Economic Rise of China and India
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2._reform_liberalization_and_economic_growth.pptxECON 2213 2. Reform, Liberalization, and Economic Growth
China’s economy 1949-1978: “Big Push” industrialization
Before 1949, China had a traditional household-based economy.
After the PRC was established, China’s leaders resolved to develop an industrial economy by using a high degree of socialist planning.
China’s presidents
1949-1959 Mao Zedong
1959-1968 Liu Shaoqi
1968-1975 Song Qingling and Song Biwu
1975-1976 Zhu De
1976-1978 Song Qingling
1978-1981 Ye Jianying
1981 Song Qingling
1981-1983 Ye Jianying
1983-1988 Li Xiannian
1988-1993 Yang Shangkun
1993-2003 Jiang Zemin
2003-2013 Hu Jintao
2013-: Xi Jinping
China’s premiers
1949-1976 Zhou Enlai
1976-1980 Hua Guofeng
1980-1987 Zhao Ziyang
1987-1998 Li Peng
1998-2003 Zhu Rongji
2003-2013 Wen Jiabao
2013-: Li Keqiang
The president is the head of state; the premier is the head of government.
China’s economy 1949-1978: “Big Push” industrialization
Priority was given to investment over consumption.
By 1954, investment was 26% of GDP.
Even today, the world average is 19%.
This was almost entirely government investment in the construction of new factories, especially heavy industry.
China’s economy 1949-1978: “Big Push” industrialization
Between 1952 and 1978:
industrial output grew by 11.5% per year on average
the share of industry in GDP rose from 18% to 44%
the share of agriculture in GDP fell from 51% to 28%
The Big Push did jump-start the economy—but other strategies might have worked too.
China’s economy 1949-1978: “Big Push” industrialization
China focused on the industries at the top and middle of the value chain: natural resource extraction and materials (top), refining and machinery (middle).
Hong Kong and Taiwan focused on the industries toward the bottom of the value chain: final products for consumers and firms, such as textiles, toys, and food products. They later moved up the value chain and had even faster growth than China.
China’s economy 1949-1978: Command economy
Key feature: no role for prices in resource allocation.
The government owned all large factories; in rural areas, agricultural collectives owned the land and organized the farm economy.
Factory product prices were kept high and farm prices were kept low (with procurement quotas), so relative prices were set to push resources into industrialization.
To keep workers in agriculture, there were restrictions on mobility through the hukou system, the household registration system providing residency permits and access to schooling and health care.
China’s economy 1949-1978: Command economy
No need for a modern tax system: state-owned industrial enterprises were very profitable, adding to government revenues.
Material balance planning was used to run the economy.
Nomenklatura system (Communist party controls on employment decisions) used to manage employees.
Compared to the Soviet Union, the economy was less controlled, with more decisions made at the local government level—but political ideology was more controlled.
China’s economy 1949-1978: Policy instability
China’s economy 1949-1978: Policy instability
1949-52: Recovery
1953-57: First five-year plan
1958-60: Great Leap Forward
Communes established in countryside; all monetary incentives rejected
Leaders reduced the resources available for agriculture, but increased the required procurement of grain
The result was the largest famine of the 20th century, with 25-45 million excess deaths
China’s economy 1949-1978: Policy instability
1961-63: Readjustment
1964-66: Third Front
1966-69: Cultural Revolution
Groups of students (“Red Guards”) encouraged by Mao to overthrow the Communist Party leadership
1969-71: New Leap Forward
1971-76: Retrenchment
1976-78: Leap Outward
China’s economy 1949-1978: Legacy
Consequences:
Dissatisfaction with standard socialist system
Periods of experimentation showed possibilities
Mao as a scapegoat
Neglect of consumption and services
1952-78: investment grew 10.4% per year on average, while per-capita consumption grew 2.3%
Services declined from 29% of GDP to 24% of GDP
No competition in consumer markets, little quality improvement, few new products
Luxury goods like wristwatches and electric fans were inaccessible to average households
China’s economy 1949-1978: Legacy
Other shortcomings:
Underemployment and slow job creation due to emphasis on capital-intensive industry
Overambitious industrialization strategy, inefficiency of industrial products
But: high human capital
Life expectancy rose
2/3 of the population was literate by 1982, where literacy is defined as recognizing 1500-2000 characters
India’s economy 1947-1981: slow growth
India’s economy 1947-1981: Nehru’s objective
Jawaharlal Nehru was prime minister from 1947 to 1964. His goal was for India to be independent.
Nehru wrote: “The objective…was the attainment…of national self-sufficiency. International trade was certainly not excluded but we were anxious not to be drawn into the whirlpool of economic imperialism…To base our national economy on export markets might lead to conflicts with other nations and to sudden upsets when those markets were closed to us.”
Nehru referred to economic independence as the key objective of his advocacy of heavy industry.
India’s prime ministers
1947-1964 Jawaharlal Nehru
1964 Gulzari Lal Nanda
1964-1966 Lal Bahadur Shastri
1966 Gulzari Lal Nanda
1966-1977 Indira Gandhi
1977-1979 Morarji Desai
1979-1980 Choudhary Charan Singh
1980-1984 Indira Gandhi
1984-1989 Rajiv Gandhi
1989-1990 Vishwanath Pratap Singh
1990-1991 Chandra Shekhar
1991-1996 P.V. Narasimha Rao
1996 Atal Bihari Vajpayee
1996-1997 H. D. Deve Gowda
1997-1998 Inder Kumar Gujral
1998-2004 Atal Bihari Vajpayee
2004-present Manmohan Singh
India’s economy 1947-1981: Industrial policy
India’s industrial policy had three key elements: a dominant role of the public sector, regulation of the private sector through licensing, and price controls.
A large role for the public sector was necessary because India wanted to keep out foreign investors, and the private sector had too few resources to take a larger role.
Because of the need for licences and permits, India’s economic policies were known as the “Licence Raj.”
India’s economy 1947-1981: Industrial policy
At first, only industries with larger factories (more than 50 workers) were subject to licensing, but all industries came to be included. Licensing meant that firms could not expand capacity, change the goods produced, move location, or increase production without permission.
As the economy grew more complex into the 1960s, the licensing system grew more chaotic and corrupt.
Price controls were instituted to control inflation and grew in importance in the 1960s. Price controls were imposed on goods from iron and steel, nonferrous metals, coal, and fertilizers, to cotton textiles, paper, sugar, cars, bicycles, tires and tubes, soap, and matches.
India’s economy 1947-1981: Agricultural policy
Agriculture had a low priority at first, with little role for price incentives. Nehru stated that he did not want to “encourage acquisitiveness beyond a certain measure.”
The zamindars (revenue-collecting landlords) were eliminated in the first round of reforms, but there was slow progress on land redistribution, and slow growth in agricultural output.
India’s economy 1947-1981: Growth 1951-1965
Growth in GDP was 4.1% on average between 1951 and 1965, due to rising investment rates (from 9.7% of GDP in 1954-55 to 14.1% in 1964-65) and to expansionary fiscal policy (that would prove unsustainable).
From 1965 to 1981, growth was much slower. Between 1965 and 1975, GDP grew by only 2.6% on average; since population grew by 2.3%, this meant a virtual standstill in the standard of living.
A per-capita growth rate of 0-1% has been called the “Hindu” rate of growth.
India’s economy 1947-1981: Growth 1951-1965
India’s economy 1947-1981: Political context
Nehru was prime minister from independence until his death in 1964. In 1966, his daughter Indira Gandhi became prime minister and (except for 1977-80) ruled until her assassination in 1984.
With stagnation caused by the droughts of 1971-73 and inflation caused by the 1973 oil price shock, the heavily-controlled economy could not adjust. Mrs Gandhi was found guilty of fraud in the 1971 election but declared a state of emergency rather than step down.
She called an election in 1977 and lost power, but three years of a failed coalition led to her re-election in 1980.
After her assassination in 1984, her son Rajiv became prime minister until 1989.
India’s economy 1947-1981: 1960s
Trade deficits, droughts, and war with Pakistan led to a crisis in 1965, and India was forced to devalue its currency and liberalize its trading regime. Both were politically unpopular and the liberalization was short-lived.
The government then imposed further controls on industry, tighter restrictions on foreign investment, and tighter licensing restrictions, and introduced a policy reserving certain products for small-scale industry (including clothing, shoes, leather products, and other goods that a labour-abundant country would have a comparative advantage in producing and exporting).
India’s economy 1947-1981: 1960s
Labour-market regulations were introduced that made it almost impossible for larger firms (more than 100 employees) to fire workers.
Detrimental to productivity
Drove entrepreneurs towards capital-intensive industries and capital-intensive technology
In 1969, larger banks were nationalized. This caused more branches to be opened in rural areas, but could this have been done at a lower cost?
The Green Revolution (the use of high-yielding dwarf varieties of seed from Mexico) was the most positive development of the 1960s. This was controversial, but India was self-sufficient in food by the late 1970s.
http://www.youtube.com/watch?v=HucSCNQ01X4
India’s economy 1947-1981: Growth 1965-1981
Whether due to poor economic policy or adverse external shocks, India did experience slower growth in the 1965-81 period compared to the 1951-65 period.
But growth should have been much faster.
During 1965-75, the world economy grew rapidly, including the GDPs of developing countries in Latin America, Africa, and Asia.
By keeping itself closed off from the world economy, India missed out on this growth.
India’s economy 1947-1981: Growth 1965-1981
Reform in China after 1978
By now, China has spent a longer period building a market economy than it spent under a command economy. However, the transition is not yet complete.
The first phase of reform (“reform without losers”) was gradual and began to develop a market economy alongside the command economy.
The second phase was more thorough.
Reform in China after 1978
The reform process in China was very different from transition in Eastern Europe and the former Soviet Union.
There was no “big bang” in China, whereas in Eastern Europe, the goal was to move as quickly as possible to a market system, despite the short-run costs.
In China, the focus was always on economic development. Areas of unregulated activity (special economic zones [SEZs] or township and village enterprises [TVEs]) were allowed to operate since they would help lead to growth.
Gradually the balance between the planned economy and the market economy began to shift.
Reform in China after 1978
The reforms started in the countryside in 1978, with farmers in Anhui province taking over land to use privately. The government called this the “household responsibility system,” in which farmers were responsible for sending a certain amount of grain to the government but could retain their extra output.
The result was increasing production. Lin (1992) shows that agricultural output grew at an annual average rate of 7.1% during 1979-1984, compared to 2.7% during 1970-1978.
The reforms in the industrial sector followed a similar path, with enterprises given residual control over production.
Reform in China after 1978
Characteristics of the early phase of reform:
Dual-track system: coexistence of a traditional plan and a market channel.
A commitment to growing out of the plan over time, i.e., keeping the traditional plan constant and allowing the market channel to grow. This meant that both farms and enterprises faced market prices at the margin.
Government monopoly over industry was relaxed and new entrants were allowed.
Gradual loosening of price controls.
Reform in China after 1978
Continued characteristics of the early phase of reform:
Managerial reforms, not privatization; new emphasis on profitability and autonomy even in state-owned enterprises (SOEs).
Rise of SEZs, TVEs, and other areas of detachment from planned economy.
Experiments to attract FDI started in Guangdong province in 1979.
TVEs produced 26% of GDP by 1996.
Saving done by households rather than government.
Reform in China after 1978
Industrial output grew at an annual rate of 9.3% between 1978 and 1993.
Most groups benefited from reform; workers in SOEs were protected.
In 1989, anger over rising inflation (over 25%), corruption, and possibly unfulfilled expectations of more rapid political and economic change led to weeks of demonstrations in Tiananmen Square in Beijing. After a political struggle behind the scenes, conservative leaders ordered the military to clear the square. Hundreds were killed and reform slowed for a couple of years.
Deng Xiaoping’s 1992 “Southern Tour” got reform back on track. “Development is the only hard truth. It doesn’t matter if policies are labeled socialist or capitalist, so long as they foster development.”
Reform in China after 1978
The second phase of reform started in 1993 and is ongoing.
Characteristics include:
Market reunification: no longer a dual track.
Fiscal reforms and the introduction of a tax system to boost government revenue.
Macroeconomic austerity to reduce inflation.
Restructuring of the banking system.
Foreign trade reforms, including WTO membership.
Reform in China after 1978
Outcomes of the second phase:
Downsizing of SOEs: the number of workers who are employed in state-owned firms has dropped by 40% since the mid-1990s.
Privatization (“restructuring”).
Reform with losers, e.g. SOE workers.
Continuing reforms:
Financial system: dominated by state-owned banks with weak budget constraints.
Corporate governance.
Regulatory agencies.
An increase in inequality and poverty, with pensions and health insurance lagging behind.
Kotwal, Ashok, Bharat Ramaswami, and Wilima Wadhwa, “Economic Liberalization and Indian Economic Growth: What’s the Evidence?,” Journal of Economic Literature 49:4 (2011), 1152-1199.
Problems with data
Measuring output
Production measured at current prices vs. constant prices.
Comparing countries using exchange rates vs. purchasing power parity.
Data quality
It is unusual for economists to even acknowledge that data are not always trustworthy.
The Penn World Table used to give grades for data quality.
Maddison, Angus and Harry X. Wu, “Measuring China’s Economic Performance,” World Economics 9:2 (2008), 13-44.
China GDP per capita, PPP (constant 2005 international $) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 523.9502538933956 544.18014197095351 585.02132210964976 639.48138123978163 727.07990399191988 814.0746264205344 872.6365966536116 958.37008432165305 1049.6293429554642 1076.0395147511001 1100.6599312861044 1185.6326034115484 1337.500031896272 1507.3215860462565 1685.6207313865207 1849.1526357037051 2012.8593312634948 2177.6536134027569 2325.0927749438551 2480.2314669136617 2667.4693830072824 2867.9611825868928 3108.0518003825318 3397.6284366118884 3718.6369847281785 4114.5728335605054 4611.3032281580854 5238.6765809166618 5712.2456196384073 6206.2642939206544 6818.7074959928459 7404.3142815106366 India GDP per capita, PPP (constant 2005 international $) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 879.40451701131644 910.84026873932362 921.08346821811983 965.97737433045654 980.51280150711352 1009.215043091741 1034.2685654425352 1052.0017125508098 1128.6432124658288 1170.603520167024 1209.8191055785294 1197.7599935570452 1238.2225251846851 1271.6699447919298 1330 .3406816909451 1404.2313473999084 1482.4738769921551 1514.7541558312621 1580.143534606844 1684.4533174808537 1722.0973038784928 1777.762135085389 1817.8416016115059 1931.7465580870762 2051.6314938531732 2208.5873499991367 2377.7429624171737 2573.1362837195993 2635.3368500647239 2812.5824516540983 3038.8079887210697 3203.0028038890805 United States GDP per capita, PPP (constant 2005 international $) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 25509.516998569699 25902.312325137493 25148.490917881056 26044.94593484807 27678.151171419486 28562.061834871638 29269.196653521172 29927.483294743139 30872.927905635621 31673.007345463709 31898.502942437131 31392.871401409597 32014.626881963628 32502.818185665539 33427.711438626371 33873.996349679655 34749.845950540846 35880.978665502815 37026.108013659403 38385.536123853184 39544.955546896126 39583.610081315674 39934.957992361953 40603.853463048974 41629.711221960184 42516.393469999275 43228.111147106982 43635.585206814234 43069.58 1985720804 41187.655325080705 42078.594105197226 42485.983357520781
Bosworth, Barry and Susan M. Collins, “Accounting for Growth: Comparing China and India,” Journal of Economic Perspectives 22:1 (2008), 45-66.
Eichengreen, Barry, Donghyun Park, and Kwanho Shin, “When Fast-Growing Economies Slow Down: International Evidence and Implications for China,” Asian Economic Papers 11:1 (2012), 42-87.
