure, in both rural and urban areas, so that domestic enterprise can blossom further. This is not to suggest that we must shut foreign enterprise out. Far from it. India can benefit from more FDI, and must seek more of it in the infrastructure sector, to be able to create an environment conducive to accelerated economic growth.