India beats China: What new report says on the state,market,people

India is 45th and China,75th,in the latest edition of the London-based Legatum Institute’s Prosperity Index. Released last month,the index processes data for 104 countries,covering 90% of the world’s population. This is the third Legatum Prosperity Index. But it has already captured global attention. It attempts to measure prosperity by going beyond GDP but by avoiding the woolliness usually associated with the GDP-is-not-enough crowd.

India being ranked far ahead of China in the 2009 Prosperity Index is even more eye-catching because in the first two editions of this index,in 2008 and 2007,the usual China-beats-India rule applied. In 2008,India was a lowly 70th and China,54th. In 2007,India’s rank was 46th to China’s 42nd.

What changed in 2009? The basic reason seems to be that as the index covers more and more variables and finetunes the concept of ‘well-being’ — how citizens in a country feel about themselves — the importance of personal freedom,institutional maturity and mutual trust is increasing.

In the 2009 Prosperity Index,India,China and 102 other countries were assessed under 79 variables grouped under 9 sub-indices. The sub-indices are economic fundamentals,entrepreneurship and innovation,education,democratic institutions,governance,health,personal freedom,security and social capital.

Even now,not all the variables under these sub-indices are what economists and statisticians call robust,that is,amenable to solid data-crunching,especially across countries. But still,a lot of data was thoroughly processed and the results are therefore important.

China easily outperforms India in the two economic subindices — an unsurprising result. China also does better than India in health,education,general safety subindices. But in domestic institutional maturity,India is ranked 36th to China’s 100th. Similar wide gaps to India’s advantage exist in governance — India,41st,China,93rd — and personal freedom — 47th and 91st. These are somewhat unsurprising,too,except that the wide margins should be noted by all those sceptical about Indian democracy’s ‘real’ advantage.

A really interesting finding is in the social capital subindex: India is ranked 5th and China,70th. This is the only subindex where India is in the top 10 or even in the top 20. What is social capital? A measure of the extent to which people and communities support each other. The study finds that building trust and personal/community relationships is far easier in India than in China. Considering that China is ethnically and religiously a far more homogenous society than India,this is food for interesting thought.

This is also one of the counter-intuitive implications — for those in the free market corner. They usually discount social capital in their analyses,sometimes equating it with inefficient tradition that should be supplanted by market rules. These findings show India’s ‘traditions’ may be getting something right.

Free market types should also note the Legatum study’s findings that European high tax/social welfare heavy countries beat Anglo-Americans when it comes to a well-rounded measure of prosperity. The first 8 countries in the rankings are European countries and Canada,which has a socio-economic system closer to the European model than the American one. Clearly,the ‘small government means better-off citizens’ orthodoxy needs interrogation by its proponents.

But market sceptics should pause and think,too. The consistent finding is that countries that provide better environment for private capital end up giving a better deal for its citizens. The lowest rank countries all score awfully on this count.

Finally,there’s a counter-intuitive lesson for the subset of free market sceptics who argue China is great because of its communism. The subindices where China beats India are those that measure market friendliness. China gives a better deal to business. India gives a better deal to people.

India beats China because how people feel is hugely important. If India makes private capital feel better — a very doable job — all kinds of global studies,not just Legatum’s,may start showing different results for the India-China binary.