Opinion & Commentary
Now it’s China’s Turn to Learn from India
In terms of growth, the two bright spots in the global economy also happen to be the two most populous countries: China and India will likely grow at more than 6 percent in 2009. But that is where the comparison should end. China has been the hero over the last three decades. In 2006, Indian Prime Minister Manmohan Singh asked what Mumbai could learn from Shanghai? But the time has come for Beijing to learn from New Delhi.
Beijing is building its way out of an economic slump – roads, ports, railways – name anything big and they’re likely to be building it. But India’s approach has been different. Indians, including the poor, are looking to consume their way towards further growth. Sure, the demand for handbags, air travel and fine dining in Mumbai has collapsed but the real indicator of economic progress in developing countries is how the poor are getting along. In terms of poverty alleviation, China had a huge head start. It began free-market reforms in 1978 while India only started on its current journey in the early 1990s. But since the turn of the century, India is rapidly improving while China is getting worse.
China and India have something in common: half of the people in China and two thirds in India still live in rural areas. That means about 700 million people in each country, most of whom remain poor. Progress in rural areas is a strong indicator of overall economic progress in developing countries. But this is where the paths of both China and India are diverging.
In China, the urban-rural income ratio was 1.8 times in the mid 1980s, 2.4 times in the mid 1990s, 2.9 times in 2001, and now around 3.5 times. The 1980s was a golden period for China’s poor. Over 80 percent of the poverty reduction that has taken place in China occurred during the first 10 years of reform (1978-1988). Although per capita incomes have risen since then, an estimated 400 million people have seen their net incomes decline over the past ten years. Despite the decades of spectacular growth, absolute poverty as well as illiteracy has actually doubled since 2000.
Although beginning from a lower base, it has been a different story for India. The urban-rural income gap has been slowly but steadily declining since the early 1990s. Over the past decade, economic growth in rural India has outpaced growth in urban areas by almost 40 percent. Rural India now accounts for half of the country’s GDP, rising from 41 percent in 1982 and 46 percent in 1993. Importantly, agriculture in rural India now accounts for only half of rural GDP and is falling. Agriculture was responsible for around 72 percent and 64 percent of rural GDP in the 1970s and 1980s respectively. This means the development of a balanced economy is occurring in rural India, with rapid growth in non-farm sectors such as manufacturing and services. Unlike in China’s already crowded cities, rural Indians do not have to migrate to urban areas to earn a better living.
The divergent path of these two developing giants is also demonstrated by the role of domestic consumption in the economy. In China, domestic consumption as a proportion of GDP has fallen from around 60 percent in the 1980s to 35 percent currently – the lowest of any major economy in the world. The Chinese ‘economic miracle’ is depending more and more on exports and state-led fixed investment. Even Beijing consistently admits that this is an unbalanced and unsustainable strategy. Moreover, depressed levels of consumption (and correspondingly high levels of savings) by the citizenry of a still poor country means that growth is uneven and benefitting the relative few. In contrast, domestic consumption makes up more than two thirds of the India economy. India has a lot of catching up to do but its poor are rising with the tide, unlike China.
China’s emphasis on state-led fixed-investment growth in urban areas has exacerbated inequality in China and heavily favours a relatively small number of well placed insiders. It was a deliberate decision taken after the Tiananmen protests in 1989 in an attempt by the state to retake control of the economy. Rural China was the heart of private, entrepreneurial progress when reforms began in 1978. Mean household incomes were rising with the tide. Prior to Tiananmen, growth in investment by the private sector in rural China was growing at 20 percent. After Tiananmen, it dropped to 7 percent. Hundreds of millions of Chinese have since largely missed out on the fruits of the country’s spectacular growth.
Magnificent as Shanghai now is, its shiny buildings have been built on the back of the savings of China’s peasants who are forced to deposit these in state-owned banks and receive little in return. No matter who wins the election, India would do well to avoid China’s example.
John Lee Cheong Seong is a Foreign Policy Fellow at the Centre for Independent Studies, Sydney. His book Will China Fail? was published in 2007.
