China and India in the global economy
Jens Ho
¨lscher a ,Enrico Marelli b ,*,Marcello Signorelli c a Brighton Business School,University of Brighton,Mithras House,Lewes Road,Brighton BN24AT,Great Britain,United Kingdom
b
Dipartimento di Scienze Economiche,Facolta
`di Economia,University of Brescia,Via san Faustino 74/B,25122Brescia,Italy c Department of Economics,Finance and Statistics,University of Perugia,via Pascoli 20,06123Perugia,Italy 1.Introduction
The decline and growth of the Chinese and Indian economies has a large in?uence on the world economy.This in?uence can be positive,as it was the case in the last three decades,but also negative,like in past centuries.It is possible that in the aftermath of the recent economic crisis and in the current gradual recovery,China and India could take over the role of global economic growth engines.This phenomenon has attracted considerable research interest (see,for example,Basu,2008;Chinn,2009;Pritchett,2009).
China and India share many common elements:(i)geographically,not only are they placed in the same continent,but they are separated by a common border;(ii)demographically,both of them are Economic Systems 34(2010)212–217
A R T I C L E I N F O Article history:
Received 30July 2009
Received in revised form 22January 2010
Accepted 6February 2010
JEL classi?cation:
P52
F40
O57Keywords:
China
India
Globalisation
Opening of the economies
A B S T R A C T
The purpose of this overview paper is to present the economic growth in China and India over the last three decades with a speci?c focus on the integration of these countries into the global economy.In the ?rst part,we brie?y review the long-run process of growth and institutional change,emphasizing the reforms leading to the ‘‘opening’’of the two economies.Then,we focus on key structural features and compare the recent development processes of the two countries.At the end,there are some hints about certain persisting
imbalances and the sustainability of the growth processes.
?2010Elsevier B.V.All rights reserved.
*Corresponding author.Tel.:+390302988828;fax:+390302988837.
E-mail address:emarelli@eco.unibs.it (E.Marelli).
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doi:10.1016/j.ecosys.2010.02.002
‘‘giants’’,with populations exceeding one billion;(iii)historically,both countries have rich and long histories and both were considered as leaders in the world economy until the 19th century.Also,both countries went through similar developments in economic terms,although some important differences will be shown in this article.Under their recent economic take-off,the two countries’economic performances differ both in timing and intensity.The main difference between these countries relates to their different political systems;however,this lies beyond the scope of this paper and therefore will not be addressed.
The purpose of this overview paper is to present the economic growth in China and India over the last three decades with a speci?c focus on the integration of these countries into the global economy.
Some stylized facts on economic growth in a long-run perspective will be presented in Section 2.Section 3will summarise the most signi?cant institutional reforms and key structural features.Section 4will present a descriptive analysis of selected aspects of economic growth.The conclusions refer to aspects of the recent world economic crisis.
2.Some stylized facts:from long-run decline to recent ‘‘miracle’’
The economic decline and growth of China and India has been largely investigated according to very different time-periods and comparative perspectives (e.g.,Maddison,2007;Srinivasan,2004,2006;Bosworth and Collins,2008).The long-run historical view highlights that the two economies accounted for just half of the world output from 1000to 1820,1then declined to less than 30%in 1870and to less than 10%in 1950and 1973(Fig.1).This dramatic relative decline was accompanied by:(i)a long period of relative growth in Western Europe (from 9%in 1000to 18%in 1500,from 22–23%in 1700and 1820to 33%in 1870)followed by a relative decline (26%in 1950and 1973)and (ii)the relative growth of the US (from 2%in 1820to 27%in 1973).In the long-run perspective,the evolution in the relative weights of China and India –considered separately –with respect to Western Europe,the US and the World economy is particularly interesting (see Fig.1).
In the past three decades the high economic growth experienced by China and to a lesser degree by India determined a fast increase in their weight in global output,from less then 10%to over 20%.Since 1980both the Chinese and Indian GDP increased at annual rates close to 10%and 6%,respectively,while the economic growth in the US and,especially,in Europe and Japan was signi?cantly lower.As shown in Fig.1,during the ?rst half of the past decade,the GDP weight of the ‘‘two giants’’again (for the ?rst time after many decades)became higher than that of the US and of Western Europe.Also in coincidence with the recent global recession,China and India only had a deceleration in their still positive growth rates rather than negative rates.As a consequence,the relative
comparative Fig.1.Relative growth/decline of China and India (1–2006).Note :The data refer to the %share of GDP of each country/region with respect to world GDP.Source:Maddison (2001)and update 2009.
1And even more in the ?rst millennium.
J.Ho ¨lscher et al./Economic Systems 34(2010)212–217213
‘‘recovery’’of the two giants has been continuing during the global recession.2For the future,some studies have focused on the growth capabilities of the two countries,in some cases highlighting the greater growth potential of India relative to China (e.g.,Srinivasan,2006).
3.Institutional change,reforms and opening of the economies
Economic growth in China and India has been affected primarily by institutional change.It cannot be ignored that both China and India experienced a gradual but signi?cant ‘‘transition’’(see,e.g.,Srinivasan,2004).Whilst recognising that there are a number of aspects of ‘‘transition’’,in this paper,we refer to the concept of ‘‘transition’’just as ‘‘change in the economic system’’,without considering other important aspects like social and political evolution.
It should be noted that ‘‘gradualism’’is a common feature of both the Chinese and the Indian transition.This is one of the key differences with respect to the ‘‘great transformation’’–characterised by high speed –that occurred in Eastern Europe after the fall of the Berlin wall in 1989.3
As for China,the evolution from an inef?cient planned economy began in 1978and the trajectory of economic reforms can be distinguished in ?ve periods.In the ?rst period (1978–1984),a reform in the agricultural sector (household responsibility system )introduced a new form of collective ?rm (township and village enterprises )and permitted the direct distribution to households of the revenues deriving from the part of production exceeding the planned level.As a consequence,both agricultural production and productivity increased in this ?rst period.During the second period (1985–88),the reforms mainly occurred in the industrial sector,by liberalising prices and wages and permitting ?rms to keep the pro?ts for self-?nancing.The growing productivity and wages in this sector attracted labour force underemployed in the primary sector,contributing to the overall productivity increase.It should be especially recalled that –during this period –the ‘‘open door policy ’’started,thus supporting the beginning of the integration of China into the world economy through both trade and FDI.In particular,foreign ?rms were initially attracted by ?scal incentives in four ‘‘special economic areas’’and later by international trade and FDI liberalisations in 14large cities and coastal regions.However,the gradual openness and extension of strong incentives to FDI was accompanied by (partial)persisting rigid conditions for admitting FDI.Throughout the third and fourth periods (1988–91and 1992–97),economic reforms involved all sectors;the role of market economy and private property was of?cially recognised at the Communist Party Congress in 1992by creating the condition for less gradual economic reforms.The more recent period (1998–present)has been characterised by a growing openness of the Chinese economy,especially post admission in the WTO (2001).
A crucial role in explaining Chinese economic growth is usually attributed to the increasing degree of trade openness,especially regarding exports (while the liberalisation of imports has been more gradual).This model of export-led growth supported by an undervalued currency was successfully pursued by West Germany in the 1950s.In addition,huge FDI in?ows,mainly attracted by much lower unit-labour costs,probably favoured spill-over effects and contributed to the transformation of the model of productive specialisation.
The ‘‘gradual transition’’of India has been different to that of China in many aspects.In particular,Indian institutional change and reform policies started later,contributing to a signi?cant delay in the integration into the global economy.Some reforms,for instance the partial liberalisation of imports especially of intermediate and investment goods that began in 1976with the ‘‘open general licensing’’(i.e.,a list of products that could be imported without any license)were introduced in the 1980s and followed by progressive privatisations,but it was only after 1992that the institutional change and reform policies gradually accelerated,including reforms of the ?scal system and ‘‘special economic zones’’.However,in addition to persisting rigidities and weaknesses in the labour market,the bureaucratic system,the infrastructure,the still high weight of the public sector and small ?rms,the integration of India into the world economy is much less intense than that of China.It should also be
2
Considering Maddison’s (2009)data –referring to the year 2006–together with more recent economic trends,it should be noted that China’s GDP is now becoming higher than that of the US (and has already surpassed Western Europe).3As for some key features and consequences of the ‘‘speed of transition’’in Eastern Europe,see,for example,Marelli and Signorelli (2010).J.Ho
¨lscher et al./Economic Systems 34(2010)212–217214
recalled that India,in contrast to China,had a large private sector even before transition began,although the market functioning was conditioned by rigid state controls.
The ‘‘gradual’’and partly different institutional change and reform policies in China and India over the last three decades lead to a signi?cant increase (especially in China)in the degree of openness with regard to foreign trade and FDI of the two economies and their integration into the world economy.
4.Structural features of development and key imbalances
One of the key explanations of per-capita GDP growth is usually related to the sectoral reallocation of productive factors (labour and capital)from lower productivity sectors toward higher productivity sectors.A complex and unstable relationship,with many feedbacks,exists between the degree of openness (export,import and FDI)and structural (sectoral)change.Moreover,in transition economies,the usual sectoral reallocation characterising economic development –from agriculture to industry and services –is accompanied by a signi?cant shift from the public to the private sector.
In both China and India there occurred three decades of ‘‘institutional change’’,the main features of which have been the increasing share of private property and the private sector (especially in China)as such,as well as price and wage liberalisations.This institutional change has been a ?rst,direct,channel promoting sectoral change,with a positive impact on GDP growth and productivity dynamics.However,as previously recalled,the ‘‘gradual transition’’of the two economies affected the composition,level and dynamics of the ‘‘openness indicators’’(export,import and FDI)differently:this can be considered a second,indirect,channel favouring sectoral reallocation and increasing overall productivity.
Given the above relationships and the differences (i)in initial sectoral composition and (ii)in the features of ‘‘gradual transition’’in the two economies,the weight of the industrial sector on GDP was (persistently)far higher in China in comparison to India since 1980.This industrialisation also led to a
sharply rising demand for energy (Ho
¨lscher et al.,2008).India is more specialised in service activities (recently including the advanced services)and the agriculture’s economic weight is also still higher 4(Fig.2).These differences in sectoral composition and reallocation can partly explain the gap in per-capita GDP growth of the two economies in the last three decades.
These trends also have profound implications for ‘‘social sustainability’’.A key structural feature of the Chinese and Indian economies is related to the persistently huge disparities in (individual and household)income/wealth distribution even within regions of the same country,e.g.between rural and urban areas.The territorial and structural imbalances are combined with macroeconomic disequilibria.For China,it is evident that international investment allows in part for high domestic savings and ‘‘sovereign funds’’are mainly derived from a high accumulation of foreign exchange reserves originated by a current account surplus.This is the mirror image of another imbalance in a different part of the world:in fact,until now,Chinese savings allowed the ?nancial sustainability of the huge and persistent US ‘‘twin de?cits’’.The ?nancial sector in China,however,is
still
Fig.2.Agriculture contribution to GDP (1980–2005/6).Note :*China 2005and India 2006.Sources:DataStream.
4
Agriculture’s weight in terms of employment is even higher:about half of total Indian employment is still in the agriculture sector (it was 72%in 1970),thus testifying the backwardness and low productivity of this sector.J.Ho ¨lscher et al./Economic Systems 34(2010)212–217215
underdeveloped,i.e.highly regulated and with the state as the majority shareholder.The amount of ‘bad debts’collateralised by a house price boom is simply unknown.
Fig.3refers to the gross domestic product per capita since 1980.5Until the beginning of the 90s,GDP per capita was greater in India than in China,although the gap was quite small.Since 1993,China’s growth has been much faster,so that in the ?nal year per capita GDP in China was more than double than in India.
5.Conclusions
In this review of the ‘‘miracle’’of Chinese and Indian economic growth we have focussed both on the institutional reforms introduced in the last three decades and on the main structural features.
We have highlighted the positive growth effects of opening and integrating into the world economy for both countries.On one hand,the extraordinary growth of these countries can sustain global economic growth;on the other hand,world economic dynamics obviously affect their economic performance.Therefore it is not clear whether these growth rates will be sustainable in an environment of sluggish recovery from the crisis in Europe and the United States.Some reorientation towards domestic development rather than export-led growth might be appropriate.In addition to the continuation of important investment plans for infrastructures,housing,schools,etc.,consumption should also increase in the next years.Moreover,both giants have no institutions of a welfare state or pension systems.In the absence of a welfare state,the propensity to save has been extremely high,as it is the only way for social protection.The expansion of public services and transfers could be a way of reducing some inequalities in the development processes and,at the same time,melting down the excessive currency reserves and reducing the global imbalances.
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