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Politics, Productivity & Population: Why The Chinese Economy Flew and India’s Just Grew

Consumption

The two countries have roughly the same population, similar average unemployment rates and current GDP growth rates that are among the highest in the world. Yet China’s economy is almost five times larger than India’s. The GDP per capita for China and India in 1985 was approximately $293 per person. According to 2017 data from the World Bank, China’s GDP per capita has ballooned to $8,827, and India’s has climbed to $1,942. Both countries have made tremendous progress, but the growth in China has been miraculous. Why such a significant difference? How did China outpace India to become the second largest economy in the world? The answer lies in the differences between politics, productivity and population trends.

China’s GDP per capita growth has outpaced India’s

World Bank, III Capital Management

Politics

The Chinese Communist Party (CCP) governs the country with few barriers. When the government decides on a course of action, few obstacles stand in its way. For example, China spent more than a decade building the Three Gorges Dam, the world’s largest hydropower project. The massive undertaking displaced more than 1.2 million people and flooded 13 cities, 140 towns and 1,350 villages. The dam, despite its enormous social and environmental cost, provides China with a source of clean energy and brought thousands of jobs to the Chinese interior. When it comes to rapid development in such scale, an authoritarian political system is a definite advantage.

India is a democracy. It has regional parliaments and a federal parliament with many assemblies. This system is all-inclusive, but a nightmare for development. It can take decades to make a decision.  For example, it took 16 years for the Indian parliament to pass a tax reform bill (2016). A project like damming the Yangtze River could not happen in India. Plagued by corruption at all levels, the divided political landscape would kill the project before it began. Politics prevent spending on infrastructure. Estimates suggest that the lack of adequate infrastructure investment reduces India’s annual GDP growth by 1-2 percent. Physical infrastructure, such as electricity, railways, roads, ports and airports has not kept pace with the growth of the Indian economy. India has underinvested in these massive projects and the consequences have curtailed economic growth compared to China; some argue China has overinvested. China’s willingness and ability to build out its infrastructure, via a centrally controlled political system that is not afraid to accumulate debt, has helped propel China ahead of India.

Productivity

Higher productivity growth in China relative to India can help explain the increase in the GDP per capita differential between the two countries.  Productivity measures how efficiently production inputs, such as labor and capital, are used in an economy to produce a given level of output. Productivity growth is a byproduct of infrastructure investments mentioned above. The hydroelectric power created from the Three Gorges Dam provides low cost, uninterrupted power to hundreds of Chinese factories. The efficient rail and road networks allow speedy transportation to distribution centers and ports. By comparison, India is far behind. In the annual World Economic Forum Global Competitiveness Report, India lags China in every infrastructure category. The relative growth in productivity is another factor behind the meteoric rise in GDP per capita of China.

Population

Another component of China’s ascent is a massive urbanization. In 1969, 17.5% of the population in China lived in cities, compared to 19.5% in India. Today, the urbanization rate is 58% in China and roughly 37% in India. In both countries, tens of millions of people have left the agricultural sector and moved to cities in search of higher wages — it just happened at a much faster pace in China. A worker in a factory is more “productive” than a farmer, meaning that there is a higher economic value to manufactured goods than farm goods. The desire to relocate the Chinese population to focus on manufacturing required huge infrastructure spending. India’s strategic focus on the development of its service sector did not necessitate such a large agrarian-to-urban migration.

Data suggests a strong link between GDP per capita growth and the rate of urbanization.

World Bank, III Capital Management

A political system that bypasses the laws and bureaucracy associated with democracy, a strategy to invest in infrastructure to develop a manufacturing juggernaut despite the social and environmental cost, along with policies to mass-urbanize the population, have compounded over the last several decades to propel China ahead of India in GDP per capita growth. Fast forward to today, and there is considerable debate whether the policies that lifted China so far ahead of its emerging market peers are sustainable. China’s private sector debt has more than doubled as a percentage of GDP; India’s is unchanged. Eventually, further investment in roads, bridges and airports will hurt productivity rather than add to it.

Indeed, China is shifting its focus to the service sector and away from its reliance on exports and manufacturing, while India is attempting to improve its infrastructure to promote growth outside of services. Both nations have prospered. Both countries are moving up the GDP per capita ladder. China’s unique combination of politics, people and strategy help explain how China skipped a few steps, but skipping steps on a ladder can be dangerous. We will have to wait another few decades to appreciate the consequences.

Forbes



2 Comments on "Politics, Productivity & Population: Why The Chinese Economy Flew and India’s Just Grew"

  1. Antius on Sat, 23rd Mar 2019 4:50 am 

    I don’t care about Brexit anymore. The British government will still be a disgusting despotism either way. Brexit will not help me escape from them.

    Britain’s Australian Home Secretary decides to ban a political rival because they don’t like their politics. It then prosecutes anyone with ‘similar’ political views as a terrorist, because they ‘might be linked’ to the organisation that they decided to ban.

    https://tinyurl.com/yx96c8yd

    This country is now full on 1984. It is a socialist, one-party state, in which all dissent is illegal.

    The sort of democratic change that we are seeing in Europe would be impossible in Britain. The country is not free enough to allow it to happen.

  2. Peter on Sat, 23rd Mar 2019 7:13 pm 

    We cannot change the world. It’s life.

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