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Microeconomics Case Study
Economic Superpower: The Race between China and India
Publication Year : 2010
Authors: S Chhaochharia
Industry: General Business
Case Code: MBM0023IRC
Teaching Note: Not Available
Structured Assignment: Not Available
Ever since the progress of globalisation and liberalisation were set in motion worldwide at the beginning of the 1990s, the world focus shifted to China and India. Both were among the world's fastest growing economies - China with a growth rate of 8-10% and India with a growth rate of 6-7%. The case analyses the political, economic, social and technological environment (PEST) of both the countries. The case also discusses the areas of strength and weaknesses of both the countries in the above four PEST aspects.
- To the economic background of India and China.
- To the economic reforms in India and China.
- To the differences in growth approaches.
- To the prospects of winning in the long run..
Globalisation, China, India, Global economic powers, Indian economy, Chinese economy, Chinese economic history, Economic reforms, Indian economic reforms, Chindia, Comparative picture between India and China, Civil war, Great leap forward, Economic superpower
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The International Monetary Fund (IMF), the most prestigious international financial institution in the world, has rated China's ranking to number one economic superpower in the world -- surpassing those of the United States based upon the purchasing power parity of GDP indicator (gross domestic product). IMF has asserted that China produced 17% of the world gross domestic product (GDP) in 2014 exceeding U.SA's GDP of world's 16% (1). China's economic growth performance over the last 30 years has impressed development economists who took the position that China will remain in the low/middle income group of nations permanently due to its very large population -- approximately 1.2+ billion in 2015. Moreover, China's performance has inspired other low and middle income countries to emulate China's approach and engage in growthmanship including many middle income countries of Latin America such as Brazil, Argentina, Columbia and India which also has a large population like China.
It is most likely that China will maintain its lead in economic ranking of GDP in the foreseeable future largely due to catch-up of its per capita income which is rising annually at 8%-10%. (2) Although China's GDP has converged and surpassed Untired States GDP, its per capita GDP is still below the U.S. and first world. However, China's rapid GDP growth coupled with low fertility rate (number of children per women) will boost China's per capita income to high marginal annual growth paving the way for its convergence, in less than two decades, to the level of high income countries as estimated by USC researchers (3). It follows that the GDP gap between China and other countries will further widen in the future. Moreover, the U.S. carries a heavy military burden which does not feedback to economic growth while China has avoided heavy military burden. Instead in 2014, China inaugurated a major international economic development program by financing infrastructure projects in the historical silk route countries. It is engaged in financing economic infrastructure projects in the silk route countries with positive ROI for China and the recipient countries. (4)
The genesis of China's remarkable upswing in a relatively short span of time goes back more than five decades to 1948 when China emerged an independent state after World War II upon the defeat of Japan by the United States. China's leadership was bifurcated between Chairman Mao Zedong's communist party and Chiang Kai-shek's Kuomintang regime raising concern of a pending civil war. (5)
To China's good fortune, the two leaders' views coalesced and a coalition government was formed. The absence of a civil war and the peaceful political transition of leadership largely explains the remarkable ascent of China's political and economic fortunes.
China's political system is not monolithic, or colossal, it has worked under a seven-member Politburo Standing Committee of party congress. Political leadership is elected every five years.
The second major influence that explains China's good fortune is its decision to open up to the free world and get out of the Soviet sphere of influence. It was prompted in the 1960s when President Richard M. Nixon sought reproachment with China and sent his Secretary of State Henry Kissinger to China who arranged a personal visit by President Nixon with China's leadership. The approach turned out to be very successful. It got China out of the sphere of Soviet Union's influence, paved the way for China to open up to the Western world, and the rest of the world, and eventually modify its system of political economy to a very unique system of private enterprise market economy and a one-party political system. This unique approach has turned out to be successful both politically and economically for China, and it has benefitted the rest of the world in trade, commerce and international peace. In 2014, President Barrack Obama initiated the exchange of 100,000 American students to study in China further cementing cultural and education relations between the two countries.
Following is a synopsis of China's economic, political and social framework that augur well for its continued development and leadership, and provide a blueprint for other nations to emulate.
The transition of leadership in China has been remarkably peaceful and smooth. As can be seen Deng Xiao Ping adopted market economy in December 1978. Deng Xiaoping (1978-1987) was instrumental and responsible for modernization and reform. Premier Zhu RongJi (1988-2003) paved the way for China's entry into World Trade Organization (WTO). President Jiang Zemin (1993-2003), theory of promoting business and entrepreneurial class into the country's one-party system, helped China's economic expansion. Current president Xi Jinping launched the economic development of the silk route countries, clamped down on corruption by rooting out high party members and military brass, has launched a rural development program to close distributional and development gaps, and promote social equity.
The economic innovation in China started in the early eighties beginning with Deng Xiaoping through Hujintao implementing innovative economic policies which lifted China's sluggish economy by introducing private ownership, market economy, and less governmental control contributing to robust economic performance. A succession of leadership in China including president Hu Jinping and follow-up by the current president Xi Jinping's flexible and innovative economic policy took advantage of globalization and export orientation, attracting foreign investment, and maintaining a sound monetary and fiscal policy. China became a member of the World Trade Organization (WTO) and hosted a very successful International Olympic Games.
B. INTERNATIONAL TRADE ORIENTATION.
Beginning in early 1980s, China shifted its economic strategy from self-sufficiency to export orientation. The shift was pivotal to the growth rate of China's GNP. Concurrently, China is building its domestic consumer sector so that in the future it will have a strong and well-developed domestic market. The multi-billion dollar natural gas contract with Russia in May of 2014 will be a major plus for China's energy demand. China's drive for the development of non-fossil fuel under its twelfth five-year plan could make it a world leader in energy exports and offer unmatchable prices on alternative energy in the world market contributing to convergence of per capita income of the silk rout countries.
C. GROWTH RATE PERFORMANCE.
The process of China's remaining catch-up time of per capita income to that of the first world is estimated to take place in approximately two decades. It follows that China's catch-up time with the first world would take place in five decades, starting in 1980 while it took the first world nearly 50 decades to reach its current level of per capita income. Part of the explanation is the diminishing return to capital in the first world since it is saturated with capital and return to capital has dropped. And the law of accumulation of capital due to growth rates differential between the first world's average of 2% annual growth and those of China with an annual growth range of 7%-10%. The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. (x) And its growth rate for the next couple decades may be somewhat lower than 2%. This means that there may exist 4%-6% percentage point differential in growth rates that has contributed to the rising trend of annual growth rate of China. This phenomena will continue until China's per capita income reaches within 70% level of the first world. Then its annual growth rate will conform to the first world's annual growth rate of approximately 2% per year.
D. MACROECONOMIC MANAGEMENT.
China's sound macroeconomic management was demonstrated during the Great Recession (2007-2009) when its export dropped 15% - 18% causing 23 million to become unemployed, but 98% found jobs as the economy readily bounced back and the unemployment rate dropped to 4%. This performance is in sharp contrast to a number of countries where the recession is still lingering in 2014. It is most notable that China escaped three global financial meltdowns since 1990, including the Japanese severe credit implosion, the Asian economies foreign reserve meltdown caused by capital flight due to rigidity of fixed exchange rate. The Great Recession (2007-2009) which engulfed the world economy was contagious, and China was subject to the turbulence and transmittable global meltdown -- but ironically China escaped. China's experience has drawn re-examination of the Western neoclassical paradigm concerning macroeconomic stability, and efficacy, of countercyclical measures via mini manipulation of the supply of money by the Federal Reserve Board. A better alternative for all nation states is to establish social indicator targets.
E. RENEWABLE ENEGY
China's 12th five-year plan has placed specific emphasis upon the targeted development of renewable energy to satisfy 15% of China's energy needs by the year 2025. This policy will contribute to clean air in China and prevent environmental degradation as the use of fossil fuel is substituted by renewable energy.
F. China is already the world's biggest merchant marine operator according to U.N. data. Container port data compiled by the United Nations shows. Customs administration figures show around 40,000 ships entered and left Chinese ports in the first half of 2014.
G. POPULATION POLICY.
China's one-child policy and its recent modification has been optimal given the absolute number and the possibility of population trap. Successful control of fertility rate (number of children per women) is the hallmark of optimal population and determinant of China's long-term growth potential and carrying capacity. China's prosperity is closely connected to its population policy although the age distribution of the population may pose some problems concerning productivity in the future. Its population is expected to peak to 1.5 billion by 2040 reaching zero growth rate and avoiding the population trap dilemma. No doubt, it is known that population policy in Europe in the 14th century led to the Industrial Revolution in the 18th century. Technology of industrialization from 18th century to the present created the high level of per capita income in the first world. Clearly, demographic policy affects economic development in all low- and middle-income countries.
H. POVERTY REDUCTION.
Since 1978, China has uplifted millions of peasants out of poverty and it has been the most successful country in the world in poverty reduction. China will deserve very high marks for its social indictor and distributional objectives.
Other favorable political economy policies that have made poverty reduction feasible include annexation of Hong Kong. Three-fifths of China's foreign direct investment are financed through Hong Kong, and billions of dollars of China's assets are in Hong Kong's financial institutions. Development of Growth Zones -- such as Shanghai to attract foreign investment -- and investment in human capital including all levels of education through college are among the hallmarks of growth policies in China. The above factors have given a major impetus of high growth to China since 1980, ranging in an annual growth rate of 7 to 10%. This is an unprecedented growth rate in the experience of world economy with the exception of Germany in the '20s, largely due to military buildup.
I. ANTI-CORRUPTION CAMPAIGN
Unfortunately corruption is a universal problem and once it takes roots it becomes institutionalized and penetrates the culture. Thus it becomes difficult to undo corruption. It is keenly prevalent in low- and middle-income countries. China is no exception in this regard, however, a concerted effort has been launched to bring corruption under control beginning with the effort of former president Hu Jinping and follow-up by the current president Xi Jinping. Beginning in 2012, reportedly imposing punishment occurred upon 182,000 government officials at all ranks through 2014. Several high level party members have been removed; legal cases of anti-corruption of high officials in China have been reported in the Western press with due process. Perhaps China will succeed to clean up corruption completely. The anti-corruption drive in China is serious and admirable. It is certainly instructive for other countries to adopt a policy of transparency and uproot such criminal activities.
J. UNIQUE FEATURES OF CHINA'S SOCIETY AND POLITY
Altruism, social cognition, equity, equality, egalitarian motives, public service and economic growth are the hallmark of China's leadership pronouncements. The duel system of one political party and free competitive market economy characterize China's unique socio-economic-political system. The political system is not monolithic, or colossal, it has worked under a seven-member Politburo Standing Committee of party congress. Political leadership is elected every five years. Last year 10,000 small protests were tolerated. Currently over half of China's GDP is produced by private enterprises. China's government has not been shut down due to internal political dissent of multi-party feuds. More than 250 million people have been lifted out of poverty, this is approximately 20% of the total population.
In June of 2014, China's 2,400-year-old Grand Canal, which historically linked sections of the Silk Road, was awarded Enesco heritage status, as were large portions of the ancient overland Silk Road. The 11,179 kilometer Yunxinou International Railway linking Chongqing and Xinjiang with Europe and, commonly referred to as the "New Silk Road", runs alongside many of these ancient caravan tracts.
The foregoing are indicative that China is embarking in a distinctly alternative approach of inter-governmental collaboration and connectivity to promote economic catch-up of low and middle income countries that are located in the path of silk road.
NAKE M. KAMRANY IS PROFESSOR OF ECONOMICS AT THE UNIVERSITY OF SOUTHERN CLIFORNIA, FRANK JIANG IS PRESIDENT OF A STUDENT RESEARCH ORGANIZATION - THE USC GLOBAL INCOME CONVERGENCE GROUP AND A SENIOR IN ECONOMICS AT THE UNIVERSITY OF SOUTHERN CLAIFORNIA.
1. International Monetary Fund, www.imf.org. Data Base, world economic outlook, GDP, 2014.
2. Kamrany, Nake M. and George Milanovic, "China's growing economic strength in the 21st century," Huffington Post, 11/17/2011, also see: NAKE M. KAMRANY and FRANK JIANG, CHINA'S INNOVATIVE PARADIGM - SHARING GLOBAL PROSPERITY - THROUGH CONNECTIVITY OF THE SILK ROUTE COUNTRIES , Huffington Post, September 4, 2014 2014
3. Ibid. Also, see: Kamrany, Nake M, 'China's Rapid Recovery in the Great Recession of 20o7-2009,' Huffington Post, 2/11/2011.
4. THE SILK ROAD Economic Belt Construction and Future: 12 countries Think Tank Forum, Proceedings of Conference, Renmin University of China (RUC), Beijing, China, June 27 - 28, 2014- http"//RDCY2013-SF.RUC.EDU.CN
5. Richard Bernstein, China 1945 Mao's Revolution and American's Fateful Choice. N.Y.: Alfred A. Knopf, 2014.
6. Fan, S, ET. Al, "The Economics of China: Successes and Challenges, "NBER, Working Paper No. w19648 for link go to firstname.lastname@example.org National Bureau of Economic Research (NBER)
7. Waggle, S. at al, "Integrating Border Regions and Connectivity and Competition in South Asia," World Bank Paper No. 6907, Economics Research Network