| China
and India seem to be the hot topics in the world economy
today. In the international press, there is almost an
obsession with these two economies, and how their current
growth presages the coming ''Asian century''. It is not
just that they are both countries with large populations
covering substantial and diverse geographical areas,
and therefore with huge potential economic size. Most
of all, they are cited as the current ''success stories'':
two economies in the developing world that have apparently
benefited from globalisation, with relatively high and
stable rates of growth for more than two decades and
substantial diversification.
In India too, the obsession with
China is now well-developed, mostly in the form of a
longing eastern gaze. The rapid economic growth and
structural transformation in China are not just eyed
with envy; they are typically invoked to justify the
economic policy of choice. Thus there are those who
argue that the recent Chinese economic success is because
of liberalisation and openness to foreign trade and
investment. By contrast, others point out that the early
Communist history of land reforms and egalitarian policies
formed the essential basis upon which all subsequent
change has depended.
In the outside literature, these economies are often
treated as broadly similar in terms of growth potential
and other features, and this even infects some Indian
analyses. But in fact there are crucial differences
between the two economies which render such similarities
very superficial, and which mean that individual policies
cannot be taken out of context of one country and simply
applied in the other to the same effect. There are at
least ten significant differences.
The first relates to the nature of the economy itself,
the institutional conditions within which policies are
formulated and implemented. India could be described
until recently as a traditional ''mixed economy'' with
a large private sector, so it was and remains a capitalist
market economy with the associated tendency to involuntary
unemployment. So the need for macroeconomic policies
to stimulate demand, as common in capitalist economies,
operated in addition to the usual ''developmental'' role
of the state.
China, by contrast, has been for the most part a command
economy, which until recently had a very small private
sector, and only recognised the legal possibility of
home-grown capitalists a few years ago. Throughout the
period of ''liberalisation'', that is the 1990s and later,
there have remained important forms of state control
over macroeconomic processes that have differed from
more conventional capitalist macroeconomic policy. Even
in 2004, public enterprises accounted for more than
half of GDP and more than two-fifths of exports.
The control over the domestic economic in China has
been most significant in terms of the financial sector,
which describes the second big difference between the
two economies. In India, the financial sector was typical
of the ''mixed economy'' and even bank nationalisation
did not lead to comprehensive government control over
the financial system; in any case, financial liberalisation
over the 1990s has involved a progressive deregulation
and further loss of control over financial allocations
by the state in India.
But the financial system in China still remains heavily
under the control of the state, despite recent liberalisation.
Four major public sector banks handle the bulk of the
transactions in the economy, and the Chinese authorities
have essentially used control over the consequent financial
flows to regulate the volume of credit (and therefore
mange the economic cycle) as well as to direct credit
to priority sectors. Off-budget official finance (called
''fund-raising'' by firms) has accounted for more than
half of capital formation in China even in recent years,
and that together with direct budgetary appropriations
have determined nearly two thirds of the level of aggregate
investment. This means that there has been less need
for more conventional fiscal and monetary policies,
although the Chinese economy is now in the process of
transition to the more standard pattern.
The third difference is quite apparent to all - the
dramatically high rate of GDP growth in China compared
to the more moderate expansion in India. The Chinese
economy has grown at an average annual rate of 9.8 per
cent for two and a half decades, while India’s economy
has grown at around 5-6 per cent per year over the same
period. Chinese growth has been relatively volatile
around this trend, reflecting stop-go cycles of state
response to inflation through aggregate credit management.
This higher growth in China essentially occurs because
of the fourth major difference, the much higher rate
of investment in China. The investment rate in China
(investment as a share of GDP) has fluctuated between
35 and 44 per cent over the past 25 years, compared
to 20 to 26 per cent in India. In fact, the aggregate
ICORs (incremental capital-output ratios) have been
around the same in both economies. Within this, there
is the critical role of infrastructure investment, which
has averaged at 19 of GDP in China compared to 2 per
cent in India over the 1990s.
It is sometimes argued that China can afford to have
such a high investment rate because it has attracted
so much foreign direct investment (FDI), and is the
second largest recipient of FDI in the world at present.
But FDI has accounted for only 3-5 per cent of GDP in
China since 1990, and at its peak was still only 8 per
cent. In recent times, the inflow of capital has not
added to the domestic investment rate at all, but to
the holding of international reserves, which have increased
by $100 billion per year.
In terms of economic diversification and structural
change, China has followed what could be described as
the classic industrialisation pattern, moving from primary
to manufacturing activities in the past 25 years. The
manufacturing sector has doubled its share of workforce
and tripled its share of output, which, given the size
of the Chinese economy and population, has increasingly
made China ''the workshop of the world''. In India, by
contrast, the move has been mainly from agriculture
to services in the share of output, with no substantial
increase in manufacturing, and the structure of employment
has been stubbornly resistant to change. The recent
expansion of some services employment in India has been
at both high and low value added ends of the services
sub-sectors, reflecting both some dynamism and some
increase in ''refuge'' low productivity employment.
The sixth major difference relate to trade policy and
trade patterns. Chinese export growth has been much
more rapid, involving aggressive increases on world
market shares. This export growth has been based on
relocative capital which has been attracted not only
by cheap labour but also by excellent and heavily subsidised
infrastructure resulting from the high rate of infrastructure
investment. In addition, since the Chinese state has
also been keen on provision of basic goods in terms
of housing, food and cheap transport facilities, this
has played an important role in reducing labour costs
for employers. In India, the cheap labour has been because
of low absolute wages rather than public provision and
underwriting of labour costs, and infrastructure development
has been minimal. So it is not surprising that it has
not really been an attractive location for export-oriented
investment, its rate of export growth has been much
lower, and exports have not become an engine of growth.
There is another issue relating to trade policy. In
China, the rapid export growth generated employment
which was a net addition to domestic employment, since
until 2002 China had undertaken much less trade liberalisation
than most other developing countries. This is why manufacturing
employment grew so rapidly in China, because it was
not counterbalanced by any loss of employment through
the effects of displacement of domestic industry because
of import competition. This is unlike the case in India,
where increases in export employment were outweighed
by employment losses especially in small enterprises
because of import competition.
The seventh difference is in terms of poverty reduction.
China has been much more successful in this regard -
official data suggest that 4 per cent of the population
now lives under the poverty line, unofficial estimates
suggest around 12 per cent. The poverty ratio in India
is much higher, between 26 per cent and 34 per cent
according to the 1999-2000 NSS data. The Chinese success
in this regard can be related to several features: to
begin with, the basic issues in terms of asset redistribution
and basic needs provision were the focus of the Communist
state until the late 1970s. This also assisted in economic
growth: because of the more egalitarian system, there
was a larger mass market for consumption goods, which
has allowed producers to take advantage of economies
of scale.
Subsequently, poverty reduction in China has been concentrated
into two main phases: 1979-82 and 1994-96, which were
both phases of higher crop prices and rising agricultural
incomes. In the first phase, institutional change in
the form of allowing peasant production in diversified
crops played a great role in increasing productivity
and allowing peasants to benefit from rising prices.
Also, since Chinese economic growth has been more employment
generating, this has also operated to reduce poverty.
Until recently, there was much more focus on ''human
development'' in China, and public provision of health
and education. This included universal education until
Class X, as well as better public services to ensure
nutrition, health and sanitation. However, in recent
years, this emphasis has been much reduced and there
is greater privatisation of such services in China,
which has also led to worsening conditions especially
in particular areas. In India, the public provision
of all of these has been extremely inadequate throughout
this period and has deteriorated in per capita terms
since the early 1990s.
In terms of inequality, in both economies, the recent
pattern of growth has been inequalising. In China, the
spatial inequalities - across regions - have been the
sharpest. In India, vertical inequalities and the rural-urban
divide have become much more marked. In China recently,
as a response to this, there have been some top-down
measures to reduce inequality, for example through changes
in tax rates, greater public investment in western and
interior regions, and improved social security benefits.
In India, it is political change that has forced greater
attention to redressing inequalities, though the process
is still very incipient.
This brings into focus the tenth big difference: that
of political systems. It can be argued that the political
democracy in India, which now appears deeply entrenched
even though it has not translated into universal economic
enfranchisement, has played some role in creating more
confused but less extreme patterns of economic growth.
Certainly, historic and potentially transformatory economic
legislation such as the Employment Guarantee Act could
only come about because of impact of political changes.
Perhaps the ability of the political system to force
at least some change of direction in economic policies
in India can serve as an important example to the rest
of the world, and one of which Indians can justly be
proud.
However, in terms of the future prospects, surprisingly
both economies end up with very similar issues despite
these major differences. There are clear questions of
sustainability of the current pattern of economic expansion
in China, based on a high export-high accumulation model
which requires constantly increasing shares of world
markets and very high investment rates. Similarly, the
hope in some policy quarters in India that IT-enabled
services can become the engine of growth is one which
raises questions of sustainability.
The most important problems in the two economies are
also rather similar - the agrarian crisis and the need
to generate more employment. In both economies, the
social sectors have been neglected recently by public
intervention. In both countries, the policy message
appears to be the same, that the most basic issues are
those that require to be addressed first, and if so
the other areas of expansion will probably look after
themselves. |
