Khans Model of Rent and Saxenians TTC Model - Case Study Example

Over the next twenty years, what is the likelihood that India will overtake China in terms of the size of its economy?  Please evaluate each economy using Khan’s economic rents analysis and at least one other analytic framework from the course.  Identify the factors driving growth in recent years and the social and political bases of these factors.  Consider whether or not these social and political bases will sustain themselves over the next several decades.  Also, consider what new growth drivers are likely to emerge given the current configurations and growth trajectories of each economy Introduction: In the recent years, one of the most discussed dialogues in international economics is with respect to the supposed capacity that India would have in taking over China in terms of economic growth. The camps on the two sides are as vehement in their view. In this discussion, I will try and analyze the debate in terms of the two models of economic growth-Khan’s model of rent and Saxenian’s TTC model. India is one of the members of the BRIC nations that are supposed to be the next global superpowers in terms of technological and economic strength. The two countries are also among the most populated in the world with China topping the list and India coming in a close second. India however has a population density higher than China. As far as the process of growth and the success story till date is concerned, the two countries have similarities as well as disparities in their culture of economic development. The Khan Model: (you can only about corruption but also a mention of a growth factor and how it applies to rent?) Rent seeking would have to be understood in the context of two essential views; the neo-classical view of rent seeking and Khan’s model that is in essence a criticism of the first view. The concept itself owes a lot to the economic theory advanced by theorists like Buchanan, Tullock, Tollison and others (Ngo and Wu, 2009). The idea in a rent theory model is the rent is the payment that is made to an owner of a resource over and above that which those resources could command in alternative uses. This would automatically then mean that rent is a return in excess of opportunity cost (Khan and Sundaram, 2008) Khan’s model is based on the basic premise that the existing rent-seeking literature has made an error in focusing just on the social costs that are used in the process of rent seeking. This works creates a misrepresentation of the rent-seeking problem by presenting only one side; the input side- of the process (Ngo and Wu, 2009). Khan argues that different types of rents created in different contexts are of equal importance. According to him, some rents are inefficient and growth retarding. The better understood examples of these rents are monopoly rent and those stemming from governmental and political interventions such as subsidies. There are other natural resource rents and rents for learning that play an essential role in growth and development. The more important question according to Khan is whether the economic benefits that are being produced by good rents can outweigh the rent-seeking costs or whether the cost of bad rents would add to the pile of social wastes (Khan and Jomo, 2008). In other words, the model proposed by Khan, suggests that it is not just the costs that are incurred by rent seeking that matter; rent outcomes or outputs produced by rent seeking should enter the equation of the cost-benefit calculation. Khan further argues that economic rents and rent seeking activities have a universal existence. The relevant distinction is between rent-seeking systems that are developmental and those that are crippling. The idea in this analysis would be to ensure that there is an understanding of the manner of rent distribution. In cases where this is limited to a single monopolistic class, that utilizes the rent to their own end instead of an investment in a public scheme the rent would automatically qualify as bad rent and would therefore be more harmful to economic growth. On the other hand if this distribution is such that it works in the interest of the society at large the rent would qualify as being positive rent. (Phongpaichit P 2005b p2). This is the basic theory of rent and can now be qualified in terms of the India-China economic growth scenario. In most cases of monopoly market and politics aiding the class with money, make use of the powers at their disposal so as to capture much of the pro-poor spending. In these cases, rent seeking by intermediate class interests to capture more aid resources can quickly have adverse effects (Khan, 2009). The idea again is that in countries where there is success in ensuring that the distribution of income is evened out there would automatically be a lot more growth in keeping with the Khan model. The idea that theory suggests is that in most cases, states would have to achieve the ability to protect property rights. This would therefore need the ability to fight corruption and the rent seeking behavior. The idea therefore is that in the next decade the country that has the better ability to deal with corruption would be more likely to progress in terms of economic growth. This would again not happen on its own but would need reform and a greater level of democratization of the process of governance. The final component often added to the package by development agencies is the promotion of pro-poor service delivery as a way of mobilizing the poor who are the majority or close to the majority in poor countries. If this group can be mobilized to hold the state to account by ensuring that the state delivers to them, then the accountability essential in this framework can be kick-started. The idea here is that rents would have to manifest themselves in terms of economy aid programmes and positive rent schemes for them to have an impact on the economic development of a given country. Both the countries of Asia have been a victim to extreme corruption within the ranks of it government officials and its ministers-in short the decision makers although it might be said that the brand of corruption differs within the two countries wowing to communist ideological allegiance China shares. Interestingly enough a survey in 2005, pegged the corruption in China at 3.9 and India at 2.8, in terms of the CPI score. (A CPI Score relates to perceptions of the degree of corruption as seen by business people and country analysts and ranges between 10 (highly clean) and 0 (highly corrupt). One would have to understand the fact that despite it being a discussion on future economic growth in terms of rents, it would be useful to know the base of the country growth at present so that one could make an informed prediction based on the existing gap between the two nations. India lags much behind China in terms of capita income. As of 2007, India had a per capita income of $941 while China was way ahead at $3,180 (at market exchange rates). The Chinese economy is also three times the size of India’s economy in terms of GDP growth-Gross Domestic Product (GDP) measured in US dollars in 2008 for the two countries stood at $4.2 trillion and $1.2 trillion respectively (Thakurta, 2008).   One of the primary arguments that stand in favor India’s ability to overtake China in terms of economic growth is the fact that much of China’s economy is dependent on foreign investment and sales in foreign markets. China is not a market based on originality but one that has thrived on its ability to supply cheap labor and cheaper products. India’s growth story on the other hand is one that has been based on highly original and even patented products like the development in information technology and pharmaceuticals (Kathwala Y and Heeren C, 2008). This has meant that the rent factor in India has come from original products rather copies and fakes. China has been known as the factory to the world in recent times and is the largest trading partner for India and Australia, replacing USA and Japan respectively. In terms of rent therefore, the investments in India are on the right path given the innovative, original nature of their vision, whereas, that of China though helpful in the short run would amount to bad rent in the long term growth due to an absence of originality and innovation. This was one of the greatest proofs of the fragile nature of growth characterizing China’s economic development and highlighting the bad rent factor that is ingrained in the fabric of the Chinese growth strategy. In terms of growth strategy it would be important to understand the simple fact that India is in terms of efficiency and innovation parameters whereas it is faring badly in basic requirements like health and primary education, macroeconomic stability etc. In terms of factors mired purely in growth terminology, one would have to accept that India is in the process of undergoing balanced structural change and a slower insertion in the world market, although some sectors, such as software, steel, automotive and pharmaceuticals are recently increasing their share in the world markets. One would also have to accept the fact that owing to the huge number of micro-enterprises and the great size of the informal sector, India is bound to benefit, much less than China from the economies of scale and from the third wave of the ‘fordist’ model of growth. China, on the other hand is bound to experience the negative externalities of this recent phase of rapid growth, such as higher inequalities, pollution and urban congestion, which would pull it back in the race towards positive rent driven growth. This would therefore mean that the bulk of the trade on which the growth of the Chinese economy and hence its growth is based is based in turn on the ability of cheap Chinese products to sell in foreign markets (Rajadhyakshya, 2009). This is where the recent secessionist global crisis point fingers at the chinks in the Chinese outsourcing amour, given the fact that 2. 67% of Chinese GDP relies on FDI. FDI, many believe is a steroid that when withdrawn would do more harm than it has ever done well. The Chinese economy when 2003 shows 60% & 2007 shows 30% of non performing loans(NPL) in Chinese banks as against 10% of NPLs in India by the year 2007 and the banks been funded from the surplus package from the government, compared to the 12% NPL in Indian banks.   The other basic factor that one would have to consider is the fact that the Chinese population is aging and the median age of age in China is 34 whereas the median age of Indian workforce is 24. The gap would keep increasing thereby affecting the positive aspect of the rent factor. The idea is that a younger population would be more productive and more innovative thereby increasing India’s chances of leaving the Chinese behind. The problem of adverse rent seeking in china is magnified by the fact that the economy functions based on a process that is devoid of any innovation. The products are a copy-replicas (World bank report).   This obviously aided by the fact that India is a democracy with a free and ever burgeoning media that helps bring instances of corruption to public focus. China on the other hand has no such provision. Although it is correct that the Indian subcontinent is still plagued by the ghosts of the license raj and it is a fact that bribes and falsifications are perceived to be a way of life as far as the private sector is concerned, one would have to understand the basic fact that the ramifications of the recent crisis that have led to reverse migration and rampant unemployment in china have demonstrated the fact that the growth story of India is built on a platform far less flimsy. The factors of the Indian economic growth are innovation and the genuine pool of talent that India has been slowly able to harvest. It has been argued that despite the image India produces no more than 50 PhDs in computer science in a year and the levels of literacy are much lower for India (61%) as opposed to china (Karl, 2009). One would however have to remember the fact that the Chinese culture of growth is one that lacks originality and is thus mired in bad rent-it is one that is based on counterfeiting and copying. Indian economy grew at 7 per cent a drop of just 2 per cent vis-à-vis the previous year’s growth in view of the economic crisis while the Chinese growth rate dropped an astounding 5%  from 12% to a mere 7% in 2009.   The TTC Model: The early usage of immigrants or migrants whose meanings are conceptualized in terms of dispersion from one place to another, permanent settlement in host society by adopting new languages, culture and life styles even though its painful, sometimes objectionable, had no longer retain today. Today its meaning has changed as the immigrants developed a different and multiple networks simultaneously with the societies of origin and host society by communicating with their kith and kin. The model developed by Saxena is a development of this concept and proposes that a country that is able to make use of the networks of its transnational population in the development of the country will automatically prosper in terms of economic growth. The idea that Saxenian puts forward in his model is that for most countries, there are a number of Transnational Communities that are in essence migrant populations that have moved to a country other than the one in which they have been born, yet retaining the ties the country of their birth. The basic idea in the model is a focus on the immigrant population of influence and the transfer of technology entrepreneurship to Asia.  The idea that Saxenian puts forward is that there would in most cases be a positive correlation between the TTC contributions and the growth within a given country. The idea here is simple. In any country that witnesses the relocation of capable Diaspora from within its fold, there is a problem of brain drain. The idea therefore is that the countries that are making attempts at development find it difficult to replace highly educated and skilled youth (Kyokal, 2003). This would also therefore mean that there are a large category of the migrants that shift base on a permanent basis taking their productive capacities with them. The issue therefore is that a country in order to grow and develop would have to tap the population that has moved out and aid the one left behind in developing itself in terms of future businessmen that would help the countries grow in their future (Altback, 1998). This model would therefore have two dimensions to it-the ability of the population and the development of this ability and the aid that a given country could expect from its migrants.  When one talks about the prospects of economic development the number of graduates and the numbers of professionals that a country is able to come up with and the prospects that it is able to provide its professionals is a factor. Both India and china are probably at par where the minting of the more educated professional is concerned. The numbers speak for themselves. China produced more than 600,000 engineers in 2005, and India produces nearly 500,000 technical graduates annually, the numbers are therefore much larger when compared to the annual 70,000 graduates that come out of US annually. China has also invested heavily in university education with the spectacular results (Preeg, 2008) The idea therefore is that while both India and China are able to create home grown entrepreneurs, both countries are aided by their chances of more graduates who complete their qualifications/achievements in the U.S. to get more future leaders for start-ups or to help stimulate innovation to enable both countries with brain circulation.    In order to compare the success rates of the two countries in the near future in keeping with this model one would only have to think about a graduate from Tsinghua University, looking to build a private company in China from scratch. In contrast someone from IIT would have his task much easier, given the local ecosystem and the information environment and the protection of private property rights, for the Indian entrepreneur, to succeed. India companies have had a better record on this count, whereas Chinese companies still need to learn the idiom of international commerce. “In instances of corporate governance as well, Indian companies are light years ahead of Chinese companies”(Vembu, 2008). That ties in with the observation that the equity markets in India are light years ahead of their Chinese counterparts. Open governance comes from a need to communicate to outside investors and outside constituents. Chinese state-owned enterprises really feel no need to take their communication function seriously. Finally the last statement that one could make in this context is that the overwhelming majority of wealthy immigrants in USA are Indians-thereby making them potentially the biggest source of untapped economic aid and thereby economic growth for India in the coming decade. This is of course subject to the ability of the country to tap the resource. Growth Trajectory: If one was to examine the growth trajectories for India and china, one would see a marked difference between the manners in which the two countries have followed their set objectives. India has seen a growth that has been driven by success in the IT sector and the ability of the country to provide services to the western more developed countries. India is primarily a country that has seen success backed by the BPO formula. China’s government, aware of the value of diversification, has continuously sought other strategies to ensure growth and has undertaken efforts to support technological sectors, such as the IT industry. In terms of China’s growth, one would have to understand the fact that Chian’s trajectory would be based on a high level of gross domestic product growth despite more than 20 years of surging productivity in the region. It would be driven by China's accumulation of physical capital, technological progress, improvement of human skill and economic integration. It would also have to be documented that the investment rate in China has fluctuated between 35 and 44 per cent over the past 25 years whereas compared to 20-26 per cent in India. China is ahead in terms of the fact that the economy has moved on from the classic to manufacturing sector, whole India has moved from the primary to mostly the service sector. The difference in the perception has been that a Hewitt-Packard setup in India would focus on development and innovation while the same in china would focus on duplication. Finally it could be stated that comprehensive growth targets for both countries would be highly dependant their abailities to reduce inequalitues. China has spatial inequalities (across regions) while in India the equalities are more vertical in nature. Conclusion: One could conclude by stating that in terms of potential and opportunities available, it would seem that India is poised to challenge china in terms of economic growth and development. This would however be hinged on the country’s ability to effectively tackle corruption, develop infrastructure and better the education system to raise its levels of literacy. The pool of talent is thus mired in problems of the fake rather than a culture of the development of the original and it is for this reason that if one was to go by the Khan model of growth and economic development one would have to state the fact that if India is able to continue gaining reign on the culture of corruption it would most likely overtake the Chinese economy in terms of economic development by 2030. [Word Count: 3300] Bibliography: Karl D, 2009, India: So near yet so far from great power status, pub, The China Morning Post, accessed January 30, 2010,   Rajadhyakshya N, 2008, Will India overtake China?, pub, Mint, December 9, 2008, accessed January 30, 2010,   Thakurta P G, Can India's economy overtake China?, pub, BBC Report, accessed January 30, 2010,   Vembu V, 2008, Indian units are light years ahead of Chinese companies, pub, DNA Money, accessed January 30, 2010, Khan M H and Sundaram J K, 2000, Rents, rent-seeking and economic development: theory and evidence in Asia, pub, Cambridge University Press, p85 Phongpaichit P , Money Politics and its Impact, accessed January 31, 2010, Silicon Valley's Skilled Immigrants Becoming Agents Of Global Economic Change, Survey Finds: High-Tech Immigrants Fueling Entrepreneurial Networks in Home Countries, accessed January 31, 2010, Kathwala Y and Heeren C, 2008, IT Outsourcing: China Grasps for the Lead, accessed January 31, 2010, < http://gbr.pepperdine.edu/093/itoutsourcing.html> Khan M H, 2009, Governance, growth and Poverty Reduction, DESA Working Paper No. 75 Ngo T W and Wu Y, 2009, Rent Seeking in China, pub, Taylor and Francis, pp3-5 Saxenian A,  From Brain Drain to Brain Circulation: Transnational Communities and Regional Upgrading in India and China, accessed January 31, 2010, Preeg E, 2008, India and China: an advanced technology race, pub, CSIS, p43 Altbach P G, 1998, Comparative higher education: knowledge, the university, and development, pub, Greenwood Publishing Group, p140 Kyokal N R, 2003, Migration and the labour market in Asia: recent trends and policies, pub, Organization for Economic Co-operation and Development, p12 Read More