comparative socio-economic development strategies: india and china

Comparative Comparative Socio-Socio-Economic Economic Development Development Strategies:Strategies:India and India and ChinaChina

Thorvaldur GylfasonThorvaldur Gylfason

Compare the development Compare the development strategies and trajectories of the strategies and trajectories of the two economic giants of Asiatwo economic giants of Asia

One obvious differenceOne obvious difference India is a India is a democracydemocracy China, though, is notChina, though, is not

Many other differences, and Many other differences, and similarities that includesimilarities that include

Low foreign debtsLow foreign debts Long coastlinesLong coastlines Large overseas communitiesLarge overseas communities

Two giantsTwo giantsWhat’s the story?What’s the story?

India and China: GDP per capita 1820-1950 (constant 1990 US dollars)

0

100

200

300

400

500

600

700

800

1820 1913 1950

China

India

China was China was richer than richer than India 200 India 200 years ago, years ago, butbutIndia did India did better than better than China China thereafterthereafter

India and China: GDP per capita 1820-1950 (constant 1990 US dollars)

0

100

200

300

400

500

600

700

800

1820 1913 1950

China

India

Since Since 1950,1950,however, however, China has China has grown grown more more rapidly rapidly than India, than India, albeit less albeit less evenlyevenlyWhy?Why?

India and China: GDP per capita 1975-2003 (ppp, 2000 international dollars) China 7.7%China 7.7%

Africa -Africa -0.5%0.5%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

China

India

Sub-Saharan Africa

India India 3.2%3.2%

India and China: GDP per capita 1960-2003 (2000 international dollars)

China 5.7%China 5.7%

Africa 0.5%Africa 0.5%India 2.5%India 2.5%

0

200

400

600

800

1000

1200

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

China

India

Sub-Saharan Africa

India and China: Life expectancy at birth 1960-2004

0

10

20

30

40

50

60

70

80

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

ChinaIndia

Sub-Saharan Africa

Persistent Persistent rise in life rise in life expectancy expectancy as well as in as well as in other other human human developmedevelopment nt indicators indicators in both in both China and China and India since India since 19601960

What it takes to to growgrowI.I. Saving and investmentSaving and investment

Physical capitalPhysical capitalII.II. Education, health careEducation, health care

Human capitalHuman capitalIII.III. Macroeconomic stabilityMacroeconomic stability

Financial capitalFinancial capitalIV.IV. Exports and importsExports and imports

Foreign capitalForeign capitalV.V. DemocracyDemocracy

Social capitalSocial capitalVI.VI. DiversificationDiversification

Away from Away from natural capitalnatural capital

Undisputed

Controversial

Three main sources Three main sources of of economic growtheconomic growth

Investm en t O penness Education

G row th+ ++

denotes a positive effect in the direction shown+

Three further sources Three further sources of of economic growtheconomic growth

Investm en t O penness Education

G row th+ ++

Democracy Diversification

+ +

Let’s now look at these factors one by one

Economic vs. political diversification

Stability +

Investment 1960-2004

0

5

10

15

20

25

30

35

40

45

50

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

ChinaIndiaSub-Saharan Africa

In China, more investment and more rapid economic growth, but …

% of GDP


0

5

10

15

20

25

30

35

40

45

50

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


In China, it takes almost almost twice as twice as much much investmentinvestment to grow roughly twice as fast as IndiaChinese banks have more nonperforming loans than Indian banks

% of GDP


0

5

10

15

20

25

30

35

40

45

50

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


In China, it takes 41 41 daysdays to obtain the licenses necessary to start a businessIn India, it takes 89 89 daysdays

% of GDP

Gross foreign direct investment 1960-2004 China

attracts far more foreign capital than India, especially through joint ventures

0

1

2

3

4

5

6

7

8

9

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

China

India

Sub-Saharan Africa

% of GDP

Gross foreign direct investment 1960-2004 China appears

to have less endemic corruptioncorruption: 27% of managers in China view corruption as a major constraint compared with 37% in India

0

1

2

3

4

5

6

7

8

9

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

China

India

Sub-Saharan Africa

% of GDP

Gross foreign direct investment 1960-2004 China appears

to have less endemic corruptioncorruption: Transparency International in Berlin gives China 3.4 for corruption and India 2.8 on a scale from 1 to 10

0

1

2

3

4

5

6

7

8

9

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

China

India

Sub-Saharan Africa

% of GDP

Inflation and financial depth 1960-2004 China’s

inflation 1961-2003 was 3.2% per year on average compared with India’s 7.6%China’s liquidity grew fasterLiquidity lubricates the wheels of growth

% of GDP

0

20

40

60

80

100

120

140

160

180

200

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


% of GDP

Inflation and financial depth 1960-2004 China’s market

capitalization of listed companies increased from scratch in 1991 to nearly 50% of GDP in 2003India’s figure is also a bit less than 50%

% of GDP

0

20

40

60

80

100

120

140

160

180

200

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


% of GDP

Exports 1960-2004

0

5

10

15

20

25

30

35

40

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


% of GDPChina’s exports of goods and services have outpaced those from IndiaIn China, taxes on taxes on tradetrade are now 9% compared with 16% in India

Adult female literacy 1960-2004

China has taught more females than India how to read and writeThe youth youth female female literacyliteracy rate in China is 99% compared with 65% in India

0

10

20

30

40

50

60

70

80

90

100

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004


%

Adult female literacy 1960-2004

China sends China sends almost almost 70% of her of her youngsters to youngsters to secondary secondary schoolschool compared compared with with 50% in in IndiaIndia““An educated An educated child does child does not want to not want to plant rice”plant rice”

0

10

20

30

40

50

60

70

80

90

100

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004


%

Agriculture 1960-2004 China has

done more than India to transfer labor from the landWhere have all the workers gone?

0

10

20

30

40

50

60

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004


% of GDP

Manufacturing 1960-2004 Rural

workers in China have flocked into manufacturing In India, the services sector has expanded rapidlyHardware Hardware vs.vs. softwaresoftware

0

5

10

15

20

25

30

35

40

45

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


% of GDP

The results so farThe results so far ChinaChina

Saves and invests more than IndiaSaves and invests more than India Attracts more foreign capital Attracts more foreign capital Has less inflationHas less inflation Exports more goods and servicesExports more goods and services Teaches more females how to readTeaches more females how to read Transfers her labor more rapidly out of Transfers her labor more rapidly out of

farming into manufacturing and servicesfarming into manufacturing and services Small wonder, then, that China Small wonder, then, that China

grows more rapidly than Indiagrows more rapidly than India Even without democracy!Even without democracy!

Common legacy of foreign Common legacy of foreign influence or domination followed influence or domination followed by communism or socialismby communism or socialism

Market-friendly reforms started Market-friendly reforms started earlier in China than in Indiaearlier in China than in India

1978 in China1978 in China 1991 in India1991 in India

So, China has been reforming her So, China has been reforming her economy twice as long as Indiaeconomy twice as long as India

… … and more rapidly and radically and more rapidly and radically

China started earlier

Again, one glaring differenceAgain, one glaring difference India is a India is a democracydemocracy China is notChina is not

Does democracy impede Does democracy impede economic growth? economic growth?

Is this, perhaps, why India Is this, perhaps, why India has grown less rapidly than has grown less rapidly than China since 1950?China since 1950?

The role of The role of democracydemocracy

Next question

Two theoriesTwo theories Democracy is good for growth, and Democracy is good for growth, and

so are investment, education, etc.so are investment, education, etc. Reason: Reason: democracy fosters efficiency democracy fosters efficiency

by facilitating change of government, by facilitating change of government, and efficiency is good for growthand efficiency is good for growth

Democracy hurts growth, or worseDemocracy hurts growth, or worse Reason: Reason: democracy plays into the democracy plays into the

hands of pressure groupshands of pressure groups that tend to that tend to abuse their power at public expenseabuse their power at public expense

Growth and political liberties 1965-98

Central African Republic

Brazil Democracy Democracy is good for is good for growth:growth: No visible No visible sign that sign that democracy democracy stands in stands in the way of the way of economic economic growthgrowth-8

-6

-4

-2

0

2

4

6

0 2 4 6 8

Index of political liberties 1972-90

Gro

wth

of G

NP

per c

apita

196

5-98

, adj

uste

d fo

r ini

tial i

ncom

e (%

per

yea

r)

r = -0.62r = -0.62

BotswanaChina

Niger

Venezuela

Korea

85 countries85 countries

India

Growth and political liberties 1965-98

Central African Republic

Brazil

-8

-6

-4

-2

0

2

4

6

0 2 4 6 8

Index of political liberties 1972-90

Gro

wth

of G

NP

per c

apita

196

5-98

, adj

uste

d fo

r ini

tial i

ncom

e (%

per

yea

r)

r = -0.62r = -0.62

Botswana

Niger

Venezuela

Korea

Political Political liberty is liberty is good for good for growthgrowthbecause because oppression oppression breeds breeds inefficiencinefficiency,y,and so and so does does corruptioncorruption

China

India

Growth and Growth and democracydemocracy 1960-2000


Democracy Democracy and growth and growth seem to go seem to go togethertogether

-8

-6

-4

-2

0

2

4

6

8

-10 -5 0 5 10

Index of democracy 1960-2000

Gro

wth

of G

DP

per c

apita

196

0-20

00, a

djus

ted

for i

nitia

l inc

ome

(% p

er y

ear)

r = 0.48r = 0.48

EquatorialGuinea

MalaysiaSingapore

Must look elsewhere for an explanation

Education and Education and democracydemocracy 1960-2000Equatorial

Guinea

MalaysiaSingapore

Must look elsewhere for an explanation


Democracy Democracy and and education go education go hand in handhand in hand

0

20

40

60

80

100

-10 -5 0 5 10

Index of democracy 1960-2000

Seco

ndar

y-sc

hool

enr

olm

ent o

f girl

s 19

70-8

8 (%

)

r = 0.62r = 0.62

Democracy Democracy 1946-1946-20002000

DemocracyDemocracy

OligocracyOligocracy

AutocracyAutocracy

1946: 20 out of 701946: 20 out of 702000: 90 out of 1702000: 90 out of 170

Num

ber o

f cou

ntrie

sNu

mbe

r of c

ount

ries

Measures to combat corruptionMeasures to combat corruption Corruption perceptions index Corruption perceptions index from from

Transparency International Transparency International Measures to enhance equalityMeasures to enhance equality

Gini indexGini index What do the data say?What do the data say?

Other ways to build up social capital

Growth and Growth and corruptioncorruption 1965-1998


Honesty is good for growth because corruption creates inefficiency

Small difference

r = 0.40r = 0.40-6

-4

-2

0

2

4

6

0 1 2 3 4 5 6 7 8 9 10

Corruption index 2000

Gro

wth

of G

NP

per c

apita

196

5-98

, adj

uste

d fo

r ini

tial i

ncom

e (%

per

yea

r)

China

India

Growth and Growth and inequalityinequality 1965-1998


Equality is Equality is good for good for growthgrowth: : No visible No visible sign that sign that equality equality stands in the stands in the way of way of economic economic growthgrowth

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality, various years

Gro

wth

of G

NP

per c

apita

196

5-98

, adj

uste

d fo

r ini

tial i

ncom

e (%

per

yea

r)

China

India

r = -0.50r = -0.50

Big difference

Growth and Growth and inequalityinequality 1965-1998 Gini-Gini-

coefficients:coefficients:• India 33India 33• China 45China 45

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Gini index of inequality

Gro

wth

of G

NP

per c

apita

196

5-98

, adj

uste

d fo

r ini

tial i

ncom

e (%

per

yea

r) China

India

r = -0.50r = -0.5075 countries75 countries

Big difference

One more thing:One more thing: FertilityFertility China adopted a China adopted a one-child policyone-child policy

in 1980 in 1980 Relaxed it subsequently to allow two Relaxed it subsequently to allow two

children – if the first was a girlchildren – if the first was a girl 300 million fewer Chinese today300 million fewer Chinese today than than

otherwise would have been the caseotherwise would have been the case This should be good for growthThis should be good for growth

India did no such thingIndia did no such thing India’s population is forecast to India’s population is forecast to

overtake China’s by 2025overtake China’s by 2025

Births per woman 1960-2004

Less rapid population growth means fewer fewer mouths to mouths to feedfeed and and fewer minds fewer minds to educate, to educate, allowing allowing better care better care for each for each child, and child, and hence hence more more rapid growthrapid growth

0

1

2

3

4

5

6

7

8

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000


Number of births

Child mortality 1960-2004

More and better health care and education have helped reduce child mortality in China and in India, and across the worldLet’s take a look

0

20

40

60

80

100

120

140

160

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004


Per 1,000 live births

Fertility and growth 1960-2004

Fewer births go along with higher growthFewer births increase and improve human capitalRank correlation between fertility and education is --0,900,90

-8

-6

-4

-2

0

2

4

6

0 1 2 3 4 5 6 7 8

Fertility 1965-98 (Life births per woman)

Gro

wth

of G

NP

per c

apita

196

5-98

, adj

uste

d fo

r ini

tial i

ncom

e (%

per

yea

r)

r = -0.78r = -0.78


China

India

Poverty Poverty 19991999

0102030405060708090

Share of population living onless than one dollar a day

Share of population living onless than two dollars a day


Even so, India has a more equal distribution of income, with a Gini index of 33 compared with 45 in ChinaEquality is good for growth

% of population

Sir Arthur Lewis Sir Arthur Lewis got got it rightit rightSince the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources which which make the make the effort to achieve iteffort to achieve it

W. Arthur LewisW. Arthur Lewis(Accra, 1968)(Accra, 1968)

China and India are China and India are like other like other countriescountries, not special cases, not special cases

What works for the rest of the What works for the rest of the world also works for themworld also works for them

Economic policies and institutions Economic policies and institutions that spur that spur investment, openness, investment, openness, education, health care, education, health care, diversification, democracy, and diversification, democracy, and family planning are good for family planning are good for growthgrowth

Conclusion: Conclusion: It can be It can be donedone The same applies to Africa

Conclusion:Conclusion: It can be It can be donedone

To grow or not to grow is in large measure a matter of choice

Many of the Many of the constraints on constraints on growth are growth are man-mademan-made, , and can be and can be removedremovedThe EndThe End

These slides – and more! – can be viewed on my website: www.hi.is/~gylfason

comparative socio-economic development strategies: india and china

Documents

international trade

us dollarschina