Monday, January 3, 2011

Lessons for developing countries from China’s and India’s growth successes

Amelia U. Santos-Paulino and Guanghua Wan argue that the growth successes of China and India offer three main lessons for the developing countries: (i) absorption of surplus labor, (ii)raising of domestic and foreign investment, (iii) and support for R&D.

Surplus labour from traditional agricultural sector has shifted to the progressive industrial sector, promoting industrialization. Characteristics of China’s labour market include an extensive rural-urban inequity, rapid rural-urban migration despite various restrictions, and high and rising real wages in the formal sectors. Furthermore, China’s comparative advantage in labour-intensive activities—alongside the scaling-up of its production and export baskets—has iterated with an improvement in the investment climate. This is steep with a continuous, virtuous circle of growth. 

Foreign investment has not only helped in overcoming the shortage of capital, but also in stimulating economic growth through various spillover effects. Accompanying FDI is the expansion of the private firms and multinational corporations (MNCs). In India and China, labour-intensive firms tend not to locate in mid-sized or large cities as compared to smaller ones, due to higher wages, training and attrition costs. Although labour regulations in China and India deter firms from locating in the larger cities, firms in the export sector prefer to be in large cities. Proximity to inputs within the city has a positive impact on firm location. These findings have important policy implications for urban governance, infrastructure, labour and environmental policies, which are key issues for growth and development.

China and India’s export productivity and specialization patterns are in line with those of wealthier and more advanced economies. This empirical finding challenges the traditional assumption that knowledge creation is exclusively the domain of advanced economies. Drivers of such change include investment in knowledge and innovation activities and the growing link between high-tech companies and local research. FDI and multinational enterprises’ investment in knowledge-creating activities, such as R&D, is concentrated in a few emerging countries. China and India are considered two of the top ten destinations for foreign R&D expansion. China has experienced the strongest growth in scientific research, surpassing any country, whether developed or developing. India has also built up prominent research records, with an extraordinary expansion of peer-reviewed studies in material sciences.

The exports of information, communication and technology (ICT) have been key in driving the Southern Engines’ economic success, mostly in China and India. Empirical analysis shows that Chinese exports have experienced rapid growth since the early 1990s; the country’s market share in both Japan and the USA has risen sharply; most of the Chinese ICT exports are attributed to foreign firms; and the shrinking market shares on third markets (i.e., other Asian developing countries) may be the result of multinationals’ relocation rather than intensified competition from Chinese exports. India’s experience reveals an unparalleled paradigm of the role of technological progress, and the transmission channels through which macroeconomic fundamentals can explain the country’s economic success, primarily by inducing changes in productivity. Changes in labour market antagonisms and investment market frictions (such as taxing labour income) did not play a significant role. The Indian experience in targeting productivity evokes that of other successful Asian economies such as Japan in a similar stage of development, or during the take off process.

The role of government has been crucial in bringing about this change.

First, a key lesson from China’s experience is the adoption of a pragmatic approach to economic reforms (which was the turning point in China’s economic development), and the adaptive capacity of the countries’ economic agents to this process. Second, industrial policy has been at the heart of development policies and strategies in developing countries, although not particularly so in India. As in the case of other strategies and economic reforms, this policy’s implementation produced varied outcomes, and with different levels of success. Third, trade and the liberalization of commercial policies have played a primary role in the Southern Engines’ growth success.

The interface of trade liberalization and domestic reforms has contributed to their success, akin to developing and transition countries. Decentralization and privatization of state-owned enterprises is another area of policy accomplishment. Also, the formulation of economy-wide development strategies should be a balanced outcome of the government and private agent decisions and choices, reflecting at the same time the country’s evolving and comparative advantages. These policies and processes should also adjust to the continually changing global economy.