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The European Journal of Comparative Economics
Vol. 6, n.1, pp. 53-55
ISSN 1722-4667
Available online at http://eaces.liuc.it
53
Comparing China and India: an Introduction 1
Sean Dougherty and Vittorio Valli
Abstract
Editors’ Introduction to the symposium ‘Comparing China and India: Structural Change and
Development’.
JEL- classification: O11, O53, O57, P51
Keywords: China’s economy, India’s economy, comparative development
While China and India’s average incomes remain low, their sustained economic
growth of recent decades combined with their enormous populations (that each exceed
the size of the OECD) has turned both countries into such large players that their
economic scale is only exceeded by the United States, and possibly Japan.2 So though a
large share of their populations remain poor, both China and India are already heavily
integrated into the rest of the world’s trade and financial flows, making their current and
future development impossible to ignore.
Most recently, as the developed world has slipped into a severe and prolonged
recession – which many observers are calling a depression – China and India stand
alone among major economies in registering positive growth, with the rest of the
world’s economies hoping that these emerging giants will help to bring the rest of the
world out of its deep morass. Nevertheless, these countries are fragile and are still in the
midst of ongoing dramatic structural reforms, facilitated by their governments in some
straightforward as well as peculiar ways.
Recently, the Chinese case has been cited as an example to the most developed
countries of the potential virtues of a state-interventionist growth model to push
through dramatic reforms, which could even be of use to market economies that are
facing difficulty. Though there are many serious proponents of this view, and numerous
1 The symposium is based primarily on papers that were presented at a panel on the comparison
between China and India’s economies held at the 10th bi-annual EACES Conference at the Higher
School of Economics in Moscow on August 28-30, 2008. The papers have been updated and
substantially revised. We thank the organizers of the Conference and all the participants in the
panel for their useful comments on the preliminary drafts of the papers. The views of the authors
are strictly personal and do not in any way reflect the views of their respective institutions.
2 The exact size of China and India’s GDP at PPP is the subject of considerable debate. The World
Bank revised its estimates of both economies’ size downward by about 40% last year, following the
results of the 2005 ICP round. However, many questions have arisen about the reliability of these
results (see Maddison and Wu, 2008; Heston, 2009). Some datasets, such as the Groningen Growth
and Development Centre’s, estimate the economies’ sizes to be much larger (using alternative
PPPs). Thus, the relative rank of Japan vis-à-vis India, as well as China and India’s per capita
income levels – as shown in the first two papers in this symposium – is subject to a substantial
amount of uncertainty.
EJCE, vol.6, n. 1 (2009)
Available online at http://eaces.liuc.it
54
lessons that can be learned from each country’s reform chronology, this line of
argument may ignore the most important driving forces of each country’s development.
In the case of China and India, we have two contrasting views. According to the
opinion of our guest editor, growth has occurred primarily in spite of the state, rather
than because of it. Repeatedly, at the key inflection points in both economies’ recent
growth trajectories, it was those reforms that reduced state intervention in key markets
that created the opportunities that followed. In China, for instance, the disbanding of
collective farms was an early and vital step, as was the decentralization of state control
over business. In India, analogously, the removal of the licensing regime on business
was a fundamental reform. This is not to say that the role of government was
unimportant in either case. The gradual, yet decisive removal of many sorts of
interventions and distortions across both economies is perhaps the most obvious
similarity in their growth experiences. While the process was uneven and is still very
much still ongoing, government decentralization allowed important reallocations to take
place, putting resources into increasingly productive use, introducing growing
international competition, and facilitating the productive human and physical capital
investments that enabled growth to accelerate.
The contrasting view of the second editor is that, although economic reforms in
both countries were essential for the acceleration of economic growth, the role of the
state has remained very important as regards the stabilization of the growth trajectory.
In China the gradualist approach devised by the state has avoided the severe transitional
crisis which struck the former Soviet Union and Eastern European countries in the early
1990s. The decision to avoid introducing a fully convertible currency and open the
capital account sheltered China from the 1997 Asian Crisis and from the full effect of
the present crisis. In the Indian case, the manipulation of the value of the Indian
currency and the remaining controls on capital movements have contributed to avoid
part of the effects of the world financial turmoil. The step-by-step approach has proved
to be a rather sensible policy. However, in both countries the action of the state in
favour of the basic needs of the poorest part of the population has been manifestly too
weak.
The papers in this symposium touch on several of these themes and offer
alternative interpretations of the pattern of growth and of the insertion of the two
countries in the world market.
The first essay, by Sudip Ranjan Basu, examines a series of economic and human
development indicators for evidence of the welfare and equity shifts in both economies’
growth performance. He finds that while both economies were at nearly the same
position in terms of material well-being two decades ago, India was considerably behind
in human development terms. And, despite solid economic performance for the Indian
economy, China’s economic development index grew three times faster over the reform
period. Nevertheless, India’s human development measures have grown more rapidly
than China’s, thereby narrowing the gap in development quality. This is all the more
impressive in light of the reduction in the regional polarization of these human
development measures as well across Indian states.
The second contribution, by Vittorio Valli and Donatella Saccone, discusses the
complexity of both economies’ economic transformations, and the feedback loops that
have promoted the development and transformation of both economies (interpreting it
through a fordian lens): by first increasing their scale, then their profits and investment,
Comparing China and India: an Introduction
Available online at http://eaces.liuc.it
55
and finally facilitating various types of productivity-enhancing shifts. Evidence for these
type of shifts is brought to bear, which seem likely to continue for some time, as the
economies become increasingly integrated with the global economy.
The third paper, by Isabelle Bensidoun, Françoise Lemoine and Deniz Ünal,
examines the nature of these economies’ growing trade integration with the rest of the
world, and changing specialization. While China has become a major hub of the
increasingly segmented global production process, India has become more specialized in
certain niche service sectors, with a proportionately higher price-quality composition.
Yet major challenges remain for both: for India to broaden the industrial base of its
economy beyond its current services niche, and for China to adjust in light of the crisis
to improve its terms of trade.
The final paper, by Ila Patnaik and Ajay Shah, deals with macroeconomic policies
and the exchange rate regimes of both economies. It suggests that considerable
distortions may have been created by the monetary interventions of authorities that
have de facto pegged the exchange rates of both countries’ currencies, and thereby led
to the accumulation of large quantities of reserves, feeding into imbalances in the global
economy that may have even contributed to feed the current crisis.
However, the exchange rate policies of China and India may have favoured the
export growth of both countries – albeit probably excessively in the case of China – and
contributed to partially shelter them from the world financial crisis. The sharp fall of
exports after the eruption of the real effects of the world crisis will probably induce
both governments to try to focus more of their growth on the development of their
internal markets.
Notes:
Heston, A. (2009), ‘What Can Be Learned About the Economies of China and India from
Purchasing Power Comparisons?’, forthcoming in Emerging Giants: China and India in the World
Economy, Eichengreen, B., P. Gupta and R. Kumar (eds.), Oxford University Press, Oxford
Maddison, A., Wu H.X. (2008), ‘Measuring China’s Economic Performance’, World Economics,
9(2), April-June
