Visitors invariably comment that China is shiny, orderly and clean while India is dusty, chaotic and dirty. In 2006, Prime Minister Manmohan Singh asked what Mumbai could learn from Shanghai? Both these giants will defy the economic malaise in Western economies and are likely grow at more than 7% in 2009. But that is where the comparison should end. China’s performance has captured the world’s attention over the last three decades. It is common to ask whether India can follow in China’s footsteps. But contrary to the popular hype, it is time for Beijing to learn from New Delhi.

Since the global fall in exports, Beijing is building its way out of an economic slump – roads, ports, railways – name anything big and they’re likely to be building it. But India’s approach has been different. Indians, including the poor, are looking to consume their way towards further growth. Sure, the demand for handbags, air travel and fine dining in Mumbai has collapsed but the real indicator of economic progress in developing countries is how the poor are getting along. In terms of poverty alleviation, China had a head start. It began free-market reforms in 1978 while India only started on its current journey in the early 1990s. But since the turn of the century, India is rapidly improving while China is getting worse.

China and India have something in common: half of the people in China and two-thirds in India still live in rural areas. That means about 700 million people in each country, most of whom remain poor. Progress in rural areas is a strong indicator of overall economic progress in developing countries. And this is where the paths of both China and India are diverging.

In China, the urban-rural income ratio was 1.8 times in the mid-1980s, 2.4 times in the mid-1990s, 2.9 times in 2001, and now around 3.5 times. The 1980s was a golden period for China’s poor. Over 80% of the poverty reduction that has taken place in China occurred during the first ten years of reform (1978–88). Although per capita incomes have risen since then, an estimated 400 million people have seen their net incomes decline over the past ten years. Despite the decades of spectacular growth, absolute poverty as well as illiteracy have actually doubled since 2000. In India, both these things have halved.

Although beginning from a lower base, it has been a different story for India. The urban-rural income gap has been slowly, but steadily, declining since the early 1990s. Over the past decade, economic growth in rural India has outpaced growth in urban areas by almost 40%. Rural India now accounts for half of the country’s GDP, rising from 41% in 1982 and 46% in 1993. Importantly, agriculture in rural India now accounts for only half of rural GDP and is falling.

Agriculture was responsible for around 72% and 64% of rural GDP in the 1970s and 1980s, respectively. This means the development of a balanced economy is occurring in rural India, with rapid growth in non-farm sectors such as manufacturing and services. Unlike in China’s already crowded cities, rural Indians do not have to migrate to urban areas to earn a better living.

The divergent path of these two developing giants is also demonstrated by the role of domestic consumption in the economy. In China, domestic consumption, as a proportion of GDP, has fallen from around 60% in the 1980s to 35% currently – the lowest for any major economy in the world. The Chinese ‘economic miracle’ is depending more and more on exports and State-led fixed investment. Even Beijing consistently admits that this is an unbalanced and unsustainable strategy.

Moreover, depressed levels of consumption (and correspondingly high levels of savings) by the citizenry of a still poor country means that growth is uneven and benefiting the relative few. In contrast, domestic consumption makes up more than two-thirds of the Indian economy. India has a lot of catching up to do but its poor are rising with the tide, unlike China.

China’s emphasis on State-led fixed-investment growth in urban areas has exacerbated inequality in China and heavily favours a relatively small number of well-placed insiders. It was a deliberate decision taken after the Tiananmen protests in 1989 in an attempt by the State to retake control of the economy. Rural China was the heart of private, entrepreneurial progress when reforms began in 1978. Mean household incomes were rising with the tide. Prior to Tiananmen, growth in investment by the private sector in rural China was growing at 20%. After Tiananmen, it dropped to 7%. Hundreds of millions of Chinese have since largely missed out on the fruits of the country’s spectacular growth.

The Chinese and Indian development models are not actually in competition – that is more a media obsession. But magnificent as Shanghai now is, its shiny buildings have been built on the back of the savings of China’s peasants who are forced to deposit these in state-owned banks and receive little in return. In contrast, India started its reforms 15 years later than China but is quietly and gradually building its base. Now that Prime Minister Singh is well into his second term, he will do well to reject the dangerous appeal of the Chinese approach.

Dr John Lee is the Foreign Policy Fellow at CIS and a Visiting Scholar at the Hudson Institute in Washington. The second edition of his book Will China Fail? was released in June.