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Joseph C. H. Chai and Katrik C. Roy,
Economic Reform in China
and India: Development Experience in a Comparative
Perspective. UK and Northampton, MA, USA: Edward Elgar,
2006, 295 pp., tables, index. (price?) Reviewed by Penelope B.
Prime, Mercer University.
With rapid change occurring in both India and China, this systematic
review of reform and development is a welcome addition to the economics
literature. Both are continental economies in the process of replacing planned
allocation with markets, but they have many differences that need to be taken
into account. Having two authors with impressive experience collaborate on
this study of Economic Reform in China and India is a promising strategy.
A strong point of this book is that it is comprehensive in its coverage of
both economies, and provides a useful starting point for researchers looking at
either China, or India, or comparison projects. The argument put forth by
Joseph Chai and Kartik Roy is that India was doing better in the 1950s in most
respects, but today China is more advanced on many fronts, and that overall
the authors feel it is unlikely that India will catch up. Relying primarily on
data comparisons, the authors cover major economic and social sectors to
support this thesis. The book does not have a unified theoretical framework,
but some of the analyses in individual chapters draw on specific economic
models.
The first two chapters describe initial conditions in both economies in
the beginning of the 1950s, the economic systems that were built under the
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import substitution years, and then the strategies taken once reforms were
begun in the 1980s. The authors argue that both India and China wanted
growth with equity throughout the period from the 1950s until reforms, and
that both pushed self-sufficiency, planning and government administration of
resource allocation. Neither was very successful. Both economies became
inefficient and corrupt, and while growth was higher in China, the results were
not substantially more impressive.
The next chapters discuss in detail four core economic sectors:
agriculture, industry, foreign trade and investment, and saving and investment.
The following two chapters focus on the labor side of the economy, covering
issues of population, employment, education and health, and living standards
generally. The final three content chapters evaluate social issues of women’s
role in society, environmental challenges, and democratization.
The final chapter is a summary of the main points argued throughout
the book and what they mean for the future of these two economies. The
overall evaluation is fairly negative with respect to India. In almost all
dimensions, China comes out ahead. The reasons for China’s relatively better
results are not clear, however. The authors mention periodically throughout
the book that India’s political system is standing in the way of change in
India—primarily because India’s democratic system means politicians need to
win votes, and for various reasons progress is apparently not popular. The
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other side must be that China’s non-democratic leaders are good at choosing
the right policies, since the economic outcomes have been relative positive,
and whether these policies are popular or not has not mattered much to leaders
staying in office.
While the authors do not address the political dilemma head on, it is in
the background of their discussion. Is it better for developing countries to have
non-democratic polities so that enlightened leaders can push through difficult
reforms? In their chapter on democracy, the authors argue that India is more
democratic than China based on the six measures they report, but that based on
World Bank indicators, China is ahead of India in the efficiency of
governance—which clearly is not dependent on having democracy—and they
imply this is the main reason China has out-performed India (p.248). Whether
they are correct on the positive assessment of China’s governance and
administrative reform (p.260) is questionable, but they clearly are disappointed
in the corruption and stalled progress in the case of India. They do not discuss,
however, the issue of whether China’s state-directed development of the East
Asian model variety will eventually confront political change for economic
progress to continue. Pressure for political change became apparent in Taiwan,
South Korea and Hong Kong at the same time that living standards in these
societies improved dramatically. If political liberalization is inevitable, India
may have an advantage over China that the authors undervalue.
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If we set the political differences aside for a moment and take a broad
view of the detail presented in this study, perhaps some clues to the reasons for
the current differences in economic performance can be identified. When
China and India began their reform processes—China in 1978 and India in
1991--they both faced similar challenges: stifling government control over the
economy and company decisions, low efficiency, slow growth and little
innovation. Policy makers in both countries moved to liberalize prices,
decrease the coverage of planning, allow more trade and investment
domestically and internationally, and generally rely more on the private sector
for employment and growth. While not identified as such by the authors,
based on the information presented in the study, reforms appear to have varied
in the two economies in at least four key areas.
First, China began reforms in the agricultural sector. Land had been
farmed collectively. In some areas households began working small plots of
land. Once officially sanctioned, after selling a specified quota to the
government, a family could keep the rest for their consumption and sell the
surplus on the open market. This arrangement became more widespread and
later known as the household responsibility system. In India, land had
remained privately owned, so ownership of reform was not necessary.
Government restrictions on storage, transport, pricing and sale of output,
however, had been imposed (p.46). Productivity was low also as a result of
insufficient investment in irrigation and other modern inputs (p.74). In
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addition, agricultural reforms are under the state level of jurisdiction, not
national. These differences have meant that improvements in agriculture have
not occurred systematically in India, and so farmers have not benefited from
reforms as they have in China. As a result, even though China is more unequal
than India by a number of measures, most families across China have seen
improvement in their livelihoods at some point during the reform period. It
may be that fewer families in India feel the same way. Since the rural
population is substantial in both economies, rural performance will have a
large effect on overall economic performance.
Second, as a result of the ideology and allocation system of planning,
China poured resources into industrial development. China’s industrial share
in national income increased from 23 percent in 1950 to 49 percent by 1980
(p.182). Surprisingly, with reforms the industrial bias continued. By 2003, the
shares of agriculture, industry and services in China were 15, 52 and 33
percent respectively. In 1980 India’s share of industry was only 23 percent.
With reforms, the major change came in services, so that by 2003 in India the
shares of agriculture, industry and services were 23, 27 and 51 percent
respectively (p.181). China’s industrial emphasis tended to be relatively
capital intensive and so only employed 22 percent of the labor force by 2003.
Ironically for India, the service jobs created were relatively skilled and high
paid as well, and so did not contribute to broad increases in employment as
might be the case with low wage, low skill service jobs.
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Third, both economies inherited inefficient public enterprises that put
pressure on the financial sector. In India, this pressure has emerged in the
form of national and state budget deficits. Reforms were supposed to improve
the situation, which began with deficits of about 7 percent of gross domestic
product in 1991. Instead, by 2004, they had worsened to about 10 percent
(p.265). One result is that the national and local governments have their hands
tied in terms of spending on infrastructure, schools, hospitals, and the other
public goods that would improve the overall economic environment.
In contrast, in China, in the mid 1990s, financial reforms moved the
deficit burden created by state owned enterprises to the banking system. Since
then, reforms have been aimed at reducing the bad debt and non-performing
loans that banks held, with some success. Meanwhile, China’s national budget
deficit has not improved much either (Swamy, 2007, p. 257). Some argue that
China’s sub-national governments carry de facto deficits off-budget even
though officially deficits are not allowed, however, and that makes the two
systems’ outcomes similar (Rider and Martinez-Vazquez, 2007, p.286).
India’s banking system is by many measures first rate as compared with
China’s—which is technically bankrupt--and India has a history of lending to
the private sector while China does not. On the other hand, since the 1990s,
China has continuously worked towards improving the banking sector with
injections of capital, changes in management expectations, moving policy
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loans to specialty banks, and accepting increasing competition as foreign banks
enter under WTO rules. Weighing the net effects of weak banking versus
weak fiscal conditions, another analyst sees serious problems in both but is
more positive about India’s chances of preventing an eventual fiscal crisis
(Swamy 2007).
The fourth key difference in reforms and their outcomes is in the
external sector. Both countries were committed to opening their closed
economies, but China has so far promoted trade and foreign investment more
than India. The authors underscore this point with comparative statistics for
the trade participation ratio, measured as total exports and imports as a percent
of gross domestic product. In 2003 this ratio was 60 percent in China as
compared with 25 percent in India (pp. 119, 122). China has also received
substantially more foreign investment than India, largely because of China’s
geographical location and cultural affinity with Hong Kong, Taiwan and other
overseas Chinese. Based on evidence in the economics literature generally,
and specific studies of China, the authors conclude that China’s open door
polices have contributed to growth in that economy. On the other hand, India
has been more cautious, for political reasons they argue, and as a result, trade
and investment reforms have only been partial. The authors do not expect
much progress in India in this regard in the near future, especially with respect
to foreign investment, because many politicians continue to emphasize the
negative aspects of foreign investment as a left-over from the anti-colonial
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ideology of the pre-reform period. And even though India has been a member
of GATT and then WTO since its inception, domestic firms continue to enjoy
some cushion from foreign competition due to remaining restrictions and
stalled reforms.
Because India’s system was never a comprehensively planned economy
like China’s, a priori one might think it would be easier for India to liberalize
its economy with policy rather than system changes. Private property
remained, the production structure was not over industrialized, the banking
system was relatively modern and solvent, and although India isolated itself
from international markets, it had a large domestic demand. These
characteristics are reflected in the four differences in reforms compared with
China just discussed. The puzzle is why it appears India has in fact had more
challenges in its attempts to reform than China.
Both countries have political obstacles to further progress. But both
countries have done very well when compared to developing countries
generally. India has grown more slowly, but now China is trying to slow its
own growth, as there are costs to rapid growth. The most serious costs for
China are low productivity, a deteriorating environment and rising inequality.
To some extent these costs result from excessive and misplaced investment.
India should be cautious in trying to catch up to China in this regard. China’s
leaders are also trying to lessen China’s dependence on exports. Again,
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although India may still need to lower some tariffs and trading obstacles, both
countries could increase their utilization of their large potential domestic
demand to drive future growth.
Economic Reform in India and China is a useful starting point for
anyone studying these economies. It is thorough and thoughtful in terms of
interpreting the data comparisons. The large implications of what they find,
however, are left to the reader to decipher. It would have been helpful, for
example, for the last chapter to end with speculation on what the authors
thought their results meant generally for why these two economies have
performed differently. Instead the last paragraph is a final note about
infrastructure. The pessimism about India’s progress to date and future
prospects also seems overstated. The ten-year development gap assessed by
the authors in their concluding chapter matches the ten year lag between the
start of reforms in the two countries. Perhaps, then, what India primarily needs
is more time.
Another weakness of the study is a lack of analysis of whether the data
used are actually comparable. In a few places the authors mention that there
may be data issues, such as gross value of industrial output (p.94) and gross
domestic product may be overstated (p.180), and foreign investment (p.140)
and savings (p.143) figures are not strictly comparable. But since there is not
one theoretical framework driving the inquiry, the usefulness of this study rests
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entirely on whether one believes the data being presented. More attention to
data collection, coverage, and potential distortions in each country would have
resulted in an even greater contribution.
This academic study goes a long way towards documenting the
performance of China and India under reforms. It is a must read for academics
and policy makers alike.
References
Prime, Penelope B. and Kishore G. Kulkarni, editors. 2007. Economic
Development in India and China: New Perspectives on Progress and Change.
New Delhi: Serials Publications.
Swamy, Subramanian. 2007. “Financial System Constraints in China and
India: A Comparative Perspective,” pp. 247-268 in Prime and Kulkarni, 2007.
Martinez-Vazques, Jorge and Mark Rider, 2007. “Fiscal Decentralization and
Economic Growth: A Comparative Study of China and India,” pp.269-292 in
Prime and Kulkarni, 2007.
_______________________________________________________________
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Reviewed by Penelope B. Prime, Mercer University
September 2007
Penelope B. Prime, Ph.D.
Director, China Research Center
www.chinacenter.net
Professor, Stetson School of Business & Economics
Mercer University
3001 Mercer University Drive
Atlanta, GA 30341-4155 USA
tel: 678-547-6235
email: prime_pb@mercer.edu
second email: pbprime@gmail.com
