Academic journal article The European Journal of Comparative Economics

Growth Prospects in China and India Compared

Academic journal article The European Journal of Comparative Economics

Growth Prospects in China and India Compared

Article excerpt

1. Introduction

China and India, as the fastest-growing of the 'BRIC' economies, occupy a special place in the imagination of observers in the OECD and elsewhere. Despite their low incomes, their sheer size combined with rapid growth means that they make a substantial and rapidly growing contribution to world output. The success or failure of each country to maintain their rapid growth into the future will have a tremendous impact not only on their own economies but on the world economy as a whole. Moreover, with populations of 1.3 and 1.1 billion, respectively, their rapid growth has the potential to raise living standards significantly for a third of the world's population, bringing hundreds of millions of people out of poverty and creating a middle class that rivals the EU and US in both size and income.

In both countries, growth has accelerated in recent decades as trade liberalisation and market-oriented structural reforms have deepened. A glance at both countries' experience suggests a number of similarities in their reform paths. Despite very different political systems, both countries followed a reform path that markedly reduced the role of the government in economic activity and allowed a greater degree of openness to foreign trade. Reform started earlier in China than in India. Moreover, the opening to trade has proceeded at a much more rapid pace in China. Indeed, by the beginning of this decade, India was still one of the most highly protected economies in the world. On the other hand, India has always had a stronger private sector. Moreover, while the private sector was subject to considerable constraints on its investment planning, these largely ended in the early 1990s. However, in China the private sector has only emerged in past decade, as the result of a more favourable legal framework and the sale of government-owned assets. A careful description of these countries' sequence of reforms is elaborated elsewhere and we will not dwell on the policy details here. (2) Nevertheless, it is important to note that China's transition started somewhat earlier and involved greater change than in India since it was, on the whole, further from being a market economy. However, both countries' reforms are still ongoing, so it would be premature to judge only past progress.

Looking forward, despite immense reforms and impressive growth, there has been considerable scepticism about the sustainability of China's growth in particular.

Especially over the past few years, when growth has broached double-digit rates, questions about the extent to which it can be sustained without creating inflationary pressures or incurring large batches of new non-performing loans are often heard in the press. For India, the situation is nearly reversed: many observers have thought that India can and should grow faster than the 6% average that it attained over the past ten years. Recent marked increases in investment suggest that the economy can indeed grow faster than this on a sustainable basis--at around 8 1/2 per cent annually if the increase in investment is not just a cyclical phenomenon. Indeed, many political leaders have argued that India should be able to grow even faster over the medium-term.

For China, we will argue that that current growth rates are not markedly different from potential growth rates and so that concerns about overheating are not warranted but that the case that growth will need to slow down over the medium term seems strong. On the other hand, in India growth around the 8 1/2 per cent rate can be sustained but faster growth will require substantial reforms designed to increase saving. However, considerable caution is in order, due to tremendous uncertainty about the basic statistical data which must underlie any serious consideration of each country's potential. Most prominently, China has neither an official estimate of capital stock nor a consistent economy-wide employment series. …

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