Wednesday, December 27, 2006

Comparing Indian and Chinese progress on financial sector reforms

There is a broad consensus that India has done better than China at setting up the financial system. Indian banks are less bankrupt; the Indian equity market works better; the financial sector acts as more of a check in India in choosing which firms obtain access to capital, rewarding performance and good corporate governance. While these statements are broadly on track, in recent years, the Chinese have actually made remarkable and far-reaching progress, much more than they are generally given credit for. The Chinese have gone ahead and done things that are considered heresy in India, particularly in the eyes of the communists. In recent weeks Mythili Bhusnurmath and Ila Patnaik have written a pair of excellent articles on this theme.

One feature which plays in China's favour is the liberalisation of finance that was agreed to when China was admitted into the WTO. Even though a five-year window of time governs the full implications, the promises which have been made surely guide and influence public policy which must plan a trajectory which is compatible with the dates and commitments. In India's case, there is no comparable hard budget constraint influencing liberalisation.

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