Has China or India Achieved More Sustainable Growth?

Table Of Content

1. Introduction

2. Comparison of the Different Growth Models
2.1. China
2.2. India

3. Sustainable Growth
3.1. Definition of Sustainable Growth
3.2. Spheres of Sustainable Growth
3.2.1. Economic Sphere
3.2.2. Social Sphere
3.2.3. Environmental Sphere

4. Conclusion

References

1. Introduction

Without any doubt has the focus of the world economy shifted from the US, Europe and Japan towards the emergent markets of China and India. Both economies have shown tremendous growth rates over the last years. However are both countries different and have chosen a completely different growth model. While China pursued a top-down investment, FDI and production driven path, focused India on an indigenous, service industry orientated growth model. China was able to outperform India in economic terms so far but which of the both growth models is the more sustainable one? This question is to be answered in this article. In section 2 both growth models will be portrayed. In order to answer the question which model is more sustainable the term of sustainability will be defined at the beginning of section 3 before the three different spheres of sustainability will be analyzed. The paper will end in chapter 4 with a conclusion, which is providing an answer to the original question and will also address future challenges for both countries in order to sustain its growth.

2. Comparison of the Different Growth Models

2.1. China

The Chinese approach to economic changes can be described as a system of decentralized experiments which transformed the former planned-economy to a market-based economy. (Bardhan 2009, p. 37) After successful local experiments, were the concepts implemented in a top-down manner on national scale. The first reforms took place in the agriculture sector, when farmers in two areas of the Anhui province were allowed in 1978 to sell all grown crops above a certain quota on their own. (Hou 2011, pp. 421-422) The system became known as the household responsibility system and was spread quickly. In 1982 it was adopted by the central government and became the first step towards a dual track system in which parts of a market economy were integrated into the socialist model. It was highly successful as it helped the agriculture sector to increase its growth from the time between 1970-1978 of 2.7 % per year to an annual average of 7.1 % in the years of 1979 to 1984. (Bardhan 2009, p. 19)

As the success of these reforms became visible the government decided to expand this system towards the non-agriculture sector and transferred the residual control to the managers of the companies. (Bardhan 2009, p. 20) After a short time of experimentation was this reform adopted nationally in 1984. (Hou 2011, p. 422) While the managers of the SOE became more independent also another type of business gained importance in China, the so called town and village enterprises (TVE). (Bardhan 2009, pp. 20-21) TVE were mostly found in rural areas where they started an own industrialization and became the backbone of the Chinese growth as they expanded their share of contribution to GDP from 6 % in 1978 to more than 26 % in 1996, while growing at an average rate of 28 % in the 1980s. Those collectively owned TVE benefited from good relations to officials, however they were not protected by the government as SOE were and faced high competition from other TVE which led to many failures. Reforms were expanded in 1992 when it was decided to expand the economic reform to a system reform. (Hou 2011, p. 423) This reform was seen as a turning point in the transformation as it increased the speed and scope of transition significantly. In this course also privatization of SOE and TVE started as local officials received incentives to privatize local companies which had the result that most of the former managers became the new owners of the companies. (Bardhan 2009, p. 22) The reforms in the industrial sector proved to be highly successful as industrial output grew on an annual average of 9.3 % in the time between 1978 and 1993 and even at 11 % in the period of 1993 and 2004. Industry output contribution to total GDP grew from 42 % prior to the reforms to currently 47 %. (Roach 2006, p. 8)

The experimental approach was also used in terms of preparing the Chinese economy for export orientated activities as the government assigned four “special economic zones” (SEZ) in 1979. (Hou 2011, p. 422) These SEZ were able to foster the growth of exports and also to attract foreign direct investments (FDI), especially from the Chinese diasporas in Taiwan and Hong Kong. While FDI inflows in 1982 were just as high as 0.21 % of GDP they increased to over 6.25 % in 1993. (World Bank) Also exports grew heavily in the same period by over 365 %. (World Bank) However it is commonly mistaken that export is the major driver of Chinese growth as data from the time between 1991 and 2001 shows that rather investments and consumption have led the growth while export had just minor contributions. (Branstetter/Lardy 2006, p. 66) However Huang and Khanna (2003) argue that the huge inflow of FDI has hindered local entrepreneurship with the consequence that China has failed to build world class firms as it was relying on foreign firms to drive the growth.

2.2. India

India became a democracy after its independence in 1947 and developed a system of Fabian socialism in which the state did not try to eliminate capitalism but to spread the wealth from it. (Huang/Khanna 2003) As a consequence of the exploitations by the British, developed India protectionist trade policies. The Indian economy was growing from a GDP per capita of $ 115 in 1970 to $ 270 in 1980 but it was still moving on a low scale. (World Bank) First reforms were undertaken in 1982 but major reforms started just in 1991 when India was forced by the IMF to carry out substantial reforms as a consequence of the payment crisis. (Hanson / Kathuria 1999, p. 7) Those reforms included lowering hardships for founding and expanding private companies, scaling down of import tariffs, opening for FDI and reorganization of the public sector. (Bardhan 2009, p. 25) Furthermore was the financial sector reformed heavily which helped India to build a solid banking system. (Hanson / Kathuria 1999, p. 7)

The reforms helped the industrial sector to grow as the output increased to an annual rate of 6.7 % on average in the period from 1993 to 2004 while it was 5.4 % between 1978 and 1993. (Bardhan 2009, p. 26) This relatively small growth is misleading as in the same time total factor productivity (TFP) grew from 0.3 % to 1.1 % which suggest, assuming an adequate investment rate, increased efficiencies in production. However was the industrial growth not responsible for the overall growth of India. (Roach 2006, p. 8) The major force of the Indian growth was rather the service sector which expanded its share of total GDP from 41 % in 1991 to about 54 % in 2005. But just as the assumption that the original Chinese growth is led mainly by export is wrong, also the widely spread assumption that India's growth is just based on the IT, communication and financial services is false. (Bradhan 2009, pp. 27-29) It is true that they have been growing significantly by 12.6 % between 1993 and 1999 and by 10.5 % during 1999 and 2004, however do they just contribute to about 40 % of the service sector in 2005. The other 60 % are more traditional service industries as trade and transportation. Nevertheless have the reforms failed to address the issue of informal economy. (Bradhan 2009, p. 26) It is estimated that 45 % of the output and about 85 % of the employment in the service and the industrial sector are lying in the informal sector. However have the reforms helped India to build over 25 world-class companies. (Roach 2006, p. 9) The software firms Infosys and Wipro and the pharmaceutical companies Ranbaxy and Dr. Reddy's Labs have become world market leaders in their respective industries and this all by indigenous growth. (Huang/Khanna 2003) While China attracted heavily FDI, India had to deal with significantly lower FDI inflows as it just attracted 6.7 % of Chinese FDI inflows between 1992 and 2002. (World Bank) However this fact seems to have fostered own domestic entrepreneurship. Therefore it can be summarized that the Indian approach to economic change was based on indigenous, bottom-up growth in service and technological industries.

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