Towards a Worldwide Index of Human Freedom

Liberty in Comparative Perspective: China, India, and the West • 213
restrictions on capacity expansion for established industries, fewer price
controls, and lower corporate taxes. In essence the reforms were “liberalization
by stealth” (Panagariya, 2008: ch. 4) or creeping capitalism.
These early reforms and the favorable growth record in the 1980s
were not sufficient to prevent the crisis in 1991. Public sector deficits rose.
Foreign currency was in short supply and became ever more so. After the
dissolution of the Soviet Union, the main source of foreign aid disappeared.
The reforms abolished most of the industrial licensing system.
The dream of autarky was given up. Foreign investment was reluctantly
welcomed. The Indian currency was devalued. Tariffs were cut dramatically.
The average tariff rate was reduced from 125 percent in 1990-91 to
only 71 percent three years later. The peak rate fell from 355 percent in
1990-91 to only 12.5 percent in 2005-2006 ( Joshi and Little, 1998: 70;
Nilekani, 2009: 71). Although the Indian economy did not switch as vigorously
from inward to outward orientation and export promotion as
China did, it moved significantly in the right direction. Since growth rates
improved in the early 1990s, especially in manufacturing, and since the
current account deficit fell and foreign exchange reserves strongly recovered
while the primary deficit of the central government fell, the liberalizing
reforms paid off ( Joshi and Little, 1998: 17, 35). Given the poor
record of Indian administrations in large scale policy implementation, liberalization
made sense because it implies some economizing on limited
state capability (Pritchett, 2009: 33). As Olson (1987) had recognized
long ago, an efficient administration is not the comparative advantage of
most developing countries. Therefore, planning is least likely to work in
poor countries like India.
But the Indian development pattern does not offer sufficient job
opportunities to its labor force, which is dominated by low-skilled workers
(Bosworth, Collins, and Virmani, 2006: 34). Most of India’s labor
force is not even employed in the formal economy or the so-called “organized
sector.” According to Bardhan, 94 percent of the Indian labor
force works in the informal sector (2010: 79). Frequently, workers are
self-employed. Enterprises are tiny. Work is quite unproductive. Indian
firm structure is characterized by a “missing middle.” Nearly half of all
Chinese workers are employed by enterprises with between 10 and 500
workers, but very few Indians are. This is an important difference, because
productivity in 500-plus worker enterprises in India has been about ten
times as high as in tiny enterprises (Bardhan, 2010: 35-36). Whereas
manufacturing employs more than a hundred million Chinese workers,
it employs just seven million Indians (Luce, 2006: 48-49). According
to the Economist, foreign-invested enterprises in China alone employ
more Chinese in manufacturing than the seven million Indians similarly
employed (2010, July 31: 46).
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