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special article
Economic & Political
Weekly
 
EPW
january 24, 2009
41
chn nd ind: convgn n eonom Gowhnd so tnon?
Nirmal Kumar Chandra
Do the economic policies or the “business model”adopted by China and India necessarily aggravateinequalities in income and wealth distribution, and thusexacerbate social contradictions? While not providing adefinitive answer, the article examines the risingconcentration of income and wealth, the trends inpoverty, employment and unemployment, the natureand extent of social unrest, and how the rich are gettingricher, aided by fiscal sops, and outlines a feasiblealternative centred on development with equity.
I am grateul to Sushil Khanna or many useul discussions and to RajaniDesai or comments on an earlier drat.Nirmal Kumar Chandra (
nirmal@iimcal.ac.in
) retired as a teacher ineconomics rom the Indian Institute o Management, Calcutta.
N
early 60 years ago India and China embarked on planneddevelopment o their economies. The ormer opted or amixed economy with a pivotal role or public enterprisesin critical sectors, while there were minimal reorms in the agra-rian set-up dominated by eudal or semi-eudal landowners.China adopted the socialist model o industrialisation accompa-nied by radical land reorms leading to collectivisation. In 1978China changed track in avour o a “socialist market economy”,de-collectivisation o agriculture, and an “open door” or oreigntrade and investments. India in 1991 dismantled a very large parto the previous regulatory regime and moved towards reer tradein goods and services and ever ewer controls on cross-bordercapital ows.In recent years there has been a major expansion in two-way trade and investments between the two countries. Their “businessmodels” appear to resemble each other ever more. Thanks to high-speed growth over two or three decades, they have become thenew paradigms in the international media ater the collapse o theeast Asian miracle in 1997. China has emerged as the manuac-turing hub o the world. Not only have their frms captured largeslices o the world market in textiles, ootwear, light engineeringand so on, but even in high value-added areas o electronics, tele-communications and machinery, they have marked their presence,oten with the help o multinationals rom industrial countries.India’s domestic manuacturers successully weathered thestorm o liberalisation in 1991, dispelling the Washington-inspired myth o their inefciency. Actually, the producers notonly kept “competing” imports at a low level, but also began toexport on a larger scale than beore in medium- to hi-tech areas.Over the past ew years they have been oating their shares in western stock exchanges and acquiring some renowned westernfrms. However, India’s major breakthrough has been in inorma-tion technology (
IT
) and
IT
-related services like sotware deve-lopment, “business process outsourcing”, etc. Initially, Indianstook advantage o the low labour costs here to seize opportunitiesthat opened up with the
IT
revolution in the
US
. Over the yearsthe established frms and start-ups moved into ever more com-plex areas o sotware engineering.The rise o China in the “hardware” o manuacturing, andthat o India in the sotware segment have worried many in the west who apprehend a loss o America’s position, not only inmanuacturing, but also as the world’s “innovation capital”. A goodpart o America’s highly skilled “knowledge workers” may becomeredundant as the global frms in their drive to reduce costs relo-cate their research and designing activities in low wage countries.
 
special article
january 24, 2009
EPW
 
Economic & Political
Weekly
42
Much o what has just been stated is common knowledge andthere is no need to substantiate them at length. But there isanother side to the saga o development. When a nation is recog-nised by the rest o world as an important player in the globaleconomy, its citizens generally eel proud and appreciative o theState policies. The media in India and China has highlighted theachievements. Yet public opinion polls reveal a cleavage thatrarely gets attention. There are many signs o acute, i notincreasing, social tension in both countries. This leads to animportant question. Do the economic policies or the “businessmodel” adopted by the two countries necessarily aggravateinequalities in income and wealth distribution, and thus exacer-bate social contradictions? This paper does not provide a defni-tive answer, but examines some o the “growth-oriented”measures and speculates on an alternative path.Section 1 highlights the comparative growth rates in the twocountries and explores the imperatives behind the reorm in eachcase. India and China not only diered in the “initial” (pre-reorm)conditions, but also in the nature o macroeconomic policy con-straints ater the reorm. Yet both pursued broadly neoliberalpolicies with a similar, though ar rom identical, outcome inmany spheres. Section 2 provides evidence on the rising concen-tration in income and wealth in the two countries. In the nexttwo sections we take up the trends in poverty, and in employ-ment and unemployment. The nature and extent o social unrestis explored in Section 5. The analytical side o the story, namely how the rich are getting much richer with considerable help romthe fscal authorities is explored in Section 6. Next, I look critically at the logic behind fscal concessions. Some alternatives areoutlined in the fnal section.
1 Gowh r nd rfom imv
To comprehend why reorms were undertaken, it is useul to look at the growth story. I use
GDP
per capita at purchasing powerparity (
PPP
) rom 1952 to 2005, all at constant prices o 2000,taken rom the widely used Penn World Tables (
PWT
) version 6.2. As against the ofcialdata or China, thereare substantial revisionsor the years prior to1980 when the country began to use the
UN
sys-tem o national accounts; as India ollowed consistently the
UN
 system, her ofcial statistics were used in
PWT
with minorchanges. However, the base year (1952) estimate in
PWT
or Chinaindicating a per capita income barely 40% o India’s, was hardly credible. The revision proposed by Maddison and Wu (2006)putting them at par, seems much more plausible. Both series arepresented in Table 1. Following Maddison and Wu, China took asmall lead over India by 1978, and the gap widened since then; by 2003 China was almost 2.5 times richer. Further, vis-à-vis the
US
,India’s per capita income stood at 6.3% in 1952, 6.0% in 1978, and8.6% in 2003, according to
PWT
. One may draw the ollowingconclusions. (a) China’s growth all through the years, beore andater the 1978 reorm, was greater than that o India. (b) Indiamanaged to grow at almost the same rate as the
USA
during1952-78, a period oten called the “golden age o capitalism” inthe west. Even China ailed to “catch up” with the
US
over thisperiod. (c) Growth accelerated ater the reorm o 1991 in India,and ater 1978 in China.What could be the rationale behind China’s reorm? It can beexplained by “economic imperatives” to a considerable extent.Her industries had developed along the Soviet lines with new actories coming up with technologies modifed only at themargin. The drawback with this “extensive” growth was that agreat deal o scarce raw materials and uel were “wasted” inproduction, compared to the prevailing standards in the west.Owing to a superabundance o resources the Soviets could ignorethe problem or a long time. But China is poorly endowed, andcould ace an acute shortage o resources i she continued withthe old pattern or another couple o decades. It ollowed that sheneeded huge imports o western technology and equipment justto maintain the tempo o growth. In the 1970s and 1980s the
USSR 
 also elt the same need, took big loans rom western banks, andell into a debt trap rom which it could not recover. The Chineseleaders scrupulously stuck to the Mao-era policy o national sel-reliance and decided to fnance import through additional export.Geopolitical developments oered an unexpected opportunity.By the early 1970s, Sino-Soviet hostility aggravated, reaching apoint o no return. At the same time, the Vietnam war stretched
US
military capability to its limits, heightened by a vigorous do-mestic opposition to the war. President Nixon came to meet Maoin Beijing in 1972, laying the oundation or a de acto Sino-Amer-ican entente against the Soviets. As the experience o post-war“miracle” economies o west Europe, and later o Japan, SouthKorea and Taiwan show, the key actor in their success was
accesswithout reciprocity
to the
US
market or export, and to import o 
US
technology and equipment or the modernisation o industries(Chandra 2004). Just as the
US
was earlier eager to oster theeconomic growth o her strategic allies as a bulwark against the
USSR 
(and China), in the new situation China became the benef-ciary. It was in this context that Deng’s “open door” policy took shape with its stress on export o Chinese manuactures and im-port or modernisation (Chandra 2005).While the
US
support was crucial, China never surrendered herpolitical or economic sovereignty. In oreign trade a neutral orpositive balance was maintained all through, to pay or a rising volume o import. To acilitate export, central allocation o resources to frms had to be altered drastically to enable thelatter to seize opportunities abroad; hence an increasing role orthe market orces became unavoidable. Since export prospects were brightest in textiles and light engineering, businessmenrom the Chinese diaspora in south-east Asia who had capturedlarge slices o the market in the west during the cold war era, hadto be coaxed to operate rom China. That explains why the over- whelming bulk o oreign direct investment (
FDI
) into the country  was export-oriented and came rom these sources. For
FDI
cater-ing to the domestic market in high- or medium-tech areas, China welcomed western multinationals, provided they entered (as aminority partner) in a joint venture (
JV
) with state-owned enter-prises (
SOE
), and helped the Chinese personnel to assimilate ully the new technologies. Over the years many restrictions were
tabl 1: inda and chna: th rao of GDpp caa a ppp
1952 1978 1990 2003
PWT 2.43 1.97 1.13 0.6Maddison and Wu 1.00 0.91 0.69 0.42
Source: Heston (2008).
 
special article
Economic & Political
Weekly
 
EPW
january 24, 2009
43
removed as the
SOE
s began to prove their mettle in oreign mar-kets (Chandra 1999). Nevertheless, even ater joining the WorldTrade Organisation (
WTO
) in 2002, China has an aggressive in-dustrial policy. I shall cite just three examples. In telecom Chi-nese frms are now in the oreront globally and have establishedtheir own standards or 3G telephony. Most automobiles in Chinatill recently were produced in
JV
s with leading western andJapanese multinationals, and the latter used China’s cheap labourto ship back the output to their domestic markets; now Chinesecars are launched in global markets. Power generating equip-ment, that used to be imported in large quantities in the 1990s, isnow exported rom China.On the Let, Hinton (1990), an eminent, though critical, ob-server and chronicler o the Cultural Revolution, characterisedDeng’s open door policy as a “great reversal”. He castigated thedismantling o the communes, Deng’s trickledown theory (letsome people get rich frst, others will beneft later), and the entry o oreign direct investment (
FDI
) that would necessarily re-create a comprador class as in pre-revolutionary China. Whetheror not collective agriculture can survive in a market economy isproblematic, though the thriving commune in Nanjye hasattracted nation-wide attention (Liu 2008). On the trickle downtheory, the evidence presented in later sections sharply contra-dicts it. On the other hand, some Let leaders within the Chineseparty wrote to President Hu in October 2004, admitting that“there have been gains economically in the past 26 years o re-orms and opening up, [but] the price or these moves has beenenormous” (Letter 2004). They did not call or a return to thepre-reorm system. As or the re-emergence o a comprador class, there is somecorroborative evidence. Foreign owned frms account or the bulk o China’s exports. In a large swathe o Chinese industries suchfrms have a dominant position in the domestic market. Overall,the private sector, more precisely the non-state frms, accordingto a widely quoted
OECD
(2005) survey, account or more thanhal the industrial output; the share o oreign frms is large. Asagainst this, the American
 Business Week
(2005) had a number o reports comparing India and China; one was captioned: “TheState’s Long Apron Strings: China’s multinationals, powerul asthey seem, are still beholden to the Party. That’s both a blessingand a burden.” The companies listed were Lenovo, Haier, MaytagCorp,
CNOCC
, Huawei Technologies and
ZTE
. The German publi-cation
 Der Spiegel
(2007) in a provocative piece, “Red China, Inc”described how the State Council (Cabinet) and agencies under it,especially the planning agency, the National Development andReorm Commission in Beijing, have played a key role in super- vising over the entire gamut o economic policies and closely monitor the perormance o all major
SOE
s, acting as “the centralnervous system”. When Hart-Landsberg (2008) asserts that theaccumulation process in China is “now dominated by private(proft-seeking) frms, led by oreign multinationals, whose pro-duction is largely aimed at markets in other (mostly advancedcapitalist) countries”, the author is plainly wrong on severalcounts. One, he ignores “Red China, Inc”. Two, China’s own in-dustrial policy, backed by enormous outlays on
R&D
fnanced by the state, the state-owned banks and the
SOE
s, is again passedover. Three, Geng Xiao (2004) showed that a good part o 
FDI
in-ows into China was hardly “oreign”; the percentage o round-tripping by Chinese
SOE
s in
FDI
inows stood somewhere be-tween 26% and 54% in the early years o the century. China’scentral bank reported, according to Reuters, that one-hal o 
FDI
 into China in 2004-05 was owing to round-trips by domestic frmsthrough Hong Kong and the Caribbean o-shore centres to availo tax-breaks (
The Hindu Business Line
, 10 August 2005). In short,
FDI
may not mean “oreign capital” in the usual sense. Four,China’s
SOE
s are buying up some o the iconic western frms. Five,China’s oreign exchange reserve is now so large ($1.9 trillion)that the
US
depends on China’s goodwill in many spheres. Forinstance, Fanny and McKay, the housing mortgage frm, wasnationalised in the wake o the recent fnancial crisis by PresidentBush under Chinese pressure, according to several reports, As or India, there was no compulsion behind the reorms. Themyopic political leadership o both Congress and the coalition o opposition parties that ruled rom 1985 to 1991 allowed the fscaland external payments situation to deteriorate. In both respects acrisis could be easily averted with minor changes in the fscalregime, and temporary control over imports. Yet, ignoring itspre-poll maniesto the newly elected Congress government ap-proached Washington or a bailout, and a package o economicreorms was mandated. Indeed, no signifcant section in Indiahad called or such reorms, and big business in particular wasinitially lukewarm, i not hostile. However,
GDP
growth didaccelerate a ew years later, and many industries progressed, asnoted earlier. How ar the reorm as such made any positive con-tribution is open to question that cannot be discussed here. Onone point there is no doubt. The new regime, by privileging or-eign capital, especially capital ows into the stock market, haslost a great deal o autonomy in policymaking, and the country remains perennially vulnerable thanks to unabated fscal defcitsand reliance on capital inows.
2 inqu of inom nd Wh
Since the turn o the century there has been a growing concernabout the excessive concentration o income and wealth in mostcountries and at the global level. One may cite among many othersthe studies by Milanovich (2002), and by Davies et al (2006) rom
WIDER 
. These are based on household income surveys or devel-oping countries and income tax returns in industrial countries,and all point to a rising Gini coefcient, currently at above 0.4 –generally reckoned as a “danger” mark or social stability, inmany countries. A dramatic picture emerges i one looks at the top o the pyramid. As part o globalisation, world fnancial markets are getting moreand more integrated. Global Asset Management Companies(
 AMC
) have sprung up to help clients, rich individuals and frms,move their fnancial assets rom one location to another to mini-mise tax payments. Boston Consulting Group, a leading frm,estimated that the global wealth o the “auent” individuals(minimum assets o $100,000) and large frms in dierent coun-tries rose in $ trillion rom 85.3 to 97.9 between 2004 and 2006.(www.bcg.com). No country-wise break-up is available. The totalmay be contrasted with the
CIA
estimate o world
GDP
(at the
of 00

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