Monday, November 22, 2010

(Over)optimistic about India and China? II

Chinese growth is widely regarded as furiously export-driven, but domestic investment has in fact been the major component. Even at the height of global trade expansion in 2002-2007, exports (in value-added terms) accounted for only a little more than one-quarter of GDP growth, whereas domestic investment contributed a substantially larger share.

Moreover, contrary to popular belief, much of the dramatic poverty reduction in China over the last three decades was due not to integration into the global economy, but to domestic factors like growth in the agricultural sector (where mass poverty was concentrated). This is attributable largely to public investment in rural infrastructure, and, in the initial period, to institutional changes in agrarian production organization and an egalitarian distribution of land-cultivation rights.

Expansion of exports of labor-intensive manufactures has nonetheless lifted many Chinese out of poverty. That is not true of India, where exports are still mainly skill- and capital-intensive. Economic reform clearly has made the Indian corporate sector more vibrant and competitive, but most of the Indian economy is not in the corporate sector (public or private). Indeed, 92% of the labor force is employed in the informal sector.

Indian poverty reduction has been significant, but not substantial. However, in terms of non-income indicators of poverty – for example, child mortality, malnutrition, and school dropouts – India’s performance has been dismal (in some respects worse even than in sub-Saharan Africa).

In the financial media, China and India have become poster children for market reform and globalization, even though in matters of privatization, property rights, deregulation, and lingering bureaucratic rigidities, both countries have in many ways departed from economic orthodoxy. According to the US-based Heritage Foundation’s widely cited Index of Economic Freedom, China and India are relegated to the group described as “mostly unfree.” Out of a total of 157 countries in 2008, China ranked 126th and India 115th.

Although socialist economic policies in both countries inhibited initiative and enterprise, a positive legacy of that period cannot be denied. It is arguable, for example, that Chinese socialism provided a strong launching pad for growth, particularly in terms of a solid base of education and health, rural electrification, a safety net enabled by equitable distribution of land rights, regional economic decentralization, and high female participation in the labor force. Moreover, a major part of the socialist legacy in both countries is the cumulative effect of the state’s active role in technological development.

Always refreshing to read Pranab Bardhan’s pieces. Here is a review of his latest book.