- (A) China's Key Economic Reform Strategies
- (B) Indian Economic Reform Strategy
- (C) Results of Economic Reform
- China-India: A Comparative Outlook
- Concluding Remarks
In
this paper I like to discuss the experiences of large populous economies in
respect of growth and development. In general, they are notably different in
many respects from the small/medium sized economies. Among the developing
countries we can broadly identify seven most populous countries starting
from China, India, USSR, Indonesia, Brazil, Nigeria and Argentina in the
descending order. These countries between them cover 51.5 per cent of world
population and in contrast a meagre 9.2 per cent of world Gross Domestic
Product [GDP] measured at 1990 US dollar in 1994. Further, when their share
in the world population decreased from 51.94 in 1980 to 51.51 in 1994, their
share of the world GDP increased from 7.9 per cent to 9.2 per cent over the
same period. This shows that although they started with a big handicap of a
very low per capita GDP in 1980 compared to the rest of the world, their
achievements in regard to GDP per capita are marginally better.
If
you measure their population growth rate between 1980 and 1994 it comes to
nearly 1.6 per cent as against 1.8 for the world overall. Of course world
population growth averages the high growth of sub-Saharan Africa (above 3.0
per cent) and some Latin American and South Asian countries, alongwith a
very low growth of developed countries. Among the 7 big populous countries
the population growth rate is lowest in USSR followed by China and is the
highest in Nigeria. In terms of GDP growth of this group of seven, the
growth rate was 4.9 per cent between 1980 and 1994 as against a growth rate
of 3.6 per cent, for other small and medium developing countries and 2.8 per
cent of global growth between 1980 and 1990 and 1.96 per cent between 1990
and 1994. The developed countries witnessed a growth rate of 2.73 per cent
in the 1980s and 1.58 per cent in the 1990s. This clearly shows that the
overall growth rates and growth in GDP are much higher in the larger
developing countries compared to other developing and developed countries.
But inspite of this comparatively high growth, its per capita income is
lower than that of other developing countries, mainly because of its large
population.
Among
the seven countries, we have chosen the first two most populous countries,
China and India. Interestingly, these two countries together show the
highest growth rates among the most populous seven large economies, India
growing at 5.2 per cent between 1980 and 1994 China 9.6 per cent between
1980 and 1994. As against this, USSR is showing a negative growth and
Nigeria has grew by only 2.3 per cent over the same period. Indeed, among
most populous economies the success story comes mainly from China, India,
Brazil and Indonesia of which again three are from the Asian sub-continent.
If
we examine their individual growth performance, Brazil's growth has
accelerated very recently, reflecting its liberalisation policy since 1992;
China's growth trend started much earlier since the reform of 1978. But it
accelerated significantly from 1991- 92. For Indonesia the growth
accelerated from 1985 coinciding again with their economic liberalisation
activities. Nigeria and USSR are showing a deterioration in recent years.
USSR's negative growth is explained by their problem of transition to a
market economy. For Nigeria their new economic policy seems to have failed
to show any positive impact.
There
is often a generalization that all success stories of large and small
developing countries can be explained by the growth of world trade and
opening up of these economies with market based deregulation. But from any
indepth scrutiny one finds that the reform package under the broad heading
of "libera!isation" is very different from country to country.
There is no standard recipe of a "reform package". Also their
country specific applicabilities are not "neutral" to the factor
endowment or initial conditions of any country as is often propagated by
many economists. Indeed, the failure to appreciate the need for
country-specific adjustment has left a large number of economies in Africa
from the main stream of fast growth. Here, in the case of China and India, I
shall try to bring out certain specific development features which are
relevant mostly for large populous countries. These are mainly in the area
of regional imbalances and problems of backward areas -which get
increasingly bypassed by a market economy oriented growth process. Indeed,
the increasing regional imbalances observed both in China and India under
market-oriented reform, are also applicable to most other populous
countries. Similarly, in large countries, the problems of centre- state
financial relations are coming more and more into sharp focus. The "new
economic policy" in these countries asks for stability of the macro
economic balances by centralised control and at the same time looks for
micro level incentives (i.e. at the grass root) which are possible only by
increasing decentralization and private sector involvement. Here an inherent
conflict is coming out between the centralized role of the Government and
the decentralization autonomy of the provinces/states. These two features
are common in most large countries, given the diversified availability of
factor endowment unevenly distributed spatially. These problems are much
less in small economies like Hong Kong or Singapore. The wide spectrum of
diversified factor endowment also encourages predominance of any import
substitution lobby. In this respect, even the United States with its large
diversified factor endowment is not an exception where there is a very
strong lobby for the protection of domestic sector. To some respect this
applies also to some of the European countries. Therefore, in the growth
process of large populous economies there is a continuous debate on the role
of domestic investment versus foreign direct investment. The general
experience of most large countries tells that success is more visible in
those countries where domestic saving and domestic activity have largely
supplemented foreign direct investment and enterprise. The present high
saving ratios of China and Indonesia are telling examples. The recent
declining savings ratio of India is, therefore, a cause for concern among
most economists. Another special feature of large populous countries is that
they have large geographical coverages. This bring to focus the importance
of transport, communications and spatial management of investment
allocations. Also, the problem of rigidity or restriction in inter-regional
movement, adds to the transaction cost in production in these economies.
Both
in China and India a large majority of the population lives in rural areas
and is engaged in rural activities. Hence, in their developmental activity,
agriculture comes as a focal point. Finally, population policy in a populous
country also became the key development objective. China's success can be
ascribed largely because of its effective population control.
In
the pre-reform days, both in China and India top priority was given to
equity, removal of poverty, increasing the social aspects of standards of
living. This, however, was attempted in China under a total state-controlled
economy and in India with the public sector playing a dominant role along
with the market forces. Both the ecorlomies adopted a strategy of import
substitution and heavy industry growth. China over time, realized that
maintaining high standards of living is becoming difficult unless efficiency
in resources use is increased. The attempt to maintain equity through forced
saving and administered directives resulted in social unrest, which came to
a breaking point after the controversial Cultural Revolution. The key
objective of present reform in China is to bring incentives back in the
economy by increasing the role of the market with minimum changes in their
political institutions. This is defined in China as an experiment in a
socialistic market economy.
In
India, because of heavy import substitution leading to increased
inefficiency in production, the generation of a surplus for maintaining the
tempo of equity measures and social development become impossible. This led
to heavy borrowing, culminating in a balance of payments crisis. To meet the
crisis, the new economic policy in India has been initiated.
China started her new economic policy much earlier, from 1978, but experienced acceleration from 1992. Compared to China, India started very late. Although the deregulation of the India economy started in mid 80s, the new economic policy in fact came into force from June 1991. However, at the beginning of her reform process the general indicators of social development were much lower than in China. Therefore, the concerns among economists about the social cost of transition were comparatively less in China, as compared to India.
(A)
China'. Key Economic Reform Strategies
Unlike
India, China was not forced to undertake reforms by any economic, political
or social crisis. Rather, Chinese leaders, in spite of the significant
achievements in China's pre-reform era, in the elimination of mass poverty
and substantial gains in the health, education and quality of life of the
people, realised that the economy was becoming increasingly costly in terms
of supression of personal consumption and that sustaining the past strategy
will not be possible.
To
reform the economy internally, the household responsibility system was put
into effect in the countryside. Later on, in 1984, reform of the economic
system has begun in the cities. During the process of economic reform, the
Chinese Government stressed persistently on the role of commodity economy,
while promoting the market mechanism under the guideline of macro- economic
adjustment and control. Simultaneously, as part of socialist market economy
public ownership was allowed to co-exist with the market. The socialist
market economy consists of five key links such as the modern enterprise
system, unified and open market, sound macro-economic adjustment and
control, reasonable personal income distribution and multi-level social
security system.
In
order to open the economy to the outside world, as early as in 1980 four
Special Economic Zones (SEZs) namely, Shenzhen, Zhuhai, Shantou and Xiamen
were opened up. In 1984, fourteen coastal cities were opened up as a further
step. In 1985, three delta areas along the Yangtze River and Pearl River and
in the southern part of Fujian province as well as several other places were
opened up. In the following years, Hainan Island, Pudong New Area in
Shanghai, five big cities along the Yangtze River, eighteen provincial
capitals and a part of inland and border cities were opened up. These zones
were created initially as experimental stations to adjust and watch their
operations vis-a-vis open market interactions.
There are four consistent themes in the Chinese approach to reform: gradualism, partial reform, decentralization and self-reinforcement of reforms. In almost all areas of reform, implementation has been spread over time, often several years and usually after experimentation. Such experiments were carried out in designated reform areas and after the results of trials were observed, these were then spread to other parts of the country. By using the gradual approach and by not subjecting the state sector to major shocks, China has succeeded in avoiding severe social costs during its transition. China's economic reform strategy can be examined under four major heads: Agricultural reform, Rural enterprise reform, State enterprise reform and Trade liberalisation.
1. Agricultural
Reform
Agricultural
reform started with the introduction of the household responsibility system
and abolition of communes in agriculture and with this, Chinese authorities
laid a firm foundation for reforming other sectors. Prior to 1979,
agricultural production was organised according to communes that consisted
of brigades and production teams. Detailed production planning decisions
were made by higher level authorities and often did not take into account
the local conditions. Remuneration for workers was based on the total income
of the commune and was not closely linked to individual productivity.
However, farmers generally were allowed to have private plots of land and to
market their production from them at rural trade fairs.
The
inefficiency of the agricultural sector prior to the reform was reflected in
slow growth of production. To improve agricultural performance, the
Government initiated reforms in the rural areas in 1979. The size of private
farm plots was increased, diversification of production was encouraged and
rural free markets for agricultural products were allowed to grow.
Experiments were conducted with various methods of giving individuals
greater autonomy and by 1984 the household responsibility system had emerged
as the dominant arrangement. Under this system, right to use collectively
owned land was contracted out to farm households for a fixed period. The
household was responsible for meeting a share of the production teams
mandatory state procurement quotas, taxes on agricultural output and
contributions to collective services. After meeting these obligations, the
household was allowed to dispose of its output either by selling to the
state at negotiated prices or in the rural free markets.
The
household responsibility system, together with increases in the relative
prices of agricultural products, unleashed substantial productivity gains
and resulted in a diversification of agricultural production. The growth
rate of agricultural output averaged nearly 8 per cent a year during
1979-84, compared with a growth of less than 2 per cent a year in 1958-78.
However, it declined to about 4 per cent per annum during 1985-93.
2.
Rural Enterprise Reform
Since
1979, restrictions on non-agricultural activities in the rural areas have
been relaxed and enterprises in these areas have been allowed to sell their
products at market prices. As a result, a large number of individually or
collectively owned enterprises were established or expanded in townships and
villages. These township and village enterprises (TVEs) absorbed significant
amount of the surplus labour that emerged as agricultural efficiency
increased following the implementation of the household responsibility
system. Competition in input and output markets is generally tougher for the
TVEs than for state enterprises and their budget constraints are harder,
reflecting their less easy access to subsidies and credit. Consequently,
they have proved to be more flexible and more responsive to changes in
market conditions than their counterparts in the state sector. The TvEs have
made an important contribution to China's development by providing
competition for state enterprises and creating an environment for the
development of entrepreneurial expertise.
The
rapid growth of the TVEs has led to a dramatic change in the economic
landscape, particular1y in the countryside, where they were estimated to
total about 19 million and to employ more than 100 million workers in 1992
out of a total rural labour force of about 430 million. They contributed to
about half of rural GDP and accounted for about one-third of the country's
total in 1992.
3.
State
Enterprise Reform
In
the pre-reform period, State enterprises were centrally controlled via the
plan; leaving enterprise managers little or no room for initiative with
respect to production, pricing, marketing and investment. Enterprises
transferred all their surplus funds to the State, while losers were covered
by budget subsidies. Investment funds and some working balances were
provided to the enterprises through the Government budget in the form of
grants; the banking system supplied additional working capital. Wages were
paid according to a centrally approved wage scale and age was a major
determinant of wage differences among worker. Under this system, enterprises
were not held responsible for their financial results; instead, their main
responsibility was to fulfil quantitative output targets established by the
plan. Enterprise managers therefore had little incentive to improve
efficiency and productivity.
The
focus of enterprise reforms has been on increasing incentives by enhancing
the enterprise decision-making authority and by providing them with greater
financial resources, while making them more responsible for their own
profits and losses. Following some experimentation, the Government in 1983
initiated a changeover on a national scale from profit transfers to income
taxation and by 1986 profits of almost all enterprises were subject to
taxation rather than being fully remitted to the Government. Since 1986, the
Government has started to reduce interference in the day-to-day operations
of the enterprises through the introduction of contracts for large and
medium-sized enterprises. Under this contract responsibility system, targets
were specified for an enterprise over a three-or four-year period for its
performance, its production quota to the state and financial obligations to
the Government. About 90 per cent of the enterprises had signed management
contracts by 1988.
To
accompany these changes, a bankruptcy law was enacted in 1986 and become
effective in 1988, but until recently it was hardly used against state-owned
enterprises. In 1988, the authorities also enacted an Enterprise Law, which
seeks to transform the SOEs into fully autonomous legal entities that are
responsible for their own profits and losses. Detailed regulations giving
effect to the broad provisions of the law were issued in July 1992.
While
reforms contributed to a pick up in the growth of output by the state
enterprises, their share in total industrial production fell from 81 per
cent in 1978 to less than 50 per cent in 1993, reflecting the greater
dynamism of non-state enterprises and the serious problems that continue to
affect the efficiency of state enterprises. Price controls persisted,
production quotas for sale to the state remained part of the contracts, the
SOEs had access to certain quantities of cheap raw materials, credit was
readily available for investment and the budget continued to provide support
for loss-making enterprises. It shows the unfinished nature of the reforms
which is jeopardizing the macro-economic management. SOEs are contributing
to a rapid rate of credit expansion, which reflects the mounting demands on
the state budget to cover enterprise losses and low revenue buoyancy. To
address these problems, the authorities during 1991 announced some 20
measures, 12 of which were to improve the operations and external
environment of the SOEs and the others were aimed at facilitating the
operation of market forces on the SOEs. Some measures, such as reducing
mandatory planning, were a further step towards market economy.
Another
important experiment in SOEs reconstruction is the shareholding system
boosted by the establishment of stock exchanges in Shanghai and Shenzhen.
Except for large enterprise in strategic sectors of the economy such as
defence and high technology, most SOEs could eventually be converted into
shareholding companies with the State retaining a significant share.
About
70 per cent of the losses of SOEs are policy-induced, mainly because of
price control and if these enterprises are to be financially independent, it
is necessary to liberalise the prices of the goods and services they
produce.
4.
Trade
Liberalisation
Prior
to 1978, China's foreign trade was handled exclusively by 12 stateowned
foreign trade corporations (FTCs) organized along product lines. These
corporations procured and traded the quantities directed by the central plan
and all profits and losses which did not have direct access to foreign
markets were given production targets under the plan for supply to the FTCs.
Through this trade plan, balance of payments was controlled.
Under
the reforms, the FTCs were progressively given greater autonomy and made
more accountable for their operations, while the administration of the
system was decentralized and provincial authorities were given authority to
establish their own FTCs. By 1989, most local branches of national FTCs had
become independent entities responsible to the local authorities for their
financial results, bringing the number of FTCs to about 4,000.
Starting
in 1991, a number of new measures were taken to liberalize trade, in part
stimulated by China's efforts to make its trade conform to international
practices in the context of its application for re-entry into the WTO. All
direct budgetary export subsidies to foreign trade corporations were
eliminated from January 1991, and export tariffs on mineral ores were
reduced. Import duties were reduced on a number of commodities and China's
customs duty regulations were replaced with the harmonized commodity
description and coding system. In April 1992, the import regulatory duty was
eliminated and in October 1992, it was confirmed that the import
substitution regulations had been terminated. In addition, under a
memorandum of understanding with the United States, China announced its
intention to publish many internal trade regulations to increase the
transparency of the system. Other trade-related measures included a revision
of the patent law to bring it into line with international conventions and
various steps toward establishing legal conventions and practices for the
conduct of external trade.
During
the early stages of reform, various arrangements were tested for sharing
foreign exchange with the objective of improving incentives for exports. A
retention system was evolved, under which exporters surrender their actual
foreign exchange and are issued retention quotas by the State Administration
of Exchange Control (SAEC) equivalent to a portion of such earnings. Through
1990, a complex set of regulations had been developed that allocated foreign
exchange differently according to industrial type and provincial location.
In 1991, a significant simplification occurred under which a uniform
retention rate for enterprises was set throughout the country and standard
formulas were established for sharing foreign exchange between the centre
and the localities. During the early 1990s, experiments with cash retention
have been undertaken (notably in Hainan, Shanghai and Shenzhen).
In
December 1991, all domestic residents were allowed to sell foreign exchange
at the swap rate at designated branches of banks; since then, there has been
virtually no restriction on the sale of foreign exchange in the swap centres.
However, restrictions remain on purchases and for about three months in
early 1993, the authorities attempted to cap the 5Wap market exchange rate.
This effort was abandoned when it became evident that most transactions were
being driven into the black market.
With
the new exchange arrangements in 1986, the official exchange rate was in
effect pegged to the US dollar. There yere two devaluations in 1989 (21 per
cent) and 1990 (9 per cent) and in 1991, small frequent adjustments in the
official rate Nere made. By April 1993, the real effective exchange
rate of the official exchange rate had depreciated 33 per cent more than in
1986 and 70 per cent more than in 1980. The authorities have indicated that
the ultimate goal is unification of the exchange rates and convertibility of
the currency.
(8)
Indian Economic Reform Strategy
In
India there were several attempts to liberalize or reform the system of
economic management. In 1980, India began to adjust the long-pursued
economic policy which stressed on development of state-run heavy industry
and import-substitution. The main contents of the new economic policy
consisted of measures such as to relax the control on private enterprises
and foreign capital, to open industries (e.g. aluminum making, machine-tool
building, chemical industry, chemical fertilizer, electricity,
pharmaceutical etc.) which had been monopolized by the public sector, to
foreign and private capital. It also raised the proportion of private
capital in the planned investment from 45 per cent in the Fifth Five-Year
Plan (1974-79) to 46 per cent in Sixth Five- Year Plan (1981-86). India's
competitiveness had weakened because of its technological backwardness. In
order to change the situation, the Indian Government revised the policy of
import substitution to provide incentives to export and reducing the
protection on imports.
In
the 1980s, the Indian Government stressed on reorganization of low-efficient
state-run enterprises and partial disinvestments, further relaxations of the
control of private enterprises and foreign capital, introduction of a
competitive mechanism, reduction of protection for domestic industries,
promotion and importation of advanced technological equipment from abroad
etc.
In
July 1991, India had introduced a series of economic reform measures. These
measures were initiated with the purpose of macro-economic stabilization
mainly by a sharp reduction in the deficit of the public sector in the
Central Government budget. The Government continuously attempted to reduce
the ratio of fiscal deficit in GDP by reducing public expenditure,
increasing taxation, abolishing part of commodity price subsidies and a
partial privatization of public enterprises. In addition, a new trade and
industrial policy was announced. The new industrial policy abolished the
system of industrial licences, opened nine of the 17 industries which are
monopolized by the state to private enterprises, the proportion of foreign
equity was raised from 40 per cent to 51 per cent. It also eliminated
licensing requirements for private domestic and foreign investment in
certain industries and relaxed the restrictions under the Monopolies and
Restrictive Trade Practices Act on expansion, diversification, mergers and
acquisitions by large firms and industrial houses. The power sector, which
had been a monopoly of the public sector, was opened to private, domestic
and foreign investors. Regulations on pricing and distribution of steel were
lifted. Domestic and foreign investors were invited to invest in the
production, refining and marketing of oil and gas and in certain segments of
the coal industry. A National Renewal Fund was established to assist workers
who might be laid off during the process of modernizing, restructuring or
closing uncompetitive firms in the public and private sectors. The
Committees appointed by the Government to look into the functioning of the
financial sector insurance and the tax system have submitted their reports.
Another committee has formulated guidelines for the privatization of public
enterprises.
The
new trade policy deregularised export and relaxed control over import of
advanced technological equipment. In order to promote exports and link India
with the world markets, the Government has reduced tariffs many times. In
February 1993, the rupee on trade account was declared to be fully
convertible. In terms of policies related to foreign capital, the important
measures which have adopted since 1992 include: foreign institutions are
permitted to buy shares issued by Indian companies; the development of many
kinds of minerals has been opened to foreign capital in accordance with the
revised law of mineral products and India signed the convention of
protection for foreign investment.
(C)
Results of Economic Reform
In
this section, I would like to explain the diverse economic results of the
two countries over the last 14 years. The annual growth of Gross Domestic
Product (GDP) in China during 1980-92 was 10.1 per cent as compared to 5.2
per cent for India. China had a per capita Gross National Product (GNP) of
US$ 609 in 1992 compared with US$ 310 for India, with an average annual
growth rate of 7.6 per cent and 3.1 per cent respectively. In specific
sectors, especially in agriculture, the Chinese have made considerable
progress with a growth rate of 5.4 per cent compared to India's 3.2 per cent
during 1980-92. In regard to industry, China recorded an average annual
growth rate of 11.1 per cent in comparison with India's 6.4 per cent during
the same period. In the 1992-94 period, the Chinese economic growth rate has
been very high at about 13 per cent per annum. In the case of India, the
growth rate has been about 4 per cent in the same period. The annual rates
of inflation during 1980-92 was 6.5 per cent in China. In the last two years
(1992-94) the inflation rates have reached double-digit levels in China.
India's inflation rate during the same period of 1980-92 was 8.5 per cent
and has continued to be in the range of 8 per cent in the 1992-94 period.
Savings
and investment ratios to GDP have been significantly higher in China. Gross
Domestic Savings as a proportion of GDP in 1992 was 38.7 per cent for China
compared with about 23.10 per cent for India. The Gross Domestic Investment
ratios were 37.7 per cent and 23.6 per cent correspondingly. The figures for
Foreign Direct Investment (FDI) shows that China has been much more
successful than India in attracting GDI. Foreign Direct Investment in China
was about US$ 95.6 billion from 1979 to 1994. In the case of India, FDI,
which was negligible in 1991, has picked up substantially to reach a level
of US$ 3.0 billion in the period of 1991 March to 1995 June.
In
regard to foreign trade, the increase in exports and imports since 1979 has
been extremely rapid in China. In fact, China's foreign trade grew even
faster than the rest of the economy. The trade turnover rose from US$ 38
billion in 1980 to US$ 236 billion in 1994. The annual export volume in 1994
reached US$ 121 billion and the import volume was US$ 115.7 billion. India's
export, on the other hand, witnessed an average annual growth rate of 5.9
per cent during 1980-94. India's trade turnover in 1994-95 was US$ 54
billion only.
The
ratio of China's exports and imports to its GDP has also risen rapidly since
1978. In the fourteen years of reform and open door policy from 1978,
China's ratio of exports to GDP rose sharply from 5.31 per cent to 19.58 per
cent, while for India this was 5.6 per cent to 7.6 per cent. As a result of
China's phenomenal expansion in foreign trade, its share in GDP rose from 13
per cent in 1980 to a high of 37 per cent in 1991. In India, the share of
trade in GDP fluctuated within a narrow range of 18 to 20 per cent. Thus,
not only did China's exports grow faster than India's in dollar terms, they
also grew faster in relation to domestic growth. While India's share in
world exports declined from over 2 per cent in the early 1950's and
stabilised around 0.5 per cent, China more than doubled its share from 1 per
cent to 2.7 per cent between 1980-end 1994.
China-India: A Comparative
Outlook
There
is a major difference between Chinese and Indian reforms. In India,
agricultural land has always been in private hands and the organization of
production consisted overwhelmingly of small owner-operated farms. Since
Indian agriculture was never communised, it did not have to be decommunised.
Further, Indian Government has proposed no significant agricultural reforms.
Thus, the spectacular growth in output and productivity that China has
experienced since 1978 after the household responsibility system has no
counterpart in India, where the growth in total factor productivity is more
gradual. In China, production of food grains rose from 163 million tons in
1952 to 450 million tons in 1993. In India, output of food grains was 51
million tons in 1950-51 and 177 million tons in 1992-93.
The
contrasting achievements of India and China can also be seen in terms of
important social parameters which show the position of China to be better
than that of India. While life expectancy at birth in India is still as low
as 59 years, the Chinese figure is 10 years more (69 years). In fact,
mortality is two and a half times as high in India (79 per thousand live
births in comparison with China's 31). China is well ahead of India as far
as the elimination of health deprivation is concerned. Another important
area in which the contrast is extremely sharp is basic education and
literacy. In China, the proportion of rural population below the poverty in
this period, and the magnitude of reduction has been much more modest: a
fall from 55 per cent in 1977- 78 to 42 per cent in 1989-90. China has done
much better than India in this respect. This is mainly due to the high rates
of growth of output and real income in China, which have helped to reduce
poverty and to improve living conditions.
Concluding Remarks
The
economic reform processes in China and India have been marked by extensive
decentralization and deregulation, adjustments in the exchange rates,
reduction in tariffs, financial sector reforms and modernisation of
industry. In China, however, there is a distinctly discriminating
"area-based" policy where zones have been provided with faster
liberalisation measures, more favourable incentive packages and easier
access to FDI. These then act like windows to establish contact with the
rest of the world. This is warranted because China had no significant
experience in the operation of a private sector market economy. In India,
there has been only a limited effort at establishing special economic zones,
primarily oriented towards exports. Since India too was a relatively closed
economy in the pre-reform period, the successful way China has used the SEZs
to open up the rest of the economy should be a lesson for India. For, in
terms of achievements, the Chinese approach has induced a much better
response than the Indian economic reform policy.
Both
India and China have a major role to play in the future international
economic scenario. But, they face a number of similar short and long-term
economic problems. The Chinese economy is at present "overheated"
and needs to contain its inflation and prices. It also has to streamline its
centre-state relations and institutional framework for the conducive use of
indirect, market-based instruments of economic management by the Government.
India also has a problem of inflation, but in contrast to China's problems
of "too much growth", her problem is one of "too little
growth". Market-based economic management in India is in a much better
shape but it too has a centre-state problem, though of a different kind: the
problem of percolation of economic reform to the grass-roots because of some
rigidity in the constitutional allocation of funds and revenue sources
between the Centre and the States. India needs more decentralization whereas
China's central authority is trying to revive its lost control on many
provinces. Both economies have problems of building up an infrastructure
base and containing growing inequality, both spatial, and between rural and
urban areas. In the long run, China has the most challenging problem of
establishing compatibility between its reform strategy and political
structure and economic institutions. India is fortunate in this respect as
her political institutions are closely geared to a democratic market-based
system.
