Comparative Economics Studies of China and India

12 December 2016

In 1950, China and India was the two developing countries with largest resources in term of land and labor. At that time, they both had the comparable economic structures and degree of development. However, with the difference mainly in political systems, in which China is Socialist Communist government, while India adopt parliamentary democracy, and specific countries’ development policy, it leads to the difference in the rate of growth in industrialization in particular countries.

The dissimilarities in political system account for the rate of decision making process. It is the particular reason China had its development policy change in 1978, which undertake export-oriented policy creating special economic zones (SEZs), result in being one of the fastest growing countries in the past 30 years, while In the case of India, before 1991, the economic growth is considerably low, referring as “Hindu rate of growth”, reflects slow growth in industrialization.

After 1991, India had its economic reform policies, Industrialization begin to grow once more, especially with the support of SEZ Act in 2005.

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It is still questioned whether India could follow China in growth of industrialization due to poor quality of infrastructure and protesting in land acquisition. Introduction The development policy of China and India had it starting point since India’s independency in 1947 and China’s liberation in 1950. These two countries had merely identical initial position in term of economic structures.

GDP per capita of China and India, using prices at 1960, were estimated to be 65 US dollar and 62 US dollar respectively. Also, total labor working in industry was 11 percent in India, while it was only 7 percent in China. Moreover, 9 percent of total output was generated in Large-scale manufacturing and utilities, similar to 6% in India. Likewise, Both China and India economies characterized by mass rural poverty under feudal mode of protection in the country side. However, the gap of industrialization between two countries began to widen during 1970s.

As in 1980, there was a substantial disparity in percentage share of GDP, only 21. 9 percent in India, compare to 48. 5% in China (Saith, 2008. ) Why was the gap broadened due to similar economic structures? This paper focuses on the reason behind the different rate of industrialization that leads to discrepancy in economic growth. The first section analyzes about the distinction of Chinese and India’s political system, autocratic socialist versus parliamentary democracy, and how it affect the decision making process of two countries.

Next section examines various policies of each country, including Import substitution policy of India during 1950-1990, China reform in 1979 with special economic zones (SEZs) and SEZ Act of India in 2005 and the success or failure of those policies. The third Section discusses the policy of land acquisition of China and India that contribute to industrial district. Section four reviews quality of infrastructure of two countries that affect the industrialization accordingly. The Final section concludes the paper. Political Systems

There is a distinct political system between China and India. China or PRC is considered as a single-socialist party, in which general secretary of communist party is the president of PRC. This gives total power to communist party to rule over country, although there are minorities of eight other political parties. Furthermore, having economic reform in1978, it gave provincial leader powers to allocate resources in their province. Local economic performances among states evolved into the essential criterion to evaluate lower-level officials.

These economic performances included GDP growth, to steel produced, the miles of road constructed (Li & Zhou, 2004. ) It created competition among state official to compete for promotion in to higher level, which increase efficiency in each states. Li and Zhou (2004) used data from 28 provincial units from 1979-1995, estimated with regressions, showing that annual growth rate of GDP has positive relationship with promotion (15 %. ) Moreover, with average growth rate over 5 years, result in positive relationship more than double of the result of annual growth rate (33%. In contrast, India constitutes a parliamentary multi-party democracy which more than 40 political parties. It can be said that Indian politics is dominated by duopoly of National Congress party and BJP party. However, those small regional parties still possess some political power as no parties have votes enough for being one-party government. After 1992, Indian politics have become politics of caste factions. Candidates for legislative assembly seats have been selected from local faction leaders who have local ote banks in specific caste and community. There is no party which can be one-party dominance except being head of multi-party coalition (Stern, 2000. ) Also, with numerous political parties, those parties choose to play vote bank politics. Sometimes they prefer not to afflict with their vote banks, although it is better in terms of society (Inhovi, 2009. ) Moreover, the composition of state power of China and India which it was created during achieving independence or liberation is what make it difference between two political system.

In India, the independence movement was supervised mainly by the people in the middle and upper castes. By this I mean, in the post-independence period, people in middle and upper castes can retain their power, while protecting their benefits. As a result, the Indian institutional framework is taking as a constraint toward industrialization and economic growth (Saith, 2008) On the other hand; revolutionary communist party led by Mao Zedong has taken control over china in 1950. Those powers were in the hand of the poor peasant and workers.

Prior Status-quo and political structures were overthrown during the revolutionary under socialism. Therefore, the Chinese could adjust their institutional framework so that it is suitable for development of the countries. With the dissimilarity in political system, it leads to the differentiation in the decision making process. For China, which political system is one-party domination, the decision for policies can be made in the communist party as less transaction cost of negotiation among political parties and no obstacle from institutional framework and status-quo.

But for India, having duopoly in politics with coalition of multi-party government, culture of patron-client relationship and vote banks system, such decision on policies takes longer time as high negotiation cost between political parties, and it might has conflict with their vote banks (Inhovi, 2009 . ) In addition, China had dual-track implementing system in decision making process, in which State Planning Committee (SPC) make important decision on policies. It also monitors and implements the policy, supporting by powerful party structure, result in successful solutions in terms of growth and infrastructure development.

While, India had separated institutions of decision making process and implementation on policies. Strategic Plans were constructed by working groups, including representative of line ministries, technical experts and others. However, in reality, the implementation was deviated from the plan. In addition, past Indian development plans only pointed out directions but not specific goals, making implementation process harder. The distinct model of decision making process would affect both developments policies and infrastructure of both countries that lead to difference growth of industrialization and economic performance (Kim& Nangia, 2008. Development Policies In 1950s, India led by Nehru Gandhi launch first development plan, in which its objective was to promote industrialization which large investment were made basic industries. It was known as Import Substitution Policy (ISI). Self-reliance on industrial goods was their prime target. As a consequence, government placed heavy protection against domestic industries with licenses, permits and quotas. Only manufactured goods that improve productivity of industrial goods were allowed to import.

The development of industrial sector was portrayed by central planning which controlled private sector through license and permits and massive investment in public sector, including specific industries exclusively reserved (McMillan& Naughton, 1992. ) Consequently, India industrialized that its industries mostly produce everything from tinned fruit to nuclear energy (Stern, 2000). However, the rate of industrialization is slow as in behalf of non-comparative advantage and high costs of producing goods. Still, average annual GDP growth in industrial sector in real term from 1951-1960 was 5. 7% (Reserved bank of India, 2011. ) At the same time, China had its development policy slightly differentiate from India. China also had development policy centrally planned. However, it relied on the collectivization of agricultural sector, using surplus on development of producing raw materials, investment goods industries and larger-scale, capital intensive industry. All trade of China was controlled by foreign trade corporations, which indeed owned by ministry of Foreign trade. It regulated all imports and exports to specific quantitative guidelines.

Similar to India, China’s export and import is irrelevant to country’s comparative advantage (Branstetter& Lardy, 2006. ) Then, in 1970s, there’s a turning point in Chinese economy. China, led by Deng Xiaoping, had a several economic reforms especially creating “special economic zones. ” These zones were enacted for which foreign firms receive preferential tax and administrative treatment and given an unusually free hand in their operations (Branstetter& Lardy, 2006. ) By that time, there were 4 zones: Shenzen, Zhuhai, Xiamen and Shantou.

The prime objective of SEZs was to serve as a bridge to introducing foreign capital, technology and knowledge and management know-how (Roychoudhury, 2010. ) These special economic zones had several advantages. First, each of the zones is extremely large in terms of geographical area; for instance, 2000 square kilometers in Shenzen. It creates cost advantage of economies of scale for industrial sector both internal and external, and low transportation cost among suppliers. Second, they locate in the coastal area, having ports and transport networks.

Also, these zones were established near major cities or countries; for example, Shenzen neighbor Hongkong, and Xiamen borders Taiwan. It could attract foreign investment from nearby cities, boast industrialization in SEZs. Moreover, foreign industries received preferential tax in corporate tax rate; the actual tax burden is 11%, while domestic industry paid 23% in actual tax burden, although nowadays, the preferential tax had been lifted except few high-technology sector and small enterprises (Guo& Feng, 2007. SEZs helped foster rapid industrialization in China within its area; incentivize foreign investors using comparative advantage of cheap labor costs. Along with the assistance of import policy in 1987, which granted imports of raw materials, parts and components for exporting production purpose tax-free, China industrial sector emerged as low-wage assembly services (Branstetter& Lardy, 2006. ) As a result, SEZs growth has been enormous, as an example of Shenzen, which average annual GDP growth rate from 1980-2005 was 27%, later referred as “Shenzen Speed” (Guo& Feng, 2007. Later on, China has gained benefit from importing technical knowledge contained in capital goods, parts and components; as a result, some of the industry has shifted from assembling and processing services to self-manufacturing (Branstetter& Lardy, 2006. ) By the end of 2005, there are five Shenzen brands with sale more than 10 billion Yuan. The actual use of foreign capital inShenzen has increased to $3. 3 billion in 2006, compare to $153. 7 million in 1979 (Guo& Feng, 2007. ) 7% of gross world FDI flows in 2009 went in to China, increase significantly from 1% in 1980.

In 2008, China had its share of world GDP in PPP basis of nearly 12% compare to 2% in 1980. China’s real GDP has increased average over 10% annually (Roychoudhury, 2010. ) SEZs policy has proved its own successful, accelerating industrialization and economic growth in China in the past 30 years. In contrast, coping with Hindu rate of growth for over 40 years, 3 percent per annum from 1947 to 1975 and 5 percent per annum from 1976-1991, India had its economic reform later in 1991, starting trade liberalization to oster industrialization and economic growth, including abolishing of industrial licensing, decreasing tariff protection, removing industries reserved for public sector and small-scale sector and liberalizing foreign direct investment. Before trade liberalization, the import substitution policy proved to be inefficiency due to licensing policy, high cost of producing, inflexibility of labor market and non-incentive for efficiency improvement (Ahluwalia, 2002. ) Companies paid no attention on management training, quality control and advertising because there is only few or no competitor due to licensing policy and tariff protection.

As in 1970s, Indian market for industrial goods soon exhausted as domestic market is small and low competitiveness against other companies in the world market. GDP growth in industrial sector of India from 1971-1980 is only 4. 3% especially growth from 1970-1976 is only 3. 4%, compare to 5. 9% and 6. 2% for growth from 1951-1960 and 1961-1970 respectively (reserved Bank of India, 2011. ) As a consequent, industrial licensing has been nullified, replaced by new competition law to increase competitive environment in domestic and international market.

Moreover, 15 industries in public sector that was reserved exclusively, such as iron and steel, air transport services, have been opened for private companies to invest. Also, some of productions reserved for small-scale sector have been removed as those productions have export potential. Moreover, import licensing against capital goods and intermediate goods were removed in 1993, and quantitative restrictions on imports of manufactured consumer goods were abolished in 2001. It increased competitiveness for domestic industry, forcing to compete with other companies in global markets.

In addition, Average tariff rate has reduced from 72. 5% in 1991-1992 to 15 percent in 2004, which will increase competition in domestic markets. However, the average tariff was considered high, comparing to China (Ahluwalia, 2002. ) The growth in economy and industrialization in India in late 2000s also partly came from “Special Economic Zones” or SEZ. In 2005, Government of India has passed SEZ A, which it goals was to incentivize local and foreign investors and promote export. There are numerous benefits investing under special economic zones..

Firstly, the government provided duty free import of goods for development, operation and maintenance of SEZ units. Secondly, income tax on export in the first 5 years is exempted, and 50% exempted in year 6TH -10TH and 50% of the export ploughed back export profit for year 11TH-15TH. Third, SEZs units also exempted from central sales tax, service tax and minimum alternate tax. Moreover, SEZs units could borrow from external commercial borrowing up to 500 million dollars in a year without maturity restriction.

In addition, SEZs unit gain benefit from single window clearance for central and state approvals, which reduce transaction cost of dealing with governments (SEZ India website, 2011. ) The SEZs policy in India is quite similar to SEZs policy in China; however, there are some distinctions between two countries. First, SEZs units in China mostly produce industrial products or consider in industrial sector, while in India, it can be both industrial sector and service sector. IT/ITES/Electronic hardware Technology parks accounted for 61. 3% of formal approvals of SEZs.

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