The political economy of growth in China and India

Abstract

This paper attempts to examine the growth performance and its impact on inequality and poverty in China and India. The recent upsurge in growth rates in China and India is seen widely as the ‘success’ story of globalization. It is also claimed that these developments will make a significant impact on the reduction of global inequalities and poverty.

Although a number of scholars have analysed the recent economic performance of China and India, these studies, however, have not taken into account the past policies and their impact on current performance. We find there is a gap in the current discussion, which overlooks historical and economic factors on the recent performance.

This article critically assesses the claimed fall in global poverty due to mainly the rise of China and India in recent years. The article questions the ‘pro-globalization’ argument, which suggests that there is a link between ‘market liberal’ free market policies and falling poverty. It is argued instead that the evidence concerning poverty reduction is ambiguous, and it is not that the most successful economies have adopted pro-globalization policies.

Studying the developmental changes taking place in these two countries is important because they together account for 37.5% of the global population. These populous neighbours, regarded as symbols of poverty and failure until two decades ago, contain large numbers of people living below the officially defined poverty line.

Keywords:

• China
• India
• neo-liberal economic reforms
• economic growth
• FDI
• poverty
• inequality
• inter-sectoral and regional variations

Acknowledgements

I would like to thank Dr. John Anchor and Dr. John Eames for their comments and suggestions on previous drafts. I would also like to thank two anonymous referees for useful comments on earlier draft. An earlier version of this paper was presented in a conference on emerging economies at University of Huddersfield, April 2008.

Notes

1. Klein (2005) concluded that ‘in recent years, we often approached such meetings with the thought there was a main, sole locomotive for the world economy, but that situation has run its course, and the motive power presently comes form China and India’.

2. See BusinessWeek, ‘Stars of Asia’,11 July 2005, p. 11.

3. See in World Bank, 2007. World Development Indicators (CD-ROM).

4. The term ‘neo-liberalism’ is considered synonymous with ‘globalization’. John Williamson (1994) pronounced the concept as set of neo-liberal policies, which in turn referred to the advice that was being given by the Washington-based international financial organizations, namely IMF and World Bank, to Latin American countries during the late 1980s. These policies were those of fiscal discipline, tax reforms, trade liberalization, privatization of government enterprises, liberalizing financial sectors by reducing controls over banking and a greater role of FDI.

5. See International Trade Statistics, 2005, World Trade Organization, 2005, p. 21, Table 1.5, Geneva.

6. According to China's Statistical Yearbook (2004) the headcount poverty ratio declined drastically from 31% in 1978 to 2.8% in 2004 (Government of China). In India the ratio declined from about 60% in 1950s to 23% in 2003, and the most recent Planning Commission estimates suggest that poverty is expected to decline further to 20% by the end of 2008 (Planning Commission).

7. See Economic Survey, 2005, which is the annual publication of the Ministry of Finance, Government of India, New Delhi.

8. See Dreze and Sen (1997).

9. Until 1992, almost all FDI in China was in the form of joint ventures. The term ‘foreign invested’ was used to reassure that these ventures were domestic firms with foreign participation. Since 1992, a growing proportion of local affiliates of foreign firms are majority owned or wholly owned by foreign investors.

10. The term ‘foreign invested enterprise’ covers subsidiaries of Transnational Corporations (TNCs) and joint ventures. It is a misnomer in China and here it means local affiliates of foreign-owned firms. Many of these locals are joint ventures with Chinese enterprises.

11. Wipro, an India-based IT firm, has a revenue of US$1.7 billion and a 42,000-strong workforce as of 2004. Its stock, which is traded on Wall Street, has climbed 230% in just only 2 years. It has not only become leader in software development but also a pioneer in business process outsourcing.

12. For detail see Gallagher and Robinson (1953).

13. See Chang (2002).

14. According to Naoroji, D. ‘India had since the late 18th century been steadily “bled” of its industrial, agricultural and fiscal wealth, along several channels: enormous military expenses, import–export imbalances including duties on British goods, debt farming, and “Home Charges” in the form of developmental loans and remittances as well as extremely unfavourable exchange rate’ (Naoroji 1901, p. 283).

15. The ‘drain theory’ was developed by Dadabhai Naoroji in his book (1901) Poverty and un-British Rule in India. Others too contributed to its theoretical development, amongst them R.C. Dutt. They held the view that the cost to India of British colonialization was, contrary to imperial rhetoric, to vast benefit for Britain and to disadvantage of India.

16. For a more recent debate on this issue, see Roy (1987).