India and China: Are catch-up theories relevant? Essay

For many decades, Japan has been the dominant power in Asia. Since 1945, America with the help of its close ally, Japan has dominated Asia. The spectacular rise of China during the past two decades has the potential to change this status quo. During the past 6-7 years, with impressive economic growth, India also has emerged as a nation to reckon with. USA and Japan see a stronger India as a means to limit China’s freedom to maneuver in the region. In short, Asia is becoming an arena for balance of power politics. After more than a century of relative stagnation, the economies of India and China have been growing at remarkably high rates over the past 25 years. In 1820 the two countries contributed nearly half of the world’s income; starting from roughly equal levels of per capita real income in 1870, India forged ahead of China until the outbreak of the First World War. Though both experienced declines in their per capita incomes thereafter (China more so than India) by 1950, India’s per capita income was about 40% higher than that of China. During the same period, the industrialized West pulled away, India and China had a share of less than one-tenth of the world income. It took roughly the next three decades for China to catch up with India. Since 1980, China has forged much farther ahead. China and India were the star performers in aggregate GDP growth in the 1980s and 1990s. China’s average growth of 10. 6% per year during the 90s had slowed slightly since to 9. 4%. India on the other hand albeit much lower rate of 6% in the 90s has a slight improvement since to 6. 2% (see Exhibit 1). Today, India and China are in 154th and 121st positions in a listing of the 230-odd countries ranked by per capita GDP. But their share in world GDP is around 2% and 5% respectively thanks to their billion-plus populations . Two countries account for 37. 5 percent of world population and 6. 4 percent of the value of world output. India and China have sustainable growth rates 7% and 10% respectively whereas the developed countries (USA, Japan, Germany, UK, France, Italy, Spain, and Canada) have only 2% even though they contribute nearly 66% of world GDP. Given the kind of dramatic growth relative to the rest of the world, it has become very fashionable to compare India and China and indulge in a bit of crystal ball gazing. The two countries with one third of the world’s population is not only dominating the world statistics but also attracting the due attention of everyone like policymakers, industrial corporate, and economists alike. Understandably, there is a great deal of interest in learning about what has enabled China and India to grow so rapidly while many countries in Sub-Saharan Africa and Latin America have languished during the same period. Their growth already started showing its effect on global resources and if it continues as is expected for next two decades, it will have major implications on the world economy and hence for other countries. China’s economic reforms: During his tenure as China’s premier, Mao Zedong had encouraged social movements such as the Great Leap Forward and the Cultural Revolution which had had as their bases ideologies such as serving the people and maintaining the class struggle. However, two years after Mao’s death in 1976, Chinese leaders were searching for a solution to serious economic problems produced by these movements which left China in a state where agriculture is stagnant, industrial production was low, and the people’s living standards had not increased in twenty years. Communist Party leaders saw economic reform as a way to regain their and their party’s moral virtue and prestige which was eroded by the traumatic experience of the Cultural Revolution (Shirk, 1993). The initial reforms were not that radical in nature. The central government retained the dominant power in economic resource allocation and responsible local officials worked for the interest of the units under their control (Solinger, 1993). However, as time passed, some aspects of the old system were altered. In 1985, further reforms were introduced. The first part of Chinese economic reform involved implementing the household responsibility system in agriculture, by which farmers were able to retain surplus over individual plots of land rather than farming for the collective. Some commodities were freed from government controls so their prices could respond to market demand (Shirk, 1993). This allowed a great percentage of the populace to become involved in private enterprise and investment in family or group ventures. The conditions also allowed rural Chinese to leave the villages and become involved in industry in urban centers. The economy grew so quickly that inflation occurred and the government had to reinstitute price controls. China’s economy retains these characteristics of potential for growth–and inflation–to this day. Another important aspect of Chinese economic reform was the decision of China to join the world economy. Deng Xiaoping and his allies hoped to affect this 1979 resolution in two ways: by expanding foreign trade, and by encouraging foreign companies to invest in Chinese enterprises. The Open Policy, which designated limited areas in China â€Å"as places with preferential conditions for foreign investment and bases for the development of exports† (Nathan, 1990), was extremely successful in the areas where it was implemented. The implementation of the Open Policy was so successful that by 1988 the leaders of the CCP were encouraged to create a new program called the â€Å"coastal development strategy. † In this program, even more of the country was opened up to foreign investment-an area which, at the time, included nearly 200 million people. Moreover, by involving more overseas investors, â€Å"importing both capital and raw materials,† and â€Å"exporting China’s cheap excess labor power,† the new policy was one of â€Å"export-led growth or export-oriented industrialization†. It was explicitly modeled on the experiences of Taiwan and the other Asian ‘small dragons’ (Nathan, 1990). China took another step in the late 1990s and early 2000s, by the closing of unprofitable state-owned factories and the development of social security systems.