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Decimal Digest
27 Aug 2012

Why has India failed to produce growth comparable to China? – A Game Theory explanation

In the late 1940’s & early 1950’s, the period during which both India and China became republics, the economic condition in the two nations was miserable. Till late 1970’s, economic development in both these giants kept pace with each other. However, since then, the Chinese economy has been growing much faster than Indian economy, and every passing year is leading to larger gap between the two nations, with the Chinese economy, with a population size not too different than India, now nearly 2.5 times that of Indian economy.

This difference can be explained by a phenomena known to game theorists as the “Keynesian Beauty Contest”. For the benefit of readers who may be unfamiliar with the concept, we will explain this simple game below.

Lets consider a game played by millions of people, where each person is required to pick a number from 1 through 100. A persons whose pick is one-half of the average is pronounced the winner. Lets see what would happen if this game is played over and over again.

In the first iteration, some smart guys will guess that if everybody else is picking numbers randomly, then the average will be around 50. Hence, if they pick 25 (half of 50), they should have better chance of winning. Some, even smarter guys will second guess the smart ones and say that the average will be well below 50, since some guys will pick 25, and hence they may pick something around 12.

Now, when the results of the first round is announced, everybody will see that there are lots of picks at 25 and 12; so in the second round, nobody will pick anything above 50, and picks will concentrate in single digits.

As more and more rounds are played, the picks will concentrate around 1, as one cannot go below 1.

This is what has happened to Indian democracy in last six decades. Given the fact that majority of Indian are illiterate, hungry and sick; coupled with design of Indian democracy where first past the post is winner; each successive round of elections have returned representatives with lesser and lesser levels of skills. Also since the representatives have an perverse incentive to keep their electoral college intact, the pace of reforms in India is much lower than in China.

Some of these challenges faced by developing nations lead us to the question whether democracy needs to have a different form or shape to be more effective?


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