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.
Details
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Author
Li, Wei Mengistae, Taye Xu, Lixin Colin
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Document Date
2011/04/01
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Document Type
Policy Research Working Paper
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Report Number
WPS5641
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2011/04/01
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Disclosure Status
Disclosed
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Doc Name
Diagnosing development bottlenecks : China and India
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Keywords
Finance & Private Sector Development;business environment;quality of power supply;average number of employees;small and medium enterprise;access to finance;total factor productivity;degrees of freedom;Labor Market Flexibility;access to bank;investment in road;information on education;power generating capacity;tertiary enrollment rate;adult literacy rate;school enrollment rate;labor force skill;market exchange rate;gross domestic product;impact of policy;supply of power;labor market reform;distribution of skill;local labor market;enforcement of labor;share of state;constraints to development;gradual economic reform;flexible labor market;labor regulation;firm size;labor flexibility;labor productivity;firm performance;regulatory burden;permanent worker;
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Citation
Li, Wei Mengistae, Taye Xu, Lixin Colin
Diagnosing development bottlenecks : China and India (English). Policy Research working paper ; no. WPS 5641 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/110051468214510067/Diagnosing-development-bottlenecks-China-and-India