Breaking down China and India’s Economic Rise

China and India are two economic behemoths who regularly make headlines around the world for their impressive development. However, flashback to thirty-nine years ago in 1980, they were among the poorest countries in the world in terms of per capita GDP¹. In the span of an average adult’s working life, China and India have developed into middle-income countries with rising world influence and increasing global economic integration.

Despite these impressive developments, China’s economic growth rate has far outpaced India’s rate with a per capita GDP of $8826.99 USD against India’s per capita GDP of $1942.10 USD in 2017¹. As a result, it is natural to ask, “Why has China grown faster than India?”

Last year, I conducted a pilot research project into examining factors that have allowed China to outpace India economically over the period 1980 to 2017. While this issue is an economic one, it is important to look at social and political factors to gain insight into how history, politics, and culture interact with the market. Economically, India and China were both at similar stages of development in the 1970s and 1980s. Therefore, it is important to look at governmental policies and social institutions to comprehend their influences on the market. I have categorized my results under two main areas: economic factors and social institutions.

Economic Factors

When the People’s Republic of China was established in 1949, its economy was marked by three main challenges: lack of foreign exchange reserves, limited exports, and insufficient economic surplus². China’s agricultural sector was collectivized, and the Chinese government emphasized heavy industry, similarly to the Soviet Union. For the near three decades under Chairman Mao, these policies were not effective. Beginning in the late 1970s, China’s agricultural sector was gradually liberalized, which increased its agricultural productivity and provided industry with raw materials². Its industrial, and commercial sectors were later reformed to allow for private enterprise, and international trade was slowly liberalized. These reforms allowed the economy to complete the appropriate capital accumulation and industrial development. Moreover, price controls were abolished, ownership structures were diversified, and special economic zones were established to stimulate foreign trade and investment². Combined with weak labour laws, low wages, and a large labour force, these factors gave foreign firms the incentive to create more manufacturing jobs in China. As a result of these reforms, China’s foreign direct investment skyrocketed past India’s inflows beginning in the early 1990s³. Further, China’s economy continued to emphasize investment, which explains the rise in its gross capital formation rate in the 2000s, reaching a high of 48% of GDP in 2010³. While China’s high investment rates have played an important role in its growth, it is important to note that concerns have been raised about wasteful investments in some sectors of the Chinese economy in recent years. These inefficiencies could hinder China’s long-term growth.

On the other hand, India’s economy did not begin to see reform until the early 1990s. Many regulatory, trade, tax, investment, and fiscal policies underwent substantial changes from 1991 to 1993⁴. These policies increased competition and improved productivity; however, India’s difficult labour laws and governmental bureaucracy have remained a large source of inefficiency⁵. As it is difficult to dismiss workers in India, many firms have hired less labour than they would have otherwise, which has limited India’s economic growth. Furthermore, the later introduction of special economic zones and other economic incentives meant that India’s growth fell behind China’s. Finally, although India also had a relatively high gross capital formation rate, China simply had a higher rate, which made the Chinese economy grow more quickly than the Indian economy³. If the Indian government could curtail bureaucracy, liberalize labour laws, and increase incentives, it has been hypothesized that their economy could reach double digit economic growth in the future⁶.

Social Institutions

Three decades of Maoism left China with a competent labour force with skills adequate for an initial expansion into light industry (such as consumer goods and textiles), and later expansion into semi-skilled and human capital-intensive jobs⁷. Although few Chinese citizens had achieved post-secondary education, the majority had completed primary schooling^3a. China had a relatively literate, healthy and skilled population for one of the poorest countries in the 1970s. When China began its reformation and liberalization, its relatively skilled and literate labour force could be easily inputted into manufacturing jobs.

Why couldn’t India take a similar approach? While China’s education system emphasized primary schooling, India’s system focused more on post-secondary education, which meant its citizens either achieved a high level of education or received little to no education. Aggregating the education level of all Indian citizens, the lower value of their education index in 1990 of 0.311 against China’s level of 0.405 can be explained by the inequalities in the Indian education system^3a,3b. In essence, India’s human capital was not favourable for more productive manufacturing jobs, in contrast to China.

In summary, I found that China’s higher gross capital formation rate, and foreign direct investment rate combined with less restrictive labour laws and a more educated population helped the economy grow at a quicker rate than India over the period 1980 to 2017. This is not to say that India’s policies were ineffective, as both countries were among the fastest growing in the world. Rather, these policies held India’s growth, relative to that of China, back for a time. As I have noted, India has now overcome much of its disadvantage. Both economies have their strengths and weaknesses. As these positive and negative forces interact, it will be interesting to see the relative growth rates of China and India in the future.

World Bank and OECD (2017). World Bank national accounts data, and OECD National Accounts data files: GDP per capita (current US$). Retrieved October 9, 2018, from https://data.worldbank.org/indicator/ny.gdp.pcap.cd

Zhao, Y. (2018). The Rise and Prospect of China’s Economy. Estudios De Economia Aplicada, 36(1), 277-290.

World Development Indicators Database (2017):
China. (2017). Retrieved October 9, 2018, from: http://databank.worldbank.org/data/views/reports/reportwidget.aspx?Report_Name=CountryProfile&Id=b450fd57&tbar=y&dd=y&inf=n&zm=n&country=CHN
India. (2017). Retrieved October 9, 2018, from http://databank.worldbank.org/data/views/reports/reportwidget.aspx?Report_Name=CountryProfile&Id=b450fd57&tbar=y&dd=y&inf=n&zm=n&country=IND

Bardhan, P. K. (1998). The political economy of development in India: Expanded edition with an epilogue on the political economy of reform in India. Delhi: Oxford University Press.

Chotia, Varun & V Muralidhar Rao, N. (2015). Examining the Relationship between Labour Laws and Economic Development of India. Pilani, Rajasthan: Birla Institute of Technology and Science.

Basu, K. (2009). China and India: Idiosyncratic Paths to High Growth. Economic and Political Weekly, 44(38), 43-56. Retrieved December 15, 2018 from http://www.jstor.org/stable/25663570