Economic Development of India and China

ABSTRACT

This study looks at the factors that have shaped the economic development of India and China. Starting in the 1990s, a gap emerged in the economic development between the comparable countries. This gap can be attributed to many factors including: China’s authoritarian government and focus on infrastructure, India’s focus on the service sector rather than manufacturing, and India’s late embrace of the market economy. Although this gap has been consistent since the 1990s, there is a possibility to close the economic developmental gap between the two Asian countries.

INTRODUCTION

India and China are both leaders in Asia’s emerging market. However, currently, China gets ten times more foreign direct investment than India. This paradox is so intriguing because up until the 1990s, India’s highway and railway infrastructure system was far beyond that of China, and until 1993, the two countries had similar GDPs. However, beginning in the 1990s, a gap emerged in the economic development between the two countries. This study will look at the economic performance, path to modernization, and political similarities and differences. All of these factors play a role in the gap that has emerged.  The globalization process has played a large role in the development of countries worldwide. Firstly, this study will delve into globalization and how the process has impacted each country differently. Secondly, we will look at what factors indicate why China has developed at a much faster pace than India. Finally, it will look at the possibility of bridging the gap.  

THEORETICAL FRAMEWORK

Assumption 1: The transformation of development has changed due to globalization. Less developed countries do not have to invest time and capital in research and development; borrowing technology creates faster development.

Hypothesis 1: China and India have vastly different markets and political strategies. Globalization had led to massive economic growth in both, however, the different economic and political choices made by both countries have impacted their speeds of development 

Theoretical Lens: This study will utilize the liberalist theoretical lens to analyze this study. This theoretical approach abides by the assumption that the driving force behind economic integration is globalization. Therefore, implemented it will lead to increased trade and investment. Globalization has played a heavy role in the development of both India and China, and can assist in the explanation of the gap that has occurred. Globalization is supported by classical economic liberals because they adhere to what globalization essentially stands for. Because this study focuses primarily on economic development, this study will utilize the focus that the liberal school of international relations has on the economic benefits of globalization.  Globalization has assisted in the worldwide spread of large companies, democratic values (India), and skill sets. China is a perfect example of the benefits globalization can offer. Their growth can be attributed to their large manufacturing export sector and the market incentives that came when they opened their economy.  

METHODOLOGY

Research Question:

How are China and India’s different choices responsible for India’s lag behind China?

Thesis Statement:

The gap that has occurred between India and China can be attributed to various factors including India’s focus on the service sector, the lack of government cohesiveness, and their late opening to the global market.  

Data Collection:

I chose these two specific countries for a few reasons. These neighboring countries share a 2000-kilometer border. They each have a large population and similar objectives. Their relationship has transformed in many ways in modern history; transitioning from ally to rival and back to allies again. They both endured devastating famines and they are both historically very similar. One of the biggest gaps that I noticed is that their pace to development differs greatly. This gap began to occur in the 1990’s, therefore my study will focus on 1990-now.

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This paper will rely primarily on qualitative research found in scholarly journal articles and books. The sources are available on the internet.  The Journals utilized includes: Journal of Indian Business Research, Modern Asian Studies, The China Quarterly, Asian Survey, Comparative Politics, and International Affairs. This study also used data from the World Bank, the Organization for Economic Cooperation and Development (OECD), and the United Nations Educational, Scientific and Cultural Organization (UNESCO).

BACKGROUND

When looking at each countries’ current state, it is important to acknowledge their respective histories and the role that they played. Both China and India have a long history, however, their histories vary. Both were major exporters of textiles and largely dominated the seas until 1500. Both countries have vast territories and utilized this in the agricultural sector. However, China’s history drove it towards mass industrialization. China is a large, centrally run state and has a history of stability and single authority. Their country views itself as a unitary, hard state. This allows them to pursue single goals with ease and mobilize resources effectively. India endured foreign rule from the British until their Independence in 1947. India struggled to find unity within diversity and articulating an integrated vision of Indian nationhood. They had issues because they were trying to accommodate different languages and religions within a democratic framework. However, the average Indian was slightly better off than the average Chinese the first few years after India’s independence. These historical legacies have greatly influenced the political and economics of China and India.

CHAPTER I: GLOBALIZATION IN DEVELOPING COUNTRIES

The globalization process has introduced numerous opportunities and threats to India and China. Both countries have extensively liberalized their economies in recent years and they have seen rapid economic growth in the past two decades. However, these two countries have benefited from these opportunities at very different rates and responded to the process in different ways. This is where our study’s first questions is introduced:

The globalization has effected developing countries differently, why?

The ambassador to the Geneva Center for Security Policy defines globalization as, “A complex process that involves economic integration, transfer of policies across borders, and the transmission of knowledge.” [1] It is a process that encompasses the causes, course, and consequences of transitional and transcultural integration of human and non-human activities. Therefore, it is evident that this concept plays an integral role in this study.

Global integration has decreased poverty in China more so than in India. However, there has been an overall decline in poverty for both countries. The main difference between China and India is the inequality that has developed in India due to the change in economic status within the society. Overall, globalization and economic integration has increased the number of people living in extreme poverty in the world’s richest and poorest countries.  

India

India is still in the ongoing process of globalization and economic integration into the world economy.  Most scholars believe that the starting point for economic liberalization in India is began in 1991.[2] This is when the government openly sought integration into the economy and their orientation shifted. This included the removal of tariffs and restrictions on foreign trade. The Indian government also liberalized their foreign direct investment and cut taxes during this time. Although there was an orientation shift in 1991, regions within India experienced very different growth rates. This is mostly a result of the differences in foreign direct investment flow. During this time, only 4 regions accounted for 43.74% of FDI in the country.[3]

Globalization caused uneven growth regionally as well as in different sectors. Growth in the agriculture sector declined significantly in comparison to the manufacturing and service sectors. If growth would have been spread more evenly throughout the various sectors, inequality and poverty would decrease across the country.

China

China’s rapid growth is associated with them being one of the first Asian countries to integrate the globalization process and open up to the world economy. In the past 40 years, China’s approach to development has been so successful that they are now ranked as the second most important economy. They began their economic reform in 1970s which gave them a head start in growth rate in comparison to other countries in the region. Currently China’s service sector is much broader than India’s. This includes tourism, business, and transport services.

Globalization has led to rapid economic development within China.  In the 1990s, China focused on being labor intensive. They diversified their export sector to include computer equipment and telecommunications. Their manufacturing increased from 72% of merchandise exports to 91%.[4] This demonstrated China’s importance in the world economy and the manufacturing sector. Overall, the globalization process sped up the GDP growth rate in China. It also decreased their vulnerability to economic crises. It actually protected them from the Asian financial crisis in the 1990s.

Different choices in history by China and India have resulted in China being a leader in economic development. This is because China opened up their markets earlier and India started in 1991. India also did not focus on industrialization. They specialized in services and IT. Unfortunately, the IT-sector does not contribute a large benefit to GDP, therefore, this growth did not result in significant growth within India.

CHAPTER 2: FACTORS THAT STIMULATE DEVELOPMENT INEQUALITY

This chapter will look factors that have encouraged the rise of China and lag of India. This puzzle is specifically intriguing because the countries’ GDPs were so similar up until the 1990s. This is where the second question within this study is introduced:

Why has China developed so much faster?

Below are the main reasons why China is so far ahead of India:

China is an Autocracy. The Chinese authoritarian government owns all of the land. China’s government allows for quick land acquisition for development of infrastructure projects and to restore and rehabilitate the displaced people. This leads to faster decision making and faster implementation.  In the 1990’s China had a rapid infrastructure push and roads, railways, and airports were built. Rather than waiting for the need to arise, China’s government built for their country’s projected needs. For the most part, the policy decisions decided on are not altered by different party politics, ideology or leadership change. This allows the government to stay committed to a focus on their economic growth. One of the most successful government implemented policies is the encouragement of resource mobilization.

China has an extremely strong savings culture. There are four large state banks that citizens deposit their money into. Overall, China has a faster growth of capital stock which results in rapid growth of capital intensity. This high savings rate has transformed into available capital. This capital is directed by the leadership into various key projects. This correlates to China’s focus on infrastructure projects. This capital has financed the majority of the government infrastructure projects in China.

China embraced a market economy early. China experienced one of the greatest comparative advantages in economics’ history. In the 1990’s, China began to focus more on their relations with strong global powers like the United States, Russia, Japan, and European countries. They embraced market economy in 1992 and utilized their massive amounts of land. Land reform led to equitable distribution of income and wealth throughout the country.

China has a strong manufacturing base. When China invaded the world market, they focused on labor-intensive manufacturing sectors like textile and apparel. They successfully transitioned from agriculture into high productivity sectors. They began to focus their orientation largely on exporting manufacturing goods. China successfully became the world’s manufacturing hub by creating low-cost electronic and hardware products. This provided a much needed boost to their economy and a substantial amount of jobs were provided.

China has favorable demographics. China’s population provides them with a massive market making their current demographics favorable for a strong economy. China currently has more people in working age which leads to higher productivity and a higher GDP. However, due to the One Child Policy, this is expected to decline in the future. That being said, China’s population has been one of their best selling points. Chinese leaders organized delegations, hosted conferences, and successfully convinced foreign investors that China was stable and committed to an open-door policy. They essentially used their massive size as a selling point to increase foreign investment. Additionally, China’s population has a high literacy rate compared to India. Mao rapidly increased literacy rates within China, particularly in women. In 2012, the adult literacy rate was 96.4% in China and 71.2% in India.[5]

China has a hidden source of income: the tourism industry. They host almost 6 times more tourists every year in comparison to India. This industry creates over 60 million jobs in China. This hidden source of income dominates their service sector.

China has a flexible investment zone. They have a highly developed bond market where investors can easily hedge their risks against deviations. They also have the China Development Bank which heavily finances their infrastructure development. Their government has successfully created flexible investment zones, and export processing zones that are combined with tax incentives and strong infrastructure. China has a much higher FDI from OECD countries due to its large domestic market.[6] They also have stronger international trade ties with these countries.

Below are the main reasons why India’s growth has been stunted in comparison to China’s:

India’s growth model: India has focused predominately on an idiosyncratic pattern of development. However, they have emphasized services and skill-intensive manufacturing rather than labor- intensive manufacturing.[7]

India is a democracy. India’s government politicians’ policy decision are often driven by what will get them the most votes rather than what is necessarily right for the country. Winning elections is prioritized, and things like subsidies take precedence over large infrastructure projects. This causes delays and the result is ineffective decision making. They have multiple political parties with no coherent approach to development. Additionally, the government has not provided a stable macro-economic environment.

India’s main focus is on the service sector. India never experienced mass industrialization or a boost in the manufacturing sector. They still currently focus on the service sector which includes skill and knowledge.  The service IT-sector which India has focused on does not contribute a large benefit to GDP.

India’s economy opened up much later than China. The economy is currently largely closed and trade is a much smaller part of its economy. Their country fosters a sense of protectionism that prohibits companies from owning a majority of a company within India. The intention of this policy was to foster native companies, however, it has stifled their growth and economy. However, in 1991, Prime Minister Narasimha Rao implemented reforms to accelerate Indian economic growth.[8] These results were short lived, and due to political paralysis of policies, economic growth was stunted once again. 

India has a poor methodology towards infrastructure. India’s approach to infrastructure is to wait for the demand to arise before building. China is the opposite. India’s mall infrastructure projects have been funded by private companies. India is in dire need of a development finance institution (a lender solely for long-term infrastructure projects).

India lacks the business-above-all attitude. Unlike China, India has extremely stringent environmental protection laws. This often leads to cost escalation. It has been referenced as a third world country with first world ambitions and resources but outrageous environmental ethics.[9] Trade and economic growth have not been paramount in India. Their focus on native companies and local industry has curbed and restricted foreign investment.

CHAPTER 3: LESSONS TO BE LEARNED AND PROSPECTS FOR THE FUTURE

What are some policy lessons to be learned?

The education system needs to be at the forefront. It is important for India to maintain the current comparative advantage over China within the IT-sector. In order to do that, India must continue to reform the educational system and promote education throughout the country. Overall, the average level of education needs to increase. Additionally, specialized training can further strengthen their labor force. Finally, India’s government needs to realize that industrialization rather than service specialization is needed to reach high growth rates.

Is it possible to bridge the gap?

Demographically, India’s population and market will soon be the size of China’s. By 2020, India’s working age population is projected to overtake China. This is partially a result of China’s One Child Policy. The UN projected that India will have more than 1 billion people in working age by 2050. As of 2012, India’s fertility rate was at 2.5 compared to China’s 1.7.[10] India also offers cheaper labor costs, geographic closeness to many OECD investor countries, and lower country risk. This can increase their prospects for increased FDI investment.

In efforts to boost tourism, India is implemented a new policy that allows for visa on arrival without the need to visit an Indian consulate or visa center. This policy has the opportunity to increase country revenue and support job growth within the service industry.

Since the election of Prime Minister Narendra Modi in 2014, foreign investment has been increasing in India. PM Mobi has pledged to banish India’s reputation as a hard place to invest and do business. He also plans to invest heavily in rail, roadway and energy infrastructures. He promises to create efficient bureaucracy, develop the necessary infrastructure to support profitable industries, and work side by side with foreign and domestic investors to efficiently implement their projects.[11]

CONCLUSION

There are various economic and political choices made by both countries in the past that have largely effected their developmental success today. This study identifies these reasons as specific pieces to the gap puzzle. When we look at these as a whole we can see why there is such a large gap in the economic development of India and China.

China’s began their orientation towards the world economy in 1978, while India did not shift their orientation until 1991. It is possible to successfully bridge the gap between the two countries. However, considering the 15 year head start that China has on India, this process will take time. That being said, India’s new Prime Minister Narendra Modi offers a glimmer of consistency and productive policies to ensure India’s continued development.

REFERENCES

DeLong, J. B. (2003). India since independence: An analytic growth narrative. In search of prosperity: analytic narratives on economic growth, 184-204.

G.K. Kalyanaram, (2009) “India’s economic growth and market potential: benchmarked against China”, Journal of Indian Business Research, Vol. 1 Issue: 1, pp.57-65, https://doi.org/10.1108/17554190910963208

Fravel, M. (2010). International Relations Theory and China’s Rise: Assessing China’s Potential for Territorial Expansion. International Studies Review, 12(4), 505-532. Retrieved from http://www.jstor.org.library3.webster.edu/stable/40931355

Hall, I. (2017). Narendra Modi and India’s normative power. International Affairs, 93(1), 113-131.

Malik, J. (1995). China-India Relations in the Post-Soviet Era: The Continuing Rivalry. The China Quarterly, (142), 317-355. Retrieved from http://www.jstor.org.library3.webster.edu/stable/655419

Nayef R.F. Al-Rodhan and Gerard Stoudmann, (2006) “Definitions of Globalization: A Comprehensive Overview and A Proposed Definition”, Geneva Centre for Security Policy, available at http://www.gcsp.ch/e/publications/Globalization/index.htm.

Reich, M. R., & Bowonder, B. (1992). Environmental Policy in India. Policy Studies Journal, 20(4), 643-661.

The World Bank, World Development Indicators (2012). Fertility rate, total (births per woman). Retrieved from http://data.worldbank.org/indicator/SP.DYN.TFRT.IN. 

UNICEF (2012). State of the World – Statistics, Retrieved from https://www.unicef.org/infobycountry/india_statistics.html

Wenhui Wei, (2005) “China and India: Any difference in their FDI performances?”, Journal of Asian Economics, Volume 16, Issue 4, 2005, Pages 719-736, ISSN 1049-0078, http://dx.doi.org/10.1016/j.asieco.2005.06.004.

[1] Nayef R.F. Al-Rodhan and Gerard Stoudmann, “Definitions of Globalization: A Comprehensive Overview and A Proposed Definition”, Geneva Centre for Security Policy, 2006, available at http://www.gcsp.ch/e/publications/Globalization/index.htm.

[2] G.K. Kalyanaram, (2009) “India’s economic growth and market potential: benchmarked against China”, Journal of Indian Business Research, Vol. 1 Issue: 1, pp.57-65, https://doi.org/10.1108/17554190910963208

[3] G.K. Kalynarma, (2009).

[4] Fravel, M. (2010). International Relations Theory and China’s Rise: Assessing China’s Potential for Territorial Expansion. International Studies Review, 12(4), 505-532. Retrieved from http://www.jstor.org.library3.webster.edu/stable/40931355

[5] UNICEF (2012). State of the World – Statistics, Retrieved from https://www.unicef.org/infobycountry/india_statistics.html

[6] Wenhui Wei, (2005) “China and India: Any difference in their FDI performances?”, Journal of Asian Economics, Volume 16, Issue 4, 2005, Pages 719-736, ISSN 1049-0078, http://dx.doi.org/10.1016/j.asieco.2005.06.004.

[7] Malik, J. (1995). China-India Relations in the Post-Soviet Era: The Continuing Rivalry. The China Quarterly, (142), 317-355. Retrieved from http://www.jstor.org.library3.webster.edu/stable/655419

[8] DeLong, J. B. (2003). India since independence: An analytic growth narrative. In search of prosperity: analytic narratives on economic growth, 184-204.

[9] Reich, M. R., & Bowonder, B. (1992). Environmental Policy in India. Policy Studies Journal, 20(4), 643-661

[10] The World Bank, World Development Indicators (2012). Fertility rate, total (births per woman). Retrieved from http://data.worldbank.org/indicator/SP.DYN.TFRT.IN. 

[11] Hall, I. (2017). Narendra Modi and India’s normative power. International Affairs, 93(1), 113-131.