Is There a Recipe for Economic Development? A Comparative Analysis of China and India

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The rapid development of China and India has prompted much debate about what these economies are doing right? The ultimate purpose of this debate has been to ascertain whether the growth strategies pursued by these countries could be emulated by other countries seeking to achieve similar growth.

This article critically evaluates the economic development of China and India, by analysing the contributory factors of their growth as well as the stumbling blocks faced by them, and special emphasis is given to the role of the rule of law in their development. Further, it examines whether existing development theory could explain the economic development achieved by these countries and concludes by drawing certain universal inferences on the development process.

China

Since opening its economy in 1978, China has recorded an unprecedented average growth of 9% (World Bank, 2024). What factors have contributed to this remarkable growth? After the initial success of opening its markets, the government invested a large proportion of the proceeds in industry and infrastructure, which helped the country industrialise within a short period of time. However, the most influential factor in China’s growth has been its large and cheap labour supply. This has been a major source of attraction for foreign investment into the country, resulting in a wave of manufacturing process outsourcing to China. The other factors which have contributed to China’s growth include its geography, where locating manufacturing in China’s vast coastal areas gives easy access to sea transport and reduce intermediate transportation; its culture, specifically the attitude of the people towards work; and to a controversial extent, the philosophy of the government, which is discussed below.

Despite the development China has achieved, there are several red flags. China’s industrialisation has come at a heavy cost to its environment.  Out of the world’s most polluted cities, still, most are located in China. Unless, China takes measures to minimize the environmental impact of its economic activities, the growth achieved would be counterproductive. Further, Shirk (2010), predicts a future political upheaval in China. However, since the Tiananmen Square incident in 1989, there has not been such significant political unrest in the country. Chinese Political Science Professor, Shaoguang Wang (2008), contends that the country’s political system has received the legitimacy of its people because it has been able to address the needs of the people, especially by delivering economic growth. If this argument holds true, a political revolution in the future would be unlikely. The most important challenge facing China is how it is going to manage the structural change of its economy. As wage levels and education standards rise, China cannot hope to rely on its industrialisation model of growth. It must foster indigenous innovation. Further, it must restructure its economy to be less dependent on the US economy. Its economic model to a large extent is based on the dearth of savings in the US and appetite for imports. Still, despite the tensions in US-China trade relations, China is the second largest foreign holder of US securities and the largest source of imports to the US. In 2022, China’s holding of US securities amounted to 12% of total foreign holding and imports to the US amounted to 14% of total imports (CRS, 2023).

What role has political institutions and the law played in China’s development? The western block of developed countries has always questioned the existence of rule of law in China. In analysing this claim, first, it is important to understand what the rule of law achieves in society. The application of a uniform set of rules to members of society, gives predictability and consistency to the functioning of society. In this context, has China’s political system failed to provide predictability to society?  As stated above, according to Professor Shaoguang Wang (2008), China’s political system has received the legitimacy of the people. He refers to this as legitimacy based on substance and distinguishes it from legitimacy based on procedure, which is embodied in the western democratic model of governance. Despite the absence of democracy in China’s political system, it has received the acceptance of its people and given predictability to the people.

It is worth considering whether China’s rapid development is supported by existing development theory. China has relied on open market conditions for its growth; however, it is far from a free market system that allocates resources through private ownership as advocated by the Modernisation Theory of development. China’s government, however, still has a strong hand in its economy and allocation of resources. The large state owned enterprises contribute to as much as 25% of the GDP (World Bank, 2019). However, as open market principles have underpinned its growth, it cannot be categorised under the Dependency Theory of development, which repudiate integration with the global economy and the marked based distributive mechanism. Shirk (2010), argues that the degree of state intervention in China, distorts resource allocation in the economy and lead to inefficiencies. However, China’s economic performance questions the validity of this argument. An important basis on which state intervention could be justified is during economic crisis or slowdown. China was resilient to the effects of the global financial crisis in 2007, because of the measures taken by its state. At the outset of the crisis, the government was able to swiftly diffuse a 4 trillion yuan stimulus package in the economy and increase bank credit through the large state owned banks. This helped China minimise the impact of the crisis and resulted in an upward revision of the the growth forecasts.  In fact, developed economies battered by the crisis and recession resorted to similar state intervention in the economy through stimulus packages and ‘quantitative easing’ (which means increasing the supply of money to purchase securities or assets in the economy).

In Washington a set of economic policy reforms were agreed on to achieve economic development and this was coined the Washington Consensus. This development model proposes, among others, the following policies; fiscal discipline, prioritisation of public expenditure, competitive exchange rate, trade liberalisation, privatisation, and deregulation. China’s fiscal discipline and public expenditure has been lax throughout the history of its growth. However, this policy has worked well for China. As stated above, China was able to minimise the impact of the financial crisis because of the fiscal stimulus provided by its government. China’s exchange rate policy has always been a moot point. The US and other developed countries have accused China of deliberately undervaluing its currency in order to keep the prices of its exports competitive. The government also adopts protectionist policies against imports. State owned enterprises account for more than one third of China’s output.  Thus, the policies adopted by China contradict the policies promoted by the Washington Consensus.

In this context, where existing development frameworks fail to provide an explanation for the development achieved by China, a new development model dubbed the Beijing Model has been promoted by the Chinese based on their experience. However, the model prescriptions are vague, lack consensus even among its promoters and used to mean a multitude of things. Therefore, the practical implications and worth of the model remains to be seen.

 India

India’s growth is forecast at 7.5% (World Bank, 2024). It is predicted that in the very near future India’s growth will surpass that of China. However, because of India’s delayed start it would be a long time before it reaches China’s level of development.

What factors have contributed to the development in India? Much of the success is owed to India’s private sector, from the smallest entrepreneur in the slums of Mumbai to global enterprises like Mittal Steel and Tata Motors. What is remarkable about India’s private sector is that it has been able prosper despite the lack of support from the country’s policy makers and other numerous obstacles inherent in the country, which is discussed below. Another important contributory factor to India’s growth is its demography. India has a very large working age population and its dependency ratio (percentage of dependants to working age population) is forecast to be one of the best in the world, even surpassing China. For 2050, India’s dependency ratio is forecast at 47%, whereas China’s is 63% (UN: WPP, 2012). This means a higher proportion of the population is able to contribute to economic activity.  A feature of India’s large work force is that many are educated in English and Information Technology. This is one of the reasons why India has become an international hub for outsourcing call centres and other business processes. It is also contended that India’s democracy has helped the economy by creating a free environment for entrepreneurship and innovation to flourish. However, as discussed below, India’s democracy and political institutions has stood more in the way of its development than anything else.

India’s road to economic prosperity is, however, quite literally riddled with potholes. One of the country’s main weaknesses has been its lousy infrastructure. Roads, electricity, water, public transport and many more infrastructure and public utilities are substandard and eating away into the productivity of the private sector. The condition of the road network and traffic congestion contributes to the increase of transportation costs by as much as 30% (The Economist, 2010). Although, India has a large workforce, it has an acute shortage of skilled labour required for the economy; graduates, engineers and vocationally trained workers. India, also has many social problems concerning poverty and its social development at present is questionable.

However, the foremost concern for India’s development has been the country’s so called democracy and political institutions. The problems with the country’s governance have impacted the economy in many ways. Firstly, the multiparty democracy has led to political instability and the coalition governments with competing interests have failed to implement much needed policy reforms. Secondly, the politicians have taken a populist view to pacify the voter base and this view has been usually been unfriendly to business and the economy. The construction of a much needed expressway between Delhi and Tajmahal (“Yamuna Expressway”) was delayed for years by taking such a populist view. Thirdly and more importantly, the entire political framework of the country has been rampant with corruption. Also, the complicated political structure and relationship between central and state government has left many investors confused about who is actually in control. In contrast, in China, investors know exactly with whom to deal. India’s political system has caused many in the country to voice the opinion that if it had a political system like in China, it would be much easier to implement policy reform and develop the country.

At first glance because of private enterprise and the democratic model of governance, it is easy to think that India has a capitalist economic model that accords with the Modernisation or Washington Consensus approach. However, India’s economy is more closed and regulated than it seems. The degree of India’s protectionism is evident by the fact that it has the highest tariffs of any major world economy, averaging at 13.8% (USTD, 2019). Although, important regulation ramparts (the ‘license raj’ system – licence for everything) have been brought down, many aspects relating to business and the economy remain highly regulated and subject to bureaucratic red tape. The government lack fiscal discipline and prioritisation of public expenditure. The government continue spending on subsidies and loss making state enterprises and this has lead to growing debt and crowding out of private sector credit. Thus, these development models fail to accurately describe the economic growth achieved by India and the stark contrast with the policies adopted by China render the new Beijing Model irrelevant in explaining India’s growth.

Conclusion

From the above analysis of China and India, several inferences could be drawn on the development process. Existing development theory fails to explain the growth achieved by both these countries.  The policies adopted by the two countries are different and one could even argue at opposite ends of the spectrum. China’s economic development has been largely induced by the government’s role in the economy, whereas India’s engine of growth has been the private sector. This disproves the notion of a consensus model for development as propagated by development theory. There is no cookie cutter approach or one size fits all approach for achieving economic growth. Instead, economic policies must be based on each county’s circumstances or context (Spence, 2008). A country must first investigate into its own economy and identify the factors constraining economic growth. This, however, is easier said than done and involves an in depth analysis of the economy of the country. Thereafter, implement policies targeting these constraints.  There may be multiple policies to achieve the same goal, but not all may work for the particular country. Therefore, a country must be prepared to experiment with policies and practice gradualism in implementing policies.

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