Towards a Worldwide Index of Human Freedom

216 • Towards a Worldwide Index of Human Freedom
as shares of GDP have been falling since about 2000 (Hale and Hale,
2008: 65). But capital is frequently not used productively. State banks in
China prefer to provide loans to state-owned enterprises (SOEs). Until
some years ago, they were least likely to invest the money productively.
By contrast, private entrepreneurs sometimes pay more than 200 percent
interest per year on the black market (Economist, 2011, March 12:
74). Chinese banks fail to channel the savings toward productive investment.
It has even been questioned whether the earlier problem of nonperforming
loans has been solved or merely been swept under the rug and
transferred to the future. Moreover, there are reasons to fear that the stimulus
spending in 2009 will generate new and additional non-performing
loans in the near future (Walter and Howie, 2011). Nevertheless, Chinese
total factor productivity growth has been excellent: “one-third of China’s
growth is coming from rising productivity” (Anderson, 2009: 20-21).
Whereas the total factor productivity growth rate in the United States,
Japan, or Germany was not much better than one percent per year in
between 1990 and 2008, China achieved four percent (Economist, 2009,
November 14: 88). But India did well, too. It achieved nearly 3 percent
productivity growth.
India should raise its investment rate. Since household savings have
strongly increased, the savings rate could support more investment
(Bosworth, Collins, and Virmani, 2006). Actually, India seems to be well
on the way towards raising investment. By contrast to China, there is little
financial repression in India. But in infrastructure development, India
might lag a full decade behind China (Lal, 2008: 28-29). Since the Indian
public sector is already deeply in deficit, financing infrastructure will be difficult;
44 percent of recurrent public expenditures in India service the public
debt (Economist, 2005, March 5: 14). So, the legacy of past profligacy
undermines India’s capability to improve its infrastructure. Chinese public
debt might be as little as 17 percent of GDP.28 But India’s is as high as 75 percent
(Bardhan, 2010: 127). Whereas China’s government might have been
28 China’s government accounts, its banks, and their debts are still opaque and leave room
for radically divergent evaluations. Chang arrives at an estimate of public debt that is
about seven times as high as that of the Economist by including bad bank debts in the
public debt (2008: 34). Recently, the Economist reported estimates of Chinese public
debt ranging from 20 to 50 percent of GDP (2010, January 16: 65). According to Walter
and Howie, 75-77 percent is a good estimate for the 2009-2011 period (2011: 201). The
higher estimate includes local public debt and asset management companies which took
over non-performing bank loans which seem to be rising again. Even the highest estimates
of Chinese public debt compare not unfavourably with public debt in rich Western
countries, which averages close to 90 percent. Certainly, central government finances are
much healthier than local government finances in China. Whereas local governments
receive only 46 percent of tax receipts, they account for 77 percent of public spending.
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