China and India - a Note on the Influence of Hierarchy vs. Polyarchy on Economic Growth

This note tries to apply two versions of Sah and Stiglitz's "The Architecture of Economic Systems: Hierarchies and Polyarchies" model (SandS) to highlight some important differences between the development paths of India, the largest democracy, and China, the largest of the few remaining communist ruled economies. It argues that the original SandS model is applicable to private organisations but not to governments, to which a revised model is applied. It is the reliability of the government's decisions and the ability of the investor to rely on them that the modified SandS model tries to capture. As a communist country, China is as centralized as a huge polity of its size can be. A decision of the central authorities, a contract or promise confirmed by Beijing, can be relied upon. This provides a degree of security to the investor that his contract will be honoured and she will not be dispossessed. In the Indian federation the investor has to assure herself that all authorities involved agree to support her project, because any agency that has any say may be able to derail it. These differences are accounted for by the adjusted Sah and Stiglitz model. These differences affect not only the total quantity of investments but also their composition. Clearly, no claim is made or implied that the models introduced below provide the explanation for the differences in the development paths of these two Asian giants in the past few decades. They merely add a new perspective to the economic systems dimension of the development process.