How Do India and China Grow? Thorvaldur Gylfason.

How Do India How Do India and China and China

Grow?Grow?

Thorvaldur GylfasonThorvaldur Gylfason

Compare the development Compare the development strategies and trajectories of strategies and trajectories of the two economic giants of the two economic giants of AsiaAsia

One obvious differenceOne obvious difference India is a India is a democracydemocracy China, though, is notChina, though, is not

Many other differences, and Many other differences, and similarities that includesimilarities that include

Low foreign debtsLow foreign debts Long coastlinesLong coastlines Large overseas communitiesLarge overseas communities

Two giantsTwo giantsWhat’s the story?What’s the story?

India and China: GDP per capita 1820-1950 (constant 1990 US dollars)

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China was China was richer than richer than India 200 India 200 years ago, years ago, butbutIndia did India did better than better than China China thereafterthereafter

India and China: GDP per capita 1820-1950 (constant 1990 US dollars)

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Since Since 1950,1950,however, however, China has China has grown grown more more rapidly rapidly than India, than India, albeit less albeit less evenlyevenlyWhy?Why?

India and China: GDP per capita 1960-2003 (constant 2000 US dollars)

China 5.7%China 5.7%

India 2.5%India 2.5%

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India and China: Life expectancy at birth 1960-2004

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Persistent Persistent rise in life rise in life expectancy expectancy as well as in as well as in other other human human developmedevelopment nt indicators indicators in both in both China and China and India since India since 19601960

Three main sources Three main sources of of economic growtheconomic growth

Investm en t O penness Education

G row th+ ++

denotes a positive effect in the direction shown+

Three further sources Three further sources of of economic growtheconomic growth

Investm en t O penness Education

G row th+ ++

Democracy Diversification

+ +

Let’s now look

at these factors one by

one

Economic vs. political diversification

Stability+

Investment 1960-2004

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In China, it takes almost almost twice as twice as much much investmentinvestment to grow roughly twice as fast as IndiaChinese banks have more nonperforming loans than Indian banks

% of GDP

Investment 1960-2004

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In China, it takes 41 41 daysdays to obtain the licenses necessary to start a businessIn India, it takes 89 89 daysdays

% of GDP

Gross foreign direct investment 1960-2004 China

attracts far more foreign capital than India, especially through joint ventures

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Gross foreign direct investment 1960-2004 China appears

to have less endemic corruptioncorruption: 27% of managers in China view corruption as a major constraint compared with 37% in India

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Exports 1960-2004

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% of GDPChina’s exports of goods and services have outpaced those from IndiaIn China, taxes on taxes on tradetrade are now 9% compared with 16% in India

Adult female literacy 1960-2004

China has taught more females than India how to read and writeThe youth youth female female literacyliteracy rate in China is 99% compared with 65% in India

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Primary education

Adult female literacy 1960-2004

China by now also has more college students than India as proportion of each cohort

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%% 19919911

20020011

ChinChinaa

33 1313

IndiaIndia 66 1111

Tertiary education

Secondary education 1960-2004 China sends China sends

almost almost 70% of her of her youngsters to youngsters to secondary secondary schoolschool compared compared with with 50% in in IndiaIndia““An educated An educated child does child does not want to not want to plant rice”plant rice”

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Agriculture 1960-2004 China has

done more than India to transfer labor from the landWhere have all the workers gone?

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Manufacturing 1960-2004 Rural

workers in China have flocked into manufacturing In India, the services sector has expanded rapidlyHardware Hardware vs.vs. softwaresoftware

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The results so farThe results so far ChinaChina

Saves and invests more than IndiaSaves and invests more than India Attracts more foreign capital Attracts more foreign capital Tolerates less inflationTolerates less inflation Exports more goods and servicesExports more goods and services Teaches more females how to readTeaches more females how to read Transfers her labor more rapidly Transfers her labor more rapidly

out of farming into manufacturing out of farming into manufacturing and servicesand services

Small wonder, then, that China Small wonder, then, that China grows more rapidly than Indiagrows more rapidly than India

Even without democracy!Even without democracy!

Common legacy of foreign Common legacy of foreign influence or domination influence or domination followed by communism or followed by communism or socialismsocialism

Market-friendly reforms Market-friendly reforms started earlier in China than started earlier in China than in Indiain India

1978 in China1978 in China 1991 in India1991 in India

So, China has been reforming So, China has been reforming her economy twice as long as her economy twice as long as IndiaIndia

… … and more rapidly and and more rapidly and radically radically

China started earlier

Again, one glaring Again, one glaring differencedifference

India is a India is a democracydemocracy China is notChina is not

Does democracy impede Does democracy impede economic growth? economic growth?

Is this, perhaps, why India Is this, perhaps, why India has grown less rapidly has grown less rapidly than China since 1950?than China since 1950?

The role of The role of democracydemocracy

Next question

Two theoriesTwo theories Democracy is good for growth, Democracy is good for growth,

and so are investment, and so are investment, education, etc.education, etc.

Reason: Reason: democracy fosters democracy fosters efficiency efficiency by facilitating change by facilitating change of government, and efficiency is of government, and efficiency is good for growthgood for growth

Democracy hurts growth, or Democracy hurts growth, or worseworse

Reason: Reason: democracy plays into democracy plays into the hands of pressure groupsthe hands of pressure groups that tend to abuse their power at that tend to abuse their power at public expensepublic expense

Growth and political liberties 1965-98

Central African Republic

Brazil Democracy Democracy is good for is good for growth:growth: No visible No visible sign that sign that democracy democracy stands in stands in the way of the way of economic economic growthgrowth-8

-6

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Index of political liberties 1972-90

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r = -0.62r = -0.62

Botswana

China

Niger

Venezuela

Korea

85 countries85 countries

India

Growth and political liberties 1965-98

Central African Republic

Brazil

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Index of political liberties 1972-90

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r = -0.62r = -0.62

Botswana

Niger

Venezuela

Korea

Political Political liberty is liberty is good for good for growthgrowthbecause because oppression oppression breeds breeds inefficiencinefficiency,y,and so and so does does corruptioncorruption

China

India

One more thing:One more thing: FertilityFertility China adopted a China adopted a one-child one-child

policypolicy in 1980 in 1980 Relaxed it subsequently to allow Relaxed it subsequently to allow

two children – if the first was a two children – if the first was a girlgirl

300 million fewer Chinese today300 million fewer Chinese today than otherwise would have been than otherwise would have been the casethe case

This should be good for growthThis should be good for growth India did no such thingIndia did no such thing

India’s population is forecast to India’s population is forecast to overtake China’s by 2025overtake China’s by 2025

Births per woman 1960-2004

Less rapid population growth means fewer fewer mouths to mouths to feedfeed and and fewer minds fewer minds to educate, to educate, allowing allowing better care better care for each for each child, and child, and hence hence more more rapid growthrapid growth

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China and India are China and India are like other like other countriescountries, not special cases, not special cases

What works for the rest of the What works for the rest of the world also works for themworld also works for them

Economic policies and Economic policies and institutions that spur institutions that spur investment, openness, investment, openness, education, health care, low education, health care, low inflation, diversification, inflation, diversification, democracy, and family planning democracy, and family planning are good for growthare good for growth

Conclusion: Conclusion: It can be It can be donedone

These slides – and more! – can be viewed on my website: www.hi.is/~gylfason

The EndThe End