China and India one more time

Ajay Shah compares India and China interms of WB governance indicators;

The puzzle about India is the mismatch between a high score on Voice and Accountability, which has not yet translated into a State which is focused on providing public goods. Perhaps there are threshold effects; perhaps when India gets up from the 58.2 percentile to a 75th percentile, accountability through the political system will then manage to rein in the State, and force it to deliver on public goods.

On a related note is the issue of corruption: where India appears to have made substantial progress (from 40.3 to 52.9), at a time when China has worsened from 56.3 to 37.9. Once again, there may be threshold effects here: perhaps Indian-style Voice and accountability is at a point where improvements in corruption are starting to come about.

Corruption and the lack of focus on public goods are both manifestations of the same principal-agent problems between citizen and State. What is conventionally termed `corruption' (civil servants and politicans capturing money for themselves) is not that different from the sectarian welfare programs in the Indian State (civil servants and politicians capturing money for a group of supporters). The processes of political accountability may be coming to the point where they are able to block the former, but they are not yet strong enough to block the latter.

Broadly speaking, in 1996, China looked better than India in all the measures other than `voice and accountability' and `rule of law'. In 2005, the picture has changed a bit. The simple average of the six measures was 44.1 for China in 1996 vs. 43.9 for India. In 2005 this was 37.2 for China vs. 48.8 for India. This partly reflects the relative progress of the two countries but it also reflects shifting perceptions about these questions in the eyes of the outside world.

The Chinese are not happy at the message this is putting out to the world. Nine of the 24 executive directors of the World Bank have written to its new president, Robert Zoellick, challenging the release of "controversial indicators". Such unhappiness is, of course, futile, for even if the World Bank is pressurised to close down this effort, the key people will be able to carry this work to a university and find funding to sustain it.

Even if the World Bank's measurement of governance indicators purely reflects perceptions and not reality, such measurement is important, for India's ability to participate in globalisation is critically linked to perceptions of India in the eyes of global firms and governments. As an example, these shifting perceptions of India versus China may have something to do with the narrowing of the gap between India and China in FDI flows that has taken place in recent years.