The rise of India and China from less developed to rapidly developing economies within the span of a few decades is arguably one of modern day’s biggest economic success stories. Both countries have been able to maintain impressive annual growth rates about their Gross Domestic Products (GDPs). A comprehensive analysis of India and China reveals that both countries embarked on serious investments in key areas of their economies (Aghion, Burgess, Redding and Zilibotti 9). Most notably, however, is both countries’ significant investment in education over the last few decades that continue to churn out top-class professionals, particularly in the major industries such as manufacturing and services. Today, it is a commonplace to find manufactured goods labeled “made in China,” or call center services located in India. In fact, the recent increases in commodity and energy prices are relatively attributable to the growing demand in India and China (Ahya and Xie 19). Arguably, the level of economic growth in these continues will proceed indefinitely. At the center of both countries’ economic progress were key political institutions that came up with, and implemented policies that ultimately allowed the countries to transition from less developed to rapidly developing economies.
India’s political institutions played a key role in advancing the country’s economic progress. India’s economic development strategy had close similarities with China’s as it focused mainly on industrialization and the supremacy of the state (Kvint 71). Under the leadership of the then Prime Minister Jawaharlal Nehru, India’s political elite perceived development as synonymous with industrialization, where the primary focus of industry was basic goods such as machinery and steel. India considered private capital as an inefficient motor for development. Consequently, state control over all industries was deemed critical (Ahya and Xie 24). Initially, India concentrated on import substitution as its primary development strategy with the main development policies including the reservation of critical sectors for state activity, licensing of industrial activities, intervening in labor markets, and controlling foreign direct investment. When this strategy proved ineffective, the country instituted policy reforms in the 1980s such as encouraging the importation of capital goods, rationalizing the tax system, and relaxing industrial regulations (Kvint 123). Although these reforms took root in the 1990s after a severe macroeconomic crisis, India’s accelerated economic growth, which persists to date, is still attributable to the reforms, as well as attitudinal shifts of the 1980s.
During the 1980s, the state’s role in resource allocation significantly affected industrialization. In fact, it was only until the 1991 reforms took root that the market became the driving force behind resource allocation. Some of the foremost economic reforms instituted since 1991, and which paved the way for India’s tremendous economic growth, include the relaxation of the licensing system that controls India’s internal production, the devaluation of India’s currency, the abolition of quantitative limits on raw material imports, and the relaxation of limitations on the inflow of technology transfer and foreign capital (Cavusgil 94). Also, the state further made provisions for the expansion of industry by relaxing rules inhibiting companies from expanding new units or constructing new ones, reducing tariff levels and simplifying exchange controls. Other economic reforms included establishing tax reforms, and reducing India’s dependence on foreign currency debt (Cavusgil 101).
However, Nehru’s government maintained many of the limiting labor legislations and left the agricultural sector intact. As an economic strategy, India’s reforms greatly increased trade flows. For instance, between 1991 and 2002, India’s gross trade flows rose almost threefold, substantially increasing the trade-GDP ratio (Ahya and Xie 39). Ultimately, India’s approach to liberalization has been quite distinctive. This is large because the country took on a slow and controlled liberalization approach that emphasized gradual privatization, and the avoidance of capital account liberalization (Aghion, Burgess, Redding and Zilibotti 15). In the last five decades, India’s economy has experienced substantial structural change with the share of key sectors such as agriculture addition to the GDP increasing significantly. Agriculture continues to account for a substantive share of India’s employment alongside the services industry.
Over the years, key political institutions have been responsible for influencing India’s economic policies. These include the president who is elected by members of India’s parliament and is responsible for ratifying laws, including economic policies, and assenting to treaties and agreements that affect the economic standing of the country (Kvint 94). On the other hand, the prime minister, who is the most powerful individual in India’s government, oversees the everyday governance of the country, ensuring that appropriate institutions ensure adherence to economic laws. India’s council of ministers deliberates and makes crucial economic decisions before making recommendations to the prime minister and president on strategies aimed at advancing the country’s economic status. Conversely, the parliament of India is responsible for law making. The parliament passes legislations that guide the direction of India’s economic policies and activities, thereby influencing the nation’s economic growth (Ahya and Xie 41). The parliament is also responsible for managing the government’s money and allocating funds to sectors and projects.
China is the only Asian country that surpassed India’s exceptional growth in over the last few decades. Starting 1979 when China started implementing robust economic reforms, to 2014, China’s GDP grew at the rate of approximately 10% per year (Kvint 53). Like India, China also implemented numerous critical economic reforms that influenced the growth it continues to enjoy to date. For the most part, China’s momentous economic growth was a result of the large-scale capital investment, whose financing drew mainly from foreign investment and domestic savings, as well as rapid increase in production (Cavusgil 71). Through these economic reforms, China was able to achieve greater economic efficiency that enhanced output and enhanced resources for more investment in the economy. Historically, China has had a high rate of savings, thus when the government instituted the reforms in 1979, domestic savings as a proportion of the GDP grew significantly (Dutta 1182). Most of the savings the central government used in domestic investment was generated from profits from state-owned enterprises. China’s economic growth came as a result of economic reforms that consisted of the decentralization of economic production, whose consequence was significant increases in the savings of many Chinese households (Ahya and Xie 41). Such extensive saving levels have allowed China to boost its domestic investment with the nation’s gross domestic savings levels exceeding its investment levels.
Some of China’s foremost political institutions, and which played a momentous role in advancing its economic growth. Under China’s present constitution, which was ratified 1982 the National People’s Congress (NPC) is a supreme organ of China’s state power (Dutta 1190). The NPC is responsible for coming up with legislations that impact all aspects of China’s operations, including economics. The NPC also supervises the functioning of four critical political bodies, key among them, the State Council, which is a high-ranking organ of China’s state administration. This institution is responsible for managing state bureaucracy and overseeing the everyday management of the nation (Dutta 1181). The state presidency is yet another critical political institution in China that is responsible for decreeing laws passed by the NPC. Notably, in China, the state presidency is subordinate to the NPC with the former only responsible for ratifying treaties established by the NPC.
In 2006, the GDP of India grew by more than 9%, a growth rate only exceeded by China within the Asian world (Kvint 41). Despite the ongoing hype regarding the momentous economic growth experienced by India and China, their prospects, as well as the different approaches each country took to attain this growth, it is obvious that both countries face similar economic problems, key among them being emerging inequalities. For instance, India’s massive economic growth has produced a growing middle-class population, as well as the biggest number of billionaires within Asia (Cavusgil 58). Despite this, India’s predominantly rural population is still comparatively poor and mostly cut off from the immense benefits of the country’s economic progress. Also, India’s investment in infrastructure is disproportionate to its growth, with poor rural areas being the most affected by infrastructural deficits (Ahya and Xie 33). These inequalities predate the global financial crisis of 2008 that affected growth prospects in many countries, including India and China.
Notably, both countries embarked on development strategies that delivered high-income growth margins without necessarily producing proportionate increases in employment levels. This is especially so in the organized sectors where most emergent employment opportunities have been in lower productivity activities that are subject to uncertain and frequently oppressive conditions (Kvint 84). In both countries, growth levels have been synonymous with substantial increases in spatial inequalities characterized by disparate amounts of services and resources based on location. The poor rural populations of both countries have been negatively affected by this disparity. In contrast, within cosmopolitan cities in both countries, the population has access to a wider range of services and resource. This spatial inequality has produced dissimilar levels of socioeconomic development. Further attributing to the economic disparity in both countries is the instability of incomes among marginalized populations (Dutta 1175). The widening regional inequalities in both countries have been exacerbated by rising rural-urban disparities about per capita expenditure. Most of these disparities occur in urban than rural regions. In India, slow liberalization has been ineffective in shifting these inequalities. For instance, the effect of the 1990s reforms on manufacturing firms also depended on their technological level and location (Kvint 57). Liberalization in India nurtured profits, growth, and innovation in industries with greater proximity to the technological frontier while simultaneously reducing them in industries further away from the frontier.
India and China notable economic success stories, especially given the high and sustained levels of growth both countries continue to enjoy particularly about aggregate national income. In their pursuit of economic growth, India and China took unique routes, both of which centered on the implementation of economic reforms. In the end, both countries heralded significant shifts in the division of labor by transforming their employment and output patterns whereby India focused on exporting services while China focused more on the importation of goods (Cavusgil 111). The outcome of these strategies was extensive domestic deregulation, and macroeconomic management. However, despite their apparent economic success, India and China continue to experience significant problems, especially about growing inequalities as both countries display a growing income and resource disparity, especially between rich and poor populations (Aghion, Burgess, Redding and Zilibotti 15).
Aghion, Philippe, Burgess, Robin., Redding, Stephen., and Zilibotti, Fabrizio. “The Unequal
Effects of Liberalization: Evidence from Dismantling the License Raj in India.” National Bureau of Economic Research Working Paper 12031.
Ahya, C., and Xie, A. “New tigers of Asia. India and China: A Special Economic Analysis."
Morgan Stanley, 2004, pp. 1-59.
Cavusgil, Tamer. International Business: Strategy, Management, and the New Realities.
New York: Pearson Prentice Hall, 2008. Print.
Dutta, M. “China’s Industrial Revolution: Challenges for a Macroeconomic Agenda. Journal of
Asian Economics, Vol. 15, 2005, pp. 1169-1202.
Kvint, Vladimir. The Global Emerging Market: Strategic Management and Economics. London:
Routledge, 2009. Print.
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