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Comparative Comparative Socio-Socio-Economic Economic Development Development Strategies:Strategies:India and India and ChinaChina
Thorvaldur GylfasonThorvaldur Gylfason
Compare the development Compare the development strategies and trajectories of the strategies and trajectories of the two economic giants of Asiatwo economic giants of Asia
One obvious differenceOne obvious difference India is a India is a democracydemocracy China, though, is notChina, though, is not
Many other differences, and Many other differences, and similarities that includesimilarities that include
Low foreign debtsLow foreign debts Long coastlinesLong coastlines Large overseas communitiesLarge overseas communities
Two giantsTwo giantsWhat’s the story?What’s the story?
India and China: GDP per capita 1820-1950 (constant 1990 US dollars)
0
100
200
300
400
500
600
700
800
1820 1913 1950
China
India
China was China was richer than richer than India 200 India 200 years ago, years ago, butbutIndia did India did better than better than China China thereafterthereafter
India and China: GDP per capita 1820-1950 (constant 1990 US dollars)
0
100
200
300
400
500
600
700
800
1820 1913 1950
China
India
Since Since 1950,1950,however, however, China has China has grown grown more more rapidly rapidly than India, than India, albeit less albeit less evenlyevenlyWhy?Why?
India and China: GDP per capita 1975-2003 (ppp, 2000 international
dollars)China 7.7%China 7.7%
Africa -Africa -0.5%0.5%
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
China
India
Sub-Saharan Africa
India India 3.2%3.2%
India and China: GDP per capita 1960-2003 (2000 international dollars)
China 5.7%China 5.7%
Africa 0.5%Africa 0.5%
India 2.5%India 2.5%
0
200
400
600
800
1000
1200
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
India and China: Life expectancy at birth 1960-2004
0
10
20
30
40
50
60
70
80
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
Persistent Persistent rise in life rise in life expectancy expectancy as well as in as well as in other other human human developmedevelopment nt indicators indicators in both in both China and China and India since India since 19601960
What it takes to to growgrowI.I. Saving and investmentSaving and investment
Physical capitalPhysical capitalII.II. Education, health careEducation, health care
Human capitalHuman capitalIII.III. Macroeconomic stabilityMacroeconomic stability
Financial capitalFinancial capitalIV.IV. Exports and importsExports and imports
Foreign capitalForeign capitalV.V. DemocracyDemocracy
Social capitalSocial capitalVI.VI. DiversificationDiversification
Away from Away from natural capitalnatural capital
Undisputed
Controversial
Three main sources Three main sources of of economic growtheconomic growth
Investm en t O penness E ducation
G row th+ ++
denotes a positive effect in the direction shown+
Three further sources Three further sources of of economic growtheconomic growth
Investm en t O penness E ducation
G row th+ ++
Democracy Diversification
+ +
Let’s now look
at these factors one by
one
Economic vs. political diversification
Stability+
Investment 1960-2004
0
5
10
15
20
25
30
35
40
45
50
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
IndiaSub-Saharan Africa
In China, more investment and more rapid economic growth, but …
% of GDP
Investment 1960-2004
0
5
10
15
20
25
30
35
40
45
50
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
IndiaSub-Saharan Africa
In China, it takes almost almost twice as twice as much much investmentinvestment to grow roughly twice as fast as IndiaChinese banks have more nonperforming loans than Indian banks
% of GDP
Investment 1960-2004
0
5
10
15
20
25
30
35
40
45
50
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
IndiaSub-Saharan Africa
In China, it takes 41 41 daysdays to obtain the licenses necessary to start a businessIn India, it takes 89 89 daysdays
% of GDP
Gross foreign direct investment 1960-2004 China
attracts far more foreign capital than India, especially through joint ventures
0
1
2
3
4
5
6
7
8
9
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDP
Gross foreign direct investment 1960-2004 China appears
to have less endemic corruptioncorruption: 27% of managers in China view corruption as a major constraint compared with 37% in India
0
1
2
3
4
5
6
7
8
9
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDP
Gross foreign direct investment 1960-2004 China appears
to have less endemic corruptioncorruption: Transparency International in Berlin gives China 3.4 for corruption and India 2.8 on a scale from 1 to 10
0
1
2
3
4
5
6
7
8
9
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDP
Inflation and financial depth 1960-2004 China’s
inflation 1961-2003 was 3.2% per year on average compared with India’s 7.6%China’s liquidity grew fasterLiquidity lubricates the wheels of growth
% of GDP
0
20
40
60
80
100
120
140
160
180
200
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDP
Inflation and financial depth 1960-2004 China’s market
capitalization of listed companies increased from scratch in 1991 to nearly 50% of GDP in 2003India’s figure is also a bit less than 50%
% of GDP
0
20
40
60
80
100
120
140
160
180
200
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDP
Exports 1960-2004
0
5
10
15
20
25
30
35
40
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDPChina’s exports of goods and services have outpaced those from IndiaIn China, taxes on taxes on tradetrade are now 9% compared with 16% in India
Adult female literacy 1960-2004
China has taught more females than India how to read and writeThe youth youth female female literacyliteracy rate in China is 99% compared with 65% in India
0
10
20
30
40
50
60
70
80
90
100
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
China
India
Sub-Saharan Africa
%
Adult female literacy 1960-2004
China sends China sends almost almost 70% of her of her youngsters to youngsters to secondary secondary schoolschool compared compared with with 50% in in IndiaIndia““An educated An educated child does child does not want to not want to plant rice”plant rice”
0
10
20
30
40
50
60
70
80
90
100
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
China
India
Sub-Saharan Africa
%
Agriculture 1960-2004 China has
done more than India to transfer labor from the landWhere have all the workers gone?
0
10
20
30
40
50
60
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
China
India
Sub-Saharan Africa
% of GDP
Manufacturing 1960-2004 Rural
workers in China have flocked into manufacturing In India, the services sector has expanded rapidlyHardware Hardware vs.vs. softwaresoftware
0
5
10
15
20
25
30
35
40
45
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
% of GDP
The results so farThe results so far ChinaChina
Saves and invests more than IndiaSaves and invests more than India Attracts more foreign capital Attracts more foreign capital Has less inflationHas less inflation Exports more goods and servicesExports more goods and services Teaches more females how to readTeaches more females how to read Transfers her labor more rapidly out of Transfers her labor more rapidly out of
farming into manufacturing and servicesfarming into manufacturing and services Small wonder, then, that China Small wonder, then, that China
grows more rapidly than Indiagrows more rapidly than India Even without democracy!Even without democracy!
Common legacy of foreign Common legacy of foreign influence or domination followed influence or domination followed by communism or socialismby communism or socialism
Market-friendly reforms started Market-friendly reforms started earlier in China than in Indiaearlier in China than in India
1978 in China1978 in China 1991 in India1991 in India
So, China has been reforming So, China has been reforming her economy twice as long as her economy twice as long as IndiaIndia
… … and more rapidly and radically and more rapidly and radically
China started earlier
Again, one glaring Again, one glaring differencedifference
India is a India is a democracydemocracy China is notChina is not
Does democracy impede Does democracy impede economic growth? economic growth?
Is this, perhaps, why India Is this, perhaps, why India has grown less rapidly than has grown less rapidly than China since 1950?China since 1950?
The role of The role of democracydemocracy
Next question
Two theoriesTwo theories Democracy is good for growth, and Democracy is good for growth, and
so are investment, education, etc.so are investment, education, etc. Reason: Reason: democracy fosters efficiency democracy fosters efficiency
by facilitating change of government, by facilitating change of government, and efficiency is good for growthand efficiency is good for growth
Democracy hurts growth, or worseDemocracy hurts growth, or worse Reason: Reason: democracy plays into the democracy plays into the
hands of pressure groupshands of pressure groups that tend to that tend to abuse their power at public expenseabuse their power at public expense
Growth and political liberties 1965-98
Central African Republic
Brazil Democracy Democracy is good for is good for growth:growth: No visible No visible sign that sign that democracy democracy stands in stands in the way of the way of economic economic growthgrowth-8
-6
-4
-2
0
2
4
6
0 2 4 6 8
Index of political liberties 1972-90
Gro
wth
of
GN
P p
er c
apit
a 19
65-9
8, a
dju
sted
fo
r in
itia
l in
com
e (%
per
yea
r)
r = -0.62r = -0.62
Botswana
China
Niger
Venezuela
Korea
85 countries85 countries
India
Growth and political liberties 1965-98
Central African Republic
Brazil
-8
-6
-4
-2
0
2
4
6
0 2 4 6 8
Index of political liberties 1972-90
Gro
wth
of
GN
P p
er c
apit
a 19
65-9
8, a
dju
sted
fo
r in
itia
l in
com
e (%
per
yea
r)
r = -0.62r = -0.62
Botswana
Niger
Venezuela
Korea
Political Political liberty is liberty is good for good for growthgrowthbecause because oppression oppression breeds breeds inefficiencinefficiency,y,and so and so does does corruptioncorruption
China
India
Growth and Growth and democracydemocracy 1960-2000
144 countries144 countries
Democracy Democracy
and growth and growth
seem to go seem to go
togethertogether
-8
-6
-4
-2
0
2
4
6
8
-10 -5 0 5 10
Index of democracy 1960-2000
Gro
wth
of
GD
P p
er c
apit
a 19
60-2
000,
ad
just
ed
for
init
ial i
nco
me
(% p
er y
ear)
r = 0.48r = 0.48
EquatorialGuinea
MalaysiaSingapore
Must look elsewhere for an
explanation
Education and Education and democracydemocracy 1960-2000Equatorial
Guinea
MalaysiaSingapore
Must look elsewhere for an
explanation
126 countries126 countries
Democracy Democracy
and and education go education go
hand in handhand in hand
0
20
40
60
80
100
-10 -5 0 5 10
Index of democracy 1960-2000
Sec
on
dar
y-sc
ho
ol e
nro
lmen
t o
f g
irls
197
0-88
(%
)
r = 0.62r = 0.62
Democracy Democracy 1946-1946-20002000
DemocracyDemocracy
OligocracyOligocracy
AutocracyAutocracy
1946: 20 out of 701946: 20 out of 70
2000: 90 out of 1702000: 90 out of 170
Nu
mb
er
of
cou
ntr
ies
Nu
mb
er
of
cou
ntr
ies
Measures to combat corruptionMeasures to combat corruption Corruption perceptions index Corruption perceptions index from from
Transparency International Transparency International Measures to enhance equalityMeasures to enhance equality
Gini indexGini index What do the data say?What do the data say?
Other ways to build up social capital
Growth and Growth and corruptioncorruption 1965-1998
55 countries55 countries
Honesty is good for growth because corruption creates inefficiency
Small difference
r = 0.40r = 0.40-6
-4
-2
0
2
4
6
0 1 2 3 4 5 6 7 8 9 10
Corruption index 2000
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me (
% p
er
year)
China
India
Growth and Growth and inequalityinequality 1965-1998
75 countries75 countries
Equality is Equality is good for good for growthgrowth: : No visible No visible sign that sign that equality equality stands in the stands in the way of way of economic economic growthgrowth
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Gini index of inequality, various years
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me
(% p
er
year
)
China
India
r = -0.50r = -0.50
Big difference
Growth and Growth and inequalityinequality 1965-1998 Gini-Gini-
coefficients:coefficients:• India 33India 33• China 45China 45
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Gini index of inequality
Gro
wth
of
GN
P p
er
cap
ita 1
965-9
8, ad
juste
d
for
init
ial in
co
me
(% p
er
year
)
China
India
r = -0.50r = -0.5075 countries75 countries
Big difference
One more thing:One more thing: FertilityFertility China adopted a China adopted a one-child policyone-child policy
in 1980 in 1980 Relaxed it subsequently to allow two Relaxed it subsequently to allow two
children – if the first was a girlchildren – if the first was a girl 300 million fewer Chinese today300 million fewer Chinese today than than
otherwise would have been the caseotherwise would have been the case This should be good for growthThis should be good for growth
India did no such thingIndia did no such thing India’s population is forecast to India’s population is forecast to
overtake China’s by 2025overtake China’s by 2025
Births per woman 1960-2004
Less rapid population growth means fewer fewer mouths to mouths to feedfeed and and fewer minds fewer minds to educate, to educate, allowing allowing better care better care for each for each child, and child, and hence hence more more rapid growthrapid growth
0
1
2
3
4
5
6
7
8
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
China
India
Sub-Saharan Africa
Number of births
Child mortality 1960-2004
More and better health care and education have helped reduce child mortality in China and in India, and across the worldLet’s take a look
0
20
40
60
80
100
120
140
160
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
ChinaIndiaSub-Saharan Africa
Per 1,000 live births
Fertility and growth 1960-2004
Fewer births go along with higher growthFewer births increase and improve human capitalRank correlation between fertility and education is --0,900,90
-8
-6
-4
-2
0
2
4
6
0 1 2 3 4 5 6 7 8
Fertility 1965-98 (Life births per woman)
Gro
wth
of
GN
P p
er c
apit
a 19
65-9
8, a
dju
sted
fo
r in
itia
l in
com
e (%
per
yea
r)
r = -0.78r = -0.78
87 countries87 countries
China
India
Poverty Poverty 19991999
0102030405060708090
Share of population living onless than one dollar a day
Share of population living onless than two dollars a day
ChinaIndiaSub-Saharan Africa
Even so, India has a
more equal distribution
of income, with a Gini
index of 33 compared
with 45 in China
Equality is good for
growth
% of population
Sir Arthur Lewis Sir Arthur Lewis got got it rightit rightSince the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources which which make the make the effort to achieve iteffort to achieve it
W. Arthur LewisW. Arthur Lewis(Accra, 1968)(Accra, 1968)
China and India are China and India are like other like other countriescountries, not special cases, not special cases
What works for the rest of the What works for the rest of the world also works for themworld also works for them
Economic policies and institutions Economic policies and institutions that spur that spur investment, openness, investment, openness, education, health care, education, health care, diversification, democracy, and diversification, democracy, and family planning are good for family planning are good for growthgrowth
Conclusion: Conclusion: It can be It can be donedone The same applies to Africa
Conclusion:Conclusion: It can be It can be donedone
To grow or not to grow is in large measure a matter of choice
To grow or not to grow is in large measure a matter of choice
Many of the Many of the
constraints on constraints on
growth are growth are
man-mademan-made, ,
and can be and can be
removedremoved
The EndThe End
These slides – and more! – can be viewed on my website: www.hi.is/~gylfason
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