china and india in the global economy.docx

8/19/2019 China and India in the Global Economy.docx

1/18

China and India in the Global Economy

Development Strategies, Economic Reforms and Responses to theGlobal Economic Crisis and Recession

Samuel C. Park Jr. Professor of Economics, ale !niversit" and #isitingProfessor, Stanford Center of $nternational Development, Stanford!niversit"Conference on Institutions and Economic Development, ChinaCenter for Economic Studies, %udan !niversit", Economic Gro&thCenter, ale !niversit"

Overview$ntroduction

Development Strategies' China ()*+* )*- /, $ndia ()*+- 0mid )* 12s/

Reform era' China ()*- on/, $ndia (3id 12s on/

Economic Performance, Pre and Post Reform

Global Economic Crisis' $mpact on and Responses of China and $ndia

%uture Prospects

Conclusions

$n 411- China and $ndia accounted for 415 and )-5 of the 6orld2sPopulation respectivel" and )1.*5(7.*5/ and +.-5(45/ of the 6orld2s

Gross 8ational income in purchasing po&er parit" (PPP/ e9change rates(market e9change rates/.

: historical perspective on their gro&th


2/18

8obel ;aureate Robert %ogel of Chicago forecasts that the t&o &ouldincrease their share of &orld income (PPP/ to +15 and )45 respectivel"

b" 41+1.

$n comparison 3addison2s forecasts for China for 41ed b" the disasters of the Great;eap %or&ard, an avoidable famine &ith an e9cess mortalit" of


3/18

over&helmingl" poor populations living in rural areas and heavil"dependent on agriculture

Aoth adopted a Soviet St"le Centrall" Planned Development Strategies,focused on industriali>ation, &ith emphasis on capital intensive heav"

industr"

:nal"tical foundation for $ndia2s strateg" in 3ahalanobis ()*7?/ 0 %eldman ()*4 / =&o Sector Gro&th 3odel.

Development trate!ies

Aoth insulated their economies from the &orld econom" 0$ndia2s b"choice and China2s b" refusal &ith others to trade &ith her

China collectivi>ed its agriculture &hile in $ndia it &as entirel" private,dominated b" ver" small holdings.

ChinaBs econom" &as almost entirel" state o&ned and state controlled.

$ndia2s econom" &as state controlled and directed, but mostl" privatel"o&ned e9cept in industr", finance, transport and communication &herethere &as significant public o&nership, in some cases a publicmonopol".

China &as (and is still to a large e9tent/ a single part" controlled state&ith no de ure autonom" for provinces. De facto the" have hadconsiderable discretion despite central direction.

$ndia is formall" a federal state &ith a constitutionall" set assignment of po&ers and responsibilities bet&een the Central and state governments.

o&ever, even the constitutional assignment and more so subse uent practice have led $ndia to become de facto more of a unitar" state &iththe Central government dominant in economic matters.


4/18

$ndia is a parliamentar" democrac" &ith a free press and media, andChina undoubtedl" is not.

Did the substantial political differences bet&een the t&o affect economic policies and performance F

Polic" formulation and implementation are time consuming and

electoral competition pushes them to&ards m"opia and populism in ademocrac"

@ne part" rule makes both easier, less time consuming and less m"opic

o&ever contents and ualit" of policies could be good or bad for economic performance under democrac" and one part" rule so that theinstrumental role of democrac" and autocrac" for economic performancecould be benign or malign

$ndian democrac" and Chinese authoritarian rule have not undergonean" fundamental change since )*71. et both countries performed poorl" in the economic arena beforereforms and much betterafter

Democrac" is an intrinsicdesideratum regardless of its instrumentalrolein helping or hurting economic performance. E9clusive focus on itsinstrumental role is utterl" sill".

"eform Era China ()*- on/. $ndia (3id )* 1s on/

China &as ripe for reform in )*- &hen Deng iao Ping took over after the overthro& of the gang of four.

Chinese population &as e9hausted b" dislocation and disruption of thecultural revolution.

=he econom" had been shattered and &as in dire straits

$ndia 0no pressure for s"stemic reform during )*71 1 0no disasters asin China.

)*?? 3acroeconomic Crisis and assistance from $3% and 6orld Aank &ith conditionalit" of liberali>ation


5/18

: brief flirtation &ith liberali>ation &as reversed &ithin t&o "ears due todomestic political reasons and b" the reneging of the 6orld Aank on its

promised assistance due to !S pressure

Content of reforms and their time se uence differed substantiall" bet&een the t&o countries

China began &ith reform of its most distorted agricultural sector b"introducing the household responsibilit" s"stems and graduall" reducingcompulsor" deliveries to the state 0thus "ielding uick, spectacular and&ell distributed gains.

%oreign sector reforms follo&ed &ith the opening China to foreign tradeand investment and the establishment of Special Economic Hones

(SEHs/ at Shen>hen and iamen and a fe& others.

SEHs &ere free of restrictions on enterprises in the rest of China' )115foreign o&nership &as allo&ed &ith freedom to hire and fire &orkersIaccess to efficient and high ualit" infrastructure including po&er, &ater and telecommunicationsI and the si>e of each SEH &as sufficientl" largefor e9ploitation of economies of scale.

Encouragement of %D$ in general and in e9port oriented labour intensivemanufacturing in particular.

SEHs &ere later e9panded to coastal economic >ones after Deng2sSouthern =our

@ne crucial area that &as not (and is "et to be full"/ reformed is theukou s"stem of registration that handicapped labour movement a&a"

from rural areas and discriminated against migrant &orkers2 access toeducation and health services.

$ndia began &ith piecemeal and hesitant reforms in the mid )* 12s thatrela9ed the rigors of its mindless import and investment licensing s"stem


6/18

and also allo&ed the real effective e9change rate to depreciate. =heeconom" responded &ell to these change

: ver" severe macroeconomic and balance of pa"ments crisis hit in )**)follo&ing the first Gulf 6ar

$ndia2s credit rating plummeted, foreign e9change reserves fell to lessthan t&o &eeks2 &orth of imports and gold reserves had to be pledged toavoid default on e9ternal debt and $ndia had to go to the 6orld Aank andthe $3% for assistance that came &ith conditionalit".

=he rupee &as devalued and tariff barriers &ere brought do&n fromdi>>" heights, but uantitative restrictions on imports remained until$ndia &as forced in 411)to remove them b" an adverse ruling of the

[email protected] of $ndia2s model for central planning, the Soviet !nioncollapsed in )**). $ndia2s rival China had gro&n rapidl" since itse9ternal opening and market oriented reforms in )*- . =he t&o eventsmade a return to the status uo ante before the crisis no longer desirable

S"stemic and comprehensive reforms follo&ed

Reforms have progressed and performed &ell on foreign trade, foreign

investment, telecommunications, and financial sector, but have far to goor have lagged or not untouched in others. =hese include financialsector, labour and land markets, electricit" and infrastructure.

Economic #erformance: $efore and %fter "eforms$mportance of =otal %actor Productivit" gro&th for sustainabilit".

erd and Doughert" (411-/ 0=able 4

=%P gro&th in both countries &ent up after reforms.

!ntil reforms the Stalinist Development Strateg" of both economiesemphasi>ed capital intensive industr", had insulated the econom" from&orld markets and virtuall" eliminated domestic and e9ternalcompetition.


7/18

Gro&th until reforms &as modest and accelerated onl" thereafter in bothcountries 0=able <

Economic performance of the t&o economies differed significantl" notonl" in gro&th but e uall" importantl" in the financing of gro&th

(mostl" domestic in both/ e9tent of global integration. structure of output, demand

Several conclusions emerge from these =ables'China and $ndia depended almost entirel" on domestic savings tofinance investment &ith $ndia catching up &ith China in both.

China increased its share of &orld merchandise trade far more than$ndia. =he China $ndia gap in shares in &orld e9ports of commercialservices is much narro&er.

Several conclusions emerge from these =ables , contd.China is integrated &ith global markets to a much greater e9tent than$ndia both in markets for goods and services and financial markets(e9cept on capital account/.

China continues to attract %D$ flo&s to a much greater e9tent and

portfolio flo&s to a lesser e9tent than $ndia.$ndia continues to have much higher applied 3%8 tariff barriers thanChina and its bound rates e9ceed its applied rates b" a substantialmargin.

China2s structure of output is heavil" tilted to&ards industr", particularl"manufacturing.

Several conclusions emerge from these =ables, contd.$ndia2s e9port demand as a share of domestic e9penditure at )-5 ismuch less than China2s


8/18

China2s population is not onl" older but also aging faster because its rateof gro&th of population is and &ill remain considerabl" slo&er.

o&ever, China2s &orking population is better educated and healthier than $ndia2s.$ndia thus has a potential advantage both for reasons of its demograph",and also because &ith a higher share of labour force in agriculture andother lo& productivit" primar" activities has a greater potential toaccelerate its gro&th b" shifting labour to higher productivit" activities.) Several conclusions emerge from these =ables, concluded.Success in reali>ing the potential depends heavil" in completing reformsin health and education and eliminating constraints on labour allocation.$ndia has a considerable edge over China according to uang (3$=/ and

hanna ( arvard/ for the follo&ing reasons'$ndia depends to a much greater e9tent its efficient the private sector for entrepreneurship and on markets for allocation of capital$ndia2s financial sector including banks, e uit" and public debt marketsmore efficientKChina2s banks &ere technicall" insolvent until recentl"$ndia2s better governance in the private corporate sector &ith itsentrepreneurial and innovation capabilities reduces the need for seek %D$ to substitute for &eak domestic markets and entrepreneurship as inChina

) Several conclusions emerge from these =ables, concluded.Success in reali>ing the potential depends heavil" in completing reformsin health and education and eliminating constraints on labour allocation.$ndia has a considerable edge over China according to uang (3$=/ and

hanna ( arvard/ for the follo&ing reasons'$ndia depends to a much greater e9tent its efficient the private sector for entrepreneurship and on markets for allocation of capital

$ndia2s financial sector including banks, e uit" and public debt marketsmore efficientKChina2s banks &ere technicall" insolvent until recentl"$ndia2s better governance in the private corporate sector &ith itsentrepreneurial and innovation capabilities reduces the need for seek %D$ to substitute for &eak domestic markets and entrepreneurship as inChina


9/18

Impact of Global Economic Crisis and "esponse

$mpact of crisis on $ndiaPerception in mid 411 Speech of the then RA$ Governor Redd"'=he impact &as e9pected to be modest

Possible spread of crisis to $ndia through the financial and real channelsSpread through financial channel not e9pected because'Credit derivatives market &as embr"onicRA$ restriction on investment b" residents on derivatives issued abroadPrudential policies have ensured a sound financial s"stem, particularl"

banksRedd" did not mention spread through the real channel=he perception changed b" @ctober 411Speech of Rao, Redd"2s successor

$mpact of crisis on $ndiaPerception in mid 411 Speech of the then RA$ Governor Redd"'=he impact &as e9pected to be modestPossible spread of crisis to $ndia through the financial and real channelsSpread through financial channel not e9pected because'Credit derivatives market &as embr"onicRA$ restriction on investment b" residents on derivatives issued abroadPrudential policies have ensured a sound financial s"stem, particularl"

banksRedd" did not mention spread through the real channel=he perception changed b" @ctober 411Speech of Rao, Redd"2s successor

Debunked LDe coupling ‖ fadReiterated Redd"2s main claim on the soundness of $ndia2s financials"stem and banks


10/18

Reduction of portfolio flo&s affect e uit" markets and are affected b"volatilit" in e uit" returnsReduction of foreign credit to domestic corporations increases domesticcredit demand and affects e9change rates$mpact on GDP gro&th from reduction in e9port gro&th relevant but

e9pected to be uantitativel" small because of relativel" lo& share (lessthan 47 percent/ of e9ports of goods and services in GDPo&ever the share of e9ports in manufacturing is much higher and thus

fall in e9port gro&th affects gro&th of manufacturing significantl"%inancial channel became more significant because of $ndia2s faster integration in global financial, compared to real markets in 411- 1 ,credit plus debit on trade in goods and services &as +75, on currentaccount 7


11/18

$mpacts of Crisis on China$n China also GDP gro&th declined from )


12/18

=he governor of the Peoples2 Aank of China has defended China2s highdomestic savings rates and e9pressed his support for a move a&a" fromthe !.S. dollar as the ma or international reserve currenc".

@n balance, given China2s e9tremel" modest fiscal deficit, large scopefor e9panding domestic consumption and the availabilit" of si>eableresources, China can comfortabl" ad ust to the crisis and resume gro&thin the near future.

China has liberali>ed trade far more than $ndia

$ndia 0still one of the most protected countries in the developing &orld b" some measures

China2s embrace of openness and its purposive use in acceleratingdomestic reform process have been important as compared to continuingskepticism about the benefits of openness in $ndia.

&uture #rospects

$ndia2s potential future prospects once the global crisis ends and gro&thresumes are bright. Reali>ing the potential re uires that the follo&ingreform tasks are completed.

: credible commitment to complete the reform agenda is neededurgentl". %or e9ample, $ndia could announce its &illingness to consider much more liberal commitment to reduce barriers to agricultural andnonagricultural trade in the Doha negotiationsI the budget presented onJul" ? unfortunatel" did not announce reductions in non merit subsidiesand handouts, revive and go further on labour la& reform.

Constraints of infrastructure 0ph"sical and human to be addressed.

Reform of labour la&s 0their d"sfunctionalit" and gro&th and e uit"costs has been kno&n for a long time


13/18

Reform of bankruptc" la&s 0took a decade on average to close a business in June 411

Rethinking SEHs along the lines of Chinese SEHs

3aking $ndia a true Common 3arket

:gricultural reforms

:ddressing high costs of doing business 0e.g. it took nearl" + "ears and+? procedures to enforce a contract in 411

Pushing ahead &ith integrating $ndia &ith the global econom"Kthecurrent crisis is 8@= an argument for retreat

China2s potential future prospects are also bright 0the needed economicreform tasks to reali>e the potential are easier to accomplish then needed

political reforms to be discussed in the concluding section.

=he economic reforms tasks including unif"ing the labour market b"abolishing the ukou s"stem and other restrictions4- '. &uture #rospects: Cont’d.China2s investment at over 715 of GDP is inefficient 0need to reducethe share of investment and making it more efficient

%inancial s"stem is still inefficient and needs to be reformed.

=he problems of rising dependence ratios and falling share of the population in the &orking age group (unlike in $ndia/ need to be tackledthrough pension reforms and shift of labour from rural areas and fromagriculture.


14/18

Conclusions

Rising $ne ualities' Regional and individual

$ndia2s soft po&er versus China2s hard po&er

$ndia' Democrac", free press and media act as safet" valves althoughconflicts in ashmir, 8ortheast region and in other states could stille9plode, in large part because of resort to repression b" the central andstate authorities

$ndia2s recent election a ringing affirmation of the entrenchment of democratic values.

o&ever its competitive electoral politics focused on local issues and populism is d"sfunctional

China2s authoritarian s"stem continues to depend on repressionKthestrong measures to uash an" demonstration of remembrance on the41th anniversar" of the =iananmen massacre of )* * and the ethnicconflict bet&een !ighurs and :8 &estern China are the most recente9amples. =he restrictions on internet access is another e9ample. =heconflict and repression in =ibet have continued since the founding of thePeoples Republic of China.

=he bargain of delivering rapid gro&th and internal stabilit" for one part" rule ma" not last ver" long

6hether China can successfull" and peacefull" transform it2s polit" intoa vibrant pluralistic democrac" &ith regular free and fair elections, as ithas done so in transforming its moribund centrall" planned statecontrolled econom" to a largel" market econom", is an open uestion.


15/18

4*China hare in(orld GD#

India hare in(orld GD#

)*2+ ?11


16/18

GlobalInte!ration erchandise

China India

)-/ ).4 ().-/ ).< ().+/)-* ).4 ().)/ 1.7 (1.-/2++ .* (?.*/ ).) (). /Commercial ervices2++


17/18

<5able : tructure of Outputand DemandChina

India

)**7 411- )**7 411-%!riculture 41 )) 4? )Industry +- +* 4


18/18

for Economic Co operation and Development.3@% (411 /. Economic

Surve", 411 1*. 8e& Delhi, 3inistr" of %inance.RA$ (411*/. L:nnual

Polic" Statement for 411* )1 ‖ 3umbai' Reserve Aank of $ndia.

http'NNrbidocs.rbi.org.inNrdocsNnotificationNPD%sN:P:PR1*PRD.pdfhttp'N

Nrbi.org.inNscriptsN:nnualPublications.asp9Fhead 3acroeconomic

541and5413onetar"541DevelopmentsSrinivasan, =.8. (411+/.

LEconomic reforms and global integration, L in %rancine %. Q arr",

. (Eds/, !e "ndia#C!ina relations!ip: W!at t!e $nited %tates needs to

kno&. Was!ington' DC: Woodro& Wilson Center Press.

china and india in the global economy.docx

Documents