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CHINA AND INDIA IN THE GLOBAL
ECONOMY AND POLITY:
COMPETITION AND COOPERATION
T.N. SRINIVASAN
Samuel C. Park Jr. Professor of Economics
Yale University
Eldon Foote Lecture in International Business and Trade
University of Alberta
Edmonton, Alberta Canada
Tony Lecture Hall
October 24, 2008
Introduction
• China and India – the two fastest growing large
economies since 1980 and have contributed a
significant share, roughly a little over 20 percent of
global growth during 1980-2006– Table 1
Table 1: Growth of Real GDP Average, percent per year
1980 to
1990
1990 to
2000
2000 to
2006
2007 2008 2009
China 10.3+ 10.6++ 9.8++ 11.1~ 9.4~ 9*
India 5.7+ 6.0++ 7.4++ 9.6^ 9.0^ 7.9**
Contribution
to Global
Growth
(percent)
23 22
Sources: + World Bank (2005), Table 4.1
++ World Bank (2008a), table 4.1
~ World Bank (2008b)
^ RBI (2008)
* 3rd Quarter of 2009, New York Times, 10/21/2008, pB9
** CSO 92008), 1st Quarter 2008-2009
•Both are expected to grow in the coming decades – Table 2
•The acceleration in economic growth of both has been
associated with economic reforms.
•Reforms involved the significant opening of their economies to
world trade and foreign investment
•Reforms also allowed market forces to play a greater role and
reduced state involvement in the economy than earlier
Introduction, continued...
• Chinese reforms were initiated by the visionary leader, Deng Xiao Ping in 1978. Indian reforms began hesitantly and sporadically in the mid-1980s and became systemic and broad ranging after a serious macroeconomic and balance of payments crisis in 1991.
• However, association of reforms with growth acceleration does not necessarily imply deeper causal connection
• Distinguishing mere association from deeper causation requires a counterfactual analysis of what would have happened in the absence of reforms
• Any counterfactual analysis involves not only an analytical model but also the use of assumptions, not all of which are testable – a complete analysis of the robustness of conclusions with all possible but plausible variations in assumptions, a virtually impossible task
• In what follows, I will present what I hope is a robust analytical description, but it should not be seen as a substitute for a counterfactual analysis. The description will cover
– A historical perspective of the growth of the two economies (Section 2)
– Broad contours of their development strategies and objectives since the communist take-over in 1949 in China and independence from the UK in 1947 (more precisely from 1950) in India (Section 3)
– The rationale for the adoption of reforms in the two economies (Section 4)
– The content of reforms (Section 5)
– Achievements of reforms with respect to growth and its
sustainability, distributional outcomes, savings and
investment (and its efficiency), foreign trade and foreign
investment (and their differential role in the two
economies), agriculture, manufacturing and services,
special economic zones, financial sector, and political
economy issues (Section 6)
• Conclusions (Section 7)
• Maddison (2007) points to the exceptional character of China – it is and has been a larger political unit that any other; already in the 10th century A.D., it was the world’s leading economy and the leadership lasted until the 15th century A.D., outperforming Europe in technology, efficiency of resource use and in a bureaucracy capable of administering a huge empire. In the subsequent four centuries, China was overtaken by Europe.
• Although India was a large political unit in several periods in its history going back to the Maurya Empire in the third century B.C., it did not have the continuity of China – its per capita income was also comparable to Europe until about the 16th century – its achievements in mathematics was outstanding. In its early history China was ahead in technology
• The cultural-religious exchange between China and India go back to the founding of Buddhism in 4th century BC.
2. Historical Perspective
• Shares in World GDP and Merchandise Trade – Table 3
• During first wave of globalization during roughly 1850-1913, China’s per capita real GDP declined somewhat while India’s grew by 26 percent.
• India was under direct British rule from 1857 and Britain followed a policy of free trade through the empire.
• Early in the 19th century the two countries were the world’s leading exporters of textiles (cotton and silk) and were the two dominant industrial powers after the United Kingdom – Table 4A
• Since the spread of the industrial revolution both economies fell behind in industrialization
• India, under the peace and order of British Rule, began to reindustrialize in the late 19th century. This process gathered momentum during the interwar period when growth of manufacturing was faster than the global average and that of many industrialized countries – Table 4B
• China, however, suffered internal disorder and external intrusions during 1920 until the revolution of 1949.
• These included Taiping Rebellion (1950-64); Boxer Rebellion (1899-1901) and simultaneous armed struggles with foreign powers; Russia took over of 10 percent of Chinese territory in the 1850s and later engineered the separation of Outer Mongolia; three wars with Japan and two with France and the UK; victorious powers exacted large financial indemnities.
• Maddison argues that both the imperial regime and Kuomingtong (KMT) were incapable of creative response to internal disorder and foreign intrusions. In his view, KMT was ineffective in asserting China’s national interests, did not respond effectively to Japanese aggression and finally collapsed when faced with the civil war against communists led by Mao Zedong
• On the other hand, under the leadership of Mahatma Gandhi, there was unity across the political spectrum in the struggle for independence from the British colonial rulers.
• Even prior to independence there were several plans for India’s future development, some of which had a lasting impact on post-independence India.
• The Hindu-Muslim Conflict that led to Colonial India’s partition at independence into India and Pakistan in 1947 was a relatively late development. The partition riots and population movements between the two nations involved enormous number of deaths and lasting damage.
3. Pre-Reform Development Strategies
• China after the revolution in 1948 and India after independence from Britain in 1947 were very poor and had been poor for more than three centuries
• It is no surprise that poverty eradication was the overarching objective of Development in both
• India’s poverty and the failure of colonial rule to address it was articulated by Dadabhai Naoroji, an Indian member of British Parliament, first in a lecture in Mumbai in 1876and published in 1899 under the title “Poverty and Un-British Rule in India”
• Development plans were formulated in the late 1930s by the National Planning Committee of Indian National Congress, the party of Gandhi that led the struggle for independence. There were other plans by a group of businessmen of Bombay and also the Indian Labour Federation (both in the early 40s). All had poverty eradication as their focus.
• All the plans emphasized accelerating economic growth
• Yet, India’s planners of the pre-independence era never viewed rapid growth as an objective of intrinsic value from a social perspective, that is, it has no value in and of itself, but valued only for its instrumental role in achieving other intrinsically valued social objectives, in particular, poverty alleviation
• Indian planners, however, did realize the efficiency of accelerated growth as an instrument very much depended upon how inclusive it was and emphasized inclusiveness of growth
• The fear that realized growth may not be inclusive was expressed early on at the end of the Second Five-Year Plan in the early sixties and led to the appointment of the Mahalanobis Committee, to look into the Distribution of Income and levels of living
• I am not aware of such clear distinction between the intrinsic
and instrumental value of rapid growth being made in China in the pre-revolutionary era
• The development strategies of China and India during 1950-80 were broadly similar, both of which emulated the Soviet style central planning
• Prime Minister Nehru had visited the Soviet Union between the World Wars and was an admirer of the Soviet Plans for having transformed an essentially agricultural economy to an industrialized one capable of fighting the industrialized Germany
• Yet the planning that a democratic India chose, while it
emphasized the role of the state and the need for it to control the “Commanding Heights” (to use Lenin’s phrase) of the economy, nonetheless did not nationalize the entire production sector. Agriculture and retail trade were entirely in private hands. So were significant segments of industry.
• China, as a communist state virtually nationalized the entire economy. Both countries emphasized the development of heavy industry, in particular, equipment manufacturing in the public sector. The rationale for this (as expounded in the Feldman model of 1920s for the Soviet Union, later independently developed in India by Mahalanobis) was rapid long-term growth in an economy largely closed to international trade
• The suspicion of foreign trade was deep-rooted among
India’s planners – competition of any kind was viewed by them as wasteful rather than efficiency-enhancing. The result was that they insulated the domestic edonomy from internal and import competition.
• In China’s case the hostility of the industrialized west and its refusal to treat China as yet another trading partner forced insulation, even if the planners did not want to adopt it. Domestic competition was ruled out by the state ownership of means of production.
• The sad story is that the strategy of planned development adopted by both neither delivered rapid growth nor significant poverty reduction until the 1980s after the initiation of reforms
4. Rationale for Reforms
• In India a severe macroeconomic and balance of payments crisis led India to approach the IMF and World Bank for assistance in the spring of 1966
• The assistance was provided subject to the conditionalities that the rupee be devalued and the restrictions on foreign trade be relaxed. These were “sweetened” with a promise of $750 million of non-project assistance from the World Bank to tide over the adjustment costs of devaluation and trade liberalizaiton
• The IMF-World Bank package was not popular particularly with the senior leaders of the Congress Party, but Prime Minister Indira Gandhi who had assumed power only a few months before in January 1966 was politically weak and accepted the World Bank-IMF package
• However, the World Bank reneged on its promised non-
project assistance because of pressure from the US which wanted to punish India for its opposition to the Vietnam War. Also, because of the unpopularity of the package the Congress Party lost some seats in Parliament in the 1967 general election. Both evens led Mrs. Gandhi to reverse the trade liberalization part of the package while the rupee’s devaluation was not reversed.
• It so happens that Korea, Taiwan and other East Asian economies liberalized their trade regimes in the mid-1960s while India reversed the liberalization. It is plausible to argue that had India not reversed, it would have also experienced the same rapid growth as East Asia during 1950-80.
• The successful introduction of the green revolution in the late sixties, the discovery of significant oil resources in the Arabian Sea and the flow of remittances from Indian labour migrants to West Asia after the first oil shock in 1973 eased the balance of payments and macroeconomic pressure.
• Clearly, with economic situation being comfortable and the potential for rapid growth from trade liberalization remaining only a potential, there was no significant political pressure for systemic reforms of the development strategy during 1950-80.
• The Congress Party in power used the discretionary economic control system to dispense patronage and rents. Rent receivers were concentrated and lobbied to ensure that the system was not reformed to eliminate rents. Those hurt by the system were too diffused to organize and lobby against the system.
• The situation in China was very different. Of course, with a single party authoritarian regime in control, there was no question of political opposition pressuring the party for reforms or for anything else.
• However, the convulsions that the Chinese people and the economy were put through by Mao Zedong cost them significantly in terms of lives lost and growth foregone.
• The famine during the Great Leap forward caused an excess mortality of 30 million. Amartya Sen, the Nobel Laureate has persuasively argued that India’s free press and vibrant democracy, in contrast to the Mao dictatorship, explain the absence of famines in post-independence era compared to several in the colonial era.
• The massive dislocation during the Cultural Revolution led to a lost decade in economic and social times. Almost a whole generation did not get adequate schooling.
• By the late 1970s the senior leaders of the Communist party
of China, including Deng, realized that the country’s economic, political and social problems required a major overhaul of the system. In particular, the development strategy of Mao Zedong had to be abandoned and a new one put in place.
• With the death of Mao in 1976 and the overthrow of the Gang of Four after his death and the assumption of leadership of CPC by Den Xiao Ping, China was ready for systemic reforms in 1978.
• India had to wait until 1991 for its systemic reform. However, since the sixties there had always been attempts to moderate the rigours of the economic controls and mitigate their unintended distributional consequences without reforming the system itself.
• Rajiv Gandhi who succeeded his mother as the Prime Minister after her assassination in 1984 and the young economists who had served in the World Bank and the IMF whom he appointed to senior positions, did attempt to reform the system but in spite of a huge majority for his party in Parliament, Rajiv Gandhi could not muster support from his party for thorough reforms.
• However, in the mid-eighties he and his appointees experimented with relaxing industrial foreign exchange and trade controls at the margin in the same fashion as past attempts describe earlier.
• Although such liberalization increased the potential supply from existing capacity with the significant trade barriers in place, the increased demand for potential increase in supply had to come from domestic sources. Thus, domestic demand expansion was achieved in the eighties by abandoning conservative macroeconomic policies of the 1950-80 and engaging in fiscal profligacy financed by borrowing from foreign and domestic sources. By 1990-91 the fiscal deficit had grown to 9.4 percent of GDP”
• With the outbreak of the first Gulf War, the price of imported oil rose phenomenally and at the same time remittances from Indian labour in the Gulf disappeared. In fact, such workers had to be brought back to India by the government. There was enormous pressure on the balance of payments. This was compounded by the downgrading of India’s sovereign debt to junk status. Outflow of capital ensued. Foreign exchange reserves had fallen to less than $1 billion, less than two weeks’ worth of imports and a possible default on foreign debt loomed.
• The economic crisis was compounded by a political crisis with three changes of Prime Minister within a year and the assassination of Rajiv Gandhi in May 1991 while campaigning for his party in the general election.
• Thus, as Prime Minister Rao with Dr. Manmohan Singh as Finance Minister came to power in June 1991, there was no alternative left for India but to approach the IMF and the World Bank for assistance once again.
• However, once the crisis was over, India did not revert to
the pre-1991 economic development strategy but went
beyond the condtionalities of IMF-World Bank package to
undertake systemic reforms. The reasons for this were
basically two, both external:
– First was the complete collapse in 1991 of the Soviet
Union and its system of Control Planning emulated by
India
– Second was the rapid growth of China since 1978 under
Deng’s reform. Having fought and lost a border war with
China in 1962, the prospect of being left behind China
economically was unpalatable to policymakers. Thus,
the systemic reforms were born.
5. Content of Reforms
• Chinese Reform followed three successive stages according to Shanguin (1999)
– First stage (1978-84) focused mainly on rural areas, particularly the replacement of agricultural communes with the household responsibility system and free sale of most output at market prices. Outside of rural areas four Special Economic Zones (SEZs) were created. Also, urban enterprises (particularly state owned) were made to pay taxes on their profits rather than surrender them altogether to the state
– Second stage (1985-92) focused on urban areas, particularly reform of state-owned enterprises (SOEs) with the introduction of share-holding system, freeing them to make their own investment decisions and the creation of more coastal SEZs including on one the island of Hainan
– Third (1992- ) and still continuing stage is the creation
of a “socialist market economy.” It included the signing of access agreements with the existing members of the WTO by China as a prerequisite for becoming a member of the WTO. The membership commenced in 2001 with the signing of the last access agreement with Mexico
• Experimentation is the hallmark of Chinese reforms with successes and failures at each stage leading to further reforms and correction of earlier ones at subsequent stages. Experimentation and learning also included the use of the diversity of various regions of China as, in effect, laboratories with learning from reforms and their outcomes in different provinces, townships and villages. There is no Indian analogue of China’s experimentation and its township and village enterprises.
• Chinese reforms were not entirely “top-down” like Indian reforms but had some significant “bottom-up” elements with sufficient flexibility allowed by the centre to provincial governments to adopt reform models and pilots better suited to their circumstances.
• The contents of Indian reforms were in large part dictated by the crisis that provoked the reforms in the first place. The reform agenda was broad and systemic and included: fiscal consolidation, abolition of investment and import licensing, unification and largely market determination of the exchange rate but with significant intervention by the Reserve Bank of India, significant reduction of tariff barriers and abolition of most quantitative restrictions, reforms of debt management, telecommunication and the financial sectors. Significant exclusions from the agenda were labour market, land market reforms and also health and education sector reforms of importance. Infrastructure reforms are as yet incomplete.
6. Achievement of Reforms
6.1 Growth and Its Sustainability
• The acceleration in growth since 1980 compared to 1950-
80 is seen in Table 5
• China’s growth rates began to diverge and substantially
exceeded India’s only from 1980, though there is some
evidence of the gap narrowing since 2000
• If we use the share (5.38 and 1.87 percent respectively) of
the two economies in global gross national income (GNI) in
2006 for their share to the growth of GNI during 1990-2000
of 2.9 percent is 23 percent and during 2000-06 of 30
percent is 22 percent. Thus their rapid growth has
contributed nearly a quarter of global growth
• Both economies are expected to slow down significantly in 2008. In the second quarter of 2008 Chinese growth was 10.1 percent and in the third 9.7 percent according to Financial Times, October 20, 2008. This estimate is scaled down to 9 percent in other publications such as the New York Times.Industrial production and exports also slackened. In India, in the first quarter of 2008-09 growth rate was 7.9 percent as compared to 9.2 percent in the same period in 2007-08. The annual growth rate for 2008-09 is now projected between 7 and 8 percent. Index of industrial production during April-August 2008 was 4.9 percent higher as compared to April-August 2007. This is about half the growth achieved in April-August 2007 as compared to the same period the year before.
• Given the great uncertainty about whether and if so how soon the global financial crisis will be resolved and pre-crisis growth resumed, both China and India are entering a period of increased uncertainty about their growth prospects. Their having “de-coupled” from the rest of the world is clearly seen as a myth.
6.2 Sustainability of Growth
• In the 50s and 60s Soviet Union grew rapidly. There were boasts by the Soviets and fear in the West that the planned economy of the Soviets would overtake Western free market economies. This led to research on sources of growth and growth accounting. The sources of growth were basically there. Growth of inputs such as capital, labour and land, improvement in the efficiency of input use and technical progress by. The leftover residual of actual growth after deduction of the contribution of efficiency gains and technical change, was called the Solow residual in honor of Robert Solow, The residual was also called total factor productivity growth or TFP growth. Since there were obvious limits to the growth of inputs, unless TFP growth was positive and substantial, aggregate growth will be driven to zero. Put another way, unless the contribution of TFP growth to aggregate growth is substantial, the latter cannot be sustained.
• The estimation of TFP growth involves assumption about production function, and market structure as well as data used.
• Did china and India experience significant TFP growth? Did reforms accelerate TFP growth in either or both? Several estimates of TFP growth in China and India are available. They are broadly similar. Table 6 presents TFP estimates from a recent study.
• Two points emerge from Table 6:
– First, TFP growth since 1980 accounted for between 28 and 41 percent of aggregate growth in China and a similar 27 to 41 percent in India depending on the periods compared with the highest 41 percent ,as is to be expected, in the early years of systemic reform, i.e. 1980-89 in China and 1990-99 in India, although in 1980s there were some piece-meal reforms
– Second, TFP growth was much slower in the pre-reform period of 1950-79 in both countries and its contribution to GDP growth was only 5.5 percent in China and 13.8 percent in India. Thus faster TFP growth and its greater contribution to GDP growth in the post-reform era suggests cautious optimism about sustainability of growth in both countries.
• Input Growth – China invested 45 percent of its GDP and
India invested 25 percent of its GDP in 2006 (World Bank,
2008). Chinese investment rates will go down in the future
while India’s may increase a bit. The share of China’s
working age population in total population is near its peak
and will go down in the future while India’s share will be
rising for the next four decades. A large proportion of the
workforce is still in low productivity activities, primarily
though not entirely in agriculture in both economies,
though more so in India. Thus, the potential growth from
shifting labour away from low productivity to high
productivity activities is large in both.
• Human Capital – Under the Mao regime China’s education and health indicators improved substantially. By the time Deng reformed the economy in 1978 its labour force had at least completed primary education and they were able to avail of the opportunities opened up by reforms. India’s social indicators still are way behind China’s and its labour force is not as well educated as the Chinese. The potential for accelerating the growth of human capital in the coming decades through investment in education and health in India is substantial and significant in China.
• Taking growth of capital (human and physical), labour and TFP together, there is no doubt that both countries can sustain rapid rates of growth for the near to mid-term future.
6.3 Inclusiveness of Growth – Distributional Outcomes
• Progress towards the overreaching objective of poverty eradication was made only after reforms since the 1980s in both countries. Here again China’s achievements are much better than India’s – Table 7
• There is evidence that in both economies, provinces, states and regions experienced substantial differences in their rates of growth after the reforms. This suggests that variance across regions of real output has increased. There is also some evidence for China, that the inequality in household income distribution has increased as well. There is no similar evidence of widening household inequalities in India.
6.4 Savings and Investment
• In both economies domestic savings and investment have increased substantially since 1950. Savings (investment) as a percent of GDP went up from 27 (27) in 1990 to 34 (34) in 2006 in India. In China savings (investment) percentage went up less from 31 (42) in 1990 to 32 (45) in 2006.
• The incremental capital output ratio, a rough measure of investment efficiency is incremental output ratio measured as the ratio of investment rate to the growth rate. In 2006, it was 4.05 in China and 3.54 in India. This suggests that China was using its investment inefficiently compared to India.
6.5 Foreign Trade and Foreign Capital
• It is evident that both China and India had small shares of 1.3 percent and 0.5 percent in world merchandise exports, as they began opening up their economies to world trade. By 2006, China’s share had risen to 8.0 making it the third largest exporter in the world after Germany and the US. India’s share rose only to 1 percent making it the largest exporter in the world – Table 8, 1A.
• In trade in services, India, as expected did relatively better with a share of 2.7 percent of global trade as compared to China’s 3.3 percent – Table 8, 1B.
• China’s expansion of its share of world trade began long before its accession to the WTO in 2001 by exporting labour intensive products – Table 8, 1C
• India and China in GATT/WTO – a brief history
• China’s accession to 2001 and its rationale for signing accession agreements with the then members of the WTO
• Purposive use of accession to WTO as a means for accelerating domestic reforms
• Surprisingly for continental sized economies, both China and India (and China considerably more so) export a large share of their GDP – Table 8, II
• China has attracted far more foreign direct investment (FDI) than India – Table 8, III
• By attracting FDI from Hong Kong, Taiwan and others from the Chinese Diaspora and using them in exporting activities, China was able to use their expertise in producing and exporting labour intensive products – India did not attract such Diaspora investment since there were few with expertise in labour intensive manufacturing and exports
• However, a different perspective on China’s and India’s use of FDI is provided by Khanna and Huang (2003) who argue:
– “What’s the fastest route to economic development? Welcome foreign direct investment (FDI), says China , and most policy experts agree. But a comparison with long-time laggard India suggests that FDI is not the only path to prosperity. Indeed, India’s homegrown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets.”
– In this view, China used FDI as a substitute for its weakness in the financial sector including capital markets and also in entrepreneurship.
– In “China the government is the entrepreneur with all the associated inefficiencies while in India it is almost exclusively the private sector and civil society that innovates”
• Compared to China, India’s trade barriers are high – Table 9A
• India has become the largest user of anti-dumping measures replacing the US and EU in this dubious honor. All three target China with these measures – Table 9, B and C
6.6 Agriculture, Manufacturing and Services
• Both China and India have half or more of their labour force employed in agriculture
• China collectivised its agriculture immediatelyt after the revolution. Interestingly, the National Planning Committee chaired by Nehru during the late 1930s also recommended collectivisation in India. But it was not implemented in post-independence India in which agriculture remained in private hands with millions cultivating very small areas of land
• Deng’s first and most basic reform was to abolish collectives and replace them with the household responsibility system in which the village authorities assigned plots of land on a 30-year lease to farmers. This system of collective ownership of land with private leasing has remained from 1978 until mid-October 2008. Now the communist party has allowed the market exchange and trading of lease rights among farmers. Although it is not a transfer of ownership. This is another efficiency enhancing reform.
• Land distribution and its concentration in India has remained virtually the same over four decades or more.
• China by emphasizing labour intensive manufacturing and the creation of SEZs has created millions of more productive employment opportunities for farmers and rural residents although the Hokou system still constrains rural-urban migration
• India by emphasizing heavy industry missed the stage of labour intensive manufacturing seen in the development history of contemporary developed countries and now in China. It thus bottled up millions in poverty without a significant opportunity to move out of it and be employed in more productive activities. Draconian labour laws compound the mistakes of missing the stage of labour intensive manufacturing
• Although India’s service sector has grown rapidly absolutely and compared to China, there is no way that rural workers with little education and skills can be employed in the high skilled IT component of the service sector.
6.7 Special Economic Zones
• China created special economic zone, first in coastal cities and then in other coastal areas for attracting foreign capital and use them for accelerating the growth of exports.
• By providing excellent infrastructure in the zones and allowing enterprises the freedom to hire or fire workers as they saw fit, China in effect created a “free-market-capitalist” enclave in the zones. Firms thus had the incentives to exploit scale economies in serving world markets. Acquiring land needed for the zones was no problem since all land was state owned. The zones proved phenomenally successful
• India began the creation of SEZs in imitation of China. Imitation may be the best form of flattery but mere imitation without understanding what made Chinese SEZs successful is unlikely to yield the same means.
– First, the proposed number of SEZs were too many and each too small to exploit scale economies.
– Second, India did not exempt SEZs by law from labour laws and sectoral caps on FDI.
– Third, the infrastructural bottlenecks of the Indian economy were not absent in SEZs.
– Fourth, in India given the inefficient or non-existent land markets, fair compensation for land to be acquired for SEZs became an issue. The use of eminent domain type acquisition of land in the state of West Bengal for the production of a cheap small car by the private firm Tatas has led to agitation for the return of land acquired back to the farmers. Although SEZs are claimed to have succeeded in some states, it is by no means as a policy it will be as successful as in China.
6.8 Financial Sector Reforms
• China’s financial sector is by all accounts inefficient as compared to India’s. India’s financial sector reforms have created a very modern and low transaction cost(comparable to that in New York Stock Exchnage) exchange in the National Stock Exchange that has surpassed the more than century old one in Mumbai. A fairly deep and efficient market for government debt has been created although a thick market for corporate debt of sufficient depth is yet to be created. The non-performance laws of commercial banks have been considerably reduced. However, with nearly three-quarters of the assets of the banking system in government banks, there are serious problems with bringing market discipline to bear on the banks.
According to Khanna(2008):
. Weak financial institutions make corporate governance an oxymoron in China. Ratings of firms across several emerging markets published by investment banking firm, Credit Lyonnais Securities Asia, dramatically highlighted China's failed corporate governence. The criteria used to assess corporate governance were management discipline, transparency, independence, accountability, responsibility, fairness, and social responsibility. India ranked sixth in the study, China ranked 19th.
• In China, where capital is allocated by fiat, domestic savings are channeled through government-owned banks to recapitalize distressed state-owned enterprises. The banks themselves are bankrupt, the stock market is riddled with inefficiencies, and capital does not find its way to where it is most needed.
• Indian equity markets, in contrast, rely on the existence of thousands of publicly traded but privately owned indigenous firms and on an industry of independent purveyors of reasonably reliable information that allow individual savers to choose where to invest. New banks are forcing the old deadwood to pick up the game. Competition is the norm, rather than the top down decision making and intervention seen in China's capital markets.
6.9 Political Economy • India is a democracy with regular elections to the parliament
and state legislatures in which participation by the poor in particular is high. Several political parties compete. The next parliamentary election is due before May 2009. China is a single-party controlled authoritarian regime.
• Democracies have the safety valve of articulating differences and conflicts in the political process and have the potential to resolve them peacefully. China’s authoritarian regimes have relied on the “People’s Army” to suppress conflicts, often with extreme force. As the economy grows rich, people will demand their democratic rights. Whether the Chinese regime can manage a transition to participatory democracy as peacefully and efficiently as it has managed the transition for centrally planned to a market economy (albeit socialist in theory) is an open question.
• Khanna (2008) points out that:
– Whereas harmony through merit-based autocracy is a defining characteristic of the Chinese state, the Indian state is probably best characterized by pluralism. India's diversity is so great that a key to sustaining its democracy has been finding a way to balance the often inconsistent demands of various groups with the needs of the collective. The good news is that the Indian system has worked to devolve power so that influence and prestige are distributed to more than the usual socio-economic elites to include several disparate historically disenfranchised groups. The bad news is that this accommodation has often come at the expense of useful collective action.
– There is rampant corruption in both countries, but the corrupt in China are demanding a piece of something new that is being created - the government is the entrepreneur - whereas India's corrupt are content to help themselves without any real contribution. The good news in India comes not from the government, but from civil society and the private sector, who are increasingly embracing some of the government's tasks....While the government is more efficient in China, the foundations for a market economy are much more robust in India.
– Despite criticisms of its human rights violations, over the last five decades China's presence has gradually and convincingly eclipsed India's in South-east Asia, the region comprising modern Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma(Myanmar), the Philippines, Singapore, Thailand and Vietnam.
– Whether by engaging in diplomaic niceties, exchanging Chinese weapons for oil and gas from pariah states, or investing in cobalt and copper in civil-war torn Central Africa, China leads with its wallet, unrestrained by politically correct norms of international relations. India is also engaged in competition with China for oil.
– With China not yet settling its border conflict with India and making claims on large areas under Indian control and with China’s reluctance to recognize a global rather than just a regional power status of India, future conflicts between the two cannot be ruled out.
7. Conclusions
I will state the conclusions as brief bullet points.
• Inclusiveness of growth as a vision in both countries
• China has liberalized trade far more than India
• India is still one of the most protected countries in the developing world
• China’s embrace of openness and its purposive use in accelerating domestic reform process
• Reluctant opening in India
• SEZs in China and India
• Rising Inequalities: Regional and individual
• India: Democracy as a safety valve
• China’s authoritarian systems still depends on repression
• Labour Laws
• Infrastructure issues
• Reforms of agricultural sector and shift of labour away from it, a challenge in both
• Creating efficient national land and labour markets
• Financial Sector reforms
• China’s inefficient investment
Table 2: Projections for China and India
Period
2000 2040
China India China India
Average annual rate of growth
(2000-2040) 8 6
Level of GDP per Capita
(PPP$) 3,617 2,368 85,000 24,000
Share of World GDP (percent) 11 5 40 12
Share of World Population 22 16 17 17
A. Fogel (2007)
Back
Table 2: Projections for China and India,
continued...
Period
2003 2030
China India China India
Average annual rate of growth
(2003-2030) 4.98 5.68
Level of GDP per Capita
(PPP$) 4,803 2,160 15,763 7,089
Share of World GDP (percent) 15.1 5.5 23.1 10.4
Share of World Population 20.5 16.7 17.8 17.4
B. Maddison (2007)
Table 3:
Share of World GDP1
(at 1990 Int’l dollars)
Per Capita GDP1 Share of World
Mercantile Exports2
China India China India China India
1500 25.0 24.5 600 550
1600 29.2 22.6 600 550
1700 22.3 24.4 600 550
1820 32.9 16.0 600 550
1870 17.2 12.2 530 533
1913 8.9 7.6 552 673
1950 4.5 4.2 439 619 0.9 (1948) 22 (1948)
1973 4.6 3.1 839 853 1.2 (1953) 1.3 (1953)
1978 4.9 3.3 978 966 1.0 0.5
2003 15.1 55 4,803 2,160 1.2 (1983) 0.5 (1983)
2030
(projection) 23.1 10.4 15,763 7,089 8.0 (2006) 1.0 (2006)
1. Sources: (a) Maddison (2007), appendix B, Table B.20, (b) Maddison (2007), Tables 2.1, 2.2a, 4.1b
2. Sources: (a) Maddison (2007), Appendix F, Tables F2 & F3 for 1870, 1913, WTO (2007) Table I8 for
1948, ’53, ’83 and 2006. BACK
Table 4A: Per Capita industrialization levels,
1750-1913 (UK in 1900 = 100)
1750 1800 1830 1860 1880 1900 1913
United Kingdom 10 16 25 64 87 100 115
Europe (excluding
the United
Kingdom)
7 8 9 14 21 36 57
China 8 6 6 4 4 3 3
India-Pakistan 7 6 6 3 2 1 2
Source: Bairoch (1982)
BACK
Table 4B: Annual Indices of Manufacturing
Production, 1913-1938
Year Japan India Germany USA World
1913 100 100 100 100 100
1920 176.0 118.4 59.0 93.2 93.2
1925 221.8 132.0 94.9 120.7 120.7
1930 294.9 144.7 101.6 137.5 137.5
1935 457.8 205.4 116.7 154.5 154.5
1938 552.0 239.7 149.3 143.0 182.7
Source: Ray (1979, p17, Table 4) BACK
Table 5: Growth Acceleration
1950
to
1980
1980 to
1990
1990 to
2000
2000 to
2006
2007 2008 2009
China1 4.401 10.3+ 10.6++ 9.8++ 11.1~ 9.4~ 9*
India2 3.752 5.7+ 6.0++ 7.4++ 9.6^ 9.0^ 7.9**
Sources: 1 Maddison (1998)
2 Author’s calculations
+ World Bank (2005), Table 4.1
++ World Bank (2008), table 4.1
~ World Bank (2008)
^ RBI (2008)
* 3rd Quarter of 2009, New York Times, 10/21/2008, pB9
** CSO (2008), 1st Quarter 2008-2009 BACK
Table 6: Analysis of factors behind
growth in China and India, 1950-2005
Source: Herd and Dougherty (2007)
BACK
Table 7: Poverty (proportion of population below poverty line) India (official)
1951-52 1961-62 1973-74 1977-78 1983 1987-88 1993-94 1999-00 2004-05
Rural India 47.4 47.2 55.7 53.1 45.7 39.1 37.3 27.1 28.3
Urban India 35.5 43.6 48.0 45.2 46.8 38.2 132.4 23.6 25.7
Combined 45.3 46.5 54.1 51.3 44.5 38.9 36.0 26.1 27.5
Sources: Datt, G (1999, 1998), Deaton (2003), GOI (2007), MOF (2008, Table 10.4)
1978 1981 1990 1996 1998 2001 2005
China (National Poverty
Line)* 30.7a - 9.5a 6.0 4.6 ---
China (World Bank,
$1.25/day PPP, 2005,
Poverty Line)** 69.4 60.2 36.4 35.6 28.4 15.9
India (World Bank,
$1.25/day PPP, 2005,
Poverty Line)**
59.8 57.3 46.6 44.8 43.9 41.6
a = rural areas only
Sources: *Park and Wang (2001) for 1978 and 1990 and World Bank (2007), Table 2.6 for 1996 and 1998; **
Chen and Ravallion (2008, Table 7)m data under the column 1998 refer to 1998, under 2001 to 2002.
BACK
Table 8: Foreign Trade and Investment
Indicators
1948 1953 1973 1983 2006
Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports
China 0.9 1.1 1.2 1.7 1.0 0.9 1.2 1.1 8.0 6.4
India 2.2 3.1 1.3 1.4 0.5 1.5 0.5 0.7 1.09 1.4
IA. Share in World Merchandise Trade by Region
and Economy (percent)
Source: WTO (2007), Tables I.8 and I.9.
BACK
Total Service
Exports ($,
millions)
1980 1990 2005 Share in World
Exports (%)
2006
Low Income 9,253 854 111,021
China 2,512 4,113 73,909 3.3
India 2,949 5,943 75,057 2.7
Table 8, continued : Foreign Trade
and Investment Indicators
IB. Trade in Commercial Services: Total Exports
Source: World Bank (1997, Table 4.10; 2008a, Table 4.6)
BACK
Table 8, continued : Foreign Trade and Investment Indicators
IC. China and India’s participation in world and major export market 1978- 1982- 1985- 1988- 1992- 1995- 1998- 2001- 2004-
1981 1984 1987 1991 1994 1997 2000 2003 2006
World Markets
China
Garments 3.93 6.93 8.74 14.95 18.78 19.70 20.45 22.71 23.26
Fabrics 5.15 7.48 8.28 8.25 7.87 8.87 9.36 12.51 21.61
Leather and leather manufactures 0.41 0.61 0.75 2.55 2.94 4.07 4.82 7.00 10.83
Jewelry 1.13 1.05 1.36 2.69 5.97 7.14 9.48 6.43 8.30
Others 1.07 1.93 3.27 7.73 14.60 16.90 18.10 13.18 21.47
India
Garments 3.95 3.43 3.46 3.82 4.40 4.97 5.27 3.94 4.25
Fabrics 2.04 1.38 1.45 1.43 1.99 2.10 2.42 2.61 2.46
Leather and leather manufactures 8.85 7.45 7.13 5.52 4.03 3.42 3.44 3.45 3.25
Jewelry 0.61 1.02 1.40 2.18 2.21 2.97 4.61 6.10 9.87
Others 0.31 0.24 0.20 0.25 0.29 0.30 0.31 0.36 0.39
North American Markets
China
Garments 3.73 8.00 8.81 13.19 21.30 21.42 20.59 13.98 18.94
Fabrics 3.73 5.31 5.61 5.66 6.25 5.84 6.52 5.85 10.68
Leather and leather manufactures 0.14 0.45 0.49 2.57 6.67 7.65 8.44 11.09 15.97
Jewelry 0.50 0.42 0.25 1.77 3.99 5.51 8.13 6.75 8.15
Others 0.72 1.51 2.98 9.92 20.89 25.62 26.57 13.98 20.11
India
Garments 4.89 4.14 4.12 4.60 5.80 5.56 5.34 4.02 4.60
Fabrics 6.02 2.64 2.69 2.98 4.62 5.93 5.73 2.60 2.41
Leather and leather manufactures 9.38 8.89 6.51 4.09 3.05 2.33 2.05 1.72 1.67
Jewelry 0.39 0.83 1.34 2.46 4.57 7.01 9.60 11.07 15.62
Others 0.19 0.11 0.14 0.22 1.28 1.09 1.01 0.27 0.28
European Markets
China
Garments 1.84 2.40 3.15 6.25 10.04 10.34 11.80 8.15 14.34
Fabrics 1.54 2.15 2.08 1.78 1.70 2.05 2.92 4.75 8.57
Leather and leather manufactures 0.33 0.37 0.31 0.86 1.14 1.27 1.89 2.37 3.68
Jewelry 0.47 0.26 0.51 1.41 3.07 4.08 5.97 1.99 3.33
Others 0.40 0.71 1.22 2.94 6.41 6.76 7.99 6.49 11.31
India
Garments 3.90 3.47 3.61 4.26 5.39 6.00 4.65 4.10 3.39
Fabrics 1.54 1.18 1.30 1.60 1.99 2.28 2.26 2.46 1.68
Leather and leather manufactures 9.90 8.51 8.26 7.65 7.45 7.09 6.12 2.48 3.96
Jewelry 0.88 1.23 1.59 1.91 2.60 3.39 4.28 3.71 3.52
Others 0.33 0.27 0.22 0.29 0.86 0.87 0.71 0.53 0.42
*Note: India figures reflect only 2004-2005 data.
BACK
Table 8, continued: Foreign Trade
and Investment Indicators
II. Share (%) of Merchandise trade (imports +
exports) in GDP
1981-83 1990 2006
Low Income 25.8 23.6 44.1
China 16.7 32.5 66.6
India 7.4 13.1 32.4
Source: World Bank (1997, 2007a), Table 6.1
BACK
Table 8, continued: Foreign Trade
and Investment Indicators
III. Foreign Capital Flows ($ Millions): Composition
FDI Bonds Equity Bank & Trade-
Related Lending
1990 2006 1990 2005 1990 2005 1990 2005
Low Income 2,233 41,711 116 2,798 7 10,793 1,623 12,182
China 3,487 78,095 -48 1,705 0 42,861 4,668 5,795
India 237 17,453 -3,959 3,206 0 9,549 1,458 12,892
Source: World Bank (1997, Table 5.2, 2008a, Table 6.10)
BACK
Table 9: Trade Barriers A. Tariffs
1. China Imports
Part A.
Source: World Tariff Profiles, WTO (2008) BACK
Table 9, continued: Trade Barriers
A. Tariffs
2. India Imports
Part A.
Source: World Tariff Profiles, WTO (2008)
Table 9 continued : Trade Barriers
B. Anti-Dumping Measures Reported, January 1, 1995 -
December 31, 2006
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
To
tals
Rank out
of 38
China, PR 0 0 0 0 0 0 0 5 33 14 16 24 92 6
European
Community
15 23 23 28 18 41 13 25 2 10 21 12 231 3
India 7 2 8 22 23 52 38 64 53 29 17 16 331 1
United States 33 12 20 12 24 31 33 25 12 14 18 5 239 2
All countries 119 92 125 170 185 227 167 216 221 151 131 137 1,941
Source: http://www.wto.org/english/tratop_e/adp_e/adp_stattab7_e.xls
Table 9 concluded: Trade Barriers
C. Anti-Dumping Measures as reported versus
Exporting Country
Exporting Country
Reporting countries
China, P_R
European
Community India
United
States Totals:
Rank out
of 98
China, P.R. 0 72 93 64 536 1
European Community 8 0 37 0 63 13
India 4 28 0 19 127 6
United States 20 11 24 0 175 3
Totals for 01/01/95 - 31/12/06 142 362 457 373 3044
Rank out of 42 7 3 1 2
Source: http://www.wto.org/english/tratop_e/adp_e/adp_stattab3_e.xls
BACK
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2, 268-333.
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