Structural change, globalization and economic growth in China and India.

• Author: Valli, Vittorio
• Position: Report

1. Introduction

   The aim of this essay is to analyze, in a comparative perspective, the relation between structural change, the process of globalization and economic growth in two great emerging economies, China and India, in their period of rapid development.

   The studies on structural change and the patterns of economic development were introduced in Japan by Akamatsu (1935 and 1962) in an original way, the "wild-geese-flying approach" then generalized by Kiyoshi Kojima (2000) and Ozawa (2001 and 2010). The structural view was also independently furthered in a different way by other great authors such as Colin Clark (1940), who inaugurated the three-sectors approach, Simon Kuznets (1957) and Alexander Gerschenkron (1962).

   Between the 1960s and the late 1980s the main contributions were due to Chenery (1960), Chenery and Taylor (1968), Taylor (1969), Keesing and Sherk (1971), Chenery and Syrquin (1975), Chenery et al. (1979), Kader (1985), Chenery, Robinson and Syrquin (1986), Syrquin (1988), Chenery and Syrquin (1989).

   Recent contributions have mainly focused on cross-country analyses, more disaggregated approaches and country studies. For example, Haraguchi and Rezonja (UNIDO, 2010), De Vries et al. (2012), McMillan and Rodrik (2011), Lin (2011), Lin and Rosenblutt (2012) have carried out important cross-country analyses; Li, Menginstae et al. (2011) have focused on China and India; Kochhar et al. (2006) on India; Wang et al. (2007) on China. However, most of the cross-country studies have jointly studied market or mixed economies, often overlooking the particular structural features of Communist central planned economies like China up to 1978 as well as of heavily regulated mixed economies like India up to 1992. These features have greatly influenced the period of transition and rapid growth in the two great Asian economies. Countries in profound transition between different systemic mechanisms of regulation and control in the economy may have very different structural transformations with respect to countries that in the same period have fully maintained their systemic characteristics.

   Moreover, few contributions have tried to analyze the relations between structural change, globalization and economic growth. The initial conditions, the pace of economic growth and the way in which a country has entered the globalization process are fundamental factors in order to understand the different economic structures of China and India and their changes over time.

   The paper is structured as follows. Paragraph 2 introduces the initial structural conditions in China and India, while paragraphs 3 and 4 trace the path of economic development and the process of globalization in the two countries. Social problems related to structural change and globalization are briefly discussed in paragraph 5. To better typify structural changes, a shift-share decomposition analysis on aggregate labor productivity is presented in paragraph 6, followed by an econometric investigation on the relation between economic growth, structural change and globalization in paragraph 7. Paragraph 8 concludes.

2. China and India: the initial structural conditions

   As table 1 shows, some important structural differences already existed between China's and India's economies in 1978, when China's radical economic reforms began.

   In 1978, the percentage share of agriculture on total employment was about the same in the two countries, while the percentage on value added was much higher in India. Although in 1978 India had a level of per capita GDP in PPPs somewhat higher than China, the share of industry was already higher in China than in India, in terms both of value added and employment, while the share of services was much lower in China than in India. This is largely a consequence of a systemic difference, namely the fact that China was a Communist centrally planned economy, where services were usually overlooked and heavy industry was strongly privileged over light industry. Moreover, China's industry was essentially constituted by large state companies with an average productivity higher than that of India's industry, sharply divided between a relatively small number of large state or private companies and many firms of the informal economy exhibiting a very low productivity.

   Interestingly, as Kochhar et al. (2006) pointed out, also in India in 1980, controlling for the level of development and the size of the economy, the percentage of services was somewhat lower than in the other developing and emerging countries, though larger than in China, while manufacturing industry's share was a little higher than in the other developing countries, though much lower than in China. However, in a few years China surpassed India in terms of per capita GDP and increased its industrial and service sectors much faster than India.

   It is also important to notice that in 1978 China's percentage of value added in agriculture on total value added was much lower than the percentage of employment on total employment. Moreover, the percentage in agriculture's value added was much lower than in India, while the percentage in industry was already double than in India. This implies that the ratio between industrial productivity and agricultural productivity was particularly high in China, and this was largely dependent on systemic differences and on the strategic choices of China's planners and India's policy makers.

3. Economic development and structural change in China and India: an overview

   By comparing the trends of some of the most important macroeconomic indicators, it is possible to see that economic development was very different in terms both of the pace of economic growth and its duration in the two great Asian countries. Table 2 and 3 show that real GDP, real labor productivity, exports in volume and, above all, real investment have grown more rapidly in China than in India, while employment has grown faster in India than in China. The phase of rapid growth began in 1978 in China and in the second half of the 1980s or in 1992 in India (3), and the average rate of growth was considerably higher in China than in India especially in the 1978-92 years.

   In the second period (1992-2012), although China continued to have a higher rate of growth than India, there was a marked acceleration of economic growth in both the economies. China and India rapidly increased their exports, capital accumulation and attraction of FDI. However, after the global financial crisis begun in the US in 2007-8, in both the countries there was a consistent reduction in the rate of growth.

   If we concentrate the analysis on the structural changes occurred in the two countries in the period covered by our disaggregated dataset (1987-2009), we can see that China reduced the percentage of agriculture both in employment and in valued added, and increased the absolute and relative size of its industrial sector much more than India. The exceptionally rapid rise in investment, value added and productivity in China has mainly regarded the industrial sector, while agriculture and services have contributed less. However, the share of services in employment constantly grew also in China surpassing in the 1990s the share of industry (see Table 4).

   Indeed, if compared to India (but also to other developing and emerging economies), China's process of industrialization has been much more rapid and extensive, while the service sector, starting from a very low level, has grown substantially. However, it has remained less extensive than in India. India has reached, and then surpassed, the average percentage level of the tertiary sector of other several developing and emerging countries, improving in particular the specialization in the production and export of software and other ICT services.

   If we consider the internal composition of industry and services in the two countries, we discover other important differences, that we will discuss in detail in paragraph 6. Here we can anticipate that China has progressively built an industry much larger and stronger than India especially for office machines and ITC equipment, but also for steel, textile, automobiles and clothes, while India has reached a good position in the pharmaceutical and steel industries and in software services.

   Some of the main determinants of the different patterns of development in the two countries may be so summarized:

   1. In 1978 China had already a larger industrial base than India, although China had then a lower per capita GDP.

   2. Since 1978 China has introduced radical economic reforms that have strongly favored industrialization much earlier than India (about 14 years in advance).

   3. China's rate of saving and investment has been much larger than in India, and investment went mainly to manufacturing industry, constructions and a part of the services sector.

   4. China favored industrialization more than India maintaining relatively low prices for agricultural goods and for some basic inputs provided by state corporations.

   5. China had an extensive use of the fordist- toyotist model of growth (4), while India limited it almost exclusively to the formal sector, which employs only about one tenth of the total labor force.

   6. China opened its economy to external trade and foreign investment earlier and much more extensively than India, as we will see in next paragraph.

   7. In the 1978-2012 period in China there was a vast increase in income and wealth inequalities, while absolute poverty diminished. In India the rise in inequalities was less severe, but there remained a large level of absolute and relative poverty.

   8. In China the extraordinarily rapid process of industrialization and urbanization and the absence of adequate environmental policies led to a great rise of pollution. In India the rise of pollution was substantial, but lower than in China.

   As regards India, it is interesting to quote a passage from Kochhar et al. (2006) "[...]...