Essay: china vs india

Tiffany Tong

March 19^th, 2008

Which Country Made the Better Choice?

China and India, the two Asian powerhouses where 37% of the world population lives, have become the miracles of economic development of the modern world (Current World Population (ranked), 2007). China and India have sustained GDP growth, unmatched by any other country in the history of human kind, of 9.4% and 7% average respectively for over a decade (Dahlman, 2007). The proportion of Indians living in extreme poverty (on $1 a day or less) has fallen from 40% to 25% in a decade, while in China, between 1981 and 2001, the proportion fell from 53% to just 8% (Sharma, 2006). The countries have followed “diametrically opposed development paths (Sharma, 2006)”: one is now the IT-enabled service center of the world and the other is the factory of the world (Dahlman, 2007). In this paper, I will compare the strategies and performances of the economic reforms of China and India and ultimately argue that due to their diverging economical strategies, it is very difficult to conclude which country is superior in terms of economic development; both have major advantages and flaws that will need to be addressed before true sustainable development can be attained.

Both China and India started off with high poverty rates, low literacy rates, and almost non-existent markets (Sharma, 2006; Dahlman, 2007). China, having implemented communist control since 1949, had abolished markets and ensured total control by the state of production. Similarly, since 1951, India had introduced a “centralised planning system…within the democratic set up” (Basu, 2007). The key was “democratic socialism – public-sector led growth with strong industrial licensing and controls and restrictive foreign trade (Basu, 2007).” Following a series of nationalizations, the industry, finance, and foreign trade sectors of the economy were “heavily controlled by the government (Basu, 2007).” These strategies in both countries continued until the early 1980s for China and the mid 1980s for India where the two countries started market based reforms (Basu, 2007).

China started moving towards a market based system in 1978 when Deng Xiaoping took power. Bold economic reforms towards a socialist society with “capitalism characteristics” were swiftly implemented (Basu, 2007). India also started reforms in the mid 1980s: the government initiated “industrial and trade deregulation measures,” however, they only provided moderate growth in the GDP (Basu, 2007). When a financial crisis hit India in 1990, the Indian government had to approach the International Monetary Fund (IMF) for loans. Conditionality tied to the loans resulted in “New Economic Policies” in 1991 which has substantially changed the Indian economy with “comprehensive liberalisation measures in every sector of the economy (Basu, 2007).”

Paths for Industrialization

China and India have followed very different strategies for industrialization: China chose to follow the export led industrialization path, while India skipped over traditional industrialization and took a services led modernization path (Sharma, 2006; Dahlman, 2007). China took the route of Asian countries that have successfully industrialized, such as South Korea, Taiwan, and Hong Kong. The main strategy is to entice foreign direct investment (FDI) to help modernize the plants, equipment, and technologies, so that local industries can develop (Basu, 2007). China used its geographical advantage of having a very long coast line in the east that faces North America by setting up special economic zones (SEZs) in strategically located cities along the coast line (Sharma, 2006). In the SEZs, foreign investors were allowed full ownership, all exporters were permitted to import intermediate products and capital goods duty free, all were given generous tax holidays— and they enjoyed assured access to reliable physical infrastructure, often through the provision of land, power, physical security, and transport to ports, within specially created industrial parks (Sharma, 2006). The plan was very successful; between 1978 and the end of 2003, foreign firms invested some $500 billion in China, creating a huge spillover of jobs into neighbouring regions (Sharma, 2006). Comparatively, India, although tried to set up SEZs, was not nearly as successful as China at luring foreign direct investment (Fulton, 2007).

India, on the other hand, chose to try a path which no other nation has tried: skip over industrialization completely and move straight into a much higher value added industry – services (Sharma, 2006). Fueled by extraordinary growth in services, primarily in information technology, India’s development path has defied most economic theories about stages of development, where a country has to first start in low value added industries and then move up the value added chain. India has only 0.7% of global share in world merchandise trade in 2003 (Sharma, 2006). But between 1995 and 2000, the Indian IT industry recorded a compound annual growth rate of 42% (Sharma, 2006). In 2002, India’s IT exports totaled about $10 billion, compared to China’s $1.5 billion. Taking into account that some 40% of China’s IT exports involved Indian IT companies based in China, China’s services and IT sector is no comparison to India (Sharma, 2006).

Specific Strategies and Performances of the Industrialization

In China, reforms were introduced gradually to “avoid major imbalance within the socio-economic-political system (Basu, 2007).” The results were successful mainly because of bold but careful leadership from government, such as the Township and Village Enterprises, and large domestic savings, a trait particular to many East Asian countries (Basu, 2007). When Deng Xiaoping first initiated economic reforms in 1979, one of the first policies was to establish the household responsibility system (HRS): each household was given their own plot of land and told that any production above the government quota (which was drastically reduced) was their property (Démurger, Sachs, Woo, & Bao, 2001). The main focus of the household responsibility system was on raising the living standards of the rural areas by restoring material and private incentives to improve “allocative efficiency (Basu, 2007).” The policy of starting from the rural areas rather than urban may be particular to China since historically the Communist Party rose to power by gaining support from rural peasants.

Simultaneously, a new system called the Township and Village Enterprises (TVEs) was established. Under this reform, communities were allowed to form business enterprises to provide services required on the developing market (Sharma, 2006; Basu, 2007). Assistance and guidance was provided by the traditional State Owned Enterprises (SOEs), such as loans from banks. Subject to market competition and hard budget constraints, but at the same time, enjoying the freedom to operate outside state planning (Sharma, 2006), the TVEs experienced astonishing growth: the share in national total export rose from 16.9% ($8 billion US) in 1988 to 46.2% ($84.3 billion US) in 1997 (Perotti, Sun, & Zou, 1998). The TVEs also absorbed millions of surplus agricultural workers into labor intensive industries (Basu, 2007). Seeing the successful development of the TVEs, the government gave up its monopoly over industrial production which resulted in a flood of new profit-seeking entrepreneurs further expanding the market (Huang & Khanna, 2003).

The State Owned Enterprises (SOEs) also had a major role in providing the basic infrastructure essential to the export led industrialization path China chose. Fueled by China’s large domestic savings, a result of cultural influence, transportation infrastructure was built to connect the vast regions of China (Sharma, 2006). Most importantly, banks had large amounts of money to lend out to entrepreneurs for investment into capital such as factory plants and equipment, which is the basis of growth in manufacturing. Also, although the SOEs structure was not designed to be profit maximizing and thus generally belittled as money wasting, a UN study suggests that the, the SOEs provides many social services that bring great value to society, such as pensions for a rapidly aging population, that provides the stability needed in a period of rapid change (Perotti, Sun, & Zou, 1998).

In India, the initial reforms led to moderate growth, but the rapid increase in GDP came with the global expansion of extraordinary cheap high-speed Internet and related telecommunications networks (Sharma, 2006). Geographical barriers have been largely rendered irrelevant by creating linkages among countries and businesses that simply did not exist a decade and a half ago. This has enabled Indian entrepreneurs and the country’s large pool of skilled and low-cost technological workers to cash in on the IT revolution (Sharma, 2006). India also has the advantage of gaining trust of Western firms due to a variety of historical and cultural reasons. For example, many of India’s diaspora has famously distinguished itself in knowledge-based industries (Huang & Khanna, 2003). As India developed, the diasporas returned to India with personal linkages to western firms, greatly fueling the outsourcing boom in recent years (Huang & Khanna, 2003). Also, a democratic system and the English language that western firms were familiar with gave confidence to investors that China could not give with its dictatorship, communist background, and different language (Huang & Khanna, 2003).

However, according to some critics, India is not growing as much as it can due to its import substitution policy, where there are high trade tariffs that prevent goods from other countries to gain competitive edge in the Indian market (Sharma, 2006). Not only does India only account for 0.7% of global exports, the average trade tariffs remain as high as 22%—far above the 8% average for the Association of Southeast Asian Nations (ASEAN) (Sharma, 2006). Some tout the import substitution method as pivotal to protecting small producers and industries in India so that they will have time to gradually develop without too many job losses. However, I think the protection is preventing the small businesses from innovate and change at a pace suitable to the globalizing economy. Inefficient businesses abound because there is little to no competition from outside firms other than in the IT sector (Basu, 2007). India’s industrialization rate for manufacturing is very low compared to China’s. The relatively bad infrastructure is also preventing industry from developing into its full potential. Also, India’s labor laws make it very costly to reduce workforces in enterprises of more than 100 employees. As a consequence, the vast majority of India’s employment is informal and involves small, tax-evading, inefficient enterprises (Sharma, 2006).

Unlike China, India’s reforms have generally bypassed the rural sector. Although the urban, high technology sectors have become prosperous, the agricultural sector, which provides the livelihood of roughly 70% of the population, only accounts for about 20% of the GDP (Sharma, 2006). The growing population is outstripping the resources the land can provide and many people are dropping into deeper poverty. The failure of the government to look after the rural population was reflected in the elections of 2004, where the majority of India, which was poor, voted out the ruling national coalition (Sharma, 2006). This study claims it is because of how the majority felt disconnected with the campaign slogan “Shining India (Sharma, 2006).” Since India is a democracy policies cannot be executed without gaining popularity from most sectors. Some fear that the continuous neglect the government shows to the least prosperous classes in the India will produce a significant backlash against the bureaucracy in the future. China, in this regard, is in a relatively advantageous position because direct action can be implemented with efficiency and effectiveness because of the dictatorship structure.

Problems of the Future?

Currently, China requires lots of resources to keep up the growth in the manufacturing industry, but with the rising prices of oil and resources in general, it is also obvious that China cannot continue to develop by ever expanding its manufacturing industries (Basu, 2007). Moreover, China has become significantly dependent on foreign trade. China’s trade in goods as a share of GDP reached to 49% in 2003, within 25 years of opening up (Basu, 2007). What will happen if FDI start flowing to other countries? Will China have enough capital and resources (human and physical) to continue lifting its citizens out of poverty? Additional challenges for China also include a weak financial system and the tension between a one-party state and an increasingly educated population (Dahlman, 2007).

For India difficulties include generating consensus for critical reforms in a very diverse population still constrained by the legacy of the caste system (Dahlman, 2007). Economic status imbalance between classes has ignited violence in many countries. Will India be able to successfully ease the tensions? Other problems also include very high illiteracy rates (52% among women), and constraints on the expansion of the higher education system (Dahlman, 2007).

Conclusion

It is hard to compare the relative performances of India and China due to their divergent strategies. Each has their own problems for the future and has many lessons to learn from each other’s development methods. I believe there needs to a convergence of strategies by China and India: China will have to start moving up the value added chain by investing in the services and technology industry; India will have to either lower restrictions on imports or facilitate growth in their manufacturing industry to meet the demands of the bludgeoning population.

Works Cited

Basu, P. K. (2007). Critical evaluation of growth strategies: India and China. International Journal of Social Economics , 34 (9), 664-678.

Current World Population (ranked). (2007). Retrieved March 20, 2008, from GeoHive: http://www.xist.org/earth/population1.aspx

Dahlman, C. J. (2007). China and India Emerging Technological Powers. Issues in Science and Technology , 45-53.

Démurger, S., Sachs, J. D., Woo, W. T., & Bao, S. (2001). Geography, Economic Policy and Regional Development in China. Third International Conference on the Chinese Economy, (pp. 1-37). Clermont-Ferrand.

Fulton, L. (2007). India’s Way Crafting Special Economic Zones. Havard International Review , 7.

Hou, C., & Hou, J. W. (2002). Evolution of economic institutions and China’s economic reform. The Social Science Journal , 39, 363-379.

Huang, Y., & Khanna, T. (2003). Can India Overtake China? Foreign Policy , 74-81.

Sharma, S. D. (2006). Asia’s Challenged Giants. Current History , 170-175.