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Diagnosing development bottlenecks : China and India, Volume 1
 
Author:Li, Wei; Mengistae, Taye; Xu, Lixin Colin; Collection Title:Policy Research working paper ; no. WPS 5641
Country:India; China; Date Stored:2011/04/25
Document Date:2011/04/01Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; Banks & Banking Reform; Labor Policies; Labor Markets; E-BusinessLanguage:English
Region:East Asia and Pacific; South AsiaReport Number:WPS5641
Volume No:1  

Summary: Although it had a a lower income level than India in 1980, China's 2006 per capita gross domestic product stands more than twice that of India's. This paper investigates the role of the business environment in explaining China's productivity advantage using recent firm-level survey data. The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China. The empirical analysis suggests that it is important to consider country-specific growth bottlenecks and the indirect effects of policy reforms.

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