No. 27 | 2010
China Papers
China and India:
Differentiating
Economic Growth
Paradigms
Dilip K. Das
China Papers
ABSTRACT
Rapid recent GDP growth in the two populous giants of
Asia turned them into systemically important global
economies during the first decade of the 21st century.
They began making a discernible global economic
impact. Their re-emergence into global economic
prominence is regarded as one of the most important
economic event of the contemporary period. However,
their individual growth performances had a great deal
of disparity. This disparity in their growth paradigm is
the focus of this article. A comparison of principal
economic variables and sectors demonstrates that
Chinese economy performed far superior to the Indian
economy. This article compares and contrasts the rapid
growth in the two economies and point to the reasons
behind the superior growth trajectory of the Chinese
economy. This article finally concludes that China’s
emergence as a global economic powerhouse is a
foregone conclusion. India’s economic present is far
better than its past, but based on its recent
performance it cannot be counted on to grow into a
China-like powerhouse of global dimension.
ABOUT THE AUTHOR
Dilip K. Das is Professor of International Economics at
Conestoga College, Canada.
China Papers
China and India: Differentiating
Economic Growth Paradigms
Dilip K. Das
China and India have emerged in recent
years as drivers of global economic growth,
accounting for 2.9 percentage points of the 5
percent growth in global output in 2007.
Low- and middle-income economies now
contribute 43 percent of global output, up
from 36 percent in 2000. China and India
account for 5 percentage points of that
increased share.
~ World Development Indicators 2009, p. 2
1. Two Ascending Asian Giants
The two labour-abundant economies, China and India share a 2,175 mile
border, have entrepreneurial trading heritage, enormous internal economic
diversity and significant agricultural sectors.1 In terms of land area, China is
three times larger than India. Both are ancient cultures, have almost five
thousand years of recorded histories and regarded as cradles of human
civilization. The two economies were noted for their prowess and prosperity in
the remote past, albeit their more recent history of the last two centuries is
replete with distressful colonization of one and feudal incompetence leading to
1
In 1990, agriculture sector accounted for 27 percent of China’s economy and 31
percent of India’s. By 2006, their relative importance had reduced. In case of China
it accounted for 11.7 percent of the economy, while in case of India it accounted for
18.3 percent (WDI, 2009).
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China Papers
economic turmoil in the other.2 Sometime between the mid-18th century and
latter half of the 20th century, the two countries became bywords for economic
stagnation. During this period they were among the poorest countries in the
world, typically thought of as locations for famine, disease, pestilence and
backwardness.
In the mid-20th century, particularly during the decade of 1960s, both the
economies suffered from famines and their economic fortunes reached their
nadir. In the facetious, if sterilized, language of international diplomacy they
became “basket cases”, deserving to be viewed through the lenses of pity. India
became heavily dependent on external assistance, particularly on the United
States (US) wheat shipments under the PL 480. Until the early 1980s, the two
countries were widely regarded as “impoverished” and comparable low-income
economies. The large populations of China and India had exceedingly low
living standards and squalid life. India’s per capita income was approximately
equal to the World Bank’s 1980 average for the low-income countries and that
of China about two-thirds that of India’s.
During the last decade of the twentieth century, mind-sets of academicians,
policy-makers in public policy arena, business professionals and opinionleaders underwent an insightful transformation regarding China and India.
Not long ago, in the mid-twentieth century, the two countries were widely
regarded as demographic behemoths but economic weaklings. By any measure
they were peripheral players on the global economic stage. Not so in the
rapidly globalizing economy of the twenty-first century. The two geographically
large and populous Asian giants comprise 38 percent of the global population.
2
“Beginning in the mid-19th century, China was reduced to dire misery as the
country suffered one humiliating defeat after another and the population languished
in poverty and starvation as a result of brutal foreign aggressions and corrupt and
incompetent feudal rulers” (Hu Jintao, 2005). President Hu Jintao was addressing
the corporate elite of Asia and the Western world at the opening ceremony of the
2005 Fortune Global Forum, on May 17, 2005, in Beijing. This text is available on
the
Internet
at
People’s
Daily
on
line
http://english.people.com.cn/200505/17/eng20050517_185302.html.
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China Papers
They have achieved momentous economic growth, maintained growth
momentum and poverty reduction in the recent past. They are increasingly
being seen as expeditiously evolving economic powers that are capable of
significant future global impact. This is a development of enormous historic
significance. Writing in The Financial Times (23 February 2005), Martin Wolf
remarked, “The economic rise of Asia’s giants is the most important story of
our age. It heralds the end, in the not too distant future, of as much as five
centuries of domination by the Europeans and their colonial offshoots”.
The statement that both the economies grew at a commendable pace needs to
be qualified. Even a casual observer is cognizant of the fact that the Chinese
economy performed far superior to the Indian economy. The objective of this
article is to examine the salient differences in the growth paradigms of the two
economies and provide reasons for the differences in their recent economic
achievements and therefore their respective places on the global economic
stage. It compares the performance of the principal economic variables and
sectors in the two economies and examines the principal causal factors behind
disparity in their growth performance. Several empirical studies are now
available that rigorously compared the performance of different variables in
the two economies. This articles draws on them.
What were the basic growth models followed by China and India and how to
account for their rapid recent growth is a valid, engrossing and intriguing line
of inquiry. It may well have valuable lessons for the other emerging-market
economies (EMEs) and developing economies. In addition, during the recent
(2007-09) global financial crisis and recession, the two economies not only did
not slip into contraction but also remained resilient in an extremely adverse
global economic environment. Academic interest in the recent growth
performance of the two Asian giants is large and growing. A slew of scholarly
books, journal articles and research papers have attempted to examine,
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China Papers
compare and contrast the recent rapid growth and its paradigms in both
China and India.3
1.1Remote History of Economic Dominance
If a long-term historical perspective is taken, until the early 19th century,
China and India were among the largest economies on the planet. Noted
economic historian, Angus Maddison (1998), calculated that during the preindustrial revolution era, in the beginning of the 18 th century (1700), China
and India, were two domineering world economies. In purchasing power parity
(PPP) terms, together they accounted for 45.7 percent of the global GDP. Their
GDPs were almost equal in size, and the GDP of entire Europe was
approximately of the same size as that of China and India individually. Thus,
at this juncture in economic history these two economies were two of the
largest global economies.
The two economies took comparable turns over the 20th century. For a long
period they remained a little ahead or behind each other in terms of per capita
income and the total size of the gross domestic product (GDP) cake. Angus
Maddison (2001) computed their per capita incomes in constant 1990 dollars,
in PPP terms, for different periods. This measure is also known as
international dollars. The two countries started the twentieth century at a low
income level. The share of world income for each one was much smaller than
their share of world population. In 1913, China’s share of world GDP was 8.9
percent, while the share of population was 26.4 percent. For India the share of
world GDP was 7.5 percent, while the share of world population was 17
percent. By 1950, these ratios had deteriorated further, reflecting worsening
poverty in the two countries.
3
To name a few outstanding quality works, Ahya and Xie (2004), Chaudhuri and
Ravallion (2006), Cooper (2006), Das (2006a), Jahangir et al (2006), Kowalski (2008),
Lee, et al (2007), Srinivasan, 2006, Bosworth and Collins (2008) and Winters and
Yusuf (2007).
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1.2 Transforming Economic Scenario
This scenario underwent a dramatic transformation and China turned in
stellar economic performance during the closing decades of the 20 th century.
Rapid acceleration in GDP growth in real terms attracted global attention and
inspired widespread accolade. The best macroeconomic performance in the
preceding three decades was recorded during the 2002-07 period, when the
economy grew at an average growth rate of 10.5 percent and the inflation rate
was kept under 2 percent. In the beginning of the 21 st century, China was
being seen by many analysts as an economic superpower of the future. It
emerged as a low-cost manufacturing juggernaut invading global markets in a
sizeable array of products, with a high and rapidly rising level of merchandise
exports and imports. Gradually China moved up the technology ladder and
began exporting high-technology products at an increasing pace. By 2006, it
surpassed the European Union (EU) and the US as the largest exporter of
high-technology products in the global economy. China’s share of hightechnology exports was 16.9 percent of the total, while that of the EU 15.0
percent and the US 16.8 percent (Meri, 2009). The downside of resolute export
promotion rendered the economy export dependent.
For decades during the post-independence period 4 , India had remained a
moribund underperforming economy. It paid high economic and social costs
for socialist economic policies and heavy emphasis on the development of
public sector. Remnants of its old import-substituting industrialization
strategy continued to remain a part of its macroeconomic strategy until recent
years. Protectionist barriers pervaded widely and were reduced extremely
slowly. GDP growth rate began picking up in the mid-1980s. India’s per capita
income doubled since 1980. During the same period, China’s per capita
income rose seven-fold. During the contemporary post-reform era, Indian GDP
growth
remained
much
slower
than
that
of
China,
yet
economic
transformation in India was substantive. Indian economic performance
positively recorded improvements when compared to that of its past, albeit it
4
India became independent on August 15, 1947.
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China Papers
did not match the dynamic growth of China. Despite improvement and
upturn, India fell behind China in every indicator of economic and social
wellbeing. Likewise, in spite of recent improvements in export performance
India’s exports remained far lower than that of China. In 2009, China
surpassed Germany to be the largest exporting economy in the world (Section
3). India still does not have a place of prestige on the league table of major
global exporters annually published by the World Trade Organization (WTO).
1.2 Impact of Differences in Growth Paradigms
The contemporary growth paradigms of the two economies display marked
differences and some similarities. For instance, the political systems in the two
countries are absolutely different, which made the pace of political decisionmaking process materially different. In turn it affected the pace of economic
growth. However, a striking similarity in this regard was that both the
countries reduced the domineering role of their governments in the economy
and adopted economic liberalization and market-oriented macroeconomic
reforms.
Although
both
the
economies
launched
macroeconomic
reforms
and
restructuring, they were markedly different in their approach and process.
Indian reforms started in an ad hoc manner, in an extremely tentative and
overly precautious way in the mid-1980s. However, following a severe balanceof-payments crisis a well-designed reform program was launched in 1991. In
contrast, the Chinese reforms, which were launched in late 1978, did not
comprise a detailed outline of macroeconomic transformation but were
essentially based on gradual, incremental and somewhat experimental
changes in the macroeconomic structure. Several bold steps were taken in
quick succession. Deng Xiaoping’s dictums of “doing what works”, “seeking
truth from facts” and “crossing the river by feeling the stones” was carefully
followed by those who implemented reforms. They were essentially guided by
principles of pragmatism. Yet, confident reform measures were frequently
taken. In addition, China’s WTO accession preparations began in the mid1980s, which quickened the pace of its reforms of the external sector.
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China Papers
Establishing special economic zones (SEZs) also had the same impact over the
economy.
As regards the implementation of the macroeconomic reforms, China did so
aggressively and at a brisk pace. Its implementation of economic reform was
purposive and sure-footed. Conversely, the implementation of the Indian
reform program was lackadaisical and poor at best. There were periods of
backtracking in important reform areas. In terms of liberalizing the external
sector, both the economies adopted radically different stance and progressed
at different pace. China opened its economy to trade and financial flows far
more and earlier than did India. The latter had a history of stringent
protectionism, to which it remained wedded even after launching its reform
program. Trade and financial barriers in India were brought down exceedingly
sluggishly.
Reforms inter alia were instrumental in underpinning GDP growth and
initiated structural transformation in the two economies. However, as
industrialization progressed India benefitted much less than China from
economies of scale and from the “fordist model of growth” (Valli and Saccone,
2009; p. 101). This model of growth is associated with a stage of strong growth
of interlinked industrial and services sector growth where scale economies and
network economies assume enormous importance and become significant
contributors to growth. In China, towards the end of the 1980s, the strategic
sectors of the fordist model growth were the electrical domestic appliances and
their interlinked sectors, which included steel, plastics, power generation, etc.
With the passage of time, other sectors were added to this list. They were
microelectronics, telecommunications and energy. After 2000 more industrial
sectors gained strength and joined in as dynamic sectors promoting fordist
growth. Principal among them were industrial vehicles, motorcycles and
automobiles. Likewise, in India the key dynamic sectors in the early 1990s
were machinery, household electric appliances, steel and pharmaceuticals.
Recent additions to this list are the software services, telecommunications,
motorcycles and automobiles. Structural transformation in China passed
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China Papers
through two phases of fordist growth. The first phase lasted between 1978 and
the mid-1990s. This phase was largely based on the growth of the domestic
markets. The second phase spanned the late 1990s and the beginning of the
global financial crisis and recession. This phase was supported and
accelerated by both rapid export growth and massive inflows of foreign direct
investment (FDI). Industrialization in India, since the mid-1980s, did progress
but it was discernibly less rapid and widespread than in China. However,
during this period the services sector in India was a larger part of the economy
than in China and grew at a relatively rapid pace.
From the vantage point of the first year of the second decade (2010) of the 21 st
century, China’s structural reforms appear to have deepened far more than
those belatedly initiated in India. The post-reform economic transformation
achieved by China is far greater than that achieved by India. Despite elements
of experimentation, China’s growth strategy was methodical, deliberate and
pragmatic. Conversely, India’s growth strategy seemed to be impromptu,
opportunistic, often chaotic. Major macroeconomic decisions in India could
not be taken without inordinate delays because of its democratic government
system. The one-party government system in China facilitated and accelerated
its macroeconomic decision–making process. This fact is amply demonstrated
by rapid pace of economic reform implementation in China in comparison to
its disconcertingly slow pace in India.
Notwithstanding the stop-go pace of reforms, in the early and mid-2000s the
Indian economic growth pace transformed further. India seemed to be joining
China in the category of the world’s fastest growing economies. During the
Tenth Five Year Plan (2002-07) period, when average annual GDP growth rate
reached 7.8 percent. During this period, 2005 and 2006 were the years of
highest GDP growth rates, 9.4 and 9.6 percent, respectively. This growth rate
was not far behind China’s double-digit growth. To some analysts this heady
pace seemed unsustainable (Das, 2009a).
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China Papers
Differences in growth patterns have had a distinct impact on economic growth
and the relative standards of living in the two countries. Over the years, a
large gap has emerged between the per capita incomes and therefore in the
quality of life in the two countries. According to 2008 statistics, per capita
national income at market prices and exchange rates in China was $2,940.
The corresponding figure for India was $1,070, approximately a third that of
China. Thus, the Chinese live significantly better than the Indians. If per
capital incomes are compared using the PPP figures, India appears somewhat
better. The per capita national income of China in PPP terms was $6,020 and
that of India $2,960 (WDI, 2009). According to this indicator, living standards
in China are approximately twice those of India. In addition, the human
development index computed by the United Nations Development Program
(UNDP) and published in Human Development Report released in October
2009, shows that China stood at 92 nd position out of 194 countries that were
included in the index and India at 134 th. Recent economic transformation has
led to the emergence of a substantive size middle class in both the countries,
which includes an upwardly mobile group of well-trained professionals. This
has profound implications for the shifting consumption patterns in the two
countries (Das, 2009b).
Towards the end of the first decade of the 21 st century, as economic
circumstances of the two economies had markedly improved, so did their
status in the global economy. China and India grew into the second and third
largest economies of Asia. According to the 2008 statistics, at market prices
and exchange rates, China was the 3rd largest economy in the world, with a
GDP of $4.2 trillion. Indian GDP was $1.2 trillion and it ranked 12 th. If the
GDP is measured in terms of PPP, their status improves further. China ($7.9
trillion) was the 2nd largest economy in the world and India ($3.4 trillion) the
4th (WDI, 2009). Given their remote history of economic strength, their current
rapid growth could justly be regarded as their economic renaissance. Their reemergence is something akin to a second Asian economic miracle. Two
eminent Goldman Sachs (2003 and 2004) studies projected their future
growth trajectory and assigned them higher status in the global economy over
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China Papers
the next of two decades. Their newly acquired status in the global economy
will involve them in key roles in several areas of global economic and financial
policy debates.
The two economies achieved markedly differing degree of success in alleviating
mass poverty from which they suffered during their pre-reform eras. China
had one of the highest proportions of population in poverty in the world in
1980. At this juncture, only four countries (Burkina Faso, Cambodia, Mali and
Uganda) had higher poverty levels. Poverty measures are usually based on
National Household Surveys (NHS). In China they measure household incomes
while in India they measure household expenditure. Using a common poverty
line set at $1.25 a day and taking purchasing power parity (PPP) exchange
rates for consumption in 2005, Ravallion (2009) compared the rate of poverty
alleviation in the two economies. NHS statistics reveal that poverty means for
China were 84.0 percent in 1981, 53.7 percent in 1993 and 16.3 percent in
2005. This was a high pace and was a widely acclaimed. In comparison
poverty means for India were 59.8 percent in 1981, 49.4 percent in 1993 and
41.6 percent in 2005. The growth elasticity of poverty reduction, that is,
proportionate change in poverty per unit of GDP per capita growth, was -0.8
for China and -0.4 for India.5 These are large differences in the impact of a
given rate of GDP growth on poverty reduction. Initial conditions and
macroeconomic and socioeconomic policies lie behind these large differences
in the elasticity of poverty reduction in the two economies. In addition, China’s
growth-promoting pro-poor reforms were reflected well in their impact on
poverty.
1.3 Changing Status in the Global Economy
Due to their rapid growth, growing financial clout and newfound sense of
assertiveness, China and India are already making their presence felt on the
global economic landscape of the early 21 st century. As leading EMEs, they are
having a say in shaping the contours of the evolving international monetary
system. In the aftermath of the global economic and financial crisis of 2007-09,
5
See Tables 1 and 2 Ravallion (2009).
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China Papers
the international monetary system is sure to change away from the USdominated system, towards a multi-polar one. The shift in economic power
structure of the global economy warrants and justifies a move towards multipolarity. The evolving system is likely to be more inclusive and region based, in
which the large EMEs are sure to have a say. In a multi-polar world, which
economies or groups thereof would play a crucial role in shaping the future
global economic and financial architecture of the global economy? Three
economic poles obviously stand out, namely, the US, the Euro area and the
large EMEs, represented by China and India, or perhaps the BRIC economies.
All the three poles share common interests and goals in creating and operating
an efficiently performing global economic and financial system (Dailami and
Masson, 2009).
Notwithstanding the fact that they are still lower-middle income economies6,
their sheer size and remarkable GDP growth rate have turned them into
substantive contributors to the global economy. Around the turn of the 21st
century, they began to have an impact on the growth of the global economy. In
the recent past, the US economy has ceased to be the singular locomotive of
global growth. China and India, along with the other large EMEs, have become
meaningful global entities in their own. Since the late 1990s, China’s
contribution to global growth became significant. It contributed far more to
global GDP growth than India. However, during the mid-2000s the gap
between the two economies began to narrow because since 2003 Indian GDP
growth rate picked up further. This was a structural increase in growth rather
than a mere cyclical upturn (Poddar and Yi, 2007). Productivity growth drove
nearly one-half of this growth, which was sustained during the 2003-07 period.
This in turn increased India’s contribution to global growth.
2. Comparing the Mechanics of Economic Growth
The determinants of rapid growth and their sustainability are valuable
research
6
and
policy
issues.
Neo-classical
growth
model
identified
According to the World Bank classification, lower-middle income group of countries
have per capita income ranging between $976 per annum and $3,855.
Page 13 of 33
China Papers
accumulation of physical capital, demographic factors and technological
advancement as sources of growth. Capital accumulation determines the
capital-to-labor ratio in the steady state and influences the GDP growth rate.
The inventory of determinants does not end here. There are myriad other
determinants of growth for an economy. For instance, total factor productivity
(TFP) growth is an important source of growth. It is a measure of gains in the
efficiency with which the factor inputs are utilized. External sector, which
made a substantive contribution to the rapid growth of the so-called miracle
economies of East Asia, is another one. Well-functioning public institutions
also play a vital role in economic development. Other than institutional quality,
governance and macroeconomic management, labor legislation, educational
standard and policy (or human capital) are some of the other vital factors that
impinge upon growth.
That said, there is no one pattern of growth to which all or most economies
need to conform. Each economy follows its own sui generis pattern, albeit
there may be commonalities. We need to see which of these factors played a
defining role in the growth spurts of China and India. Which economic factors
made a meaningful contribution to their recent growth acceleration? Political
framework and decision making process in both of these economies are the
other candidates. They may well have made positive or negative contribution
to their recent economic achievements. In particular they affect the
macroeconomic and structural reforms and their implementation.
As noted earlier (section 1.1), there are marked differences in their growth
paradigm and the Chinese economic performance exceeded that of India
steadily. Long-term average GDP growth for China in its post-1978 period was
10 percent. For India, in its post-1991 period hovers around 6 percent. The
significance of these two time points is that they mark the beginning of
launching concerted macroeconomic reforms and liberalization in the two
economies. However, improvement in Indian GDP growth rate in the new
millennium improved India’s long-term average.
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2.1 Capital Accumulation
Using standard growth accounting technique, Bosworth and Collins (2008)
estimated that two of the most important factors that contributed to rapid
growth in the two economies over the 1978-2004 period were capital
accumulation and TFP, or efficiency gains. Contribution made by these two
factors was approximately equal in both the economies. IMF (2006) 7 and
Kalish (2006) came up with broadly comparable conclusions.
Acceleration in the pace of capital formation in China began in 1978 when the
macroeconomic reforms were launched and again in the early 1990s when the
economy was further liberalized to foreign competition. In India, capital stock
building did not start until the early 1990s, as the industrial investment
licensing system was ending. When the capital formation and TFP growth
rates in the two economies are compared, China was found to have performed
far better than India (Section 2.2). It achieved its growth “through both
substantial increases in capital per worker and rates of total factor
productivity growth more than double those for India” (Bosworth and Collins,
2008 p. 54). Comparison of the rate of capital formation made by Herd and
Dougherty (2007) put China ahead by 4 percent to 5 percent over the 19782008 period. In the recent year this difference increased to 7 percent. It
evidently translated into similar differentials of capital per worker. A more
rapid growth in capital stock in China was translated into higher capital
intensity of production processes.
Rates of savings and investment in China and India reveal more and buttress
the above observation. The saving rate in the Chinese economy was high and
in recent years. It became much higher and hovered around 45 percent of the
GDP. There were years when it crossed 50 percent of the GDP. Such a
commendable saving performance helped China sustain a high investment
rate. Therefore, the rate of capital formation in China was also high, reaching
close to 45 percent of GDP (Table 1). Yu (2009) asserted that China over
7
See Chapter 3 on Asia’s pattern of economic development.
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invested, which inter alia caused high dependency on exports. 8 In contrast,
Indian saving rate hovered around 20 percent of the GDP, but has increased
to 35 percent in the recent years. Still the investment rate was appreciably
lower than that in China. Capital formation remained around 25 percent of the
GDP, that is, 20 percent or more lower than that of China (Table 1).
Ominously large public sector deficits have remained a perennial and
detrimental shortcoming of Indian macroeconomic management. Fiscal
profligacy has remained a historic weakness of the Indian economy. It
chronically marred the saving performance of the economy and absorbed a
large part of household savings. This is an area of Indian economic policy and
management that was, and continues to be, in a pressing need of mending for
decades (Das, 2010).
Table 1
Saving and Capital Formation
(as percentage of GDP)
1987
1997
2006
Gross Capital Formation: China:
India:
36.0
Gross National Savings:
53.8
37.3
22.0
China
India
37.9
23.9
37.3
44.4
41.8
20.9
24.7
35.3
Source: WDI, 2009.
2.2 Total Factor Productivity Growth
Macroeconomic
reforms,
capital
accumulation
and
increases
in
labor
productivity in the two economies indeed favorably impacted their TFP growth
in general. Hesitant reforms and their tardy implementation in India caused
slow pick up in the TFP growth and pari passu slow increase in the saving and
investment performance. In contrast in China, the pace of reforms and their
implementation was strong and it stayed the course. Converting state-owned
8
In 2007, China’s export to GDP ratio was 35 percent. In 2008 exports declined.
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enterprises (SOEs) into private sector enterprises provided a strong impetus to
TFP growth. Herd and Dougherty (2007, p. 77) concluded that “from a purely
accounting perspective, over the last 25 years, about 40 % of the difference in
labor productivity growth in China and India has come from lower TFP growth.”
The trends of TFP increase in the three principal sectors of the economy in the
two countries differ. Growth of agricultural output per worker and agricultural
productivity in China outstripped that in India. One notable trait of the Indian
agricultural sector was that growth in employment in agriculture continued to
increase after 1993; it occurred essentially due to inadequate expansion of the
other two sectors, namely industry and services.
One basic difference between the economic structures of the two countries is
the size of the industrial sector, which includes manufacturing. As seen in
Table 2, the size of the industrial sector remained strikingly larger in China
than that in India. While in China it accounted for almost half of the GDP, in
India its contribution remained less than a third.
This sector grew in both the economies since the early 1980s and capital per
worker increased. However, Bosworth and Collins (2008) show that China
recorded much faster TFP gains in the industrial sector than did India.
Spectacular growth in output per worker since 1993 in China is attributed to
both, increase in capital per worker and TFP improvements. Large empirical
exercises reported higher productivity in the manufacturing sector in China
than in India. For instance, Lee, et al (2007) concluded that for the 1980-2002
period productivity in Chinese manufacturing output was much higher than
that in India. Performance of the manufacturing sector was directly influenced
by nature and pace of economic reforms and the tenacity with which they were
pursued. Hsieh and Klenow (2009) also reported higher manufacturing TFP in
China than in India.
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China Papers
Table 2
Size of the Industrial sector
(as percentage of GDP)
_____________________________________________________________________________
1987
1997
2006
China
43.9
47.5
48.1
India
26.3
26.8
29.3
Source: WDI, 2009.
The services sector expanded briskly in both the economies. It was relatively
larger in India and its rapid pace of expansion in recent years attracted global
attention (Table 3). China’s services sector output grew steadily at the rate of 5
percent per year during 1978-2004 and since 1993 it also recorded increases
in capital per worker in the services sector. India’s services sector not only
matched China’s commendable performance but also its growth accelerate
after 1993 and its output per worker exceeded 5 percent per year. What was
remarkable about this achievement was that capital per worker in the services
sector in India increased only modestly. A large part of output increase is
attributed to increase in TFP. It was feasible due to the expansion of relatively
modern sub-sectors in the services sector, such as finance and business
service. Such sub-sectors could become highly productive with the support of
information and communication technology (ICT). However, it needs to be
noted that the largest sub-sectors in India were wholesale and retail trade and
transport.9
9
The source of statistics regarding TFP here is Bosworth and Collins (2008).
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Table 3
Size of the Services Sector
(as percentage of GDP)
____________________________________________________________________________
1987
1997
2006
China
29.3
34.4
40.0
India
44.3
47.1
52.4
Source: WDI, 2009.
The rapid TFP growth in China and India during their recent growth spurt
period sets them apart from the East Asian miracle economies. Their rapid
growth during the 1970s and 1980s was largely based on factor input
accumulation.
2.3 Labor Productivity and Labor Market Practices
Growth accounting framework also illustrated that labour productivity growth
played a decisive role in improving TFP in both the economies, once the
economic reforms were launched (Herd and Dougherty, 2007). India had the
additional advantage in this respect because the working age population in
India grew faster than the total population. However, as set out in section 2.1,
the rate of capital accumulation in India was markedly lower than that in
China. Therefore, labor productivity growth in India was responsible for a
larger contribution to TFP growth than in China. That said, labor productivity
growth in India was found to be much slower than that in China (Table 4). Lee,
et al (2007) came to a similar conclusion regarding the labor productivity in
the manufacturing sector in the two economies.
Page 19 of 33
China Papers
Table 4
Labor Productivity Growth
(in percent)
1980-89
1990-99
2000-05
China
7.51
8.66
7.67
India
2.78
4.36
3.76
Source: Estimated by Herd and Dougherty (2007).
An important factor that buttressed labor productivity growth in China was
labor
movement
from
low-productivity
agriculture
to
high-productivity
industry and services sectors.
The glaring contrast between labour market practices and legislation in the
two countries is notable. The labour market in India continued to be an
albatross around the neck of the economy because of the endurance of archaic
and irrational labour legislation. Despite high costs to the economy, India did
not abandon employment protection policies and legislation that it had
adopted during its socialist past. Judged from the norms of the advanced
industrial economies, they are draconian. Enterprises in India not only cannot
retrench labour without problems, they cannot change the job description of
workers. It falls into the category of exploitation. Herd and Dougherty (2007, p.
81) noted that Indian states with “higher degrees of restrictive labour
legislation have been found to have higher poverty levels.” Restrictiveness of
employment protection has remained one of the factors holding Indian GDP
growth
back.
Conversely
China
swiftly
reduced
restrictiveness
in its
employment protection since the mid-1990s as its SOE sector was being
wound down. At this juncture employment generation in the private sector
had gained momentum. It could offset the retrenchment in the SOEs. This
policy move had a positive effect on China’s labour productivity and TFP
growth, which in turn favourably influenced GDP growth.
Page 20 of 33
China Papers
3. External Sector Performance
Both the economies benefitted from the recent wave of economic globalization.
It enabled them to make a short cut to economic modernization. On-going
global integration facilitated a leap from traditional sectors to those
incorporating modern advance technologies in both the economies. In
particular, China’s strategy of creating SEZs made it an exceptional success in
attracting FDI, both from the Chinese diaspora in the surrounding Asian
economies and from around the world. In no time it became, and continued to
remain, the most attractive EME for the transnational corporations (TNCs)
investment. In contrast, India only recently tried to develop SEZs and was not
able to create successful ones like those in China. It also did not develop into a
large recipient of FDI because of excessive government interference and
bureaucratic rigmarole. That said, in recent years FDI inflows to India have
shown improvement. On the whole, economic and financial integration with
the global economy benefitted China far more than it benefitted India.
Multilateral trade in goods and services and regional and global integration
were areas in which the China turned in an outstanding performance, while
India remained a slow mover or a downright laggard. That said, Indian export
performance has improved appreciable in comparison to its past. In addition,
it recorded marked improvements since 2005 in the area of trade. However,
sub-regional, regional and global integration continue to be areas where India
made little progress. Both the economies were near autarkies in the past. They
were marginal traders in the early 1980s and accounted for a minuscule share
of world trade in goods and services. The Chinese economy was more autarkic
than that of India, which had a history of exceedingly high protectionism.
China’s foreign trade (imports + exports) in 1978 was paltry, at $21 billion
(Das, 2008).
In the multilateral trade arena, the two economies started from a low base.
However, over the last three decades China, and over the last two decades
Page 21 of 33
China Papers
India, liberalized their respective external sectors. They adopted and
implemented outward-oriented economic policies at a markedly different pace.
China also adopted a multipronged approach to develop, invigorate and
promote the external sector.10 Policy mandarins in China took a leaf from the
book of the East Asian miracle economies and purposefully promoted exports
of manufactured goods. The ultimate objective was to strengthen this sector so
that it turns into an engine of economic growth. This strategy succeeded and
Chinese economy has emerged as a manufacturing juggernaut of impressive
proportions.
According to the 2008 WTO statistics, China’s exports were $1.42 trillion and
its share in total world exports was 8.9 percent. This made China the 2 nd
largest exporting economy in the world after Germany. Comparable Indian
exports were $177.5 billion, which was 1.1 percent of the total world exports.
This gave India the 27th position on the WTO league table of large exporting
economies (WTO, 2009). These trends partly reflect the trends in output
growth in the two countries. According to The Wall Street Journal (January 7,
2010), based on statistics released by China’s customs agency, in 2009 China
surpassed Germany to be the largest exporter in the world.11 Thus the Chinese
economy travelled the distance between being a near autarky and the largest
exporting economy in an amazingly short time span. The external sector of the
Chinese economy is functioning in a dynamic manner is demonstrated by the
fact that China’s share in world merchandise trade in higher than that in
world output, while the reverse holds for India. China’s share in multilateral
trade had passed its share in global output in the 2002.
In the exports of commercial services, China’s exports were $146.4 billion in
2008. Its share in total world commercial services trade was 3.9 percent and it
was the 5th largest exporter of commercial services. In comparison, India’s
10
It is elaborated in Das (2008).
11
According to China’s customs agency, China’s exports in 2009 were $1.2 trillion.
This was ahead of the $1.17 trillion forecast for Germany by its foreign trade
organization.
Page 22 of 33
China Papers
exports were $102.6 billon. Its share in total world commercial services trade
was 2.7 percent and it was the 9 th largest exporter (WTO, 2009). Thus in this
one area India is not far behind China. It is essentially because of India’s
notable success in information and communication (ICT) sector. This is one
sector of the economy that fortuitously developed without government
interference
and
therefore
bureaucratic
malfeasance
could not obstruct its
inefficiency,
growth.
India’s
corruption
and
10-million strong
bureaucracy has massive economic and social costs.
During the contemporary period, China has maintained a current account
surplus ranging between 8 percent of the GDP and 11.5 percent of the GDP.
This surplus is likely to fall due to the global financial crisis and recession.
Conversely, India has had a tradition of a current account deficit, usually
ranging between 2 percent and 3 percent of the GDP. The crisis and recession
are likely to widen India’s deficit. At the end of 2009, China’s foreign exchange
reserves were $2.4 trillion, the highest in the world. China held 23.3 percent of
the world’s total reserves. The comparable figure for India was $287 billion; it
was the sixth largest holder of foreign exchange reserves in the world.
Over the last three decades China has cultivated close regional and global
trade ties. India failed to do so. The trading pattern that China has developed
is to import from the other emerging-market economies (EMEs) and the
developing economies and export to the EU and the US. No comparable
pattern has emerged for India. The two economies have gradually increased
their mutual trade and investment and have been discussing forming a
bilateral free trade area (FTA) (Das, 2006b). Using the gravity model, trade
intensities were computed by Bhattacharaya and Bhattacharyay (2007). Their
estimates revealed that China and India have considerable bilateral trade
potential. As for benefits, in the short run India’s potential gains from an FTA
were found to be lower than those of China because of high tariffs. However, in
the long-run when the tariff levels were brought down India’s gains from an
FTA increased and grew larger than those for China. Their bilateral trade
exceeded $50 billion in 2009. The two countries have the mutual target of
Page 23 of 33
China Papers
crossing $60 billion in 2010. China is 2nd largest trade partner of India, in
contrast India is not an important trading partner of China.
4. Regional and Global Integration
Gravity model is highly suitable and beneficial in estimating trade linkages
and trade intensities of economies; it helps in reaching revealing conclusions.
Estimates of trade intensities for the two economies show that China is “highly
integrated relative to fundamentals,” whereas India is “poorly integrated in
global trade relative to fundamentals” (Bussiere and Mehl, 2008, p. 17). In
terms of bilateral trade linkages, estimates demonstrated the same, that is,
they were stronger for China in relation to its fundamentals, while in case of
India bilateral trade linkages were found to be weak in relation to its
fundamentals. China was also found to be well-integrated with the large
commodity exporters like Australia, Canada and India. Additionally, it was
found to have been highly integrated with the other Asian EMEs relative to its
economic size, location and other relevant fundamentals would justify. One
reason behind this was the well-developed Asian production networks of which
China is an integral part. These networks have succeeded in producing myriad
of manufactured products, in particular high-technology goods. They are
highly active in ICT hardware production and exports. The production
networks contributed significantly to export performance of China and other
Asian economies. These production chains enabled China to make ideal
utilization of its comparative advantage in low-wage labour force.
Results of the same gravity model exercise showed India far less integrated
with the neighbouring Asian economies than suggested by its fundamentals.
This weakness began with its weaker trade links with the other South Asian
countries, albeit South Asian Association for Regional Cooperation (SAARC)
has existed for almost two decades. It has so far proved to be an insubstantial
entity essentially due to historical and political reasons. India also did not
make much progress in integrating with the South-East Asian economies or
Page 24 of 33
China Papers
the East Asian economies. Conversely, China integrated at a rapid rate and
well with these two groups of Asian economies.
5. Resilience during the Global Financial Crisis and
Recovery
While the global economic and financial crisis of 2007-09 affected them
adversely, China and India were two out of three economies which did not slip
into negative GDP growth during 2009. Notwithstanding a deceleration in their
GDP growth rates, China, India and Indonesia were the three economies that
escaped economic contraction and a severe recession.
According to the revised projections of the World Economic Outlook (October
2009), the world economy, in particular the advanced industrial economies,
are both projected to contract during 2009 and grow at a moderate pace in
2010 (Table 5). Both China and India remained resilient despite the headwinds
created by a severe global recession. With their large and growing domestic
markets they weathered the storm better than the advanced industrial
economies. Notwithstanding the crisis and recession, both of them were
projected to turn in impressive performances in 2009. Due to their economic
resilience the global economic crisis did not take a turn for much worse. In
addition, the two Asian giants led the rebound in the global economy. In 2010,
GDP growth in China was projected to be 9.0 percent and India 6.4 percent,
respectively (Table 5). In fact, in this severe global recession China and India
“fared no worse in this downturn than in the 1991 recession” (The Economist,
2009, p. 15).
Page 25 of 33
China Papers
Table 5
Revised GDP Growth Projections for 2009 and 2010
2009
2010
Global Economy
- 1.1
3.1
Advanced Industrial Economies
- 3.4
1.3
China
8.5
9.0
India
5.4
6.4
Source: International Monetary Fund. World Economic Outlook, Washington
DC. October 2009. Gleaned from Table 1.1.
The vulnerability of Chinese economy to the global financial crisis and
recession was high because like the other East Asian EMEs it is highly open,
albeit this observation does not apply to its financial sector. The export sector
was hit hard by the crisis and recession. In the last quarter of 2008, a
significant proportion of exporting firms slashed production and labour force
into half. This caused a sharp drop in the industrial production. That being
said, in early 2010 it was widely being felt among economists who study the
Chinese economy that China has had a good crisis. It responded swiftly and
decisively to the crisis. Its monetary and fiscal stimulus was one of the largest
and transmitted into the real economy with a relatively short time lag. As
planned, it successfully lifted the domestic demand. In 2009, GDP grew by 8.7
percent, setting China well on its way to be the second largest economy in the
world.12
One of the reasons why Indian economy was less vulnerable was because it is
much less open and export-dependent than China and the East Asian
economies. Secondly, while reforms and their implementation did not progress
12
This GDP growth rate is based on the preliminary announcements by the national
government and published in the economic and financial media.
Page 26 of 33
China Papers
at a satisfactory pace, whatever reforms did take place made the Indian
economy resistant to external shocks. Financial and banking sector reforms
played a definitive role in rendering the economy shock-resistant. The timely
and coordinated monetary and fiscal stimulus packages devised by all the
major advanced industrial economies and several large EMEs steadied the
global financial markets earlier than most expectations, which benefitted the
Indian economy. These stimulus packages also helped in some reflation of
global demand, which worked towards making Indian economy resilient. Its
2009 GDP growth rate was 6.7 percent.13 That India was able to achieve this
despite a severe global recession and domestic monsoon failure in 2009 is
regarded as a meritorious recent achievement. Indian agriculture is still
critically monsoon dependent.
6. Summary and Conclusions
Two populous giants of Asia, that were a domineering part of the global
economy in the remote past, had become two of the most impoverished
economies in the world. During the closing decades of the 20 th century their
economies began to transform and they began to grow rapidly again. In the
first decade of the 21st century they began making a discernible global
economic impact. Their re-emergence into global economic prominence is
regarded as one of the most important economic event of the contemporary
period.
During their present growth spurt, while the two economies grew at a
commendable pace and succeeded in alleviating poverty in their respective
societies, their individual growth performances had a great deal of disparity.
There were marked differences in their growth paradigms. A comparison of
principal economic variables and sectors demonstrates that Chinese economy
performed far superior to the Indian economy. This article compares and
contrasts the rapid growth in the two economies and point to the reasons
13
This GDP growth rate is based on the preliminary announcements by the national
government and published in the economic and financial media.
Page 27 of 33
China Papers
behind the superior growth trajectory of the Chinese economy. In particular, it
examines the principal economic factors behind the disparity in the growth
paradigms of the two economies. Differences in growth paradigms had a
distinct impact on economic growth and the relative standards of living and
poverty alleviation in the two economies.
The macroeconomic reforms and restructuring in China were implemented
with far more rapid pace than India. In particular, the external sector was
liberalized aggressively in China than in India. It was instrumental in
benefitting China from the on-going globalization far more than India. Slow
and incomplete reforms in India resulted in a large cost to the economy.
Growth accounting framework revealed that although both the economies
accelerated
capital
accumulation,
acceleration in the
pace
of
capital
accumulation started in China earlier. Various comparisons of TFP growth
reveal that China performed far better than India, albeit India also recorded
marked improvements. Hesitant macroeconomic reforms were one the reasons
behind slow improvement in TFP in India. In particular, China did far better in
TFP growth in the manufacturing sector. Differences in rates of saving and
investment in the both the economies are also revealing. They confirm the
same conclusion that China performed much better than India.
Growth
accounting
framework
also
revealed
that
increase
in
labour
productivity favourably affected TFP growth in the two economies. Labour
productivity growth in India was high, but in comparison to China it remained
lower. This conclusion applies emphatically to the manufacturing sector.
There are glaring differences in the labour market practices and legislation.
Unlike China, Indian economy continued with its archaic and irrational labour
legislation. Restrictiveness of employment protection has remained one of the
factors holding Indian GDP growth back.
In the twin areas of multilateral trade in goods and services and regional and
global economic integration, China turned in an extraordinary performance.
India remained a slow mover. Yet India’s external sector has been performing
Page 28 of 33
China Papers
far superior to its past languid performance. Gravity model estimates of trade
intensities for the two economies show that China is highly integrated relative
to fundamentals, while India is poorly integrated in the global trade. China’s
regional and global trade and financial ties as well as those with the other
EMEs have also grown strong, while India has made scanty progress. Like
China, India also did not develop into a successful FDI recipient until recently.
The global economic and financial crisis and severe recession of 2007-09
affected them adversely. Of the two, China was more vulnerable than India.
However, China and India were two of the three economies which did not slip
into negative GDP growth. They also posted high GDP growth rates for 2009, a
recession year.
Thus viewed, the two populous Asian giants have performed ebulliently over
the recent decades, but it is obvious that the Chinese economy outperformed
the Indian economy by a wide margin. That China is emerging as a global
economic powerhouse is a foregone conclusion. It is also clear that India’s
economic present is far better than its past, but based on its recent
performance it cannot be counted on to grow into a China-like economic
powerhouse of global dimension.
Page 29 of 33
China Papers
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Page 32 of 33
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ABOUT THE CHINA PAPERS SERIES
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PAST ISSUES
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3.
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4. Bi Jianghai, A Case Study of PRC Policymaking
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