China India Growth Industrialisation and Inequality - JG (1)

7/28/2019 China India Growth Industrialisation and Inequality - JG (1)

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Jayati Ghosh


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Asian century? Driven by perceptions of growth prospects of China

and India in particular.

Both China and India have large populations covering

substantial and diverse geographical areas, large

economies with even larger potential size. Current success stories ofglobalisation: two

economies that have apparently benefited.

Success defined by the high and sustained rates ofgrowth of aggregate and per capita national income;

the absence of major financial crises; and substantial

reduction in income poverty.


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Catching up?Table 1: Selected economic and productivity indicators for United States, China, and

India: 1998

2007Productivity growth

(% average annual change) GDP (US$)

Country 19982007

19982002

200307

Per employee2007

Per capita2009

2009

UnitedStates

1.6 1.8 1.3 100 100 100

China 10.3 8.5 9.7 19 22 80

India 4.2 2.8 6.3 11 10 28

NOTES: Productivity growth measured on basis of GDP per employee at 1990

purchasing power parities. GDP per capita at 1990 purchasing power parities.GDP isU.S. dollars converted at 2005 purchasing power parities.

SOURCE: The Conference Board, Total Economy Database (September 2010),http://www.conference-board.org/economics, accessed 3 November 2010 andNational Science Board, 2010


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India and China Relative to the World

Table 2: India and China Relative to the World (Percentage Shares)

1978 1980 1985 1990 1995 2000 2005 2006

GDP constant 2000 $

China 0.94 1.03 1.51 1.85 2.93 3.76 5.19 5.53India 0.93 0.89 1.01 1.12 1.28 1.44 1.77 1.86

Exports of goods and services (Constant 2000 US$)

China 1.44 1.71 1.93 1.81 2.56 3.50 7.66 8.52

India 0.43 0.45 0.39 0.46 0.67 0.76 1.07 1.05

GDP PPP (Constant 2005 international $)China .. 1.98 2.90 3.55 5.66 7.17 9.53 10.07

India .. 2.29 2.58 2.89 3.32 3.69 4.35 4.53

Source: World Bank, World Development Indicators Online


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Not similar economies:

Institutional conditions

India was a mixed economy with large privatesector, so essentially capitalist market economywith the associated tendency to involuntary

unemployment.

China was mostly a command economy, whichuntil recently had a very small private sector;

there is still substantial state control overmacroeconomic processes in forms that havediffered from more conventional capitalistmacroeconomic policy.


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Rates of GDP growth and investment

The Chinese economy has grown at an average annualrate of between 9 and 10 per cent for three decades,showing volatility around high trend.

Indias economy broke from Hindu rate of 3 per cent inthe 1980s, to annual rates of 5-6 per cent, until recently

average growth rate was 8-9 per cent. The investment rate in China fluctuated between 35 - 45

per cent over the past 25 years, compared to 24 - 34 percent in India.

Aggregate ICORs (incremental capital-output ratios) have

been around the same in both economies. Infrastructure investment from the early 1990s has beenjust under 20 per cent of GDP in China, compared to 2 percent in India.


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Structural change over four decades China: classic pattern, moving from primary to

manufacturing sector, which has doubled its shareof workforce and tripled its share of output.

India: Move has been mainly from agriculture toservices in share of output, with no substantialincrease in manufacturing, and the structure ofemployment has not changed much. Share of the

primary sector in GDP fell from 60 per cent to 25per cent in four decades, but share in employmentstill more than 60 per cent.


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Annual rates of growth of national

income1951-52 to 1964-65 4.0

1964-65 to 1974-75 3.2

1974-75 to 1984-85 4.1

1984-85 to 1994-95 5.3

1994-95 to 2004-05 6.0

2004-05 to 2009-10 8.6


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Share of agriculture in GDP and employment

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

India

Agriculture, valueadded (% of GDP)

Employment inagriculture (% of

total employment)

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

China: Agriculture in GDPand employment

Agriculture,value added (%of GDP)

Employment inagriculture (% of

totalemployment)


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Structural change in the Indian economy

Primary Seconday Teritiary

1950-51 52.6 14.5 32.9

1960-61 42.8 19.6 37.61970-71 42.4 20.8 36.8

1980-81 35.7 24.7 39.6

1990-91 29.3 26.9 43.82000-01 23.4 26.2 50.5

2007-08 17.8 29.4 52.8


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Occupational distribution

Changes in output shares have not beenaccompanied by commensurate changes in

the distribution of the workforce.

The proportion of all workers engaged inprimary activities as the main occupationhas remained stubbornly around 60 percent, despite fall in the primary sectorsshare of national income.


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0

10

20

30

40

50

60

70

80

China: Shares of total employment

Primary

Secondary

Tertiary


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Chinese characteristics After 1978, decollectivization, price increases, and the relaxation

of local trade restrictions on most agricultural products Spurred the takeoff of China's agricultural economy from 1978

to 1984. Grain production increased by 4.7 percent per year, andfruit, red meat, and fish production grew by 7.2 percent, 9.1percent, and 7.9 percent respectively.

Agricultural growth decelerated after 1985, but the country stillenjoyed agricultural growth rates that outpaced the rise inpopulation.

Agriculture contributed more than 30 percent of GDP before1980, it fell to 16 percent in 2000, and its share of employmentfell from 81 percent in 1970 to 59 percent in 2000.

The share of primary products, especially those fromagriculture, in total exports was over 50 percent in 1980, it fellto only 10 percent in 2000. Over the same period, the share offood in total exports fell from 17 percent to 5 percent.


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Trade patterns

China: Rapid export growth involving aggressiveincreases on world market shares, based onrelocative capital attracted by cheap labour and

heavily subsidised infrastructure. This in turn requiredsuppression of domestic consumption.

India: Lower rate of export growth, with cheap labour

due to low absolute wages rather than publicprovision and poor infrastructure development. Soexports have not yet become engine of growth,except in modern services.


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Obvious Importance of Trade

6.60

10.65 9.94

19.04

23.07 23.33 22.60

25.13

29.56

33.95

37.08

39.0838.29

34.89

26.18

6.39 6.215.31

7.13

10.97

13.23 12.7614.49 14.80

17.57

19.21

21.3220.59

23.51

25.40

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

1978 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Chart 1: Exports of goods and services (% of GDP)

China

India


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Goods in China and Services in India

8.2

14.5

17.6

20.820.1

22.4

26.7

30.7

33.8

35.734.8

31.6

4.1

5.8

8.89.4 9.4 10.1 10.2

10.8

12.213.0

12.5

16.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008

Chart 2: Exports of goods (% of GDP)

China

India


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India: Not a mercantilist success

India has not run trade surpluses, and even

current account has mostly been in deficit.

Recent export growth part dominated by Chinese

market, part of broader Asian production hub.

Services growing share of Indian economy, but

new services other than finance and real estate

still small (5 per cent of GDP and less than 1 percent of total employment).

Basic development project far from complete.


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Only China truly mercantilist

2008: China recorded a trade surplus of $361billion and a current account surplus of $390billion.

India recorded a merchandise trade deficit of$92.4 billion. Even if the net surplus fromservices export is taken into account the deficit

stands at $76.4 billion.Net exports has been a trigger for growth for

China, but not so for India.


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Is China different?

Similar to the first-tier East Asian industrialisers?

The Chinese economys export dependence, as measured

by the total value of exports as a percentage of GDP, rose

from 21 percent in 1991 to 40 percent in 2006, while the

average of Japan, Taiwan, and Korea never exceeded 20

percent.

Chinese private consumption as a percentage of GDP hasdropped from 50 percent in 1991 to 38 percent in 2006,

while the figures for Japan and Four Dragons always have

stayed above 50 percent since takeoff.


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US market dependence

The US constitutes the single most important

market for Chinas exports, only surpassed by

EU as a whole recently.China is the biggest exporter to the US among

all Asian exporters. In 2005, Chinas total

export value to the US reached 163 trillion, incomparison to 136 for Japan and 141 trillion

for all Four Tigers combined.


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Sino-centric export model

China has emerged as the most important destination

of other Asian exporters.

Japans export to China as percentage of total exportincreased from 7.1 in 1985 to 13.5 in 2005 (with a

concomitant drop of export to US from 37.6 to 22.9).

Both South Koreas and Taiwans export to China rose

from zero in 1985 (under Cold War) to 22 in 2005(with a simultaneous drop of exports to the US from

36 to 15 for Korea and from 18 to 15 for Taiwan)


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Can China emerge as an alternative growth

pole for developing Asia ?


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China - Investment and consumption rates

30.0

32.0

34.0

36.0

38.0

40.0

42.0

44.0

1978

1979

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

50.0

52.0

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0

Investment rate Consumpt ion rate


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So what explains Indian GDP growth success?

Boom dependent upon greater global integration, with both

trade and financial liberalisation playing roles. Financial deregulation encouraged capital inflows, sparked a

retail credit boom and combined with fiscal concessions to spurconsumption among the rich/middles classes especially in urbanareas, leading to rapid increases in aggregate GDP growth.

Constrained fiscal policies, poor employment generation andpersistent agrarian crisis reduced wage shares in national incomeand kept mass consumption demand low.

Rise in profit shares and middle class demand generated higherrates of investment and output over the upswing.

Public spending as principal stimulus for growth was substituted

in the 1990s with debt-financed housing investment and privateconsumption of the elite and burgeoning middle classes.

So this Indian growth story is not so different from thespeculative bubble-led expansion of several other developed anddeveloping countries in the same period.


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Employment trends in India


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The Chinese case

Elasticity of employment with respect to GDP over

1995-2008 was 0.03. So a 1 percent increase in GDP

was associated with a .03 percent increase in

employment. This includes agriculture where

employment is declining.

In secondary (manufacturing and construction) and

tertiary sectors, output elasticity of employment was0.13 for both, also very low.


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Decreasing Employment Elasticity in China

Employment

Growth

value-added

Growth

employment

Elasticity

1980-1990

Primary Industry 2.8 6.2 0.45

Secondary Industry 5.9 9.5 0.62

Tertiary Industry 7.9 12.2 0.65

Total 4.1 9.3 0.44

1990-2000

Primary Industry -0.8 3.8 -0.21

Secondary Industry 1.6 13.5 0.12

Tertiary Industry 5.1 9.1 0.56

Total 1.1 10.1 0.11


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Informalising Labour Market

0

5000

10000

15000

20000

25000

30000

1 98 0 1 98 1 1 9 82 1 98 3 1 9 84 1 98 5 1 98 6 1 9 8 7 1 98 8 1 9 8 9 1 99 0 1 9 91 1 9 92 1 99 3 1 99 4 1 9 95 1 99 6 1 99 7 1 9 9 8 1 99 9 2 0 00 2 00 1

EMP-CITY-SOE

EMP-STF&WRK

EMP-CITY


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Unorganised and migrant workers in China

These data leave out the increasing proportion ofunorganised workers, most particularly the ruralmigrants. Many of them are self-employed.

Rural-urban migrants currently estimated to be around150 million (half the urban work force).

Recent CASS survey shows that in 2005 a majority ofmigrant workers were in informal activities and typicallyfaced long hours of work for all days of the week, for lessthan minimum wages and with poor residentialconditions.


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Poverty reduction

China: Officially 4 per cent of the population nowlives under the poverty line, unofficially around 12per cent. (Reflects earlier asset redistribution andbasic needs provision in China under communism,

plus larger mass market and recent role ofagricultural prices.)

India: Official poverty ratio much higher andpersistent, currently 28 per cent. Food deprivation ismuch higher.


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Rates of poverty reduction

Rural India Urban IndiaAnnual poverty reduction in percentage points

1973-74 to 1987-88 -1.24 -0.79

1987-88 to 2004-05 -0.64 -0.74

Annual poverty reduction normalised to initial year, per cent1973-74 to 1987-88 -2.19 -1.60

1987-88 to 2004-05 -1.62 -1.92


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Poverty reduction in India depends upon a relatively egalitarian path of growth

increases in agricultural productivity that help raise

wages and keep food prices under control

expansion of non-agricultural employment, including in

rural areas

direct public action in the form of poverty eradication

programmes aimed at generating productive employmentfor the poor.


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Poverty and inequality in China

While Chinese growth has been consistently high across time,poverty reduction has been concentrated in particular periods.

The reduction was concentrated in two relatively brief periodsbetween 1979 and 1999: (1) the first five years of the reform

period i.e., 1979-1984, and (2) the middle three years of the1990s. Both were period of rising farm incomes.

So poverty reduction in China has not depended on GDPgrowth but on a fall in rural-urban and income group-wiseinequality.,

Growth is increasingly associated with and predicated oninequality, making it harder for China to deliver the kind ofpoverty reduction it did manage to sustain in the early 1980sand mid-1990s.


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Human development China: earlier extensive public provision of health and

education: universal education until Class X, andpublic services to ensure nutrition, health andsanitation. (In the 1990s, higher fees and someprivatisation of such services led to reduced access

and worsening indicators; since 2002 revival of publicspending in these areas.)

India: the public provision of all of these has beenextremely inadequate throughout this period and hasdeteriorated in per capita terms since the early1990s. Since 2004, slight increase in educationspending but still well below China; governmenthealth spending still very low.


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Inequalities

In both economies the recent pattern of growth hasbeen inequalising.

China: spatial inequalities across regions havebeen the sharpest. More recently, vertical inequalitieshave grown, especially in urban areas and for migrantpopulation vis--vis others.

India: vertical inequalities and the rural-urban dividehave become much more marked.


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Most important problems are currently the same

Limits to current growth model in terms of both external and

internal viability: China: high export-high accumulation model which requires

constantly increasing shares of world markets and very high

investment rates. Already signs of reduced unit values of exports

and stagnation/decline of manufacturing employment.

India: IT-enabled services experiencing current boom, butcompetitive threat from other countries. Also this not enough to

transform Indias huge labour force into higher productivity

activities.

Agrarian crisis

Inadequate generation of employment in terms of decent work

Public neglect of social sectors

Growing inequalities.


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Problems with recent boom

Countries competed to send cheaper goods to Northernmarkets.

The financial bubble in the US attracted savings fromacross the world, including from the poorest developingcountries, so that the South transferred net financialresources to the North even when they received largecapital inflows.

A net transfer of jobs from North to South did nottakeplace, as technological change in manufacturing and newservices meant that fewer workers could generate moreoutput.

Livelihood crises in the South generated short termmovements of labour migration that also subsidisedproduction and accumulation in the North.


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Global output recovery already over Basic problems in financial sector are still not

addressed (and now real estate, sovereign debtissues) and increased risky behaviour because ofmoral hazard of bailouts.

Policy response has been to encourage renewed

bubbles based on earlier growth model. US cannot be engine of global growth in the

immediate future.

Weak employment recovery so sources of newdemand constrained.

Severe procyclical policies are still being imposed onBOP constrained economies by IMF and otherinternational agencies.

Ne commodit price s rge


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New commodity price surge

From mid 2008 commodity prices started falling as

index investors started to withdraw. Another bubble now: Most important commodity

prices have been rising again.

FAO food price index now above previous peak.

But global demand and supply for most commoditiesremains broadly in balance; for some, both outputand stock holding have increased.

However, longer term supply issues are important for

food and other agricultural commodities because ofpolicy neglect and persistent agrarian crisis.


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New forms of primitive accumulation drove Indian boom

Nature: Expropriation of peasantry from land, privatisation ofwater and other natural resources, over-extraction anddegradation.

Petty production: Simultaneous destruction of viability (ofpeasant cultivation) and creation of new petty producers

because of lack of employment generation. Use of informal labour: Especially women, and in unpaid and

underpaid forms, which has subsidised modern industryand services.

Use of social categories (gender, caste, religion) to reinforce

surplus extraction in accumulation process.

Failure of human development is an indicator of thiscontinued reliance on inequality for accumulation.


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This creates challenge and new opportunities for

progressive alternatives

Process can continue for some time as region remainsfavoured destination for mobile global capital

But limits to this growth process are increasingly beingfelt: in finance (bubble will burst eventually), in internalimbalance (agrarian crisis and rising food prices), externalimbalance (BOP problems), in ecology, in employmentand livelihood and associated social tensions.

New rights-based demands (employment guarantee,food guarantee, education guarantee) generate need of

system to respond, in however limited a form. New awareness among Left of need to mobilise among

different categories of workers and others.


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Need for financial regulation Savings glut not because of inadequate financial

development: countries with large savings surpluses(such as Malaysia, Indonesia and South Korea) havevery deregulated and globally integrated financialsystems.

Insufficient financial widening and lack of inclusion

of small and medium firms, producers, cultivatorsand informal sector producers is still a majorconstraint.

Capital management techniques are required tocontrol destabilising flows of cross-border capital

Crucial interaction between food prices andderegulated finance needs to be recognised and dealtwith.

No country has developed without directed credit.


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Asia needs a new development strategy

Mercantilist obsession with increasing netexports must be revised.

Greater emphasis on more trade within theAsian region and South-South trade.

Need to shift to wage-led and employment-ledgrowth domestically.

This is important because the global crisis is

not over, it is still unfolding; and the causes ofthe crisis have still not been dealt withglobally.


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Elements of alternative strategy

Generation of good quality productive employment is themost critical variable.

Need growth strategy that allows and encourages labourproductivity increases overall while significantly expandingexpenditure and therefore income and employmentopportunities in social sectors.

Major role for state intervention, through direct public

investment and through fiscal, monetary and market-basedmeasures that alter the structure of incentives for private

agents.


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Thanks for your attention!

China India Growth Industrialisation and Inequality - JG (1)

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