Factors That Contributed to the Economic Growth and Poverty Reduction in China and India - Case Study Example

Comparison and Contrast of Factors that Contributed to the Economic Growth and Poverty Reduction in China and India Name of Student Student Number Institution Course Code Lecturer Date of Submission Introduction China and India have emerged to be among the fastest growing economies not only in the Asian continent, but also globally. The two countries had similar development strategies before moving away from deliberate insulating themselves from the global economy and consequently embracing the concept of market oriented economic reforms and liberalisation (Bosworth and Collins, 2008). China resolved to radically reform its closed, centrally planned, non-market economy in 1978. On the on the hand, India had massive private sector and functioning markets that were faced by rigid state control up to the hesitant and piecemeal reforms that came up in the 1980s. They later emerged as systematic and far broader when India faced the 1991 severe macroeconomic crisis. The success have been envisioned and established with the high and sustained growth rates economically in context to the aggregate and per capita national income, as well as considerable reduction in income poverty. Thereby, this essay seeks to critically evaluate factors favouring the success in economic growth and poverty reduction and how best the two countries have achieved the success. Further, the essay will evaluate how China has emerged a better player in this regard to emerge a global economic giant in the making and beating India in terms of economic growth and poverty reduction. The essay commences by conclusively outlining the strategic measures employed by the two countries to achieve success, then elaborate on the implementation process and achievements, variations in economic growth, and eventually conclude with the future of the two economies and how China is trending ahead of India. The strategic moves saw the two countries realise economic growth and considerably reduce poverty levels among their humongous populations in the world (Wolf, 2005). China and India has the highest and second highest populations in the world and their combined population make a third of the global total population. Therefore, China and India have many challenges to meet for the public needs, amid having maximum human capital. Their political environments in the times of reforming and the resultant consequences were totally different (Herd and Dougherty, 2007). India has continuously been an open, participatory and multiparty democracy with China having an authoritarian, single party rule; although with liberalisation (Mishra and Kumar, 2005). Thereby, the growth and development of China and India economies and achievement of poverty reduction possess various aspects for contrast and comparison. They present crucial concepts in understanding the economic aspect of globalisation and eventual poverty reduction. In the last quarter of 20th century, there were extensive reforms that took place both China and India in regard to market liberalisation and macro-economic policy, trade and industry policy, privatisation and deregulation, tax and financial policy. According to Ghosh (2010), the two nations are generally categorised as two large countries within the development world having successful stories in the realm of globalisation. In China for instance, agricultural reforms coupled with de-collectivisation, as well as shift to the household responsibility system around 1970, in conjunction with procurement prices in the agricultural sector brought about massive growth in the agricultural sector (Wolf, 2005). The economic effect was felt even to the rural areas with substantial reduction in poverty levels. Comparative China and India Economic Growth and Poverty Reduction The economic reforms taken by China and India consisted of ensuring sustainability in the local markets and availing products locally. This was boosted with the availability of ready market in the most populous nations. Industrial and agricultural sectors growth had great role in the economic development in China and India. According to Ghosh (2010), Innovative strategies undertaken by the Asian countries have elevated them at the helm of excellence in the globalisation era. China’s growth has been favoured by the rapid industrialisation, high savings, extensive investment in the infrastructure and productive capacity, highly deregulated labour and a globally open and competitive economy (Chen and Feng, 2000). China is the most populated nation in the world and the high population ensured surplus labour making labour-intensive production a reality and in turn, this enhanced the average income, consequently reducing poverty levels among citizens (Wolf, 2005). China rise to success can be traced back after the World War II, where the nation adopted a development strategy consisting of deliberate insulation from the world economy, industrialisation and economic dominance of the state (Fan, Zhang and Robinson, 2003). Nevertheless, the strategy was short-lived as the nation was falling far behind western countries, and began to reforming its closed and centrally planned economy in 1978. This occurred as a result of the reforms that were introduced in the 80s and 90s (Kuijs, 2012). The reforms were strategic and rewarding, with notable agricultural reforms being evident. With reforms, the country’s growth accelerated and in the 1980’s and 1990’s saw its Gross Domestic Product (GDP) rates emerge the global highest at 9.9% and 10.3% respectively form a low of 6% in the 70’s (World Bank, 2006). Further, China enhanced agricultural reforms that saw de-collectivisation of agricultural lands and privatisation of land-use rights. The rural areas were not left behind in the revitalisation of the changes and saw increased infrastructures come up, mandatory delivery of output to the state by farmers and enabling of farmers to have a more market oriented output mix (Fan, Zhang and Robinson, 2003). This saw the increased growth in the agricultural sector boosting the financial development among the locals drastically reducing poverty levels. This is comparative to the Indian measures of ensuring agricultural growth and promoting the local economy by enhancing local farmers and boosting production (Mishra and Kumar, 2005). The reforms made in the agricultural sector were very effective giving an average of 10% growth per year during 1980-1984 leading to substantive reduction in poverty in the rural areas (Kuijs, 2012). Consequently, the successful reforms in the agricultural sector contributed directly towards reforming and expansion of the manufacturing sector building on national economic growth. On the same note, with increased income, the rural farmers were in a position to expand their expenditure on goods and services produced in the domestic industries and promote national economic development (Bosworth and Collins, 2008). With success in the agricultural sector, the industrial sector followed suit with reforms that saw the opening up of foreign investment and establishment of township and village enterprises. The promotion of the local agricultural sector was of high essence in terms of ensuring economic growth and bringing down poverty levels in the rural areas. With high economic growth in China, the proportion of people living in absolute poverty has declined considerably in the past decades. Agriculture can be placed as a key player in the extensive reduction in the poverty reduction in the 80s and 90; the impact was far much important than the impact made in the secondary and tertiary sectors growth. In the last two decades of the 20th century after 1981, the proportion of people living under poverty line dropped from 53% to 8% (World Bank, 2006). In respect to a dollar-per-day consumption measure, World Bank estimates that between 1990 and 2000, poverty rates fell from 33% to 16%. This shows the massive achievements made in poverty reduction, although there were inequalities in the way the whole aspect was realised and reduction in poverty achieved. Evaluating the Indian economic development strategy in context, it is evident that it was initialised after World War II and resembled the one undertaken by the Chinese. The strategy by India was near autarky, industrialisation and dominating the economy by the state (Bosworth and Collins, 2008). Development was perceived as synonymous with industrialisation and production industry concentrating on basic goods like steel and machinery to promote local business. This ensured that the local market was catered for while at the same time promoting economic development locally. The private capital was considered more of monopolization and not an efficient motor for development (Prime and Kulkarni, 2007). This resulted to the state control being considered essential and a development strategy of import substitution was chosen to effectively ensure local production and promotion of local industry. According to Mishra and Kumar (2005), India took strategic measures for development, and these involved policies for licencing industrial activities, reservation of key areas for state control, controlling foreign direct investment and introducing interventions within the labour market. Nevertheless, the strategy seemed ineffective, bureaucratic and conducive to rent-seeking behaviour prompting policy reforms in the 80s. This included introduction of given provisional measures to enhance capital-goods imports, rationalise the tax system and relax industrial regulations (Kuijs, 2012). However, the reforms effect in the 1980s was less consistent like in China and they only became systematic and broader at the start of the last decade of 20th century with the occurrence of the severe macro-economic crisis (Hu, Hu and Chang, 2003). Nevertheless, economic progression was evident to have started in the 80s and the reforms and changes undertaken at that time can be attributed to the success that India so far has achieved economically. The role of the state in the industrialisation in India remained crucial even with the reforms made after the 1991 macroeconomic crisis (Kuijs, 2012). The effect was felt as the 1980s industrialisation acted as the driving force of resource allocation shift in the favour of the market. The reforms that were taken after 1991 incorporated the relation of licensing system that controlled internal production, currency devaluation, relaxing the restrictions made on foreign capital inflow and transfer of technology, removal of quantitative restrictions on import of raw materials, intermediates and capital goods (Kuijs, 2012). Further, tariff levels were reduced, exchange controls got simplified and the rules that restricted major companies from expanding and bring up new ones were relaxed. Other reforms undertaken included breaking of public sector monopolies, bringing down dependence on foreign debt, as well as tax reforms. Nevertheless, most of the restrictive labour legislation was left in place and consequently the agricultural sector. China and India have been at the forefront in the shift to the centre of economic growth. In Asia, as well as economic prospects within the economies throughout the world there have been evidently great interest and dependence upon the two Asian giants (Herd and Dougherty, 2007). The growth experienced in China was evident in the agricultural production and very impressive as it occurred against the backdrop of declining employment in the sector. Consequently, the output per worker continued to grow highly and at impressive rates of 4.3% in the 90s (Fan, Zhang and Robinson, 2003). The gains realised in China were through considerable increase in capital per worker and rates of total factor productivity growth which were more than twice those of India. This gives a clear contrast of the two countries with china fairing pretty well in the context. In terms of policy, the opening up, as well as gradual market oriented reform taken up by China were done in conjunction with a strong role of the government in ensuring free flow of resources to industry and investment. Economic growth in China can be termed to have been made out of industry and investment orientation (Prime and Kulkarni, 2007). This served China well in crucial regards that allowed for constant high growth having no great stress. Nevertheless, the same has brought up critical imbalances. The imbalances regard social economic inequalities, irregular financial development among citizens and grouping of people into social class with others dripping down to lower cadres of life. Looking at the Indian context, since the mid-80s, the country has taken up market-orient reforms (Mishra and Kumar, 2005). Policies introduced in India have mainly not fully targeted the industrialisation and investments, like it happened in China within Indian growth pattern being less industry and export oriented. The gross domestic product growth in India was highly potential and increased over time due to the high investment and total factor productivity (TFP) growth (Bosworth, Collins and Virmani, 2007). Nevertheless, there were expectations and demands that ran ahead of the supply side in the years leading to macro-economic tension. There have been fiscal pressures that were evident making both countries economic growth more inclusive and very challenging. On critically evaluating the growth in China, it is evident that the supply side worked to its benefit (Bosworth and Collins, 2008). This promoted economic growth due to the fact that trade was boosted with having more products to offer. From the mid-80s and later reinforced in the beginning of the 90s, Indian economy reforms composed of trade liberalisation and domestic market liberalisation and integration (Mishra and Kumar, 2005). However, the Indian economy has continuously remained less open to foreign competition than that of China. Further, since the occurrence of the macro-economic crisis of the early 90s, management in macro-economic aspects has improved considerably leading to observable reductions in the fiscal deficits. This shows that reforms undertaken after the 1991 macro-economic crisis, there have been tremendous developments in form of national economic progression, poverty reduction and ensuring financial sustainability for the state. According to Kuijs (2012), it is basically termed that India is approximately 10-12 years behind of China in respect to reform and development process. In respect to GDP per capita, this is true and evident with India’s GDP per capita from 2010-2011 being 55 less than that of China in 2000. Nevertheless, this is not overtly true with respect to all determinants. Looking the human capital, it is evident that in 2000, India’s human capital was lower than in China and the labour force participation as well. On the other hand, total factor productivity and capital per worker in India is observed to be quite higher than that of China in 2000 (Kuijs 2000). In conclusion, in is evident that the economic growth of China and India had various comparisons and consequently differed. Notable growth was achieved with reforms to promote agriculture and production locally with measures to enhance trade and improve on market acquisition. From the essay, it is evident that India lags behind China in terms of per capita and consequently in economic growth. The fact that China has been seen to be performing better than India does not make the latter a poor performer, but rather brings to focus the strategic measures that favoured China to favourably surge ahead of the Asian economic giants. The venturing of Chinese in the international markets with a bang has also boosted the economic growth and it is prospected to continue in the future. India consequently boasts of massive international contacts that favours it economic growth sustainability and progression. One notable factor that favours the two is the availability of extensive human capital, local market and intellectual capacity to promote economic growth. The essay has clearly showed the high populations of the two nations as favouring the economic growth in respect to workforce and market availability. However, there are trends in the new dispensation as the world is undergoing economic crises that will barely see variance in the projected economic growths. On the same note, the rising incomes among the public will slow down economic growth in a nation like China with coming years, as it will be impossible to maintain the high economic growth rates. References Bosworth, B, and Collins, S. M. (2008). Accounting for growth: comparing China and India. Journal of Economic Perspectives, 22(1):45-66. Bosworth, B., Collins, S. M. and Virmani, A. (2007). Sources of growth in the Indian Economy, Indian Policy Forum 2007. New Delhi: Sage Publishers. Chen, B. and Feng, Y. (2000). Determinants of economic growth in China: private enterprise, education and openness, China economic review. 11:1-15. Fan, S., Zhang, X. and Robinson, S. (2003). Structural change and economic growth in China, review of development economic, 7:360-377. Ghosh, J. (2010). Poverty reduction in China and India: Policy implications of recent trends. DESA Working Paper no. 92. ST/ESA/2010/DWP/92. Herd, R. and Dougherty, S. (2007). Growth prospects in China and India compared The European journal of comparative economics, 4(1):65-89. ISSN 1824-2979. Hu, A., Hu, L. and Chang, Z. (2003). China’s economic growth and poverty reduction. Paper presented at the conference; “Tale of Two Giants: India’s and China’s Experience with reform and Growth” organised by International Monetary Fund and National Council for Applied Economic Research, New Delhi, Nov. 14-14, 2003. Kuijs, L. (2012). Economic growth patterns and strategies in China and India: past and future. Working paper FGI-2012-2. Hong Kong: Fung Global Institute. Mishra, P. and Kumar, U. (2005). Trade liberalisation and wage inequality: evidence from India. IMF Working Paper WP/05/20, International Monetary Fund. Prime, P. B. and Kulkarni, K. G. (Ed) (2007). Economic development India and China: New perspectives on progress and change. New Delhi: Serial Publications. Wolf, M. (2005). On the move: Asia’s giants take different routes in pursuit of economic greatness. Financial Times, Feb. 23, 2005. World Bank (2006). World development indicators. Washington, DC: The World Bank. Read More