China and India economic performance, competition

ChinaandIndia:economicperformance,competitionandcooperation:anupdate$T.N.Srinivasan*EconomicGrowthCenter,YaleUniversity,27HillhouseAvenue,POBox208269,NewHaven,CT06520-8269,USAReceived4January2004;receivedinrevisedform27April2004;accepted26May2004AbstractChinaandIndiachosesimilareconomicdevelopmentstrategiesin1950ofnearautarky,industrialization,andthedominanceofthestateintheeconomy.Chinacameoutofinsulationandbeganreformingitseconomyin1978.India’shesitantandpiecemealreforms,initiatedinthe1980s,becamesystemicandbroaderin1991.Since1980,Chinahasgrownatanaveragerateofaround10%peryearandIndiaat6%,thoughbothhaveexperiencedaslowdownsince1997.Chinabecametheworld’sfourthlargestexporterin2002.India’sexportsalsogrew,thoughnotasfastasChina’s.Bothareexperiencingaprotectionistbacklash.Thepaperreviewstheeconomicperfor-manceofthetwocountries,particularlyofthemacroeconomyandoftheexternalsector.Itarguesagainstexaggeratingthesignificanceofthegrowingregionaldisparitieswithineachcountry,itarguesagainstexaggeratingtheirsignificance.Thetwocompeteinworldmarkets,andtherefore,haveacommoninterestinaliberalworldtradingsystem.TheircooperationintheDohaRoundoftradenegotiationswouldbemutuallybeneficialandwouldpromotetheinterestsofdevelopingcountries.#2004ElsevierInc.Allrightsreserved.JELclassification:F02;F13;F43;O24;O53Keywords:Developmentstrategy;Foreigntradeandinvestment;Growth;Poverty;RegionaldisparitiesJournalofAsianEconomics15(2004)613–636$Thispaperdrawson‘‘ChinaandIndia:EconomicPerformance,CompetitionandCooperation,’’whichwasoriginallypresentedataseminaronWTOAccession,PolicyReformandPovertysponsoredbytheWorldTradeOrganizationinBeijing,ChinainJune2002,whichisalongerversionofSrinivasan(2004).*Correspondingauthor.Tel.:þ12034323630;fax:þ12034323635.E-mailaddress:[e-mail](T.N.Srinivasan).1049-0078/$–seefrontmatter#2004ElsevierInc.Allrightsreserved.doi:10.1016/j.asieco.2004.05.0111.IntroductionTheancientcivilizationsofChinaandIndiahadcloseandfriendlycontactswitheachotherformillennia.Althoughaborderconflictin1962interruptedthese,fortunately,thetwocountrieshaveresumedtheirtraditionalrelationship.SincetheCommunistPartygainedcontrolofChinain1949,andIndiagainedindependencein1947,bothturnedtoeconomicdevelopment.Theychosesimilardevelopmentstrategiesthatinvolveddelib-erateinsulationfromtheworldeconomy,industrialization,andtheeconomicdominanceofthestate1.Chinabeganreformingitsclosed,centrallyplanned,non-marketeconomyin1978.AlthoughIndiaalwayshadalargeprivatesectorandfunctioningmarkets,theseweresubjecttorigidstatecontrolsandthestateownedthe‘‘commandingheights’’oftheeconomy.Thedeleteriouseffectsofthecontrolsandstateownership,towhichDuttarightlydrawsattentioninhiscomments,havebeenwidelydocumented.2Indiainitiatedhesitantandpiecemealreformsinthe1980s.ThesebecamesystemicandfarbroaderafterIndiaexperiencedaseveremacroeconomiccrisisin1991.Thepoliticalenvironmentsunderwhichreformswereinitiatedandimplementedinthetwocountriesandtheirconsequenceswereverydifferent.Indiacontinuestobeanopen,participatory,multi-partydemocracy,whileChinahasanauthoritarian,onepartyregime,thoughitisliberalizing.Afterrecountingthedifferingrationalesaswellasthesimilaritiesanddifferencesinthecontentoftheirreformagenda,IreviewedinSrinivasan(2002)theachievementsofreformsandremainingchallenges,particularlyregardingreformsofstate-ownedenterprises(SOEs).IconcludedwithananalysisofthecompetitionbetweenChinaandIndiainworldmarketsandthepotentialfortheircooperationintheDohaRoundofmultilateraltradenegotiationsundertheauspicesoftheWorldTradeOrga-nization(WTO).1DuttapointsoutthatChinawasmoresuccessfulinindustrializationasmeasuredbyitsmuchhighersharethanIndiaofindustryinGDP.AlthoughIndiandevelopmentstrategydidnotdeliveralargeshareofGDPforindustry,itnonethelesscreatedadiversified,butlargelyinternationallyuncompetitive,industrialstructure.InChina,draconiansavingsandinvestmentduringtheMaoyearsdeliveredsizable,butinefficient,industrialization.TherealissueisnotaboutthedifferenceintheirsharesofindustryinGDPbetweenthetwocountries.Itiswhetherineithersociety,thechosenpathofindustrializationsince1950wassociallyoptimal.Myansweristhatitprobablywasnot:thecostinIndiawasslowergrowthandgreaterpoverty(bothintermsofrealconsumptionandintermsofslowerreductioninmortalityandmorbidity)formillions.InChina,itwasmisery(andevendeath)forseveralmillionsduringtheattemptatforcedindustrializationoftheGreatLeapForwardandlaterduringthehorrorsoftheCulturalRevolution.2Thenetlossesofstate-ownedenterprisesasoff-budgetitemsarenotnormallyincludedinthefiscaldeficitfigures.Still,contrarytotheimplicationofDuttainhiscomments,theircontributiontooverallmacroeconomicimbalancewasnotsignificantuntilthe1980swhenfiscalprofligacyreplacedthemacroeconomicconservatismofthepreviousthreedecades.DuttaisalsowayoffinhisassertionthatIndiraGandhi’ssloganof‘‘GaribiHatao’’or‘‘RemovePoverty’’inIndiaandDengXiaoping’sslogan,‘‘Itisglorioustogetrich’’inChinadatetoroughlythesametimeinthe1970s.Infact,evenbeforeindependence,theplansforIndia’sdevelopmentputoutbyvariousgro