A Tale of two Economies: China and India
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By any measure, China and--more recently--India are striking economic success stories. A few decades ago, both countries were clearly among the world's poorest countries; now they are among the world's fastest-growing economies and are responsible for nearly all the recent global progress in poverty reduction.
In 1978 per capita GDP in India was $1,255--lower than the average for Sub-Saharan Africa, which stood at $1,757. Since then it has climbed steadily upward, reaching $2,732 in 2003. Even more spectacularly, China's GDP per capita, which stood at $1,071 in 1978, jumped to $4,726 in 2003. China's GDP per capita growth rate is almost double that of India. ..India also achieved a downward trend in poverty, although the outcomes were not as dazzling as in China. According to official estimates, rural poverty in India dropped from 50 percent in 1979-80 to 27 percent in 1999–2000, the latest year for which data are available. Together these two countries accounted for a substantial drop in global poverty levels, from 29.6 percent of the world's population in 1990 to 23.2 percent in 1999.
Less well known than their recent blistering economic performance, however, is the role that agriculture has played in the transformation of these still heavily rural and agricultural countries. In China agricultural reforms were the starting point for economic liberalization--in other words, reforms began in the sector where the majority of poor lived, and they were largely the beneficiaries of reform--whereas in India reforms started with macroeconomic adjustment and trade and industrial policy, areas that did not benefit most of the poor. The reform experiences of China and India--similar in some ways and different in others--shed light on the enormous potential for investments and policies in support of pro-poor agricultural and rural growth to fight poverty and malnutrition in developing countries.
Reforms in China and India
Reforms that directly strengthened agriculture were a major factor in China's economic growth and poverty reduction. Between 1978 and 1989, China underwent two distinct phases of agricultural reform, which first decentralized agricultural production through the household responsibility system, giving farmers much more leeway to decide what and how much to grow, and then liberalized the systems for pricing and marketing agricultural goods. Reported agricultural production growth immediately shot up, from 2.6 percent a year during 1966–76 to 7.1 percent a year during 1978–84. As a result of the dramatic growth in agriculture, rural people found their incomes rising by 15 percent a year between 1978 and 1984.
But perhaps one of the most striking results of China's agricultural reforms was that they led to the creation of a whole new economic sector that became the most dynamic in China's economy: the rural non-farm sector -- the small-scale food-processing plants, machinery repair shops, and increasingly more modern and technology intensive industries that cropped up to meet growing demand among increasingly well-off farmers and to employ the millions of people whose labor was no longer needed on farms. Indeed, the whole structure of China's economy shifted. Whereas agriculture provided more than half of the country's GDP in 1952, it fell to 14 percent in 2004. Over the same period, the rural non-farm sector went from providing almost none of GDP to more than one-third.
The story of agriculture in India is somewhat different. During the 1960s and 1970s, the Green Revolution, in which Indian farmers adopted new high-yielding varieties of wheat and rice, led to dramatic leaps in agricultural production and raised farmers' incomes. Production gains from Green Revolution technologies continued through the mid-1980s and then slowed sharply. In the 1970s India had adopted subsidies for agricultural inputs, such as fertilizers and electricity for pumping irrigation water, and these subsidies grew to help maintain agricultural production but started placing a strain on government budgets.
Beginning in 1991 India instituted a series of sweeping macroeconomic reforms. Although these initial reforms were not directed toward agriculture, they helped stimulate a rise in agricultural growth by generating greater demand for a wide range of agricultural products and by leading to increased private investment in agriculture. From 1991-92 to 1996-97, agriculture grew at an annual rate of 4.1 percent and rural poverty fell only from 39.1 percent in 1987-88 to 27.1 percent in 1999-2000. After the government opened the agricultural sector to international trade in the face of falling world prices of most agricultural products during the late 1990s, agricultural growth slowed again, averaging 2 percent between 1999-98 and 2003-04. Various studies have shown that whenever there is higher agricultural growth, there is greater poverty reduction in rural areas.
Now further steps are needed in India to again stimulate strong agricultural growth, including investments in roads, irrigation, and other infrastructure, improvements in education, and greater emphasis on growing high-value agricultural goods like fruits and vegetables instead of only cereals.
Lessons from China and India
What can we learn from the process of economic reform in these two countries? Does the sequencing of reforms matter? What lessons do the experiences of China and India offer for other developing countries and countries in economic transition? What could China and India learn from their own as well as each other's experiences?
1. To Reduce Poverty Faster, Begin with Agricultural Reforms
By launching market-oriented reforms in agriculture, China was able to ensure that economic gains were widespread and thus build consensus for the continuation of reforms. Besides, prosperity in agriculture favored the development of rural non-farm activities, which, by providing additional sources of income beyond farming, were one of the main factors behind China's rapid poverty reduction after 1985.
In India, on the other hand, even though overall economic growth was high, it is clear that slower growth in agriculture was the major reason behind the slower poverty reduction. Prompted by macroeconomic imbalances, India's reforms began with macroeconomic and non-agricultural policy changes. The reforms led to impressive rates of economic growth in the 1990s, but since reforms were largely focused on the non-agricultural sectors, they had limited impact on poverty reduction.
2. Make Reforms Gradually and Carefully
At the outset of reforms in China, policymakers withdrew central planning…They first created the incentives and institutions required by the market economy; then, in the mid-1980s, they began to open up markets. Studies show that the incentive reforms--in the form of greater land use rights, decentralized agricultural production management through the household responsibility system, and rises in procurement prices--from 1978 to 1984 had a greater impact on growth than did market liberalization reforms per se after 1984. Incentive reforms in China allowed markets to emerge gradually, so unlike other countries in transition, China did not experience a sudden collapse of central planning in the absence of market-based allocative mechanisms.
Instead of following a predetermined blueprint, they adopted new measures through experimentation--in the words of Deng Xiaoping, "crossing the river while feeling the rocks." Each new policy was field-tested and determined to be successful in selected pilot districts before the policy was applied nationwide and the next measure introduced.
India's quite different experience also supports this assertion. India's reforms in the agriculture sector began with agricultural trade reforms, despite the fact that the incentive structure of Indian agriculture was highly distorted; the sector was, and still is, burdened with excessive regulations on private trading and most market activities. The liberalization of agricultural trade policies in the mid-1990s, coming before incentive and market reforms in the domestic arena, created a series of imbalances. Lowered protection against a backdrop of low international prices increased agricultural imports in the late 1990s and led to an unprecedented accumulation of food-grain stocks at home.
3. Reform Incentives before Opening Markets
China's experience with marketing reforms can be valuable for other economies transitioning from a centrally planned to a market system. Policymakers embarking on the reform path should first increase incentives for production and build the institutions needed to operate efficiently in a market economy before rushing to open up markets.
In a situation of food oversupply and liberalization of agricultural trade, farm support policies geared toward self-sufficiency lose their original rationale. In India minimum support prices and input subsidies, initially intended to encourage the adoption of new technologies and fuel agricultural growth, increasingly turned from incentives into inefficient and costly income-support interventions. It is clear that once support measures have completed their function, they need to be abolished. Otherwise they lead over time to inefficiencies and the crystallization of vested interests, resulting in the slowing of growth and poverty reduction.
One…important area is the strengthening of the network of support services for small farmers related to information, credit, and extension. India seems to be better off than China in these areas, particularly with regard to the institutional infrastructure of rural credit and marketing, although the reach of its services may not be perfect. The Indian experience shows that smallholder agriculture needs strong institutional support in these areas to grow and prosper.
In terms of trade liberalization, both countries made progress in reducing protection levels, but the weighted average tariff in India, at 29 percent, is almost double China's 16 percent. If India is to attain the target of 8 percent growth in GDP, it may do well to follow through with reforms to foreign direct investment in view of their potential to transfer know-how, managerial skills, and new technologies. China can offer valuable lessons in this regard.
The inevitable restructuring and adjustments involved in opening up agricultural trade flows will produce both winners and losers. Domestic producers of crops for which the country lacks a comparative advantage (such as edible oils in India and wheat and maize in China) are likely to suffer increasingly from falling prices induced by an increase in imports. In addition, broad-based structural adjustments in the economy may depress rural incomes and increase opportunities (!) in the manufacturing and service sectors, located primarily in urban areas. These intersectoral adjustments are likely to result in a reduction in the size of the primary sector, which will release additional unskilled labor into the labor markets. The rural population will gain if it is able to shift to more profitable off-farm occupations. Investment in rural education will be crucial in increasing farmers' ability to move out of farming.
Membership in the World Trade Organization (WTO) can provide useful external pressure to improve efficiency and implement reforms... where markets are regarded as inefficient because of either government intervention or lack of infrastructure. The implementation of the various agreements under the WTO can facilitate the role of the government in providing services related to information, marketing facilities, technical assistance, and laws and regulations related to standards and quality control. Lastly, the WTO offers an opportunity for China and India to join hands and create a third bloc of countries besides the European Union and the United States in trade negotiations.
4. Improve Health, Education, Infrastructure, and Land Use at an Early Stage
After the start of reforms, both countries recorded a slowdown in the advancement of health and education. In India this was primarily due to the fiscal discipline imposed by the macroeconomic crisis, whereas in China market-oriented reforms introduced the logic of profit into the management of social services.
China had... made more progress on rural infrastructure than India. In India rural infrastructure did not receive as much attention, particularly in the rural power sector, and thus rural electrification and the establishment of telecommunications connections proceeded more slowly in Indian villages. This slow pace severely affected the growth of agro-processing and cold storage in the rural non-farm sector. It is no wonder, therefore, that the levels of processing in Indian agriculture remain abysmally low.
In China the egalitarian access to land ensured by the land distribution and tenure system performed a crucial welfare function, providing the bulk of the rural population with access to a basic means of subsistence and limiting the number of landless. In India, on the other hand, land reforms to make the agrarian structure more equitable after independence were not as successful and left a relatively large number of landless agricultural laborers exposed to the negative consequences of unemployment...so marginal and landless farmers will require a strong social protection system involving well-targeted social security and employment policies.
Conclusion
A number of factors help to explain the difference in growth during the pre-reform era: initial conditions, the sequencing and pace of reforms, and the political system, institutions, and regulatory environment. Yet special mention must be made of the fact that China and India achieved remarkable development and growth even as aid as a percentage of GDP in the two countries remained low. This is in direct contrast to most other developing countries and regions, where aid is much higher but commensurate development and poverty reduction outcomes have not been realized.
Both countries now face tremendous challenges on the path to further prosperity. Continued growth is a must, owing to pressure from population growth and the need for employment. Given the high expectations of their citizens, the lack of growth or even slower growth could lead to unrest in both countries. The limited natural resource base can be a critical constraint to growth. The future economic growth of both countries increasingly depends on imports of energy, for which future prospects are uncertain. Both countries are also among those most severely affected by water shortages. Consequently, future growth must be based on higher efficiency and will require China and India to invest in science and new technologies to harness energy and water, optimize their economic structures for allocative efficiency, and reform their fiscal, financial, banking, and insurance systems. Both countries must also pursue more pro-poor growth, which is not only a development objective in itself, but also a precondition for future growth in the long term.
China and India can both gain tremendously by learning from each other, as both nations still face a long road ahead. The dragon has attained height and the elephant is starting to gather momentum, but both need to address their weaknesses and build on their strengths in order to achieve their national goals and fulfill the aspirations of their people. The lessons learned from the experiences of China and India are also of relevance to other developing countries and the fight against global hunger and poverty.
By any measure, China and--more recently--India are striking economic success stories. A few decades ago, both countries were clearly among the world's poorest countries; now they are among the world's fastest-growing economies and are responsible for nearly all the recent global progress in poverty reduction.
In 1978 per capita GDP in India was $1,255--lower than the average for Sub-Saharan Africa, which stood at $1,757. Since then it has climbed steadily upward, reaching $2,732 in 2003. Even more spectacularly, China's GDP per capita, which stood at $1,071 in 1978, jumped to $4,726 in 2003. China's GDP per capita growth rate is almost double that of India. ..India also achieved a downward trend in poverty, although the outcomes were not as dazzling as in China. According to official estimates, rural poverty in India dropped from 50 percent in 1979-80 to 27 percent in 1999–2000, the latest year for which data are available. Together these two countries accounted for a substantial drop in global poverty levels, from 29.6 percent of the world's population in 1990 to 23.2 percent in 1999.
Less well known than their recent blistering economic performance, however, is the role that agriculture has played in the transformation of these still heavily rural and agricultural countries. In China agricultural reforms were the starting point for economic liberalization--in other words, reforms began in the sector where the majority of poor lived, and they were largely the beneficiaries of reform--whereas in India reforms started with macroeconomic adjustment and trade and industrial policy, areas that did not benefit most of the poor. The reform experiences of China and India--similar in some ways and different in others--shed light on the enormous potential for investments and policies in support of pro-poor agricultural and rural growth to fight poverty and malnutrition in developing countries.
Reforms in China and India
Reforms that directly strengthened agriculture were a major factor in China's economic growth and poverty reduction. Between 1978 and 1989, China underwent two distinct phases of agricultural reform, which first decentralized agricultural production through the household responsibility system, giving farmers much more leeway to decide what and how much to grow, and then liberalized the systems for pricing and marketing agricultural goods. Reported agricultural production growth immediately shot up, from 2.6 percent a year during 1966–76 to 7.1 percent a year during 1978–84. As a result of the dramatic growth in agriculture, rural people found their incomes rising by 15 percent a year between 1978 and 1984.
But perhaps one of the most striking results of China's agricultural reforms was that they led to the creation of a whole new economic sector that became the most dynamic in China's economy: the rural non-farm sector -- the small-scale food-processing plants, machinery repair shops, and increasingly more modern and technology intensive industries that cropped up to meet growing demand among increasingly well-off farmers and to employ the millions of people whose labor was no longer needed on farms. Indeed, the whole structure of China's economy shifted. Whereas agriculture provided more than half of the country's GDP in 1952, it fell to 14 percent in 2004. Over the same period, the rural non-farm sector went from providing almost none of GDP to more than one-third.
The story of agriculture in India is somewhat different. During the 1960s and 1970s, the Green Revolution, in which Indian farmers adopted new high-yielding varieties of wheat and rice, led to dramatic leaps in agricultural production and raised farmers' incomes. Production gains from Green Revolution technologies continued through the mid-1980s and then slowed sharply. In the 1970s India had adopted subsidies for agricultural inputs, such as fertilizers and electricity for pumping irrigation water, and these subsidies grew to help maintain agricultural production but started placing a strain on government budgets.
Beginning in 1991 India instituted a series of sweeping macroeconomic reforms. Although these initial reforms were not directed toward agriculture, they helped stimulate a rise in agricultural growth by generating greater demand for a wide range of agricultural products and by leading to increased private investment in agriculture. From 1991-92 to 1996-97, agriculture grew at an annual rate of 4.1 percent and rural poverty fell only from 39.1 percent in 1987-88 to 27.1 percent in 1999-2000. After the government opened the agricultural sector to international trade in the face of falling world prices of most agricultural products during the late 1990s, agricultural growth slowed again, averaging 2 percent between 1999-98 and 2003-04. Various studies have shown that whenever there is higher agricultural growth, there is greater poverty reduction in rural areas.
Now further steps are needed in India to again stimulate strong agricultural growth, including investments in roads, irrigation, and other infrastructure, improvements in education, and greater emphasis on growing high-value agricultural goods like fruits and vegetables instead of only cereals.
Lessons from China and India
What can we learn from the process of economic reform in these two countries? Does the sequencing of reforms matter? What lessons do the experiences of China and India offer for other developing countries and countries in economic transition? What could China and India learn from their own as well as each other's experiences?
1. To Reduce Poverty Faster, Begin with Agricultural Reforms
By launching market-oriented reforms in agriculture, China was able to ensure that economic gains were widespread and thus build consensus for the continuation of reforms. Besides, prosperity in agriculture favored the development of rural non-farm activities, which, by providing additional sources of income beyond farming, were one of the main factors behind China's rapid poverty reduction after 1985.
In India, on the other hand, even though overall economic growth was high, it is clear that slower growth in agriculture was the major reason behind the slower poverty reduction. Prompted by macroeconomic imbalances, India's reforms began with macroeconomic and non-agricultural policy changes. The reforms led to impressive rates of economic growth in the 1990s, but since reforms were largely focused on the non-agricultural sectors, they had limited impact on poverty reduction.
2. Make Reforms Gradually and Carefully
At the outset of reforms in China, policymakers withdrew central planning…They first created the incentives and institutions required by the market economy; then, in the mid-1980s, they began to open up markets. Studies show that the incentive reforms--in the form of greater land use rights, decentralized agricultural production management through the household responsibility system, and rises in procurement prices--from 1978 to 1984 had a greater impact on growth than did market liberalization reforms per se after 1984. Incentive reforms in China allowed markets to emerge gradually, so unlike other countries in transition, China did not experience a sudden collapse of central planning in the absence of market-based allocative mechanisms.
Instead of following a predetermined blueprint, they adopted new measures through experimentation--in the words of Deng Xiaoping, "crossing the river while feeling the rocks." Each new policy was field-tested and determined to be successful in selected pilot districts before the policy was applied nationwide and the next measure introduced.
India's quite different experience also supports this assertion. India's reforms in the agriculture sector began with agricultural trade reforms, despite the fact that the incentive structure of Indian agriculture was highly distorted; the sector was, and still is, burdened with excessive regulations on private trading and most market activities. The liberalization of agricultural trade policies in the mid-1990s, coming before incentive and market reforms in the domestic arena, created a series of imbalances. Lowered protection against a backdrop of low international prices increased agricultural imports in the late 1990s and led to an unprecedented accumulation of food-grain stocks at home.
3. Reform Incentives before Opening Markets
China's experience with marketing reforms can be valuable for other economies transitioning from a centrally planned to a market system. Policymakers embarking on the reform path should first increase incentives for production and build the institutions needed to operate efficiently in a market economy before rushing to open up markets.
In a situation of food oversupply and liberalization of agricultural trade, farm support policies geared toward self-sufficiency lose their original rationale. In India minimum support prices and input subsidies, initially intended to encourage the adoption of new technologies and fuel agricultural growth, increasingly turned from incentives into inefficient and costly income-support interventions. It is clear that once support measures have completed their function, they need to be abolished. Otherwise they lead over time to inefficiencies and the crystallization of vested interests, resulting in the slowing of growth and poverty reduction.
One…important area is the strengthening of the network of support services for small farmers related to information, credit, and extension. India seems to be better off than China in these areas, particularly with regard to the institutional infrastructure of rural credit and marketing, although the reach of its services may not be perfect. The Indian experience shows that smallholder agriculture needs strong institutional support in these areas to grow and prosper.
In terms of trade liberalization, both countries made progress in reducing protection levels, but the weighted average tariff in India, at 29 percent, is almost double China's 16 percent. If India is to attain the target of 8 percent growth in GDP, it may do well to follow through with reforms to foreign direct investment in view of their potential to transfer know-how, managerial skills, and new technologies. China can offer valuable lessons in this regard.
The inevitable restructuring and adjustments involved in opening up agricultural trade flows will produce both winners and losers. Domestic producers of crops for which the country lacks a comparative advantage (such as edible oils in India and wheat and maize in China) are likely to suffer increasingly from falling prices induced by an increase in imports. In addition, broad-based structural adjustments in the economy may depress rural incomes and increase opportunities (!) in the manufacturing and service sectors, located primarily in urban areas. These intersectoral adjustments are likely to result in a reduction in the size of the primary sector, which will release additional unskilled labor into the labor markets. The rural population will gain if it is able to shift to more profitable off-farm occupations. Investment in rural education will be crucial in increasing farmers' ability to move out of farming.
Membership in the World Trade Organization (WTO) can provide useful external pressure to improve efficiency and implement reforms... where markets are regarded as inefficient because of either government intervention or lack of infrastructure. The implementation of the various agreements under the WTO can facilitate the role of the government in providing services related to information, marketing facilities, technical assistance, and laws and regulations related to standards and quality control. Lastly, the WTO offers an opportunity for China and India to join hands and create a third bloc of countries besides the European Union and the United States in trade negotiations.
4. Improve Health, Education, Infrastructure, and Land Use at an Early Stage
After the start of reforms, both countries recorded a slowdown in the advancement of health and education. In India this was primarily due to the fiscal discipline imposed by the macroeconomic crisis, whereas in China market-oriented reforms introduced the logic of profit into the management of social services.
China had... made more progress on rural infrastructure than India. In India rural infrastructure did not receive as much attention, particularly in the rural power sector, and thus rural electrification and the establishment of telecommunications connections proceeded more slowly in Indian villages. This slow pace severely affected the growth of agro-processing and cold storage in the rural non-farm sector. It is no wonder, therefore, that the levels of processing in Indian agriculture remain abysmally low.
In China the egalitarian access to land ensured by the land distribution and tenure system performed a crucial welfare function, providing the bulk of the rural population with access to a basic means of subsistence and limiting the number of landless. In India, on the other hand, land reforms to make the agrarian structure more equitable after independence were not as successful and left a relatively large number of landless agricultural laborers exposed to the negative consequences of unemployment...so marginal and landless farmers will require a strong social protection system involving well-targeted social security and employment policies.
Conclusion
A number of factors help to explain the difference in growth during the pre-reform era: initial conditions, the sequencing and pace of reforms, and the political system, institutions, and regulatory environment. Yet special mention must be made of the fact that China and India achieved remarkable development and growth even as aid as a percentage of GDP in the two countries remained low. This is in direct contrast to most other developing countries and regions, where aid is much higher but commensurate development and poverty reduction outcomes have not been realized.
Both countries now face tremendous challenges on the path to further prosperity. Continued growth is a must, owing to pressure from population growth and the need for employment. Given the high expectations of their citizens, the lack of growth or even slower growth could lead to unrest in both countries. The limited natural resource base can be a critical constraint to growth. The future economic growth of both countries increasingly depends on imports of energy, for which future prospects are uncertain. Both countries are also among those most severely affected by water shortages. Consequently, future growth must be based on higher efficiency and will require China and India to invest in science and new technologies to harness energy and water, optimize their economic structures for allocative efficiency, and reform their fiscal, financial, banking, and insurance systems. Both countries must also pursue more pro-poor growth, which is not only a development objective in itself, but also a precondition for future growth in the long term.
China and India can both gain tremendously by learning from each other, as both nations still face a long road ahead. The dragon has attained height and the elephant is starting to gather momentum, but both need to address their weaknesses and build on their strengths in order to achieve their national goals and fulfill the aspirations of their people. The lessons learned from the experiences of China and India are also of relevance to other developing countries and the fight against global hunger and poverty.
posted by Abhishek* at 5:36 PM
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