Why the Chinese economy has stolen and India has just grown


2011 Bloomberg Finance LP

The two countries have roughly the same population, similar average unemployment rates, and current GDP growth rates that are among the highest in the world. Yet China’s economy is almost five times the size of India’s. The per capita GDP of China and India in 1985 was about $ 293 per person. According to 2017 World Bank data, China’s GDP per capita soared to $ 8,827 and India’s to $ 1,942. Both countries have made huge strides, but growth in China has been miraculous. Why such a big difference? How did China overtake India to become the world’s second-largest economy? The answer lies in the differences between politics, productivity and demographic trends.

World Bank, III Capital Management

Politics

The Chinese Communist Party (CCP) rules the country with few barriers. When the government decides on a course of action, few obstacles stand in its way. For example, China has spent more than a decade building the Three Gorges Dam, the world’s largest hydropower project. The massive enterprise has displaced more than 1.2 million people and flooded 13 towns, 140 towns and 1,350 villages. The dam, despite its enormous social and environmental cost, provides China with a clean source of energy and has created thousands of jobs inside China. When it comes to rapid development on such a scale, an authoritarian political system is a definite advantage.

India is a democracy. It has regional parliaments and a federal parliament with many assemblies. This system is all-inclusive, but a development nightmare. It can take decades to make a decision. For example, it took 16 years for the Indian parliament to pass a tax reform bill (2016). A project like building a dam on the Yangtze River could not take place in India. Corrupted at all levels, the divided political landscape would kill the project before it got off the ground. The policy prevents infrastructure spending. Estimates suggest that the lack of adequate investment in infrastructure reduces India’s annual GDP growth by 1-2%. Physical infrastructure, such as electricity, railways, roads, ports and airports have not kept pace with the growth of the Indian economy. India has under-invested in these massive projects and the consequences have reduced economic growth compared to China; some argue China has overinvested. China’s willingness and ability to develop its infrastructure, via a centrally controlled political system that is not afraid of accumulating debt, has helped propel China ahead of India.

Productivity

Higher productivity growth in China compared to India may help explain the increased differential in GDP per capita between the two countries. Productivity measures the efficiency with which production inputs, such as labor and capital, are used in an economy to produce a given level of output. Productivity growth is a by-product of the infrastructure investments mentioned above. Hydroelectric power created from the Three Gorges Dam provides low-cost, uninterrupted electricity to hundreds of Chinese factories. Efficient rail and road networks allow rapid transportation to distribution centers and ports. By comparison, India is far behind. In the annual World Economic Forum Global Competitiveness ReportIndia lags behind China in all infrastructure categories. Another factor behind China’s skyrocketing per capita GDP growth is relative productivity growth.

Population

Another component of China’s rise is massive urbanization. In 1969, 17.5% of the Chinese population lived in cities, compared to 19.5% in India. Today, the urbanization rate is 58% in China and around 37% in India. In both countries, tens of millions of people have left the agricultural sector and moved to cities in search of higher wages – this has happened at a much faster rate in China. A worker in a factory is more “productive” than a farmer, which means that manufactured products have a higher economic value than agricultural products. The desire to relocate the Chinese population to focus on manufacturing required huge infrastructure spending. India’s strategic orientation on the development of its service sector has not necessitated such agrarian-urban migration.

World Bank, III Capital Management

A political system that bypasses the laws and bureaucracy associated with democracy, a strategy of investing in infrastructure to develop a manufacturing juggernaut despite the social and environmental cost, as well as policies of massive urbanization of the population, have worsened in recent decades to propel China ahead of India in terms of per capita GDP growth. Fast forward to today, and there is considerable debate over whether the policies that have lifted China so far ahead of its emerging market peers are sustainable. China’s private sector debt has more than doubled as a percentage of GDP; that of India is unchanged. Ultimately, additional investments in roads, bridges and airports hurt, rather than increase productivity.

Indeed, China is focusing on the service sector and moving away from its dependence on exports and manufacturing, while India is trying to improve its infrastructure to promote growth outside of services. . Both nations prospered. Both countries are moving up the scale of GDP per capita. China’s unique combination of politics, people, and strategy explains how China has jumped a few steps, but jumping stairs on a ladder can be dangerous. We will have to wait a few more decades to appreciate the consequences.


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