The economic rise of China and India [Prima edizione.] 9788899200374, 8899200378

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The Economic Rise of China and India

Vittorio Valli is emeritus professor of Economic Policy at Turin University. He taught at Bocconi and at the Universities of Padua and Turin. He was visiting professor at the Universities of Kyoto, Roskilde, Nice and at Seoul National University and visiting scholar at Berkeley and Brown. He teaches “Comparative economic development” at Turin University. He was the fist president of AISSEC (the Italian Association for the study of Comparative Economic Systems) and EACES (The European Association for Comparative Economic Studies). He is the co-director of the “European Journal of Comparative economics” and of OEET (the Turin Center on Emerging Economies).

aA

aAaAaAaAaAaAaAaA

aAccademia University Press

The Economic Rise of China and India

aA

ccademia university press

Vittorio Valli

Vittorio Valli

The last decades have witnessed the spectacular rise of two great Asian economies: China and India. China has moved first. Since 1978 sweeping economic reforms have radically transformed the country. China has grown at a historically unprecedented high rate of growth and has conquered an important share of the world market and a relevant position in foreign direct investment. The book analyses the main determinants and the weaknesses of China’s process of very rapid growth. Great attention is given to structural changes, to the importance of the insertion in the third wave of the fordist model of growth and in the globalization process, to the deepening of income inequalities, to the rising social, environmental and demographic problems. India has begun its process of rapid growth almost fifteen years later than China. Though very high, its average rate of growth has been lower than that in China. In its period of rapid growth India has introduced weighty reforms, liberalizing external trade and investment and reducing the regulations in the internal market. Though important and accompanied by sizable structural changes, India’s period of rapid growth has not solved the deepest social problems in the country. It has created a modernized larger middle class, but limited in size with respect to total population. The crucial divide between the informal and the formal economy and the different castes, ethnic groups, languages, religions, has limited the inclusiveness of the growth process. The final chapter of the book is devoted to a brief, but revealing comparative analysis of China’s and India’s economies in their periods of rapid growth.

aA

aA aAccademia University Press

The Economic Rise of China and India

Vittorio Valli

aA

ccademia university press

Vittorio Valli

The last decades have witnessed the spectacular rise of two great Asian economies: China and India. China has moved first. Since 1978 sweeping economic reforms have radically transformed the country. China has grown at a historically unprecedented high rate of growth and has conquered an important share of the world market and a relevant position in foreign direct investment. The book analyses the main determinants and the weaknesses of China’s process of very rapid growth. Great attention is given to structural changes, to the importance of the insertion in the third wave of the fordist model of growth and in the globalization process, to the deepening of income inequalities, to the rising social, environmental and demographic problems. India has begun its process of rapid growth almost fifteen years later than China. Though very high, its average rate of growth has been lower than that in China. In its period of rapid growth India has introduced weighty reforms, liberalizing external trade and investment and reducing the regulations in the internal market. Though important and accompanied by sizable structural changes, India’s period of rapid growth has not solved the deepest social problems in the country. It has created a modernized larger middle class, but limited in size with respect to total population. The crucial divide between the informal and the formal economy and the different castes, ethnic groups, languages, religions, has limited the inclusiveness of the growth process. The final chapter of the book is devoted to a brief, but revealing comparative analysis of China’s and India’s economies in their periods of rapid growth.

The Economic Rise of China and India

Vittorio Valli is emeritus professor of Economic Policy at Turin University. He taught at Bocconi and at the Universities of Padua and Turin. He was visiting professor at the Universities of Kyoto, Roskilde, Nice and at Seoul National University and visiting scholar at Berkeley and Brown. He teaches “Comparative economic development” at Turin University. He was the fist president of AISSEC (the Italian Association for the study of Comparative Economic Systems) and EACES (The European Association for Comparative Economic Studies). He is the co-director of the “European Journal of Comparative economics” and of OEET (the Turin Center on Emerging Economies).

aA aAaAaAaAaAaAaAaA

The Economic Rise of China and India

The Economic Rise of China and India

Vittorio Valli

The Economic Rise of China and India Vittorio Valli

© 2015 Accademia University Press via Carlo Alberto 55 I-10123 Torino Pubblicazione resa disponibile nei termini della licenza Creative Commons Attribuzione – Non commerciale – Non opere derivate 4.0

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The Economic Rise of China and India Vittorio Valli

Contents List of tables List of figures Preface

VII IX XI

1. Changes in the world economy

1.1. Introduction 1.2. Relative economic ascent and relative economic decline 1.3. Economic backwardness 1.4. The three waves of the fordist model of growth 1.5. Internationalization and globalization 1.6. The shift in global power

3 4 9 10 18 22

2. China

2.1. Introduction 2.2. China: the economy of the triple mix 2.3. The phases of economic growth in the Communist era 2.4. Reconstruction (1949-52) 2.5. The First Five-Years Plan (1953-57) 2.6. The great leap forward (1958-60) 2.7. Re-adjustment, recovery and consolidation (1961-65) 2.8. Cultural Revolution (1966-1969) 2.9. Resumption of regular planning (1970-77) 2.10. Economic reforms and rapid internal growth (1978-1993) 2.11. China’s growth and the globalization process (1994-2014) 2.12. China’s patterns of growth 2.13. The fordist model of growth in China 2.14. Productive diversification and rise in knowledge 2.15. Technological up- grading: some examples 2.16. Saving, consumption and investment 2.17. Aspects of the labour market 2.18. Globalization, China and global imbalances 2.19. The dark side of China’s rapid economic growth 2.20. Excessive dependence on exports 2.21. Inequality, poverty and welfare 2.22. Energy and the environment 2.23. Ageing and other fragilities 2.24. Conclusions China: main political and economic events

25 26 30 31 31 32 34 34 35 36 40 43

46 52 55 64 69 75 78 79 80 82 84 86

88

3. India

3.1. 3.2. 3.3. 3.4. 3.5. 3.6.

Introduction The phases of economic development The Nehru era The years of social and political instability (1964-65) Indira Gandhi Rajiv Gandhi

91 92 93 95 95 96

V

The Economic Rise of China and India Vittorio Valli



3.7. Economic reforms and the acceleration of economic growth 3.8. Economic backwardness and the fordist model of growth 3.9. Formal and informal economy 3.10. Social problems 3.11. Inclusive or exclusive growth? 3.12. Conclusions India: main political and economic events

96 98 100 103 105 105 107

4. A comparison

VI

4.1. 4.2. 4.3. 4.4.

The pyramid of development Systemic aspects Demographic, geographic, and social differences Main economic differences

109 111 114 117

Conclusions

121

Appendix A. Statistical appendix Appendix B. The revision of GDP data in India

125

References List of names

133

130

141

The Economic Rise of China and India Vittorio Valli

List of tables

Table 1.1. Real GDP per capita in PPPs in selected countries or areas: 1870-2013 Table 1.2. Levels of GDP in PPPs in selected countries: 1870-2013 (USA=100) Table 1.3. Levels of per capita GDP in PPPs in selected countries (USA = 100) Table 1.4. The three waves of the fordist model of growth Table 1.5. Foreign trade and FDI in China and India Table 2.1. The growth of China’s economy: 1950-2013 Table 2.2. Selected indicators of China’s economy: 1978-2013 Table 2.3. Employment in the main branches of the Chinese economy: 1978-2012 Table 2.4. GDP in the main branches of the Chinese economy: 1978- 2012 Table 2.5. Growth rates of real value added in the main sectors of the manufacturing industry in China: 1980-2002 Table 2.6. Growth rates of real value added in the main sectors of the manufacturing industry in China: 1995-2012 Table 2.7. Growth of physical output for selected products in China: 1980-2012 Table 2.8. R. & D. in China and in selected countries Table 2.9. The rise of motor vehicles production in China Table 2.10. Capital formation in China: 1970-2012 Table 2.11. Consumption in China: 1978-2012 Table 2.12. Saving, investment and current account balance in selected countries in 2010-13

6 7 8 11 20 31 44 45 46 49 50 51 55 57 65 66 67

VII

The Economic Rise of China and India Vittorio Valli

VIII

Table 2.13. Table 2.14. Table 2.15. Table 2.16. Table 2.17. Table 2.18.

Urban and rural differences in China: 1990-2013 Urban and rural employment in China: 1978- 2012 Employment by type of firms’ ownership: 1978-2012 Wages dynamics in urban areas China in the second globalization wave: 1990-2013 China: exports, imports, balance of current accounts and FDI: 1982-2012 Table 2.19. Energy production and energy consumption in China: 1978-2012 Table 2.20. Some demographic indicators in China: 1982-2012 China: main political and economic events (1949- 2015) Table 3.1. GDP, per capita GDP and population in India: 1870-1947 (US = 100) Table 3.2. India’ economic growth Table 3.3. Employment and value added by sector in India Table 3.4. India, China and Brazil: employment indicators Table 3.5. Formal and informal employment in non-agricultural sector in India: 2009/10 Table 3.6. The informal economy in selected emerging countries Table 3.7. Employment in the informal sector by status in employment in India: 2009-10 (%) Table 3.8. Social indicators in India India: main political and economic events (1947-2014) Table 4.1. Main systemic differences between China and India Table 4.2. Some demographic, geographic and social differences Table 4.3. China and India: some comparative indicators Table 4.4. Economic institutions and environment Statistical appendix A1. GDP in PPP in selected countries: 1950-2013 A2. Per capita GDP in PPP: 1950-2013 A3. Macro-economic indicators in China: 1990-2014 A4. Other macroeconomic indicators in China: 1990-2014 A5. Macroeconomic indicators in India: 1990-2014 A6. Other macroeconomic indicators in India: 1990-2014

70

70 72 73 76 76 82 85 88 92 92 98 99 101 101 102 104 107 113 115 118 119 125 125 126 127 128 129

The Economic Rise of China and India Vittorio Valli

List of figures

Figure 1.1. Figure 1.2. Figure 2.1. Figure 2.2.

A stylized representation of the fordist model of growth Global power and its main dimensions Systemic characteristics of China’ economy in the 1950s Systemic characteristics of China’s economy in the 1978-2014 years Figure 2.3. The fordist model of growth in China Figure 4 1. The pyramid of development

12 23 27 29 48 111

IX

The Economic Rise of China and India Vittorio Valli

Preface

In 1967, after my post-graduate studies at Berkeley, where I had the opportunity to know two great development economists as Hollis B. Chenery and Harvey Leibenstein, a brilliant economic historian as Carlo Cipolla and an outstanding comparative economist as Gregory Grossman, I returned to Italy at Bocconi University with the idea of devoting a great part of my future research to the study of comparative economic development. In 1970 I was offered a lectureship for a course on “Comparative economic systems” at the University of Padua. It was the first course to be taught in Italy on this field, soon followed in Bologna by an analogous course held by Domenico Mario Nuti. My first comparative studies were not only focused on the duality between socialist and capitalist countries, but also on the diverging experiences of two great Asian countries: China and Japan. In the same period I was collaborating to the foundation of Bocconi’s ISESAO (Centre for Research on East Asian Economic and Social Studies), which was launched in the 1970s thanks to the energetic drive of Gianni Fodella and the direction of Bocconi’s president Innocenzo Gasparini. The interest on Eastern Asia economies was greatly reenforced by my sojourns as a visiting professor at the Kyoto

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The Economic Rise of China and India Vittorio Valli

XII

Institute of Economic Research in 1982 and at Seoul National University in 2010, but also by a fruitful visit to China within a delegation of Italian comparative economic experts in 1982. In Japan I had the opportunity to exchange ideas and insights with Japanese colleagues, as Hisao Onoe and Masahiko Aoki, and with Harvey Leibenstein, who was visiting the Kyoto Institute in the same period. In South Korea I could meet Korean colleagues as Moon Woosik. In China I was able to discuss the main aspects of Deng Hsiao Ping ’s economic reforms with well known Chinese economists and important political leaders. I had also the opportunity to visit several factories and rural communes, where the working conditions were in general very crude, but the on-going transformations were already visible. My following visits to China did confirm the progressive deepening of economic reforms, their successes and drawbacks and the gradual building of what I have named the economy of the triple mix. In the 1980s and the 1990s I contributed to found AISSEC, the Italian Association for the study of Comparative Economic Systems, and EACES, the European Association for Comparative Economic Studies. In both Associations I was the first president. In 1994 I also contributed to launch EJCE, the European Journal of Comparative Economics, where I am one of the editors. In those years I had also the privilege to meet and to frequently correspond on Asian economies with Irma Adelman, Andrea Boltho, Sean Dougherty, Gianni Fodella, Angus Maddison, Michio Morishima, Moon Woosik, Ignazio Musu, Hisao Onoe, Marcello Signorelli, Paolo Sylos Labini. On growth theory I had intellectual exchanges with John Hicks, of whom I translated in Italian Capital and growth, and then with Francesco Silva, Giangiacomo Nardozzi, Renata Targetti Lenti, Ferdinando Targetti and Terenzio Cozzi. In those years my knowledge of India was limited, as I had devoted much time to study also Western economies, such as Italy, the United States and Germany, and other Asian economies, as China, Japan and South Korea. However, I could profit from the intellectual stimulus of a colleague at Turin University, a brilliant expert of India’s history as Michelguglielmo Torri. In the 2000s, further studies, a stimulating visit to India and contacts with Indian scholars, as Sanjay Reddy,

Preface 

made possible to better approach the multifaceted problems of the Indian economy. All this has been partly utilized in some scholarly articles and in the introduction of a book on China’s and India’ s economies, published in Italian by il Mulino in 2012, which I have co-edited with Giovanni Balcet. This book collects a large part of the results of a research team, directed with Mario Deaglio and Giovanni Balcet, and composed by Lino Sau, Donatella Saccone, Matteo Migheli, Silvana Dalmazzone, Gabriele Guggiola, Silvia Bruschieri, Joel Ruet, Giovanna Garrone, Nadia Tecco e Elisa Vecchione. A part of the team constitutes the core of a new venture, the Turin Center on Emerging Economies (Osservatorio sulle economie emergenti - Torino), which is planning various studies, newsletters and work-shops on emerging Asian and non Asian economies. So, this little book has a long history, since it has been incubated in so many years. I conclude with the usual thanks. To my wife, Adriana, to two competent translators of some sections of the book, to all the colleagues I have already mentioned and also to friends (Ignazio Musu, Francesco Silva, Renata Targetti, Sanjay Reddy) who have read the first draft of this book and whose suggestions have been very useful. To Aldo Chiancone, Maria Weber, Ferdinando Targetti and Walter Santagata, who prematurely have left us, I send an ever grateful thought for their friendship and scholarship.

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The Economic Rise of China and India

The dragon and the elephant The dragon has wings and fire and high flies in the sky The elephant is vast and robust and steadily goes by The world will change its colours when finally they’ll ally

The Economic Rise of China and India Vittorio Valli

1. Changes in world economy

1.1. Introduction The 19th century had been the century of the major European countries, with their vast and powerful, but intrinsically fragile, colonial empires. The 20th century has seen the economic rise of the two super powers, the United States and the Soviet Union, which, after the second world-war, have dominated the international scene until the end of the 1980s. In the meanwhile, in a few decades of the post second world war period, all the European colonial empires had completely collapsed, as a consequence of independence movements, insurrections or wars. Since the 1990s, there has been the dissolution of the Soviet Union and the economic supremacy of the United States, to some extent contrasted by the European Union, Russian Federation, Japan and Brazil, part of the Islamic world and, above all, the emerging Asian economies. From the 1950s onwards, in Asia there was the impetuous economic ascent of Japan, then of the four Asian tigers (South Korea, Taiwan, Singapore and Hong Kong) and later on of some South Eastern Asian countries, such as Indonesia, Thailand, Malaysia, Vietnam, and a few oil-rich Middle East countries. All these countries have entered a phase of rapid

3

The Economic Rise of China and India Vittorio Valli

4

economic growth, reducing in different degrees the initial wide economic gap with respect to the US and the major Western European economies. Finally, also China, from 1978 onwards, and India, from 1992 onwards, have begun their phase of very rapid economic growth and of partial catching up. In this book we will concentrate the attention on the two Asian economic giants, China and India, whose economic, political and military weight is rapidly increasing, deeply altering the equilibriums in the world economy. In a second volume, near to completion, I will focus on the other three major Asian economies: Japan, South Korea and Indonesia. In both volumes there will be an extensive use of some basic concepts: a) relative economic ascent and relative economic decline; b) Alexander Gerschenkron’s economic backwardness; c) the fordist model of growth, which is a modified version of the macro-economic aspects of Antonio Gramsci’s fordism; d) economic and financial globalization. 1.2. Relative economic ascent and relative economic decline In order to analyse the main transformations of the world economy and the economic rise of a large part of Eastern and South Eastern Asia it is useful to introduce the concepts of relative economic ascent and of relative economic decline. To do so we will use very controversial indicators such as Gross Domestic Product (GDP) and per capita GDP. A long debate has shown the great limits and major weaknesses of these indicators1. However, they have the advantage to be synthetic measures, so that they permit to give a general idea of main economic trends, while for a more thorough analysis it is necessary to use a complex set of indicators, as we will extensively do in the volume. In order to compare the economic performance of different countries it is also necessary to avoid using indicators such as GDP or per capita GDP on the basis of official rates of exchanges. Rates of exchange are in fact very volatile, and mainly depend on short-run balance of payments movements and currency policies, loosely reflecting the effective purchas1. See, for example, for a critical assessment of GDP’s concept and an alternative proposal, Stiglitz, Sen, Fitoussi (2009).

Changes in world economy

ing power of the different currencies in each country. It is, for example, highly misleading to compare the level in US dollars of per capita GDP of the United States and China’s per capita GDP expressed in US dollars on the basis of the rate of change Yuan / dollar. It would be much better to use the comparison on the basis of Purchasing Power Parities (PPPs), rather than the official rates of change. We have different ways to calculate PPPs and different sources2. In the volume we will mainly use Maddison’s and Conference Board-CGDC estimates based on the GK method until 1950 and the EKS method from 1950 up to now. There is a relative economic ascent if, in a prolonged period (a couple of decades or longer), the rate of growth of an economy, measured by the average rate of change of real per capita GDP, is higher than the rate of growth of the world economy, and a relative economic decline if the rate of growth of an economy is lower than the rate of growth of the world economy. As table 1.1 shows, in the years 1870-1950 there had been a rapid relative economic ascent of the United States. In fact, US per capita gross domestic product had increased much faster than in Western Europe and in the world economy, although the United States had passed through the devastating years of two world war and of the great depression. Actually, in the whole 1870-1915 period, there has been the rise and then the consolidation of the United States as the largest world economy. Those years have also witnessed the deep relative economic decline of most East and South Asian countries, weakened and humiliated by colonial rulers or unequal treaties. In the 1950-1973 years there has been a partial catching up of Japan and the four Asian tigers, the Soviet Union and a part of Western and Eastern Europe. While China’s and Indonesia’s economies had grown more or less in line with the world economy, India had worsened her relative position.

2. On the different methods see UN (2007). See also Maddison, pp. 297-300 and Maddison, Wu (2008) for the difference between Maddison’s and World Bank estimates on China. The major sources of PPP data are due to Maddison and Conference Board-GGDC, World Bank, UN, Penn World Tables, OECD, Eurostat, IMF. We have mainly used the estimates by Maddison’s and Conference-Board-GGDC for methodological reasons and because they cover a longer historical period.

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The Economic Rise of China and India Vittorio Valli

Table 1.1. Real GDP per capita in selected countries or areas: 18702013 (annual average rates of change on GGDC PPPs data) Countries or Areas

18701913

19131950

19501973

19731978

19782013

USA

1.8

1.6

2.5

2.0

Japan

1.5

0.9

8.1

2.0

Germany

1.6

0.2

5.3

2.2

France

1.5

1.1

4.0

2.0

Italy

1.3

0.9

5.0

2,5

United Kingdom

1.0

0.9

2.5

1.3

Russia- USSR (a)

1.0

1.8

3.4

2.7

China

0.1

- 0.6

2.8

3.1

India

0.5

- 0.2

1.5

2.5

Indonesia

0.8

1.6 1.7 1.6 1.2 1.2 1.8 0.9 7.4 4.0 3.4 5.2 1.6

South Korea (b) World

6

1.3

- 0.2

2.7

2.0

- 0.4

5.4

7.5

0.9

2.9

1.7

(a) Russia for the years 1870- 1913, Soviet Union for the years 1913-1990, Russian Federation for the years 1990-2013; (b) South and North Korea for the years 19131950. The data are in PPPs Geary Khamis (GK) up to 1950 and in PPPs EKS in the years 1950-2013 and are not strictly comparable. Sources: Maddison (2001) and (2003), for the years 1870-1950; Conference Board-GGDC (2014) for the years 19502013; our elaborations for the world economy in the last column are based on data from GGDC for GDP and from United Nations for population.

In the last two decades of the 20th century and in the beginning of the 21st century there has been the German unification, the collapse of the Soviet Union and of East European communist regimes, the impetuous economic rise of China and India and, since 2008, the great financial and real crises of the United States and of most European countries. These trends are evident in table 1.2 and table 1.3 which show the level of total GDP and per capita GDP in purchasing power parities (PPPs) of several industrialized and emerging countries in percentage of the level of the United States. Table 1.2 proves that in 1870 China and India were the largest economies in the world in terms of total GDP in PPPs, though they had a much lower per capita GDP than the US and the richest European countries. Up to 1950 there was a devastating economic decline in both China and India, but in the 1973-2013 years, the two great Asian countries, as well as South Korea and Indonesia, have grown much faster than the

Changes in world economy

Table 1.2. Levels of GDP in PPPs in selected countries: 1870-2013 (USA=100) Country

1870

1913

1950 (a)

1950 (b)

1973

1990

2013

China

192.9

46.6

13.0

9.5

11.8

20.7

90.1

India

137.1

39.0

15.3

10.3

9.0

12.8

30.8

United Kingdom

101.8

43.4

23.9

24.0

19.3

16.4

15.1

USA

100.0

100.0

100.0

100.0

100.0

100.0

100.0

85.0

44.9

35.0

35.0

42.8

34.3

15.8

Russia- USSR France

73.3

27.9

15.1

15.3

19.6

17.9

14.1

Germany

72.6

45.9

17.4

18.6

29.1

25.2

19.9

Italy

42.5

18.5

11.3

12.2

17.8

17.2

11.5

Japan

25.8

13.8

11.1

11.3

36.0

40.9

29.0

Brazil

7.1

3.7

6.1

5.5

10.2

11.5

12.5

Note: GGDC GK for the years 1870-1950 (a); GGDC EKS for the years 1950 (b) -2013. The differences between GK and EKS estimates are mainly due to some differences in methodology and in the price- surveys used to build the PPPs (1990 for GK and 2005 for EKS). Sources: Maddison (2003, pp. 195, 261) and Conference Board-GGDC (2014), our elaborations. The data refer to 2003 frontiers, with the exception of Russia- USSR, which refer to Russia until 1913, to USSR until 1990 (in GK) and to Russian Federation in 2013 (in EKS).

United States and the major European countries. Since 2001 China, and a decade later India, have reached the second and the third level of total GDP in PPP in the world. On the contrary Japan has grown faster than the US from 1950 until the end of the 1980s, but considerably less from the 1990s up to now. Although in 1870 China and India were the largest economies in the world in terms of total GDP, one must remember there this was mainly due to their enormous population and that a large part of their production consisted in agricultural goods sometimes barely sufficient at feeding their immense population. Industrial and tertiary products were sizable, but very limited in proportion of total product if compared to the richest Western industrialized countries. Moreover, the average technological level in the production of civil and military goods was in China and India lower than in major European countries and the United States, although in the past for several new techniques China and partly India had preceded by centuries or decades Europe and the United States.

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The Economic Rise of China and India Vittorio Valli

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The relative technological backwardness in the 19th century contributes to explain the political and military weakness of the two great Asian countries which had allowed the United Kingdom and other foreign countries to colonize India and to obtain many concessions from the Chinese empire. So, in 1870, as table 1.3 shows, per capita GDP were in China and India about the same and much lower than in major Western countries, slightly less than 22% of the level of the US and of 17% of the level of the United Kingdom, at that time the richest country in the world. The gap was partly a consequence of brutal colonial exploitation, and it has considerably augmented until independence, reached by India in 1947 and in China in 1949. Since 1950 the gap of China towards the US has remained relatively stable until 1973, but after 1978 has decreased very rapidly, reaching 21.1% of the US level in 2013. In India the gap has increased until 1973, but then has diminished, especially since 1992, reaching 8% of the US level in 2013. It must be stressed that, while until 1981 India had a higher per capita GDP than China, China has rapidly reversed the situation and in 2013 had a per capita GDP over 2.6 times higher than India. Table 1.3. Levels of per capita GDP in PPPs in selected countries (USA = 100) Country

1870

1913

1950 (a)

1950 (b)

1973

1990

2013

China

21.7

10.4

4.7

2.6

2.8

4.6

21.1

India

21.8

12.7

6.5

4.4

3.5

3.8

8.0

United Kingdom 130.5

92.8

72.6

73.0

72.4

71.2

75.7

100.0

100.0

100.0

100.0

100.0

100.0

100.0

38.6

46.8

29.7

36.3

29.7

35.3

USA Russia- USSR France

76.7

65.7

55.1

54.9

81.0

77.0

68.0

Germany

75.2

68.8

40.6

41.4

78.2

79.1

77.5

Italy

61.3

48.4

36.6

39.5

68.7

75.8

59.5

Japan

30.1

26.2

20.1

20.6

70.1

82.9

72.3

Brazil

29.2

33.2

17.5

20.8

20.9

19.1

19.4

Our elaborations on data in PPPs GK for the years 1870-1950 (a), in PPPs EKS for the years 1950 (b) – 2013. Sources: Maddison (2007a), p. 382, 104 and Conference Board (2014). The data refer to 2003 frontiers, with the exception of Russia- USSR, which refer to Russia until 1913, to USSR until 1990 (in GK) and to Russian Federation in 2013 (in EKS)

Changes in world economy

1.3. Economic backwardness A second basic concept, economic backwardness, has been introduced by Alexander Gerschenkron in 19623 and then re-elaborated by several other authors4. Gerschenkron’s volume consists in a selection of essays on the industrialization process in some European countries (Germany, Russia, Italy, Bulgaria), which in the last decades of the 19th century and at the beginning of the 20th century could be considered “late-comers” if compared with more advanced industrialized countries, such as the United Kingdom. Late-comer countries could benefit, in adequate historical conditions, from some advantages of economic backwardness. The main advantages were: a) the possibility to transfer masses of labour force from agriculture to industry, where productivity was in general higher; b) the possibility to introduce more modern and more productive technologies acquired, through purchase or imitation, from the most advanced industrialized countries. This required a strong process of accumulation, at first especially concentrated in the heavy industry, which was favoured, for Gerschenkron, by the action of the State and of the main banks. Fuà used some elements of Gerschenkron’s concept of economic backwardness to describe the process of catching up of some late-comer European countries, such as Italy, in the 1950s and the 1960s. In favourable historical conditions also emerging countries, such as Japan in the 1950s and in the 1960s, South Korea in the 1960s and the 1970s, China since 1978 and India since 1992, could benefit from some aspects of the two main advantages of economic backwardness. In particular, in the 1978-2014 period, China accelerated its industrialization process and the transfer of workers from agriculture to industry and to services and gradually introduced more modern technologies by means of an extraordinarily rapid internal capital accumulation, the import of foreign machines and the massive inflow of FDI. India profited much less and for a shorter period than China from the two main advantages

3. See Gerschenkron (1962). 4. See, for example, Rosovsky (1966) and Fuà (1980).

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of economic backwardness, but in any case they considerably contributed to the acceleration of its rate of growth. 1.4. The three waves of the fordist model of growth Two of the main factors which powerfully contributed, together with a series of important and dramatic historical events, to the changes in industrialized and emerging countries illustrated in table 1.2, are: a) the different timing and the different intensity and diffusion of the fordist model of growth in various countries and, b) from the 1970s up to now, the process of economic and financial globalization. Several authors have treated of fordism and post-fordism as historical phases. According to their analyses there is a phase of fordism, then the crisis of the model and the beginning of post-fordism. However, this approach is too rigid (some fordist elements have remained also in the countries in which there has been a crisis of fordism) and it is mainly centred on the experience of Western industrialized countries and Japan. Looking at what happened, and is still happening, in the whole world, it would be better to speak of various waves of fordism, appearing in different periods of times in different zones, and not of precisely set historical phases. Moreover, instead of fordism, we will utilize the concept of fordist model of growth, which is a somewhat different and much more restricted notion than the concept of fordism introduced by Gramsci5 and used, in a partially different form, by the French regulation school6. The important connections of fordism to changes in labour and production organisation, to the industrial relations system, to labour division and alienation and to the whole structure of society have not been here considered, since our attention is entirely focused on the macroeconomic core of the variables which contribute to determine the growth process and which we have named the fordist model of growth.

5. See Gramsci (1978), who in 1934 introduced the term with reference to the case of Ford’s model T and the use of mass-production, assembly lines and taylorist organization of production in the automobile industry. See also Valli (2010), pp. 23-8. 6. See, for example, for the regulation school, Aglietta (1979), Boyer (1987), (2007). The attempt of the regulation school to give a general interpretation of economic, political and social-institutional changes is fascinating, but it is perhaps too ambitious, because we still lack a fully integrated social science.

Changes in world economy

This growth model (see figure 1.1) has passed through three different waves, which are illustrated in table 1.4. Table 1.4. The three waves of the fordist model of growth Waves

Countries or areas involved

Periods

Main trends

First

USA

1908-1929, 1939-1950

Strong relative economic ascent. 1908-50*: US + 1.7; World + 1.0

Second

Several Western European countries, Japan, four Asian Tigers

1950-1973

Partial catching-up and strong relative economic ascent. 1950-73*: Japan +8.1 and West Europe + 4.0 (world +2.9)

Third

China since 1978 India since 1992 Eastern Europe, Russia, Brazil, etc. since the late 1990s

1978-2013

Rapid partial catching up and strong relative economic ascent * of China (+6.9) and India (+ 3.8) (world 1.6)

* Annual average rates of change of per capita GDP in PPPs; GK umtil 1950, EKS in the 1950-2013 years. Our elaborations. Sources: Maddison (2003) and Conference Board-GGDC (2014).

The first wave started in the US economy in 1908. The fordist model of growth was introduced into the US economy by Henry Ford through the opening of the line of production of the Ford T model in 19087. As we can see in figure 1.1, the fordist model of growth led to a very rapid increase in GDP and in the size of the US market. It thus implied strong economies of scale and economies of network in several sectors, such as the automobile industry, the tyre industry, the steel industry, the oil industry, the car repair services, the domestic electric appliances, etc. There was, therefore, a rapid increase in labour productivity and a sharp reduction in unit production costs. Moreover, in those years, there were strong network economies in the distribution of oil products and in the networks of car sales, car

7. Aldous Huxley in his famous science fiction novel “Brave New World” (1932) measured time from 1908, considered Ford as a sort of deity and T as a religious symbol.

11

Figure 1.1. A stylized representation of the fordist model of growth

The chart is derived from Valli (2002).

12

repairs and electricity. Up to the great depression and after the mid-1930s, this gave the possibility to the big US corporations of the sectors with relevant scale or network economies to increase unit wages and to reduce relative prices without cutting profit margins. Their total profits could rise thanks to the rapidly increasing volume of sales, fostered by massive intensive and extensive investment, made possible, in their turn, by the large and increasing profits and by the fast rise in aggregate demand. The sales could grow because of the reduction in the relative prices of several products and services, but, above all, because more workers could afford to buy cheaper mass-production goods, such as the automobiles, or domestic electric appliances, thanks to the increase in unit wages8 and of total employment, and so the large rise in total wages. The rise in exports played a significant role for the US economy before the First World War and after the Second World War, but had a more limited importance in a great part of the interwar period because of the spreading in many countries of protectionist policies. While in the US the fordist model of growth was fully operating in the 1910s and in the 1920s and was mainly due to the rapid growth of the already huge US internal market, in Western Europe in in the interwar period it was hindered by 8. It must be noticed that one of the essential aspects of the fordist model, a substantial increase in unit wages (from 2.34 up to 5 dollars a day), was introduced by Henry Ford only in 1913, under the pressure of the loss of several workers, passed to other firms, and of severe social tensions with labour unions (see Sward, 1948 and Braverman, 1974).

Changes in world economy

the destructions caused by the first world war, by the relatively limited size of each European economy, by the protectionist policies prevailing in most countries and by the corporative policies of several governments (Germany, Italy and Spain under Franco). During the great depression in the 1930s, the economy of the United States did not exploit the macro-economic advantages of the fordist model of growth. On the contrary in those years the mechanisms of the model operated at the reverse. The fall in aggregate demand led to lower economies of scale and of network, and thus to a fall in productivity, in profits, in investment, in unit wages and in employment. Therefore total wages and consumption sharply diminished, while the protectionist policies led to similar protectionist measures in other countries and, as a consequence, to a fall in US exports. The second wave of the fordist model of growth began in Western Europe and in Japan in the 1950s and in the 1960s9, thus more than forty years later than in the US. It was greatly helped by the rise of external trade, the gradual suppression of restrictions to trade, the beginning of the integration process in Western Europe and the great advantages of relative economic backwardness for late-comer countries such as Japan, Italy and Finland10. In its golden-age period (1950-73) Western Europe and Japan registered a complex combination of elements of the fordist model of growth and of the export-led growth. In general in the 1950s in several countries development was mainly led by internal elements, such as the fast rise of investment and consumption, while in the Sixties the export drive resulted more and more important. At the beginning of the 1910s, before the break of first world-war, the size of Western European countries and Japan and the level of per capita GDP in several countries had been too low to fully exploit the benefits from economies of scale and mass-production methods. The production of automobiles had remained, for example, limited and only a small and wealthy segment of the population could afford to buy the relatively expensive European automobiles. In the inter-wars period in Italy and Germany 9. It must be noted that Japan applied a very different version of fordism introducing elements of “lean production” and “toyotism”. However, from the purely macro-economic point of view, in this period also Japan made use of the fordist model of growth as here defined. 10. See Gerschenkron (1962), Fuà (1980).

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the authoritarian fascist and Nazis regimes had established a corporative model in which free labour unions were banned or persecuted and the real unit wage of most workers were maintained more or less constant. Therefore, the total amount of wages rose only marginally and mainly because of the increase in employment, and the total demand for consumption goods rose at a comparatively slow rate. The size of the market in the two countries remained limited, and protectionist policies made it difficult to expand the sales into other countries. In the United Kingdom and in France the economic policy was more liberal as regards labour unions and wage increases, but the size of the two national markets was insufficient to fully benefit from the economies of scale. Moreover in the 1930s the consequences of the great Depression and of prevailing protectionist policies did not allow to rapidly increase exports to other industrialised countries. After the Second World War and the reconstruction phase, in Western European countries, in Japan and then in other Eastern Asian countries, such as South Korea and Taiwan, the fordist model of growth could gradually take-off as long as the economic growth led to an increase in the size of domestic markets and the liberalization of trade led to growing exports. In Western Europe, both the growing liberalisation of foreign trade and the institution of EEC and EFTA contributed to rapidly enlarge the markets beyond the national frontiers11, while for Japan, South Korea and Taiwan the Korean war led to a substantial increase in exports. Moreover, the continuing presence or the reconstitution of free labour unions contributed to stimulate innovation and the rise of unit wages and thus the growth of consumption, investment and aggregate demand. Several countries could apply Keynesian expansive policies without encountering the risk of a high inflation thanks to the great productivity gains obtained in the sectors on which mass-production techniques and economies of scale allowed a rapid increase in productivity and cuts in production costs. Moreover, latecomer countries, such as in Europe Italy, Finland, Greece, Ireland, and in East Asia Japan, Taiwan,

11. For a more detailed analysis of European growth, see, for example, Boltho (1982), Maddison (2001), Valli (2002).

Changes in world economy

Singapore, Hong Kong and South Korea could benefit from the advantages of relative economic backwardness, while in the 50s and in the 60s Portugal, Spain, and, temporarily, Greece remained partially frozen under the conservative policies of their authoritarian regimes. The only large Western European industrialised country which did not share in the rapid economic growth of the “golden age” (1950-1973) was the United Kingdom, which greatly suffered in those years because of the gradual loss of the empire and thus of the increasing difficulty in exporting to the former colonies, which before the war had been to some extent “captive markets” for the British manufactured goods. Moreover, the United Kingdom did not benefit, until 1973, from the advantage of being a member of the EEC, but only of the smaller club of EFTA countries, and up to the late 1970s it could not profit from its North-Sea oil revenues. In USSR and Eastern Europe, in the era of central planning, the policy of containment of wage increases and of civilian consumption and the rigidity of planning sterilised a substantial part of the possible advantages of the economies of scale. In the 1990s, the severe economic crisis of the transition period did not allow to introduce fordist or post-fordist models of growth, which have only begun to operate since the end of the decade in several Eastern European and former USSR countries. The United States experienced a temporary interruption of the fordist model of growth in the 1930s, after the 1929 Wall Street crash. As we have already remembered, in those years the fordist model of growth functioned at the reverse, worsening the consequences of the economic depression. With the new deal and the economic recovery, there was a partial return to the fordist model of growth, which to some extent went on also during the 1940s, although there was the difficult passage to military production and then, after the world, the re-conversion to civil production. In the 1950s in the US part of the advantages of the fordist models were already exhausted because economies of scale had become less important and several industrial sectors were close to maturity. In the meantime in Japan and Western Europe those advantages began instead to fully operate, continuing up to most of the1960s. However, in the late 1960s and in the1970s in Western Europe and Japan there was a rapid deterioration of the fordist model of growth.

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First of all, there was the increasing difficulty in several sectors of mass-consumption goods and in their furnishers to obtain further economies of scale and productivity gains within the fordist model. In fact in most industrialized countries several sectors, such as the automobile industry, household electric appliances, the steel industry, some basic chemical industries, etc. had already reached the maximum optimal size of their plants or factories, so that any further advancement in productivity required a different and costly new organisation of the production process. Secondly, some of these markets had become mature markets, where the demand could no longer increase very rapidly because almost every family already possessed an item of the goods and there were saturation problems, while for automobiles and trucks there were also great congestion and pollution problems. Thirdly, in the 1969-73 period, sweeping social and labour conflicts reduced in all Western European countries the margins of profit, contributing to increase real wages more than productivity and to raise the prices of the goods produced by the fordist sectors. Moreover, an increased use of computer-aided machines and telecommunication, led to an increase of flexibility in production and in the labour market. The success of the Japanese model induced the firms of most industrialized countries to make a greater recourse to subcontracting and firm networks and to introduce lean production methods. At the same time continuous process and product innovations, a series of restructuring and de-localization processes and other important changes in the productive process were used to try to maintain sustained rates of increase in productivity in a context where in several sectors traditional forms of economies of scale were less important and the growth of domestic sales was slackening12. Finally, the continuous expansion of the service sector and the relative reduction of the industrial sector heavily contributed to reduce the average size of the firms, to favour out12. In the automobile industry, for example, it was necessary to radically change production techniques and labour organization, introducing Japanese organisational forms (see, for example, Bonazzi, 1993) and exploiting the economies of scale on various components of the vehicle rather than on the vehicle as such.

Changes in world economy

sourcing practices in the big industrial firms and to reduce the overall trends of productivity, since some service sectors have a lower productivity dynamics than most industrial sectors. However, since the 1980s, economies of scale and of network have returned to be important in some new sectors such as micro-electronics and then internet and mobile phones, but only a few countries have been able to fully exploit their benefits. The successful stories happened in Japan, mainly in the 1980s, and in the US, especially in the ‘90s. Then they spread also to South Korea, Taiwan, Singapore, and then China for hardware, India and Ireland for software, Finland and Sweden for mobile phones, United Kingdom for telecommunication services, etc. Most Western European countries, and in particular Italy, Spain, Greece and Portugal, were unable to enter or remain competitive in these new sectors, partly because of poor industrial policies and their very low effort in R& D and in tertiary education, while Germany with Siemens and Sap, the Netherlands with Phillips, France with Cap Gemini and the Italian-French ST Microelectronics, could only partially benefit from these trends. The two great energy crises (1973-4, 1979-80) powerfully contributed to terminate the “golden age” in Western Europe, since most European countries were largely dependent on oil and natural gas imports. After the two energy crises, for a couple of decades, the rate of inflation was very high, and economic policies were often restrictive in order to reduce inflation and imbalances in the external current account and in public accounts. In the 1990s also the attempt at reaching and respecting the severe Maastricht parameters strongly contributed to reduce growth in EU countries. Finally, growing globalization put an increasing pressure on industrialised countries, which had tried to converge towards the US level of productivity, and pushed them to attempt at reducing hourly labour costs, at decentralizing production or at de-localising phases or parts of the productive cycle in cheaper countries. Moreover, in the 2008-2013 crisis, in several EU countries the rate of unemployment grew substantially because of the fall of extensive investment, so that the rate of growth in real wages per employee declined and was often lower than the rate of growth of real productivity. So, in Western Europe, Japan and the US, different forms of post-fordism and toyotism increasingly took the place of

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fordist elements or mixed up with them13. However, the fordist growth model is still present, although partly modified and less important in scope, in several sectors of most industrialised economies. It has been operating, for example, in the personal computers, mobile phones and tablets markets and in the internet world. In the last two decades of the 20th century and in the beginning of the 21st century in several emerging countries, such as China, Indonesia, Malaysia, Thailand, Turkey, Mexico, Brazil and, then India and, since the end of the 1990s, in several Eastern European countries, there has been the third wave of the fordist model of growth, although mixed with Toyotist elements and with some features of the traditional economy, or, in the case of Eastern Europe, with the residual elements of the former planned economies. As we will see in the next chapters, the fordist-toyotist model of growth has affected the major Asian countries with varying intensity and in different periods. It had had a strong impact on the Japanese economy mainly during the 1950-73 years, in China from 1978 up to now, in South Korea mainly in the 1987-97 years, in India from 1992 up to now, in Indonesia mainly in the 2000s. Japan and China are the country in which the overall impact has been more intense and pervasive. 1.5. Internationalization and globalization The internationalization and the succeeding globalization have deeply influenced the process of economic growth in major Asian countries in the second post-world war period. Up to the end of the 1960s there has been a period of internationalization, namely the gradual rise of international trade and the establishment and deepening of forms of regional integration, such as the EEC. A real process of economic globalization, characterized by a deep interconnection of the economies, mainly based upon massive FDI flows, started between the end of the 1960s and the beginning of the 1970s and was hugely re-enforced in the 1990s and in the 2000s. In the 1970s and 1980s there were continuous increases in FDI and the massive entry of rich-oil middleeast countries in the international financial circuits. Since

13. On post-fordist elements see, for example, Bell (1976), Piore, Sabel (1984).

Changes in world economy

the end of the 1980s there was also the collapse of the Soviet bloc, the access of several new countries to the European Union, the introduction of the euro, the progressive opening of China, India, Brazil and other emerging countries, massive de-localization processes in various industrial and tertiary sectors, the rising liberalization in capital movements. All these events greatly widened and intensified the second wave of globalization14, starting at the end of the 1960s. In 1970, in the western world, trade and FDI flows were largely, although not completely, liberalized, but they were subject to rigid planning constraints in the Eastern bloc, and they were very limited in China and India. In the 1980s, the 1990s and the 2000s the liberalization process of trade, FDI and capital movements continued and spread to several other countries, so that in 2014 both external trade and FDI had been substantially liberalized in a great part of the world. However, China and India conserved some constraints, especially for capital movements and inward FDI flows. The internationalization process of the 1950s and the 1960s had had a very strong impact on East Asia’s economies. The Korean war had significantly helped the rise of exports in Japan, South Korea and in the other Asian tigers. Moreover, United States’ financial aids had given a positive boost to the South Korean economy in the very difficult postwar period. Though in the 1950-73 years Japan and South Korea are not to be considered export-led economies15 because much of the growth was due to internal private and public demand, the importance of rising exports was substantial. In particular the external demand contributed to increase the economies of scale. Moreover, the export revenues made possible to acquire foreign capital goods incorporating more advanced technologies and so speed up industrialization and economic growth. The globalization process introduced further stimulus to economic growth. Since the 1970s exports and outward FDI 14. The first wave of globalization had occurred at the end of the 19th century and at the beginning of the 20th century up to the eve of the First World War. It was very extensive, but was partially operating both between colonial empires and within them, with the colonies functioning as captive commercial and financial markets for the centre of the empire. 15. As to Japan see, for example, Boltho (1975) and (1996).

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increased very rapidly in Japan, which, however, tried to resist the penetration of foreign capital until recently. Exports grew rapidly also in South Korea and at a lower pace in Indonesia. Inward FDI were an important source of capital accumulation and of technological progress in Indonesia and South Korea. As we can see in table 1.5, since the 1990s foreign trade and inward FDI grew rapidly also in China, while in India they rose much more in the 2000s. In the last decade outward FDI grew briskly both in China and in India, which tried so to strengthen their position in foreign markets and to acquire more advanced technological-know how in industrialized countries and raw materials in resource-rich countries. Table 1.5. Foreign trade and FDI in China and India Country

20

Degree of openness (a)

Stock of inward FDI in % of GDP

Stock of outward FDI in % of GDP

1990 2000

2012

1990 2000 2013 1990 2000 2013

China

16.1

19.8

23.5

5.1

16.2

10.4

1.1

2.3

6.7

India

6.3

10.8

21.5

0.5

3.5

12.1

0.0

0.4

6.4

(a) (merchandise imports + exports)/2 in % of GDP. Sources: World Bank (2014), for the degree of openness, and UNCTAD (2015) for FDI.

Globalization and exports were to some extent interconnected since China, India, and in part also South Korea and Indonesia attracted in the last two decades many FDI from multinationals, which wanted take advantage of low labour costs, long working time and weak labour and environmental regulations prevailing in those countries. They de-centralized part of their productive process and re-exported components or assembled products all over the world. In some case, such as for Foxconn, which is a Taiwanese company with thirteen large factories in China, there was a sort of triangle. Multinationals such as Apple, Amazon, Blackberry, etc. used Foxconn to assemble or produce components of their products, indirectly using more than a million of Chinese workers, operating with low wages and in very bad working conditions16.

16. In Foxconn there were many suicides, a revolt and temporary shut-down, such as it happened in the Tayuan manufacturing site on September 24, 2012.

Changes in world economy

Globalization had positive and negative aspects both for the old industrialized countries and the emerging ones. For the rich countries such as the United States, a part of Europe and Japan, globalization contributed, especially in the last two decades, to reduce inflation and greatly expand consumers’ choices. An increasing share of manufactured goods and of tradable services were directly imported from countries with cheaper labour cost or have incorporated components made in low-cost countries. Moreover, global competition has enhanced efficiency and productivity in various production sectors. Finally, globalization has contributed to open large and rapidly growing markets of several emerging countries. The negative side of economic globalization in richer countries is mainly due to the powerful acceleration of deindustrialization, of restructuring and reconversion and to the rapid rise in income and wealth inequalities. Growing production fragmentation and massive de-localization processes have briskly accelerated de-industrialization in the United States and other economically advanced countries. They have also obliged most corporations to frantically and continuously restructure or reconvert their inland productive activities, often causing temporary or permanent losses of employment or more demand for labour mobility and precarious jobs. Massive involuntary labour mobility and precarious jobs have often contributed to severely increase economic uncertainty for young generations, to disrupt family and social relations and to determine an ageing society in Japan and in most European countries. In fact low wages and more economic uncertainty for a large part of young people contributed to determine in those countries a sharp reduction in the propensity to have sons. De-localization and, more generally, an increasing fragmentation of production, have contributed to rapidly rise the profits of multinational firms and the compensation of their top managers, while the wage dynamics of rank and file workers was compressed. Those workers were, in fact, often faced by the dilemma to ask for a wage hike, but risk losing the job in favour of cheaper immigrants or of the workers in low-income countries, or to accept real wage reductions. Moreover, financial globalization gave to the families and the firms the possibility to greatly widen their choices. They

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could continue to invest in internal productive activities or real assets, or to buy national bonds or shares, but they also could invest in productive activities abroad or in all kinds of foreign real and financial assets. All this contributed to raise income inequalities. As Piketty, Atkinson and Saez have shown17, since the 1980s in most industrialized countries the top one per cent income group substantially increased its share in income and wealth, while the poorest one per cent significantly diminished its share. As to emerging countries, such as China, India and Indonesia, they too had positive and negative repercussions coming from globalization. They could more easily get access to foreign markets and to foreign capital, accelerating their economic growth. However, globalization often contributed to greatly increase within countries economic and social inequalities, and in some cases, to raise corruption and exploitation of the environment and the labour force, while on the other hand it helped some emerging countries to reduce their economic gap with respect to richer countries. 1.6. The shift in global power Since the 1980s, in three-four decades, economic and political changes have deeply transformed the world economic and political equilibriums. We can define global power as the power recognized in the world community to a country or a regional union. As it is shown in figure 1.2, global power is basically due to four dimensions – economic power, military power, financial power and political power18. The four dimensions are strictly interconnected, but there can be a delay of some decades between a rise in one dimension and the increase in the other ones. The history of the XX Century shows that, after the up-rise of a big economic power such as the United States and the Soviet Union, and then of China, there is an upsurge in its military and financial power19, then in its political power. The

17. See Piketty and Saez (2003) for the US, Banerjee, Piketty (2005) for India; Piketty, Qian (2015) for progresive taxation in China and India. See also Atkinson and Piketty (2007) and (2010), Piketty (2013). 18. For an attempt to measure the economic dimension of global power, see Valli (2010), p. 60-63. 19. The United States became the top financial power, surpassing the United Kingdom,

Figure 1.2. Global power and its main dimensions

rise in political power can entail further advantages in the economic and financial sphere. There is thus a sort of virtuous circle, that can, however, be broken by internal convulsions and external pressures, as it happened to the Soviet Union at the end of the 1980s. In the years following the second-world war we can distinguish three main phases. There is the 1946-1990 period, dominated by the two super-powers: the United States and the Soviet Union. In that period there was, however, a large asymmetry in the economic dimension, since the United States had an economy that was more than double in size than the Soviet Union’s. Then, there were the 1990s that, after the dissolution of the Soviet Union, seemed to establish the hegemony of the United States. Finally, the first part of the XXI Century is leading to a difficult asymmetrical multilateral equilibrium between the major powers: the United States, China, the European Union, Russia, India, Japan, Brazil, some Islamic countries, etc. The United States maintains its supremacy, but as regards economic size the European Union and China have become, or are becoming, larger. However, in the military sphere China and Russia are only some decades after becoming the largest economy in the world. While The Soviet Union have never achieved a very great financial power, China is now rapidly increasing its financial power and has surpassed, in terms of cumulative capitalization of its three stock exchanges, both Japan and the United Kingdom, being second only to the United States.

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reducing their gap, while the European Union suffers from its internal divisions and its ancillary role in NATO. In the political sphere the United States maintain their leadership, but in some areas of the world China, Russia and some Islamic countries or movements are steadily reinforcing their influence, while the European Union is lacking in political and diplomatic cohesion and suffers from the fragmentation and fragility of its institutional apparatus. As regards China and India, the economic rise was accompanied by a marked increase in military power, especially in China. Both countries have become nuclear powers, but China can account also on many technologically advanced vectors, a rapidly expanding military fleet and a vast and growing level of science and technology, while India, though steadily increasing its military strength and its nuclear arsenal, remains a net importer for several armaments and has a lower technological level except for software and some industrial products. China has also accumulated in the last two decades a large international financial net position, thus greatly improving its financial power. India has a smaller, though more sophisticated, financial system than China, but a net negative international position. The political power of both countries is steadily rising. China, thanks to its larger economic base and financial power has probably obtained more international influence than India, although its lack of democracy may have on the long run negative consequences both on internal political stability and in international relations with old democracies.

The Economic Rise of China and India Vittorio Valli

2. China

2.1. Introduction In most of the 19th century, China was the country with the largest population and highest total GDP in the world1. However, in terms of per capita GDP, and especially of civil and military technology, it had fallen well behind the major Western powers. Its economic and military weakness played a major part in the defeats at the hands of Western empires. There were the suffering, exploitation and humiliation endured by China during the Opium Wars (1839-42 and 1856-60), the unjust treaties, the surrender of Hong Kong to the British and of Macao to the Portuguese, and the various concessions granted to Western powers, Russia and Japan in Shanghai and other cities. During the first part of the 20th century China’s economic weakness not only persisted, but was considerably aggravated. Whereas in 1900 China’s per capita GDP in PPPs was 15.9% that of the US, in 1950 it had fallen to 4.7%2. This troubled period was also marked by terrible internal and ex1. In 1870 China had a total GDP in PPPs GK more than 90% higher than the levels in the United States and in the United Kingdom (see table 1.2). 2. See Conference Board. Total data set. (2014). Values in PPPs (purchasing power parities) GK (Geary Khamis); in PPP EKS in 1950 the level was even lower (2.6%).

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ternal conflicts, such as the Japanese invasion of Manchuria in 1931-32 and then in a large part of China in 1937-45, the atrocities suffered during the Second World War and the protracted civil war between the Kuomintang of Chiang Kaishek and the Communists of Mao Zedong. However, from the Taiping Rebellion (1850-65) onward, a movement for the modernisation of the country laboriously had grown up in China both for internal reasons and as a reaction to imperialist aggression. This process culminated in 1911 with the revolution that overthrew the Chinese empire and led to the establishment of the Republic in 1912 under Sun Yat-sen. However, the country soon fell prey to military dictatorship and internal feuding between rival warlords. The ascent of the Nationalist movement led to a concentration of power under the Kuomintang of Chiang Kai-shek in 1927. At the same time, though, the Communist movement was gaining momentum and would soon come to cross swords with the Kuomintang. This conflict, except for a short-lived truce when both sides jointly combated the Japanese, dragged on from the end of the 1920s until 1949, when the Communists took power over the whole of continental China. Chiang Kaishek was forced to retreat to the island of Formosa – present day Taiwan – already under the control of Nationalist Chinese troops following the withdrawal of the Japanese army in 1945. Since the ascent to power of the Communists in 1949, China – whose population was then largely living in conditions of extreme poverty – has experienced alternating fortunes in its economic growth. 2.2. China: the economy of the triple mix From the rise to power of the Communist Party up to now China may be described as the “economy of the triple mix”. As regards the systemic characteristics of a country we can introduce three main distinctions: a) plan versus the market, b) public versus private ownership of the means of production; c) centralization versus decentralization of the main economic decisions. Usually a socialist economy, which is dominated by a communist party, privileges the plan as the main mechanism of coordination in the economy. The market is non-existent or relegated to a very small portion of the economy. This hap-

China in world economy

pened in the Soviet Union, in most Eastern European countries in the post second world war years up to the transition period and in communist China for several decades. At the beginning of the 1950s in China there was still a considerable space for the market and for private enterprises, but in a few years the Chinese government swept away the remains of the market economy aiming at constructing a planned economy. Most economic activities were assigned to state or collective institutions. The main economic decisions were centralized in Beijing, and the Chinese Communist party and the planning agencies defined the strategic lines of the plan. So, as figure 2.1 shows, in the 1950s there was a relatively rapid passage from an economy with a strong presence of the market and of private business and decentralized decisions to a planned economy, with prevailing public ownership of

Figure 2.1. Systemic characteristics of China’s economy in the 1950s 27

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the means of production and a strong centralization of main economic decisions. While in the late 1950s, in the 1960s and for most of the 1970s there was a pendulum through different economic strategies, alternatively emphasizing the role of the “reds” or the one of the “experts”, the basic systemic characteristics remained almost completely unchanged. China’s economy remained basically planned, public and centralized. However, as we will see in paragraphs 2.6-2-9, both during the “great leap forward” and the period of “resumption of regular planning” there was the attempt to introduce some decentralization in economic decisions. In the first period this was operated giving some autonomy in the economic sphere to rural communes, which could establish industrial or tertiary activities. In the second period the public authorities of small rural towns and villages were allowed to create several industrial or service firms (TVEs). Instead, in the more acute phase of the “cultural revolution” the functioning of the economy and of planning became utterly chaotic, due to many purges of experts, managers and intellectuals made by the “red guards”. Since 1978 radical economic reforms gradually led to a great change in China’s systemic characteristics (see figure 2.2). Step by step the reforms moved the economy towards a rising importance of the market, an increasing role of private domestic and foreign ownership of the means of production and more decentralization of economic decisions, although the centre maintained a very important coordinating power. Step by step “the triple mix” was internally changing, moving towards more and more market, more private ownership, more decentralization. However most changes were not unbroken: they were often interrupted and now and then even temporarily reversed. Although a law recognizing private property passed only in 2007, after 14 years of hot political debate, in practice, since the 1980s there was a growing number of private economic activities, with various degrees of legitimacy built up with local and central authorities by the people de facto controlling the firm3.

3. On the impervious task of building legitimacy in China for private firms, namely their right to exist, see, for example, Ahlstrom, Bruton, Yeh (2008).

Figure 2.2. Systemic characteristics of China’s economy in the 1978-2014 years

29

These basic systemic changes were associated also to the passage from a very closed economy, with very limited external trade and severe centralized controls on FDI and capital movements, to an increasingly open and interconnected economy, especially after 1993 (see paragraph 2.18). The ownership of the means of production was therefore extended also to foreign private corporations, though often they were obliged to create joint-ventures with Chinese firms. However, even now, the role of the State and the Communist party remains very important and must not be underestimated. Central and local public authorities shape economic strategies and control both state and local firms in strategic sectors of activities and a great part of the banking and financial system. Moreover, government’s economic policies continue to be of great significance. Present Chinese

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economy derives from important policies such as the institution of family responsibility in agriculture and the powerful drive towards industrialization in the 1980s; the gradual introduction of TVEs and private property; the rapid opening of the economy since the 1990s; the continuing maintenance of an undervalued currency; the encouragement to a rapid penetration of China’ FDI abroad in the 2000s; the fiscal stimulus in 2008-9; the current gradual shift towards a larger importance of the internal market, the green economy and the internal zones. 2.3. The phases of economic growth in the Communist era We can distinguish eight main periods in the post-1949 years: the Reconstruction (1949-52), the first Five-Year Plan (195357); the Great Leap Forward (1958-60); the years of readjustment, recovery and consolidation (1961-65); the cultural revolution (1966-69); the resumption of normal planning (1970-77); the period of economic reforms and rapid internal economic growth (1978-1993) and the insertion of China in the globalization process (1994-2013)4. As table 2.1 clearly shows, the rate of growth of the economy was very differentiated in the various periods. It was relatively strong in the 1953-58 years, utterly disastrous during the great leap forward, rather good in the years of readjustment, painfully slow during the cultural revolution, and rather modest in the 1970-78 years. The economic reforms starting in 1978 led to a brisk acceleration of the pace of growth. Finally, the insertion in the globalization process in 1993-2013 and the booming exports gave further stimulus to the process of economic development although the recent global financial crisis contributed to reduce the rate of growth. It must be noticed that since the 1970s the policy of birth control has led to a continuous fall in the rate of growth of population, so that at present China is facing the increasing problem of ageing in its population.

4. On the first three periods see, for example, Deleyne (1971) and Salvini (1978); for the other ones, see Fewsmith (1994), Fodella (1981), (1993), Joint Economic Committee (1997), Weber (1999), Friedman, Gilley (2005) Perkins (2006), Maddison (2007b), Chiarlone, Amighini (2007), Naughton (2007), Herd, Dougherty (2007), Musu (2011), Lardy (2012).

China in world economy

Table 2.1. The growth of China’s economy: 1950-2013 (% average compound annual rates of change)

Real GDP Population Per capita real GDP

1950- 1953- 1958- 1961- 1966- 1970- 19781953 1958 1961 1966 1970 1978 1993 9.4 7.0 - 6.3 8,5 3.8 4.8 7.4 2.1 2.4 0.3 2.2 2.7 1.8 1.4 7.2 4.6 - 6.5 6.3 1.1 2.9 6.0

19932013 9.3 0.7 8.6

Source: Conference Board-GGDC (2013): EKS PPPs for GDP and per capita GDP.

2.4. Reconstruction (1949-52) The reconstruction was completed fairly quickly, also because wartime destruction had been relatively limited. It should nevertheless be underlined that the entire country was extremely impoverished and worn out from decades of bloody conflicts. In 1950 China’s per capita GDP in PPPs was equal to only 2.6% of the US’s level5 and well below that of the USSR in 1928. The great majority of Chinese population was still engaged in agriculture, the few existing industries were technologically backward and concentrated mainly in certain coastal areas and Manchuria, and the rate of illiteracy was still high. Moreover, a consistent part of China’s educated and wealthy middle and upper class people had flown to Taiwan, Hong Kong and Singapore, impoverishing mainland China of precious resources in human capital and financial means. Notwithstanding all these difficulties, the rate of growth of the Chinese economy was considerably high, as it often happens in period of Reconstruction, since it is usually easier to re-build the existing productive capacity after years of partial destructions than to build new plants and new know-how. 2.5. The First Five-Years Plan (1953-57) During the first Five Years Plan (1953-57), an attempt was made to implement economic planning essentially patterned after the Soviet Union’s. Several Chinese economists and experts were sent to Moscow to study the mechanisms of planning and the Soviet Union furnished several specialists. The plan was progressively substituted for the market, land was collectivised (in 1957 approximately 93.5% of peasant 5. See Conference Board-GGDC (2014) for data in PPPs EKS.

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families belonged to cooperatives, against a negligible percentage in 1953), and most of the important industries were nationalised. The plan prescribed a high rate of investment, giving preference to industry over agriculture and services, and heavy industry over light industry. There was, however, a significant difference with respect to the USSR, in that the allocation of products was not entirely decided by the planners, but at least in part negotiated between the wholesale or retail cooperatives and producers. This had a positive impact on the quality of products, because any goods that remained unsold due to poor quality caused the cooperative to suffer a loss, prompting it to seek a different supplier. In addition, a certain measure of economic autonomy was preserved, especially for small businesses in the services sector and, in the early 1950s, also in agriculture and light industry. Although economic growth was fairly good during the five-year period (see table 2.1), it was not evenly distributed. In fact, according to Western GGDC estimates, real per capita GDP grew 4.6% a year from 1953 to 1958, with a substantial rise in industrial production. However, this increase was concentrated chiefly in places where industry already existed, namely in various coastal areas and Manchuria. This served to exacerbate geographical disparities and the imbalance between agriculture and industry. What is more, inadequate investment in agriculture also led to a rather slow growth of agricultural output, driving up some agricultural prices, while the percentage of workers employed in the agricultural sector remained quite high. 2.6. The great leap forward (1958-60) Beginning in 1956-57 the Chinese leadership, and in particular Mao Zedong, started looking to strike out on a separate pathway, and to break away from the Soviet model. At this time dark clouds had already started to appear over Soviet-Chinese relations, culminating with the 1962 de facto rupture in economic and political relations between the two great socialist countries. In the 1958-60 period China drastically changed its growth and planning model making an attempt, which was soon aborted, to lay the groundwork for a Great Leap Forward in its economy and society. The agricultural cooperatives in the countryside were converted into Communes – collective institutions with both an economic and socio-political func-

China in world economy

tions. An attempt was also made to distribute development more uniformly, both geographically and between production sectors, by stepping up investment in rural areas, undertaking public works projects with labour squads and starting up various forms of rural industrialisation (including a great number of backyard steel furnaces). The results were fairly good in 1958 but utterly disastrous in 1959-60, partly due to unforeseeable agricultural calamities, and partly because the objectives of the plan were over-ambitious, so that they badly misfired. The government had in fact sought to balance the distribution of investment between poorer rural areas and urban-industrial areas not by reapportioning its already considerable investment, but rather by sharply increasing the overall rate of investment. The rate was approximately increased from 20% of GDP to over 40%, and this in a country that was bordering on pure subsistence. The underlying instrument was to utilise the large reserve of hidden unemployment, or underemployment, which existed in rural areas, mobilising it for the construction of roads, dams, small factories, etc. This would certainly have been feasible if done in a very gradual manner, and with the progressive introduction into rural areas of technical innovations (tractors, fertilizers, etc.) that could increase agricultural yields even as the employed labour force was sharply reduced. Contrariwise, it could not be accomplished, without precipitating a deep agricultural crisis, as it happened, by making only limited use of technical innovations in agriculture, while subtracting manpower massively during the two crucial periods of the year (seeding and harvest). Another goal of the Great Leap Forward was to develop a dualistic model (“walking on both legs”) which relied on the deployment of more advanced, capital-intensive methods in urban-industrial areas, and more labour-intensive methods in the countryside, whilst attempting to make rural areas in some measure self-sufficient for various industrial goods. It was hoped this would help stem the flow of population away from rural areas, while at the same time achieving more geographically uniform development. However the combined effects of natural disasters, teething troubles of the Communes and excessive pressure on the rural workforce caused agricultural output to collapse (cereal production dropped 20% from 1958 to 1960). Some inland regions of the country and large groups of the population

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were reduced to famine (Amartya Sen reported almost thirty million deaths from starvation)6. On top of this, some of the industrial products of the Communes turned out to be utterly inefficient or unusable (such as steel from backyard furnaces, certain chemical products and fertilisers), due to the considerable technical difficulty of the processes that needed to be mastered, the lack of skilled labour force and the limited exploitation of economies of scale in industries where this was of the essence. Finally, it should be noted that some of the public works projects undertaken in the countryside had long completion timescales and their productivity was diluted over time. So, in those years, real GDP and real per capita GDP collapsed and also the rate of growth of population severely dropped (see table 2.1). 2.7. Re-adjustment, recovery and consolidation (1961-65) Following the failure of the Great Leap Forward, there was a drastic policy change during the period of readjustment, recovery and consolidation (1961-65), which for a certain time also diminished Mao’s political power within the Chinese Communist party. This economic and political change of line led to less ambitious, more realistic investment targets, with greater emphasis on experts and technicians, economic pragmatism and material incentives, as opposed to the class struggle. Agricultural output resumed growing at good pace, also because investment and incentives were once again focused on agriculture, effectively negating the original ideology of mobilising the grassroots, which had been at the basis of the Communes. There was also fairly good growth in industrial output, with priority given to heavy industry and the production of chemical fertilisers and agricultural machinery, to support the effort to increase agricultural yields. 2.8. Cultural Revolution (1966-1969) However, with the explosion of the Cultural Revolution (196669), directly initiated by Mao Zedong, willing to regain his full political power, the pendulum began to swing in the opposite direction. The emphasis returned firmly on ideology and the class struggle, rather than on technical capabilities and eco-

6. See Sen (1999), p. 181.

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nomic pragmatism. A large portion of the party leadership was purged and many intellectuals, managers and experts were brutally persecuted and sent to do manual labour in the countryside. The internal power struggle reinstated Mao as undisputed leader, but the turmoil and violence in many areas of the country and in most firms aggravated social relations and the country’s economic difficulties. The rate of growth of real per capita GDP fell to 1.1% and this contributed to open the way for a less radical and more pragmatic economic policy, headed by Chou En-lai, the main collaborator of Mao Zedong. 2.9. Resumption of regular planning (1970-77) In 1970, the fourth five-year plan heralded a return to fullfledged economic planning, which had faltered during the height of the Cultural Revolution. This ushered in a period, of normal planning (1970-77), which in point of fact marked a slow return of the pendulum toward favouring economic pragmatism and material incentives over ideology, accompanied by a gradual quietening of the ferment, as well as the disorders and violence, which had characterised the Cultural Revolution. However the country did continue to pursue some of the strategic changes instated with the Great Leap Forward, and taken up again by the Cultural Revolution, and namely the push to make many rural areas partially self-sufficient in terms of energy production, agricultural implements, certain food and textile products etc., and the effort to decentralise industrial and service activities. This decentralisation was based on setting up constellations of small and medium sized enterprises (TVEs: Township and village enterprises) which operated under the supervision of provincial or local political authorities, rather than the central government, while the latter maintained control over the largest companies and strategic industries. The chemical industry continued to be given priority, especially for the production of fertilizers, and the irrigated land area was increased with the aim of achieving overall self-sufficiency in the production of cereals. At the National Assembly in January 1975, Chou En Lai presented the “Four Modernisations Plan” (for agriculture, industry, science and technology and national defence), spanning the period from 1980 to the end of the century, as the next important stage

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in China’s development. In that same year Deng Xiaoping, who had been purged from the Party during the Cultural Revolution, was rehabilitated. The gradual stabilisation of the Chinese economy did not, however, avert the bitter political battle, which followed the deaths of Chou En-lai (January 1976) and Mao Zedong (September 1976), ending with the ascent to power of Hua Guofeng. After various reversals (Deng Xiaoping was purged once again), the power struggle finally resulted in the elimination of the radical wing – the so-called “Gang of Four” – and the definitive rehabilitation of Deng Xiaoping in 1977. 2.10. Economic reforms and rapid internal growth (1978-1993) Deng Xiaoping rapidly seized the reins of power and proposed or allowed many important economic reforms, which were in part incubated during various congresses in 1977-78 and in the 1980s, and then progressively implemented. Unlike in Eastern Europe and the former USSR, these reforms were at first concerned mainly with agriculture and the countryside, and only afterwards with industry and services. It must be also stressed that China’s period of reforms and prolonged rapid economic growth has happened with a drastic change in economic policies, but with the maintenance of the political regime. The first reforms led to the conversion of the Communes to a system of “household responsibility” in 1979. The agricultural reforms provided a sizeable one-time incentive to peasant families, who were given the land they farmed in concession (not ownership), and allowed ever greater decisional autonomy with regard to the production and sale of their products. This helped determine a rapid rise in real gross agricultural output between 1978 and 1985 (+ 7.7 a year), while in the following decade, though still good, it returned below 6% (+ 5.8%). Greater liberalisation in the agricultural markets provided further incentives to peasant families in the countryside, which also helped increase agricultural output. In the meantime, reforms were also being implemented in industry and the services sector. These were tentative at first, and then grew considerably bolder after 1984. There was a rapid expansion of TVEs (township and village enterprises) that, as we already know, were collective industrial or tertiary firms set up in rural areas under the supervision of local authorities.

China in world economy

Still, the path to reform was by no means smooth, with frequent interruptions or temporary setbacks determined either by the economic situation or, even more, by political battles and crises such as the dramatic Tiananmen Square demonstration and bloody military repression in 1989. The economic reforms acted mainly on six levels: a) restructuring of state-owned enterprises, b) promoting rapid growth of TVEs (township and village enterprises), and then also of private businesses, c) gradual liberalisation of the markets for various goods and services, d) enhancement of domestic and international competition, e) gradual liberalization of access to international trade, f) establishment of special economic zones (SEZ) with a view to attracting foreign capital and technology. The state-owned enterprises gradually lost their monopoly over industrial production, with the progressive introduction of the following reforms: “… the right of enterprises to retain a share of their profits for distribution to employees in the form of salary bonuses and welfare benefits, the right to sell an increasing proportion of products on the free market, the right to introduce new products, the right to collect funds for investments of their own choice, the right to fire workers and to declare bankruptcy…”7. In any case, the general policy during the 1980s was to gradually reduce the role of state-owned enterprises in nonstrategic sectors enabling non-state enterprises (collectives and then private businesses or joint ventures with foreign multinationals) to rapidly gain market share and market competitiveness. The contribution of state-owned enterprises to gross industrial output, which had been approximately 76% at the beginning of the 1980s, dropped to less than one third at the end of the 1990s, a share amply surpassed by the TVEs, while after 1984 the contribution of private businesses and companies with foreign capital also rose rapidly. As we will see in paragraph 2.13, it is during this period that China began to utilize some features of the “fordist model of growth”, mainly with regard to electric domestic appliances, steel, energy, telecommunication and some chemical

7. See Wing Thye Woo (1997), p. 164.

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products. This substantially contributed to increase the rate of growth of productivity and of total GDP in the economy. Another important feature of the development model in the post 1978 period was also its partial reliance on a constellation of local development initiatives – networks of small and medium sized enterprises, deeply rooted and ingrained within their local context (city or village). Setting aside the fundamental difference in ownership of the means of production, which was largely public in China whereas it was mainly private in Italy and Taiwan, for some of these clusters there is a resemblance to the industrial districts in Italy, and to the industrial clusters in Taiwan. It is no coincidence, as You-Tien Hsing has observed8, that networks of SMEs from Taiwan have often very successfully invested in China, cooperating extensively with the local Chinese bureaucrats-entrepreneurs. These clusters of small firms were often present, like in Italy or in Taiwan, in traditional industrial sectors, like textile, apparel, shoes, furniture, etc. where economies of scale are not predominant, and could take benefit from the rapid diffusion of technical progress within the district and the support of local authorities. However, as we will see in the next paragraph, in the 1990s and 2000s several of the small TVEs of the 1980s have been privatized. Some other Chinese firms, operating in “fordist sectors” where economies of scale or of network are important, could rapidly become economic giants, but most of them continued to maintain close links with political leaders. The other great change in the Chinese economy after 1978 was the opening of its doors to foreigners. Up until that time, the Chinese economy had been exceedingly closed. In fact, whereas in the 1950s (before its rupture with the USSR in 1959-60) China had entertained a good level of interchange with the Soviet Union and Eastern Europe, in the 1960s China’s economy withdrew into its own shell. Exchanges with other socialist countries declined drastically after the deterioration of relations with the Soviet Union, while relations with the West continued to be strained. Subsequently, during the 1970s, with Kissinger’s ping -pong di-

8. See You-Tien Hsing (1998).

China in world economy

plomacy, China’s admission to the UN in 1971 and Nixon’s visit to Beijing in 1972, the country began opening up somewhat to the US, Japan and several Western countries. Even so, China’s central planning sought to strictly regulate and control these exchanges, despite the fact that increasing flows of goods were being channelled to the West by way of Hong Kong. After the economic reforms of 1978, the situation changed dramatically. Already in 1989 “… the 12 stateowned enterprises for foreign trade, which had previously monopolised commercial transactions, were granted greater autonomy, and some 4000 local branches became independent entities reporting to the local authorities. Some other companies were authorised to trade independently. The State had considerably reduced the planning constraints on imports and exports.”9 Partially thanks to economic reforms, from 1978 onward the country enjoyed an exceptional rate of economic growth. As we have seen from table 2.1, GDP and per capita GDP growth accelerated sharply with respect to the pre-1978 period, overtaking that of Japan in the 1950s and ‘60s or that of the South East Asian tigers (Taiwan, Hong Kong, Singapore and South Korea) in the 1970s and ‘80s. As of 2001, China surpassed Japan to become the second world economic power for total GDP in PPPs EKS, while it surpassed Japan only in 2010 according to the GDP data based on official exchange rates. So China became second only to the United States, in terms of total GDP in PPPs, but registered widespread and deepening economic inequalities, as we will see in paragraph 2.21. A substantial fall in the rate of population growth accompanied the great acceleration in real GDP growth from 1978 onward. In fact a strict and often brutal demographic policy10, combined with the socio-economic changes wrought by economic growth, gradually brought down the population annual rate of change from over 2% in the 1950s to 1.5% in the 1980s, and then to 1.1% in the 1990s approaching that of a rich and industrialised country such as the United States. 9. See Holliday (1997), p. 458. 10. In 1979 the government introduced the one-child demographic policy (see paragraph 2.23).

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In 2013 the rate of growth of population had further fallen to 0.5%. The higher GDP growth rate, coupled with a lower rate of population growth, naturally helped bring about a rapid rise in per capita GDP growth, enabling China to begin closing the gap with the richer nations. We must not forget, however, that even though China’s per capita GDP in PPPs EKS increased from 3% that of the US in 1978 to 6.7% that of the US in 2000 and to 21.1%.in 2013, the country’s economy still continues to lag far behind those of the wealthy Western countries. 2.11. China’s growth and the globalization process (1994-2014) As China’s industrial sector rapidly grew it was essential to try opening new markets to China’s products. So China’s political leaders devised a three-fold strategy to take full advantage of the globalization process. First of all they encouraged massive inflows of foreign direct investment (FDI), establishing Special Economic Zones (SEZs) and forcing the foreign corporations willing to invest in China to establish joint-ventures with Chinese firms and to export a large part of their Chinese production. Secondly, they succeeded in selling abroad cheap mass-products of the traditional sectors. Then they gradually up-graded their productive system toward goods and services with higher technological content, also by means of the import of modern capital goods and a rapid increase in R.& D. expenditure. Thirdly, they continued to gradually liberalize their international trade. Through various measures for reducing protectionism such as the new law on foreign trade, the reintroduction of a single official exchange rate in 1994, the 1995 laws on intellectual property rights (until then weakly enforced) and other liberalisation measures, China was able to meet the conditions for accession to the WTO, which it joined in 2001. These policies gave strong impetus to the growth of foreign trade, which in this period overtook the already high rate of GDP growth, causing China’s level of openness to rapidly increase, reaching 19.8% in 2000 and 23.5% in 2012. From being a marginal actor in international trade, in just over three decades China became the top exporter of goods in the world. However, it must be stressed that a considerable part of Chinese exports is due to foreign multinationals operating in China, so that China represents an important fraction of their global value-chain.

China in world economy

The ascent in China’s exports was in fact favoured, after 1978, by strong FDI flows from the rest of the world, at first in particular from overseas Chinese and then also from Japan, US, South Korea and various European countries. In China’s Special Economic Zones and in certain duty-free zones mainly established along the coast, FDI flows fuelled the rapid growth of export-oriented activities, which brought in the foreign currency needed to purchase imported capital goods for the country’s great industrialisation drive. The Special Economic Zones also acted as a sort of “incubator” in which large numbers of workers could be trained, acquiring technical knowhow and professional skills, and familiarity with the workings of the market economy. In recent years China has also rapidly increased its outgoing foreign direct investment. The increase in external competitiveness required sweeping reforms in China’s productive system. This was particularly important in the largely inefficient state-owned enterprises, which badly needed to increase their productivity, and in the exceedingly fragile banking and financial system in the 1980s and 1990s. As many state-owned enterprises began posting heavy and worsening losses, in the late 1990s China began converting its major public companies into joint-stock companies, and taking cautious steps toward denationalisation. Many inefficient state-owned enterprises (SOEs) were sold to TVEs or to private enterprises, while also several TVEs were in practice conceded to private investors. This process was at first partially held back by the heavy job losses potentially incurred by the heavy restructuring required to implement such a changeover. However, in the 2000s restructuring became more extensive and several State enterprises and TVEs could recover efficiency increasing both their productivity and their export capabilities, but often badly reducing the number of their employees. Sweeping reforms of banking, the bond market and the stock exchange were also implemented in the 1990s, and more specifically since 1994. The central bank obtained exclusive charge over maintaining price stability. There were also the partial liberalisation of the banking system, the gradual launch of the Shanghai and Shenzhen stock exchange markets and a further expansion of the Hong Kong Stock Exchange, also through the listing of several Chinese com-

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panies. The former British colony, with its great industrial, technological and financial potential, had been returned to China from the UK in July 1997. Hong Kong was allowed to maintain a large political and administrative autonomy, but it also became a powerful instrument for increasing China’s international trade, foreign direct investments and international financial transactions. Finally, the entrance in WTO forced China’s government to operate gradual reforms in its commercial laws, propertyrights regulations and the judiciary system in order to respect international norms. Some of these events took place after the death of Deng Xiaoping (19 February 1997), who was succeeded in power by Jiang Zemin. This package of reforms did not lead to capitalism and a free market economy, but rather to a sort of “dual track” system. In fact the public sector maintained considerable power, partly through the central government, with its planning and residual influence over state-owned enterprises, but mostly through the local political authorities in the provinces, cities or villages. However this public power found itself coexisting with a pervasive and growing influence of the market, which comprised a disparate set of actors (state-owned enterprises, TVEs, private businesses and, after the partial liberalisation of imports and FDI, foreign companies). The result was thus a sort of “market socialism”, or “Socialism with Chinese character” as it was termed by Deng Xiaoping, or “social justice plus a market economy” according to the definition given by Wu Jinglian. More generally, there was, as we already know, the building of the economy of the triple mix: a complex mix between the plan and the market, between public and private ownership of the means of production and between centralized and decentralized decisions. Although the development model of the Deng and postDeng era led to strong economic growth, it also contributed to widen the social and economic inequalities within the country. Many inland rural areas experienced very little development, in contrast with the strong growth of certain coastal areas, or of other regions where considerable local capital was available for investing in TVEs or private businesses. The Gini

China in world economy

inequality index went up from 32% in 1976-80 to 34.6% in 1986-90, and then to 40.3% in 1998 and 48% in 2009 surpassing that of European countries such as Italy, Spain and the United Kingdom, and even that of the US. Absolute poverty diminished, but relative poverty did rise, also as a result of a sharp rise in the price of certain goods and services, such as housing, especially in the big cities. What is more, the restructuring or closing down of certain large state-owned enterprises led to heavy job losses in areas such as Manchuria, without an adequate social-security “safety net” for the unemployed. 2.12. China’s patterns of growth Since 1978 China has experienced an extraordinary growth performance. Table 2.2 summarizes some of the main economic results. In the years 1978-2013 the performance in terms of real GDP in PPP EKS (+ 8.5 per year), real per capita GDP (7.4) and real labour productivity (+ 7.0) was indeed extraordinary and even more lasting than the one exhibited by Japan in the 1950-1973 period. However, in the same years the distribution of income among the families became markedly unequal (the Gini coefficient overtook the US’s level), and territorial inequalities and pollution were exploding. The economic reforms of the agricultural sector led to a rapid increase in agricultural value added and productivity. However, the system of relative prices devised by the Chinese planners continued to give a great advantage to the industrial and service sectors with respect to agriculture, because a part of agricultural products continued to be offered at low political prices and this contributed to lower agricultural market prices. As a consequence it was much more profitable to invest in industrial or tertiary activities than in agriculture, as long as the government allowed a growing liberalization of prices and of the markets of manufactured goods and services. In the 1980s and in the 1990s in several rural areas there was therefore a strong tendency to create TVE (township and village enterprises) operating in various industrial and tertiary sectors with growing profits, which, when re-invested, could determine a new expansion of employment and production. Further reforms made it possible to create private enterprises or joint-ventures with foreign corporations, accelerating the

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industrialization of the economy. The growth of income and of agricultural and industrial production raised the demand for services to the families and to the firms, so that, with some delay, also the tertiary sector could grow very rapidly, surpassing in the 1990s, as regards employment, the industrial sector. The phase of rapid growth was in fact associated to great structural changes. Table 2.2. Selected indicators of China’s economy: 1978-2013 Indicators

44

Years

Source

Population (a)

1978-2013

GGDC

Values 1.1

Real GDP in PPP EKS (a)

1978-2013

GGDC

8.5

Real per capita GDP in PPP EKS (a)

1978-2013

GGDC

7.4

Employment (a)

1978-2013

GGDC

1.5

Real labour productivity (a) (b)

1978-2013

GGDC

7.0

Gini index (income distribution, %)

2012

NBS China

47.4

Percentage of the US total GDP EKS

2013

GGDC

90.1

% of the US per capita GDP EKS

2013

GGDC

21.1

Percentage of the US Total GDP (c)

2013

World Bank

96.2

% of the US per capita GDP (c)

2013

World Bank

22.4

% of agriculture on total GDP

2012

NBS China

10.1

% of industry on total GDP

2012

NBS China

45.3

% of services on total GDP

2012

NBS China

44.6

Current account surplus (billion US$)

2013

SAFE

182.8

March 2014

NBS China

3.95

2012

NBS China

1.98

International reserves (trillion US$) Expenditure in R.& D. in % of GDP

Notes: (a) average annual compound rates of change; (b) real GDP/ total employment; (c) The revised World Bank estimates give a lower level of GDP and per capita GDP than previous World Bank’s data and Maddison’s and GGDC GK estimates, but higher values than GGDC EKS estimates. Sources Conference Board -GGDC (2014), World Bank (2014), NBS of China (various years), SAFE (2014).

China in world economy

Tables 2.2-2.6 provide some data about the trends of employment, GDP and value added in the main branches and sectors of the Chinese economy. While for the great branches of the Chinese economy (agriculture, industry and services) we have mainly used Chinese official statistics, for the disaggregated data of manufacturing industry we have used the estimates by Szirmai, Ren, and Bai11, which make possible an inter-temporal comparison of sectoral growth rates for the years 1980-2002. We have, however, used also the data by De Vries et al.12, for the period 1995-2009, which though not fully comparable with the estimates by Szirmai et al., are more recent and more consistent with the official Chinese data. All these data confirm China’s rapid structural transformation in the productive system13. Table 2.3. Employment in the main branches of the Chinese economy: 1978-2012 Employment (in millions) Sectors

1978

Agriculture

283.2

389.1

360.4

334.4

279.3

257.7

Industry

69.4

138.6

162.2

177.7

218.4

232.4

Services

49.0

119.8

198.2

234.4

263.3

276.9

401.6

647.5

720.8

746.5

761.0

767.0

Total

1990

2000

2005

2010

2012

B) Percentages on total employment Sectors Agriculture

1978 70.5

1990 60.1

2000 50.0

2005 44.8

2010 36.7

2012 33.6

Industry

17.3

21.4

22.5

23.8

28.7

30.3

Services

12.2

18.5

27.5

31.4

34.6

36.1

100.0

100.0

100.0

100.0

100.0

100.0

Total

Sources: NBS of China (2013), table 4-3.

11. See Szirmai, Ren, Bai (2005). The data-set reconstructed by these authors probably slightly underestimates employment and overestimates productivity growth in the 19952002 period because they use a corrective factor based on the 1995 industrial census data, whose effectiveness declines as long as we move away from 1995. 12. See De Vries et al. (2012). 13. For a more detailed analysis of structural changes in Chinese economy see also Valli, Saccone (2009) and Valli, Saccone (2014).

45

The Economic Rise of China and India Vittorio Valli

Table 2.4. GDP in the main branches of the Chinese economy: 19782012 (% of total GDP at current prices) Sectors

1978

1990

2000

2005

2010

2012

Agriculture

28.2

27.1

15.1

12.1

10.1

10.1

Industry

47.9

41.3

45.9

47.4

46.7

45.3

of which construction Services Total

3.8

4.6

5.6

5.6

6.6

6.8

23.9

31.5

39.0

40.5

43.2

44.6

100.0

100.0

100.0

100.0

100.0

100.0

Sources: NBS of China (2013), table 2-2.

46

In the years 1978-2012 there was a large rise in the percentage of employment and GDP in industry and services and a gradual decline in agriculture. Since in China productivity in agriculture is much lower than productivity in industry and in services, the decline in the share of agriculture was much larger and faster for GDP than for employment. In the 1980s industry became the largest sector for percentage in GDP, and continued to maintain its share over time up to 2010, while for employment it gradually rose to 30.3% in 2012, but it had been overtaken by the service share since 1994. So, as regards employment, even China, which has been called “the factory of the world”, has recently begun a process of relative de-industrialization with an increasing importance of services and a fall in employment in some traditional or mature sectors of manufacturing industry. However, if the percentage of industrial employment on total employment has begun to fall, also because of the impact of the global crisis, in absolute value industrial employment has continued to grow. Moreover, in the 2000s, the growth of manufacturing output has been revitalized by the rise in exports made possible by the Chinese entrance in WTO in 2001. In particular, in manufacturing industry, the textile and clothing sectors, which were losing employment in the 1990s, regained for some years momentum after 2002. 2.13. The fordist model of growth in China The 1978-2014 period of rapid growth was largely associated to some elements of the fordist model of growth, which contributed to increase the performance of China’s economy. As we have earlier anticipated, in the 1980s China began to experience profound sectorial transformations and several

China in world economy

aspects of the fordist model of growth. An extraordinarily rapid industrialization process, with massive economies of scale, is at the core of the process. There were, however, two important differences with the previous US and the Western European cases. In the 1980s in China the fordist model was not centred on the automobile industry, but mainly on other means of transportation (bicycles, buses, vans, trucks, ships, railways, etc.), but above all on the household electrical appliances (refrigerators, TV sets, washing machines, etc.) and their associated sectors (electricity, steel, plastics). In the 1990s there was the extension of the fordist model to ICT, and in particular to the production of PCs, faxes, printers and then mobile phones, software and internet services. Finally, in the years 2000-2014 there was, the rapid growth of the car industry and of its associated sectors, such as tyres or the distribution of gasoline, as well as a large expansion of the fast-railways network, airplanes, airlines, air conditioners, electricity, business consultancy, banking and financial services, construction, and so on. A second difference was the inclusion in the fordist model of some aspects of the Japanese “lean production” system, so that one may speak of a sort of fordist-toyotist model, or of a fordist model with some post-fordist elements. The growth process activated various forms of fordist feedbacks in China, which are described in figure 2.3, This chart is a partly modified version of figure 1.1, because it takes into consideration also the importance of agricultural surplus in the financing of industrialization and the recent rise of current account surplus in China’s balance of payments. The core of growth passed from agriculture to industry and, as tables 2.5-2.7 show, from traditional industrial sectors, such as textiles, to more modern fordist industries, such as the ones producing refrigerators, washing machines, TV set and then ICT and transport equipment. These sectors needed more recourse to tertiary support than traditional ones and the rapid increase of per capita GDP implied a rise in the demand of public and private services, so that in the last two decades also the tertiary sector rose very rapidly both in employment and in value added.

47

Figure 2.3. The fordist model of growth in China

Also some other traditional sectors began to reduce employment in a part of the 1990s, but returned to gain employment in the 2000s, while modern sectors such as “electronics and telecom equipment” continued to rapidly increase both employment and value added. However, while the dynamics of modern sectors, such as electronics, chemicals and transport equipment, was the main engine of the acceleration in growth in the 2000s, also traditional sectors of the economy as textiles, clothing, leather products, contributed to the growth of value added, also because of a significant increase in the rate of growth of their

China in world economy

Table 2.5. Growth rates of real value added in the main sectors of the manufacturing industry in China: 1980-2002 Sectors Manufacturing industry

1980-92

1992-2002

1980-2002

7.6

10.9

9.1

Electronics and telecom

12.1

23.3

17.1

Transport equipment

12.2

17.4

14.5

Leather and fur products

6.8

17.0

11.3

Electrical machinery

9.0

14.0

11.2

Clothing

10.3

12.1

11.1

Beverages

12.4

9.4

11.0

Chemical industry

9.7

10.8

10.2

Tobacco processing

11.0

9.1

10.1

Other manufacturing

9.1

11.1

10.0

Food manufacturing

8.5

11.6

9.9

Wood products

1.9

16.6

8.3

Rubber and plastics

7.0

9.8

8.2

Machinery and equipment

7.6

8.6

8.1

Paper and printing products

6.0

10.4

8.0

Instruments

4.4

11.6

7.6

Basic metals

6.0

8.7

7.3

Fabricated metals

3.6

11.7

7.2

Furniture

1.3

14.8

7.2

Non-metallic minerals

7.8

5.7

6.8

Textile industry

4.2

7.6

5.7

Oil refining, coal, coking

3.0

2.9

0.3

Source: Szirmai A, Ren R., Bai M. (2005), p. 65.

labour productivity. This was in part due to the rapid opening of the Chinese economy since the mid-1990s, fostered by the courageous policy of the government and the conservation of a undervalued Yuan. The increasing openness of the Chinese economy further accelerated after the 2001 entrance in WTO and this gave the possibility to several Chinese firms to rapidly increase their exports and to attract massive amounts of foreign capital. Thus it was possible to obtain the foreign currency necessary to import more modern capital goods and technology from advanced countries or to learn new

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The Economic Rise of China and India Vittorio Valli

50

Table 2.6. Growth rates of real value added in the main sectors of the manufacturing industry in China: 1995-2009 Sectors

1995-2002

2002-2009

Electrical and optical equipment

15.6

12.6

Others

15.0

9.7

Transport equipment

13.9

11.4

Rubber and plastic

11.4

11.0

Wood, wood and cork products

11.2

11.1

Pulp, paper and printing

10.7

7.8

Chemicals and chemical products

10.3

12.4

Food, beverages and tobacco

9.4

10.4

Machinery

9.0

12.4

Coke, refined petroleum and nuclear fuel

8.5

11.4

Textile, clothing

7.5

9.2

Leather, leather articles and footwear

7.3

9.4

Basic metals and fabricated metals

7.0

14.1

Other non metallic minerals

5.3

8.7

Source: Donatella Saccone’s elaborations on data by De Vries et al. (2012) and Timmer (2012).

techniques through joint-ventures with experienced foreign companies There was, in this way, a vast improvement both in labour productivity and in the quality of goods, and an acceleration in the growth of demand and of profitability, since foreign importers could often pay more than internal consumers. However, there was also an increasing exploitation of a part of China’s labour force, often working with low wages and very bad labour conditions. However, the huge increase in productivity made possible to concede consistent rises in real wages and a fall in relative prices of some mass-consumer goods contributing to a rapid increase in consumption and aggregate demand. The growth of more modern industrial and service sectors, as well as the rapid rise in productivity of traditional sectors since the mid 1990s, led to important increases in total profits and investment and in the possibility of raising real wages, so that consumption could increase very rapidly although the propensity to consume of the households remained particularly low and even decreased.

China in world economy

Table 2.7. Growth of physical output for selected products in China: 1980-2012 A) Volumes Sectors

1980

1990

2004

2012

Home Refrigerators, milns

0.05

4.6

30.3

84.3

Color TV sets, millions

2.50

26.8

73.3

128.2

Crude steel, mlns. tons

37.00

66.0

272.0

723.9

0.45

1.7

14.2

38.4

45.1

288.3

Chemical fibers, mlns. tons Pcs and notebooks, milns Mobile phones, millions

233.0

1181.5

Motor vehicles, millions

0.22

0.5

5.1

19.3

of which automobiles

0.10

0.3

2.3

10.8

300.60

621.2

2187.0

4987.6

2.14

6.8

312.6

127.7

Electricity, billion Kwh Telephone sets, millions B) Indexes (1980=100) Sectors

1980

1990

2004

2012

Home refrigerators

100.0

920.0

6060.0

16854.0

Color TV sets

100.0

1072.0

2932.0

4732.0

Crude steel

100.0

178.40

735.1

1956.5

Chemical fibers

100.0

366.7

3155.6

8533.3

Motor vehicles

100.0

227.3

2318.2

8772.7

of which automobiles

100.0

300.0

2300.0

10800.0

Electricity

100.0

206.7

727.5

1659.2

Telephone sets

100.0

319.6

14609.3

5967.3

Note: milns = millions. Sources: China National Bureau of Statistics, Statistical Yearbooks (various years)

Several western observers complain that the average propensity to consume of Chinese households remains very low if compared to that of most industrialised countries and this accounts for lower imports and a growing surplus in the Chinese trade balance. However, it must be observed that in a dynamic long run context no other country in the world has registered in the last thirty years such a rapid rate of growth in internal consumption and that this impressive result is partly due to the very high rate of saving and investment in the country.

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The Economic Rise of China and India Vittorio Valli

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2.14. Productive diversification and rise in knowledge The strategic lines of China’s economic development were partly inspired by the highly successful economic performance of Japan in the 1950-1989 period and of the other East Asian tigers: South Korea, Taiwan, Hong Kong and Singapore. China took also example from the United States, especially for the redesign, in the late 1990s, of its R.& D. and university system. Andrea Boltho and Maria Weber have discussed the similarities and the differences of China with the Japanese-East Asian growth model. Four characters of this model are remembered: “the almost constant encouragement given to investment, the manufacturing sector and external competitiveness, and pursued via a variety of fairly interventionist industrial, trade and financial policies; a concomitant belief in the virtues of intense domestic (Japan and Taiwan) and foreign (Korea) competition; a set of broadly sensible and appropriate macroeconomic policies; and a number of favourable (pre-) conditions, such as the presence of a homogeneous population, a relatively high stock of human capital, reasonable income equality and fairly authoritarian governments”14. The authors conclude “… China, since reforms began in the late 1970s, has shared some of these characteristics, but not all. In particular, it is still much more of a command economy than the other three countries have ever been, yet, at the same time, has embraced globalization with, arguably, much greater enthusiasm.”15 However, some other important elements of the JapaneseSouth Korean model were followed, especially since the 1990s. The Chinese government pushed towards a progressive diversification of its productive system, a constant technological upgrading and, since the mid 1990s, a brisk acceleration of the basic ingredients of its knowledge economics, namely human capital, R&D and innovation. All this was partly fuelled by the deliberate distortion of the system of relative prices. Some prices, such as the ones of food and other primary goods were maintained relatively low by the government policy, so that there was a great incentive to invest in manufacturing industry and in services, where profits could be much higher than in agriculture. Large profits in industry

14. See Boltho, Weber (2009), p. 1. 15. Ibid., p. 1.

China in world economy

made possible increasing investment, technology imports and growing R. & D. expenditures. Moreover, state firms producing strategic goods, such as steel, were heavily financed and subsidized by the State, favouring the rapid growth of industries that used steel as an important input. A decisive determinant of growth was the capacity of the Chinese productive system to progressively upgrade the technological content of its production. This result was achieved mainly through five policies: a) a steady improvement of the average level of education, although there was also an increase in inequalities in higher education16; b) a rapid rise, especially in recent years, of expenditure in R. & D. up to about 2.1% of GDP in 2013; c) a strong attraction of foreign direct investment, which could channel capital, new techniques and know-how in Chinese joint-ventures; d) a rapid expansion, in recent years, of outbound direct investment which could bring new markets and new knowledge to Chinese firms; e) an important improvement in infrastructures and services in several areas. As to human capital, R. & D. expenditure and the diffusion of innovation, we can distinguish two phases in the post-1978 period. A first phase, until mid 1990s, was based on consolidation of basic education, predominantly internal innovation and a limited engagement in R&D. activities. There was, however, a remarkable technological progress, mainly due to the very rapid growth of real investment, which generally incorporated more modern technologies. In the second half of the 1990s and in the 2000s the situation drastically changed, with the passage to an export-led model of growth. There was a vast expansion of higher secondary and tertiary education, a growth of private schools and universities, a rapid increase in international trade and in the attraction of foreign direct investment, a constant rise in R. & D. expenditure. As regards schooling it is important not only consider quantitative achievements, such as the mean years of schooling for adults, risen in China from 3.7 in 1980 to 7.5 in 201017,

16. See Saccone (2008). 17. See http://hdrstats.undp.org/images/explanations/CHN.pdf.

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The Economic Rise of China and India Vittorio Valli

54

but also the quality of education, as measured, for example, by the internationally standardized PISA tests. In 2009 these test, if limited to Shanghai and Hong Kong, put China in top position in the world. However, taking account of the sharp differences with other Chinese provinces, China might actually be at lower levels than South Korea and Japan, approximately close to the level of Germany and slightly over the United States18. Naturally the results of these tests apply only to 15th-years students, and at present the US, Japan, South Korea and Northern Europe maintain a large advantage in University education, but China is rapidly reducing the gap both in quantitative and qualitative terms. As regards technical progress, we can remember that in the 2000s China passed through the phase of imitation and assimilation of foreign technology to a phase of internal innovation and of a rapid rise in Chinese direct investment abroad. The latter were aimed at obtaining energy, other raw materials and an easier access to new markets, but also at acquiring know-how and technological capabilities19. Internal innovations were also spurred by a rapid rise of the R. & D. expenditure in % of GDP that rose from 0.6 in 1996 up to 2.1% in 201320. Though in terms of the percentage of R. &. D. expenditure on GDP, or of the number of researchers per million inhabitants, China remains well below the level of countries such as the United States, Germany, Japan, Sweden, South Korea, in terms of total R.&D. expenditure and total number of researchers China has already reached a primary position in the world ranking. As table 2.8 shows China, with over 3.2 millions of R&D personnel in 2012, is the top economy of the world having most likely surpassed the level of the United States in the 2010s. As regards total R.& D. expenditure in PPPs $, China was in 2012 second in the world, after the US, and preceding Japan, Germany and Russia. In contrast, India spends only 0.8% of GDP in R&D and slightly more than 1/7 of China total expenditure, but has more total R&D personnel than France, or United Kingdom, or Italy. 18. See, for this temptative evaluations, Karlin (2012). 19. On the theoretical bases of these FDI outflow, see Andreff, Balcet (2013). 20. See UNESCO (2013). http://stats.uis.unesco.org/unesco/TableViewer/tableView. aspx?ReportId=2656.

China in world economy

Table 2.8. R. & D. in China and in selected countries Country

Total R&D personnel (millions) (2012)

China

R&D personnel per million inhabitants (2012)

Total R&D R&D expenditure Expenditure as % of (billion PPP$) GDP (2012) (2012)

3.246

2358

243.3

2.0

US

1.413 (a)

4673 (a)

453.5

2.8

Japan

0.870 (b)

6832

148.4 (b)

3.4 (b)

Russia

0.828

5786

37.9

Germany

0.548

6995

100.2

India

0.441 (c)

366

36.2

1.1 2.9 0.8 (b)

Notes. (a) 2007, (b) 2011, (c) 2010. Sources: UNESCO-UIS (2015), http://data. uis.unesco.org/Index.aspx?queryid=115# ; UNESCO-UIS (2012). http://www.uis. unesco.org/FactSheets/Documents/sti-rd-investment-en.pdf

2.15. Technological up-grading: some examples The rapid expansion in human capital and R&D activities, associated to a massive investment in new plants and machines incorporating technical progress, to joint-ventures with Japanese or Western corporations bringing with them more advanced know-how, plus some acquisitions of foreign firms incorporating advanced technologies: all this greatly contributed to make possible a rapid and continuous technological up-grading of the productive system. Five examples regarding computers and other ICT products, airplanes, the motor vehicles industry, shipbuilding and green energy can illustrate the case. As regards the production of computers, China began almost from scratch in the 1990s, with the exception of a few large mainframe computers mainly dedicated to research and to the defence sector. In the second half of the 1990s China began a policy of attraction of foreign capital for the production of hardware components in the ICT sector. Most major PC producers from the US, Japan, Taiwan, South Korea and Europe were eager to massively invest in joint-venture in China in order to reduce their production costs and have access to the potentially huge Chinese market. From the mid1990s up to now, the same happened for mobile phones. In the meanwhile there was the rapid development of a domestic ICT industry. Thus, in something more than a couple of

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The Economic Rise of China and India Vittorio Valli

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decades China became the largest hardware producer and exporter in the world21, although more than half of its exports came from the joint-ventures of foreign multinationals located in China. Moreover, technological giants as Apple assembled a large part of their products in China, through the Taiwan-controlled firm Foxcom. However, also China’s domestic corporations rapidly evolved becoming world giants. In 2005 Lenovo was able to buy the IBM PC division. In 2014 Lenovo has become the first world producer of PCs and has acquired both the x86 server activites of IBM and the mobile phone division of Motorola. Other Chinese corporations, such as Huawei, Zte, Potevio, Datang, Fiberhome, Haier, etc. became among the world leaders in ICT production. A conglomerate corporation like Byd is an important supplier of mobile phones components to the Finnish-US corporation Nokia-Microsoft. Moreover since 2010 China was able to design and build the most powerful super-computer of the world, overtaking the US, Japan and Europe. In November 2014 Tianhe-2, of the National Supercomputing Center in Guangzhou, was the top supercomputer in the world. A part of the same pattern, although mainly concentrated in the 2000s, happened in the motor vehicles sector. This sector, which, is often considered in the West a medium-technology and mature sector, needs in reality a very large R&D input. Moreover, while the demand of automobiles is stagnating in mature Western countries and Japan, the automotive sector has an extraordinarily high rates of growth of demand in emerging countries such as China, India, Brazil, Russia and Turkey. Table 2.9 gives an idea of the very rapid rise in China of the production of motor vehicles (automobiles, commercial vehicles such as vans, trucks, buses and tractors). Since 2009 China has surpassed the US as the world largest motor vehicles market and Japan as the world largest producer. In 2013 China has produced 22.1 millions of units, of which 18.1 million cars and 4 million commercial vehicles. while the United States had an output of 11.1 million units, of which 4.4 million cars 6.7 million commercial vehicles and Japan produced 9.6 million motor vehicles, of which 8.2 million

21. See, for example, Amighini (2005), Bensidoun. Lemoine, Ünal (2009).

China in world economy

cars. Of this huge production volume, about two third of China’s production were due to joint-ventures between Chinese firms and top foreign corporations, such as Wolkswagen, General Motors, Ford, Toyota, Nissan, Honda, Hyundai, etc. but over one third were due to Chinese firms, such as SAIC, FAW, Dongshen, Changan (Chana), Chery, Geely, BYD, most of them also cooperating with foreign firms in the abovementioned joint-ventures22. Although some of the models wholly produced by China’s firms were copies of Western or Japanese ones, sometimes badly infringing copy-right rules, there was a rapid build-up of skills and technical know-how by Chinese firms. This build-up was favoured by the expertise acquired by Chinese labour force and managers in their numerous jointventures with advanced foreign automakers, by the production of components for foreign firms, but also, in recent years, by the acquisitions of licences, of foreign car corporations or design firms, and by the rapidly growing national R&D efforts. Table 2.9. The rise of motor vehicles production in China (millions of units) (a) 2000

2002

2004

2008

2010

2012

2013

Cars

0.6

1.1

2.5

6.7

13.9

15.5

18.1

Commercial vehicles

1.5

2.2

2.7

2.6

4.4

3.7

4.0

Total

2.1

3.3

5.2

9.3

18.3

19.2

22.1

(a) Cars and commercial vehicles. Source: OICA (2014).

“The bestselling car in 2005 was the Charade, a subcompact produced by FAW. It is a Chinese version of a Japanese car licensed from Daihatsu…In July 2005, Nanjing Automobile Group bought the collapsed British automaker MG Rover Group…”23 In 2004 there was the acquisition by SAIC of South Korean SsangYong Motor Company. “In 2009 GM sold Hummer to an investment partnership headed by an obscure Chinese machinery maker – Sichuan Tengzhong Heavy In22. See Balcet, Bruschieri, Ruet (2012). 23. Jeffrey Hays (2010). http://factsanddetails.com/china.php?itemid=361&catid=9&subcatid=61#335

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dustrial Machinery. Geely acquired an Australian drive train transmission supplier and leading gearbox manufacturer. Weichai Power, one of China’s top diesel companies, bought a French diesel engine producer.”24 In 2010 a consortium led by Geely bought the Swedish automaker Volvo. BYD, a large conglomerate operating in ICT components, in lithium-ione batteries, and in automobiles, is becoming a world leader for electric batteries, electric and hybrid cars, also thanks to a massive investment in R&D activities. BYD is now working in partnership with the German group, Mercedes-Daimler, for the building of a fully electric car, while its hybrid model is already in circulation. In 2010 BYD introduced its own e6 electric car with lithium-iron-phosphate batteries experimented by 50 cars leased by a taxi company in Shenzhen25. In the segment of electric cars the combination of the government policy, eager to reduce the huge pollution in the big cities, and of several private and public corporations will probably produce a leapfrogging of China if compared with the major industrialized countries26. Electric bicycles and electric scooters and motorcycles are already produced and circulating in large numbers. China has gradually become a net exporter of motor-vehicles. In 2013 its exports levels were relatively low, at about 977,000 units, of which 596.000, cars versus approximately 230,000 imported motor vehicles. However, the rate of growth of exports over the preceding years was impressive (+ 164% between 2009 and 2013)27. Since China is rapidly up-grading the quality of its products, maintaining a price advantage due to its comparatively low labour costs and its huge economies of scale, there is little doubt that the country will become a major competitor in the world market in a few years. Probably, this trend will be accelerated by a process of concentration in the motor-vehicles sector, which is now in China fragmented among too many producers. The Central government is in fact trying to favour a greater concentra-

24. Ibidem. 25. In 2012 a electic taxi caught fire after a crush. 26. See Wang, Kimble (2010). 27. See Statista (2015), http://www.statista.com/statistics/279055/number-of-vehicles-ex ported-from-china/, both for the export and import data.

China in world economy

tion, notwithstanding the fierce opposition of several local governments and interest groups. In the technologically more sophisticated airplanes and airspace sector the catching-up of China, although more difficult and contrasted, is impressive. Strategic reasons, for the military side, as well as commercial ones, for the civil side of the sector, have led to a huge Chinese R&D and innovation effort in the field. For airplanes, China has begun on the basis of relatively old Russian technology, gradually switching in the last two decades to US and European technology and partly to internal original design. Both the US Boeing and the European Airbus have de-localized in China the production of components of their airplanes in joint-ventures with local firms. Boeing has bought components in China since 1979, and has now several furnishers in the country. All the three big engine manufacturers – Rolls Royce, GE and Pratt & Withney – have built joint-ventures with local firms for the production of airplanes engines, as well as Honeywell for avionics. Foreign companies for civil aircraft are eager to invest in China, not only because of the lower wages and production costs, but also because, doing so it is much easier to sell their airplanes to the rapidly growing Chinese airlines. For example in 2007 Boeing had about 60% of the Chinese market for civil airplanes28, and is likely to maintain a large share also in the future. In 2013 China represented about 16.7% of Boeing total sales. For the 2014-2033 period it is estimated that China’ s demand for new airplanes will be of about 6020 units, more than 80% of the whole European demand29. Airbus has agreed to produce 5% of the mainframe of its new model A350 airliner in China, trying to boost its sales to China’s main airlines. However China’s national industry is rapidly catching up. A great part of Boeing’s 737 is actually made in China. China’s COMAC corporation, established in 2008 and based in Shangai, has produced two independently designed civil aircrafts: the 168-seats middle range C919 liner and a regional 78-seats aircraft: ARJ21. At the moment several components

28. See Bruns (2007). http://www.cfr.org/publication/14392/bruns.html. 29. See: http://active.boeing.com/commercial/forecast_data/index.cfm.

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are from foreign origin, but Comac plans to be able to supply its own components in the near future. A turbo prop airplane derived from Russian design, MA60, is already sold in some developing countries, while a LAVIC regional jet ARJ21 of about 80-100 places with some US components has been exported in Laos and other countries. The main obstacle for a rapid expansion of exports is due to the maintenance and after-sale assistance in which China is now weak, but is steadily improving. On the military side, China has, for example, produced JF17, a fourth generation fighter jet, and in 2009 Pakistan has begun to produce the JF17 on licence from China. Recently China has produced its own stealth and Awac-type aircrafts and some drones and it is rapidly upgrading the technological level of its production. In the field of space, China has developed launch vehicles, such as the Long March rocket which can carry artificial satellites into outer space and the Shenzhou spacecraft into orbit. In 2007 China has launched an un-crewed lunar orbiter and then, in December 2013, a lunar rover (Yutu, or “Jade rabbit”). Finally, China plans to reach the moon with a manned expedition, Mars with an orbiter and in 2020, with a rover, and to build a spatial-station. So, although distanced from Russia and the US, China can rival in the space with the two other great powers for commercial and military uses. Another important sector, both from the commercial and the strategic point of view, is shipbuilding. In the 1970s China’s production was limited and technologically very poor. Now China is the top producer in the world, having surpassed South Korea around 2010. In 2012 China accounted for 45% of the world production, while South Korea held 29%, Japan 18% and EU about 1%. Although China is mainly specialized in small and medium container ships, the technological level of its production is constantly improving30. Therefore, also China’s military navy has been able to rapidly grow in recent years, becoming the second largest fleet in the world. Although at the present China’s navy is mainly a “green water fleet”, not operating globally

30. See O’Rourke (2014).

China in world economy

in the world oceans, such as the US, British and Russian “blue water” fleets, China is now able to exercise an important presence in China’s sea and in the surrounding waters, up to Indonesia and Australia. Finally, there are the fields of high-speed trains and green energy. China is rapidly developing an extensive network of high-speed trains, i.e trains with speed superior to 200 km/h. The length of its network has surpassed the one of Japan, France, Germany, Spain, Italy. In December 2014 China had almost 19,400 km of high-speed tracks and is planning to reach 24,000 km in 2020 and to raise the average speed to more than 300 km/h. At the beginning China had to mainly use foreign technology, from Canada (Bombardier), Germany (Siemens), Japan (Kawazaki), France (Alstom) for the Pendolino, coming from the Italian Savigliano plant, and Sweden. However, China induced the foreign companies to open joint-ventures in China or to buy components from Chinese firms, therefore rapidly acquiring more advanced technology. China chose to develop conventional high-speed trains, except for the short Shangai-Pudong airport corridor in which it used Siemen’s Maglev technology based on special magnetic levitation tracks, with trains that can reach more than 430 km/h. However, Chinese scientists and engineers rapidly assimilated foreign technology, as it happened for the Japanese E2 Shinkansen’s technology, which they can now substitute with their CRH2A. Now China’s researchers are planning to develop their version of magnetic levitation trains with a 500 km/h speed, or of trains running in special tunnels which might achieve about 1000 km/h. In any case China already provides consistent operating 350 km/h services as in the Bejing-Shangai (1433 km) high-speed line. Moreover, it is exporting directly, or in combination with European or Japanese firms, medium-speed and high-speed systems to several foreign countries. For example, in November 2014 China has signed a contract for constructing a medium-speed corridor (120 km/h) of about 1400 km in Nigeria for almost 12 billion $ and has agreed to do a feasibility study for the construction of a high-speed corridor in India between Delhi and Chennai. Moreover, Chinese corporations are trying to bid for a large part of the Californian high-speed project and in January 2015 China has agreed to build a high-speed line

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between Beijing and Moscow (7000 km) at an estimated cost of 242 billion US dollars. As regards green energy, China is making an extraordinarily rapid progress. As it is well known, China is the first largest world consumer of primary energy, preceding the USA; the second net importer of petroleum, after the USA31; and the first country in total emission of CO2. Moreover, it largely depends on heavily polluting coal for the production of electricity. However, since 2005 China has begun to favour policies of energy conservation and the production of green energy, heavily incentivising the use of “renewables” such as hydro, wind, solar and bio-mass. A 2005 renewable-energy-law, partly modified and updated in 2009, and the 2013 “Action plan for the prevention and control of air pollution” greatly contributed to accelerate the process. In general China has reduced, in relative terms, its dependence on fossil fuels for electricity production. As Mathews and Tan have observed32 “…China is known as the world’s largest user and producer of coal, and the world’s largest emitter of carbon dioxide and other greenhouse gases. This is China’s “black face”. But less well known is China’s “green face”: the country is building the world’s largest renewable energy system – which by 2013 stood at 378 GW and generated just over 1 trillion kilowatt hours, by far the largest in the world. In terms of generating capacity, by 2013 China’s WWS sources (water, wind and solar) accounted for more than 30% of capacity (exceeding the unofficial 2015 target of 30%) and in terms of electrical energy generated, the WWS total was close to 20% of energy generated – exceeding the combined total of electrical energy produced by the power systems of France and Germany… In terms of capacity, wind overtook nuclear by 2008, and by 2013 had grown to 91 GW, compared with less than 15 GW for nuclear. In terms of actual electric energy generated, wind drew level with nuclear in 2012 and has remained ahead since then… ”. 31. See IEA (2014), and, for the past, Ma, Oxley, Gibson (2010). China has become net importer of oil since 1993: its imports have gone up to over half of internal petroleum consumption since 2008. 32. See Mathews, Tan (2014). Sse also Martinot (2010).

China in world economy

Hydro power production has been increased very much after the completion of the “Three Gorges Dam” and of other projects, but the solutions adopted have provoked huge environmental and social problems. The label of green energy is not wholly appropriate if we consider, for example, the environmental damages. In the three gorges dam case, there was the spoiling of the beauty of traditional views incorporated in a number of classic paintings and which constituted an essential aspect of Chinese environment. Moreover, there were high social costs due to the forced displacement of the population living in the now submerged area (about 1.2 million people) and some negative climatic effects, to be considered in front of the advantages of a great reduction of pollution for the production of electricity, the fall of the risk of flooding and the possible navigability of larger barges in the river basin. China has also rapidly become a very large producer and exporter of wind turbines and components and of solar panels. In 2009 Sinovel ranked third, after Vestas (Denmark) and GE Wind (USA); Goldwing fifth and Dongfang seventh among the top global corporations in the field. Also for the solar power sector, the rise was impressive. In 2009 China produced almost 40% of the total PV production in the world. A large part of the PV output was exported, but, since 2008, a rapidly increasing stock went to large China’s installations. In 2009 there were in China about 500 producers and “.. the top three Chinese producers were Suntech (705 MW), Yingli (527) and Ja (Jnglao) Solar (504 MW)”33. In the 2009-2014 years there was a further large increase in production and exports of Chinese solar PV, so that the US and EU were induced to introduce some protective measures for their solar industry. Bio-mass power was growing, but at a slower pace, reaching a capacity of about 5 MW in 2010 and a target of 13 MW in 2015 and of 30 MW in 202034. The objectives for 2020 for all renewables are very ambitious. In 2020 China intends to reach about 500 GW of renewable power capacity (300 hydro, 150 wind, 30 biomass

33. Martinot (2010), p. 3. 34. See Gosen J. (2014), p. 3.

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64

and 20 PV solar), i.e. almost one third of the expected total power capacity (1600 GW). Apart for the development of renewables, China is trying to introduce techniques, as the transformation of coal in gas or in liquid combustibles, which might reduce the CO2 emissions caused by the massive use of coal for power generation. Moreover China has planned a strong increase of nuclear power generation, that now is based on 15 reactors. In this field a part of the technology comes from abroad. Five of the new 26 nuclear power plants under construction are US’ Westinghouse AP 1000 units. However China’s nuclear power industry has already become relatively competitive. Most plants planned or under construction are China’s CPR 100035 and China’s firms have been able to obtain contracts for nuclear plants in some foreign countries. Finally, in December 2009, China announced, with a variety of policies, the goal of reducing energy intensity by 4045% by 2020 with respect to the 2005 level and in November 2014 has pledged to reach a peak of carbon emissions in 2030. Although China has begun to invest massively in green energy, its dependence in absolute volumes from oil and gas imports will continue to steadily increase. Probably there will be for a couple of decades a further increase in pollution level, especially in the largest metropolitan areas, although the expansion of electric or hybrid cars, of energy-saving buildings, of anti-pollution rules, of solar or wind power or other renewables might gradually reduce the speed of the increasing trend. 2.16. Saving, consumption and investment The huge growth of real GDP, of industrial production and of the service sector, in China from the 1980s up to now, is strongly associated to the extraordinary increase in capital accumulation. For several authors this was made possible by the heavy compression of internal consumption and the very high saving rate, which permitted the financing of rapidly increasing investments, mainly directed to industrial and tertiary

35. See WNA, World Nuclear Association (2013).

China in world economy

activities, in general more profitable than the agricultural ones. Also the growing inflow of foreign direct investment contributed to finance the capital accumulation effort, though internal savings, mainly of households and firms, continued to be the key factor. Public policy was also important, through the compression of public consumption and the rapidly growing effort in infrastructures. Table 2.10 gives an idea of the extraordinary progression in gross capital formation made in China since the 1970s. Table 2.10. Capital formation in China (1970-2012) Year

Capital formation in bln. US$ at constant prices

% share in GDP

% share of the US

% share in the world

1970

26.6

29.2

11.6

3.0

1980

58.0

34.8

16.0

3.4

1990

141.0

34.9

11.0

2.5

2000

384.7

35.3

17.4

5.5

2010

1419.9

48.1

103.9

18.9

2012

1671.0

48.1

129.8

22.7

Source: Kushnir (2014).

Capital formation in constant US$ has increased in China 62.8 times from 1970 up to 2012 and 28.8 times from 1980 to 2012. The share of capital formation on China’s GDP has grown from the already high level of 29.2% in 1970 to 48.1% in 2012, reaching one of the highest level in world economic history. In the 2010s, at current US$, China’s capital formation has even surpassed the level of the United States and has reached over a fifth of the entire world capital formation. According to dominant Western views36, the great, and increasing compression of household consumption, manifested in a exceptionally low consumption/ income rate, though permitting high saving rates and thus a easy financing of capital accumulation, constitutes a great limit of 36. See, for example, Blanchard, Giavazzi (2006), IMF (2009), Krugman (2010), but also the change in policy in favour of a rise in internal demand devised in China’s 12th five-year plan (2011-2016).

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China’s model of growth: a model which is presently too dependent on foreign markets and heavily contributes to global imbalances. If this is partly true, it is also true that in the long–run the rate of growth of real consumption in China has been one of the highest in contemporary economic history. As we can see in table 2.11, while in China the final consumption rate has been very low and with a decreasing trend in the 1982-2010 years, the annual rate of growth of household consumption at constant prices has been very high, surpassing 7.5% in the period 1978-2005 and reaching 9.8% in the 2006-2012 years. This strong rate of growth was essentially due to the rapid growth of GDP fostered by the very fast capital accumulation, partially made possible by the severe compression, in each year, of household consumption and the containment of public consumption. If consumptions are compressed, the rate of saving is very high. So, it is very important to analyse the main features of the savings/ consumption pattern in China in the post-1978 period and of their principal determinants.

66

Table 2.11. Consumption in China: 1978-2012 Periods and years

Final consumption Rate (%) (consumption/GDP)

Annual average % rate of growth of real household consumption

1978-80

64.0

8.0

1981-85

66.4

9.7

1986-90

63.9

4.4

1991-95

60.1

8.6

1996-2000

60.2

7.3

2001-2005

57.1

7.3

2006

50.8

9.8

2007

49.6

10.9

2008

48.6

9.0

2009

48.5

10.3

2010

48.2

8.2

2011

49.1

10.3

2012

49.5

9.4

Source: NBS of China (2014) tables 2-18, 2-23.

China in world economy

Table 2.12. Saving, investment and current account balance in selected countries in 2010-13 (average annual % share of GDP) Country

Gross domestic saving

Total investment

China

50.6

48.0

2.6

India

31.2

34.5

- 3.3

Current account balance

Russian Federation

26.7

23.1

3.7

Germany

24.1

17.5

6.7

Japan

22.4

20.5

2.0

France

20.9

22.5

- 1.6

Italy

17.3

18.8

- 2.1

Brazil

16.3

18.9

- 2.6

United States

16.0

18.9

- 2.8

United Kingdom

11.7

14.8

- 3.1

Source: IMF-WEO (2014).

As table 2.12 shows37, gross saving rate has reached in China a level much higher than in all other major emerging or industrialized countries. Domestic gross saving is almost completely due to the sum of government, corporate and household savings. China has saved more, in percentage of GDP, than most other major countries both in the public sector and in the private one (firms and households). However, the causes are different. In the public sector there was the political choice to compress the growth of public consumption in order to finance massive public investment, made possible by the great fiscal earnings associated to increase in taxation and in the concessions for the use of urban land. In state firms, after the restructuring of the sector in the late 1990s, there were high and growing corporate saving rates. This was mainly due to improved balance sheets and to the necessity to save and invest more in order to increase productivity since the financial support of the State was rapidly diminishing. Private firms had to massively rely on self-retained earnings in order to finance their investment also because of the distortions and inefficiency of China’s

37. Cristadoro, Marconi (2011) at pages 9-10 demonstrate that this is true also if we take into account the differences in stage of development.

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banking and financial system, which primarily financed the large state firms. However, a great part of the steep rise in China’s gross saving rate is due to the dramatic increase in household saving rate, which rose from about 5% of disposable income in 1978 to almost 40% in 200938. Cristadoro and Marconi have tried to explain this huge upsurge of the rate of saving, and the correlative reduction of the propensity to consume. The usual Modigliani-Cao approach39, based on a simple life-cycle model, gives only a partial and questionable explanation for China’s saving trends in the years 1953-2000 and cannot fully take into account the great consequences of the deep changes in social security made in China after the reform in the 1990s. In this period the old system of social protection (“iron bowl of rice”), based on job security, pensions, health, education and some housing services provided by the state and by state enterprises, was progressively demolished creating a very differentiated situation across provinces, between rural and urban workers and workers with or without “hukou” in urban areas. So, the traditional determinants of the rise in the saving rate in aggregate life-cycle models (long-term high rate of growth and demographic changes)40 are insufficient to explain the great rise in urban saving rate in the last twenty-five years. Moreover, the rural saving rate increased in the 1990’s, but decreased in the first decade of the 2000s. It is therefore necessary a disaggregated approach, based on the differences between provinces and between rural and urban areas. Cristadoro and Marconi’s main results based on a disaggregated approach are that “.. precautionary motives and liquidity constraints appear to be the likely causes of the recent increase in household savings in urban China… the lack of adequate safety nets and uncertainties induced by recent reforms are boosting self-insurance needs especially for pension and health-care purposes.”41 We finally remark that it is also necessary, for young cou38. See Cristadoro, Marconi (2011), p. 6. 39. See Modigliani, Cao (2004) See also Browning, Lusardi (1996), and the implicit or explicit criticisms by Horioka, Wan (2007), Chamon, Prasad (2010), Cristadoro, Marconi (2011). 40. See Cristadoro, Marconi (2011), p. 27. 41. Ibidem.

China in world economy

ples, to save more in order to be able to pay for the rapidly increasing costs of higher education of their children and for obtaining decent houses, whose prices are soaring in main urban centres. 2.17. Aspects of the labour market After the beginning of economic reforms in 1978, the labour market in China has registered continuous and very deep changes. In paragraph 2.12 we have already analysed the importance of structural transformations in employment occurred in China in that period. We briefly remind here two other aspects: a) The massive migrations from rural to urban industrializing areas and the associated problems of workers with or without hukou. b) The great transformations in employment, wages, unit labour costs and international competitiveness. The first aspect is crucial in order to understand the peculiarities of China’s model of growth. Table 2.13 confirms the very rapid urbanization process in the 1990-2013 period and the great, and increasing, gap existing between urban and rural per capita GDPs and disposable incomes. The proportion of urban citizens to the entire population almost doubled in the 1990-2013 years going up from 26.4% in 1990 to 54% in 2013. The ratio between urban and rural disposable income went up in period 1990-2013 from 2.2 to 3.1 and the saving rate was almost constantly higher in urban than in rural areas. China’s government plans to increase the urbanization rate to about 60% in 2020, and to partially relax the rigid hukou system increasing the percentage of people with full urban hukou on total population from 36% in 2013 to 45% in 2020. However, the measures taken on March 16th, 2014 to give full hukou urban status to about 100 million people are of very complex application in cities of more than five million people, and are difficult to finance for smaller cities42.

42. See Economist, May, 22, 2014 (The great transition).

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Table 2.13. Urban and rural differences in China: 1990-2013 Year

Urbanization rate

Urban immigrants without hukou (millions)

Urban to rural disposable income ratio

Saving rate (b)

urban

rural

1990

26.4

2.2

15.3

14.8

1995

29.0

2.7

17.4

16.9

2000

36.2

2.8

20.4

25.9

2005

43.0

3.2

24.3

21.5

126

2010

49.7

210 (e)

3.2

29.5

26.0

2013

54.0 (e)

250 (e)

3.1

…

…

(b) 2012 instead of 2013; (e) estimates. The table is mainly due to Cristadoro, Marconi (2011) p. 19 up to 2010; our elaborations for the succeeding years. Sources. China Statistical Yearbook, various years. OECD (2010), Borst (2012), Kam Wing Chan (2013) and Economist (May 22, 2014) for non-hukou estimates in 2013.

Table 2.14. Urban and rural employment in China: 1978-2012 (millions of employed persons and % at year-end) 70

Years

Total

Urban

Rural

Urban (%)

Rural (%)

1978

401.5

95.1

306.4

23.7

76.3

1980

423.6

105.3

318.4

24.9

75.1

1985

498.7

128.1

370.6

25.7

74.3

1990

647.5

170.4

477.1

26.3

73.7

1995

680.7

190.4

490.3

28.0

72.0

2000

720.9

231.5

489.3

32.1

67.9

2005

746.5

283.9

462.6

38.0

62.0

2006

749.8

296.3

453.5

39.5

60.5

2007

753.2

309.5

443.7

41.1

58.9

2008

755.6

321.0

434.6

42.5

57.5

2009

758.3

332.2

425.1

43.9

56.1

2010

761.1

346.9

414.2

45.6

54.4

2011

764.2

359.1

405.1

47.0

53.0

2012

767.0

371.0

396.0

48.4

51.6

Source: China NBS: Statistical Yearbook 2013. Table 4.2.

In any case, even if these measures would be fully implemented, there will remain the problem of zero or scarce provision

China in world economy

of basic social welfare, such as public health care, pensions and education, to a very large mass of illegal internal immigrants and their families. The big social divide between hukou and non hukou urban residents43 and the high income differentials between rural and urban households, if not adequately contrasted, might lead to major social and political tensions. The second important aspect regards the rapid transformations in employment, wages and international competitiveness. As table 2.14 shows, in 1978 a large majority of employed people (76.3%) worked in rural areas, but then there was a progressive shift of employment to urban areas, which in 2012 reached 48.4% of total employment. From table 2.15 emerges that in 1978 in urban areas most people worked in State-owned enterprises (SOEs), and this remained true up to the mid-1990s, though until the beginning of the 1990s also collective firms had consistently raised their employment level. Through their increasing FDI in SEZ and non SEZ areas, many corporations from Hong Kong, Macao and Taiwan and multinationals of other countries gradually rose the employment level of their activities in China. However, in the 1990s and in the 2000s, there was, above all, the rapid rise of private enterprises and urban self-employment. Employment in private urban firms surpassed employment in SOEs in 2011, going up in 2012 to the level of 75.6 millions. From the mid 1990s to 2007 State firms were subject to massive restructuring and sales of activities, in order to regain productivity and profitability, and so they lost over 48 million employees. However, since 2007, with better balance sheets, they were able to return to increase employment even in the troubled years of the global financial crisis. In rural areas there has been a gradual rise in employment in private enterprises. There has been also, only up to 1998, an increase in rural self-employed people, but a constant reduction of total rural employment since 1997.

43. In 2012 the average wages of migrant non hukou-workers were less than 60% of their urban counterpart (see Melander, Pelikanova, 2013, p.5) http://ec.europa.eu/economy_ finance/publications/economic_briefs/2013/pdf/eb26_en.pdf

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Table 2.15. Employment by type of firms’ ownership: 1978-2012 (millions) Years (1)

SOE (2)

Coll. (3)

Cor. (4)

Priv. H.K (5) (6)

For. (7)

U.S.E (8)

1978

74.5

20.5

0.2

1980

80.2

24.3

0.8

1985

89.9

33.6

1990

103.5

36.5

1995

112.6

32.0

2000

81.0

17.0

2005

64.9

10.4

2006

64.3

9.9

2007

64.2

2008

64.5

2009

R. pr. (9)

R.S.E (10)

4.5 0.6 0.04

0.6

6.1

1.1

14.9

3.2

4.9

2.7

2.4

11.4

12.7

3.1

3.3

15.6

4.7

30.5

21.4

11.4

29.3

24.5

34.6

5.6

26.6

39.5

6.1

6.9

27.8

23.7

21.2

8.0

30.1

26.3

21.5

9.3

28.6

45.8

8.6

30.3

51.2

6.8

9.0

33.1

26.7

21.9

6.8

9.4

36.1

27.8

21.7

64.2

8.2

33.9

55.4

7.2

9.8

42.5

30.6

23.4

2010

65.2

8.1

2011

67.0

7.9

36.4

60.7

7.7

10.5

44.7

33.5

25.4

44.5

69.1

9.3

12.1

52.3

34.4

27.2

2012

68.4

7.8

50.3

75.6

9.7

12.5

56.4

37.4

29.9

Notes: col. 2: state-owned enterprises; col. 3 comprises collective owned units, cooperatives and joint ownership units; col. 4 comprises limited liabilities and shareholding corporations; col. 5 refers to urban private enterprises; col. 6 comprises firms with funds from Hong Kong, Macao and Taiwan; col. 7: foreign funded units; col. 8: Urban self employed individuals; col. 9: private rural enterprises; col. 10: rural self-employed individuals. Source: China NBS: Statistical Yearbook 2013. Table 4.2.

These sweeping variations in employment were accompanied by very rapid changes in wages. Table 2.16 gives a synthetic idea of major changes in wages dynamics in the 1995-2012 years. While in 1995-97 the dynamics of real wages was relatively slow, from 1998 to 2009 it greatly accelerated. There was in these years a two-digit rate of change in real wages, but in the 2010s there was a slowing down of their rate of growth. In the whole 1998-2012 period, on the average, the rate of change of real wages was higher than both the rate of growth of real labour productivity and the rate of growth of real GDP, while in many of the preceding years the opposite had been true.

China in world economy

Table 2.16. Wages dynamics in urban areas: 1995-2012 Average nominal wage (yuan)

Rates of changes of real wages

Year

Total

Staff and worker

Total

Staff and workers

1995

5348

5500

1.8

3.8

1996

5980

6210

2.8

3.8

1997

6444

6470

4.5

1.1

1998

7446

7479

16.2

7.2

1999

8319

8346

13.2

13.1

2000

9333

9371

11.3

11.4

2001

10834

10870

15.3

15.2

2002

12373

12422

15.4

15.5

2003

13969

14040

11.9

12.0

2004

15920

16024

10.3

10.5

2005

18200

18364

12.5

12.8

2006

20856

21001

12.9

12.7

2007

24721

24932

13.4

13.6

2008

28898

29229

10.7

11.0

2009

32244

32736

12.6

13.0

2010

36539

37147

9.8

10.0

2011

41799

42452

8.6

8.5

2012

46769

47593

9.0

9.2

China BNS, Statistical yearbook 2013, table 4-11.

The growth in real wages was partly due to a gradual change in the government policy and to the rise in minimum wages44. While China as far as 1984 had approved ILO’s Minimum-Wage-Fixing Machinery Convention, only with the Labour Law passed in July 1994, did China formally require the firms to comply with local minimum wage regulations. “…In March 2004 the Ministry of Labour issued a new directive that established a more comprehensive coverage of minimum wage standards and increased non-compliance penalties. In particular, this reform emphasized the following 44. On minimum wages and their impact on employment, see Huang, Loungani, Wang (2014).

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major changes: (1) an extension of coverage to town-village enterprises and self-employed business; (2) creation of new standard for hourly minimum wages; (3) an increase in the penalty for violators from 20%-100% to 100%-500% of the wage owed; (4) more frequent minimum-wage adjustment once at least every two years.”45 So, the enforcement of the law was widened and strengthened, though local authorities could adjust its application according to cyclical events and local conditions. In 2008 there were policy guidelines allowing delays in wages adjustments, due to the aim of contrasting the negative impact of the global financial crisis on China’s firms. There was, however, in the same year, a new labour contract law, which fully incorporated minimum wages policies. In the meanwhile, there was an increasing number of labour tensions and hot labour disputes, especially concentrated in foreign owned firms. Protests and strikes attempted to raise wages, to reduce working time and to improve labour conditions in factories where they were, in some cases, utterly inhuman. If successful, these results were often extended, with some delays, to other firms. Finally, for certain positions requiring highly specialized skills, the labour supply was lower than the rapidly expanding demand of labour, so that wages for these jobs were briskly increasing. All this contributed to raise wages and labour unit costs, reducing the gap with richer industrialized country. Moreover, while China’s renminbi versus the US dollar had strongly depreciated in the 1985-1995 years and had remained more or less stable from 1995 to July 2005, from then up to January 2015 it has appreciated by about 25%. The recent trends have contributed to induce several Chinese firms to increase their outgoing FDI and their off-shore practices in other lowcost countries or to foster process and product innovations in order to increase more rapidly their inland productivity and maintain good profit margins even in presence of rapidly increasing wages. The rise in total employment, together with the increase in real wages, led to a rapid rise in the total wage bill. Howev45. See Huang, Loungani, Wang (2014), pp. 4-5.

China in world economy

er, there was also a marked change in the composition of the wage bill. While in 1995 a great part of the total urban wage bill came from state firms (76.6%), in 2012 SOES accounted for only 46.5% of the total urban wage bill, while non-state and not collective firms accounted for 50.7 per cent46. It is important to notice that the vast increase in the wage bill in the 2000s has not led to an extraordinary rise in consumption, mainly because of the increasing propensity of saving we have discussed in paragraph 2.16. However, in the 1978-2012 years real consumption has risen by over 8% a year, a rate of growth much higher than the ones displayed in most other emerging countries. Finally, we must remember that there are persistent large differences in urban wages per person employed between Chinese provinces. In 2012, for example, Beijing had a level 2.3 times higher than Yunnan, one of the poorest provinces. 2.18. Globalization, China and global imbalances China has experienced its period of very rapid economic growth during the second wave of economic globalization, which has occurred from the 1970s up to now. In this period there has been a rapid rise in global economic interconnections, at first mainly between Western countries and some developing States, then also with China, Eastern European countries and the former USSR and finally also with other emerging countries like India and Brazil. In particular, since 1978 China has greatly encouraged the inflow of foreign direct investment, mainly through the special economic zones (SEZ). As table 2.17 and 2.18 show, in the 1990s there has been a very large inflow of foreign direct investment, mostly in the form of joint-ventures with Chinese firms, while in the 2000s there has been also a rapid increase in China’s outward FDI. China has also gradually relaxed the control of central planning on foreign trade, increasing its exports more rapidly than imports especially during the 1990s and the 2000s. China’s 2001 entry in the WTO has strongly contributed to China’s exports’ boom. Large FDI from foreign multinationals have further helped to increase exports, especially in high46. See China BNS (2014), table 4-10.

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Table 2.17. China in the second globalization wave (1990-2013) 1990 Degree of openness (a)

2000

2008

2013

16.1

19.8

31.1

23.5

Stock of inward FDI in % of GDP

5.1

16.2

8.3

10.4

Stock of outward FDI in % of GDP

1.1

2.3

4.1

6.7

(a) (Merchandise exports + imports)/2 in % of GDP: 2012 instead of 2013. Sources: UNCTAD (2014) for FDI, World Bank (2014) for degree of openness.

Table 2.18. China: exports, imports, balance of current accounts and FDI (billions current US dollars and % of GDP), 1982-2012

76

1982

1990

2000

2008

2012

Exports of goods and services

23.6

57.4

279.6

1493.6

2167.2

Imports of goods and services

18.9

46.7

250.7

1144.7

1935.4

Exports of goods and services as % of GDP

8

15

23

35

27

Imports of goods and services as % of GDP

7

12

21

27

25

5.6

12.0

20.5

420.6

193.1

1.7

9.3

2.3

Balance of current account Balance of current account as % of GDP Stock of inward FDI

20.7

193.3

292.6

832.9

Stock of outward FDI

4.5

27.8

184.0

512.6

Sources: World Bank (2014) and UNCTAD (2014) for FDI.

technology sectors. Therefore, China has rapidly become the top exporter manufacturer country in the world, surpassing Germany, the US and Japan. Moreover, China has passed in the last two decades to the status of a surplus country in the balance of current accounts (see table 2.18). While in the 1980s China’s balance of current accounts was alternatively in deficit or in surplus, in the 1990s it was, with the exception of 1993, always in surplus. The surplus rose to huge amounts both in absolute terms and in percentage of GDP. The latter passed from 1.3% in 2001 to 10.1% in 2007 and 9.3% in 2008. After the negative impact on exports of the global financial crisis the percentage went rapidly down to 2.8% in

China in world economy

2011 and to 2% in 2013, but continued to remain very large in absolute terms47. In fact in 2013 the surplus in the current account of the balance of payments amounted to 201.7 billion US dollars. The large surplus of China’s current account in the balance of payments in the last two decades has strongly contributed to a a transformation from a net debtor position (until the 1990s) to a huge net creditor one. In 2011 China ha become the second world largest net creditor country, with about 1.3 trillion US$, following Japan (3.3 trillion $) and preceding Germany (US$ 1.2 trillion)48. Moreover, China could rapidly increase its international reserves in gold, SDR’s, US dollars, and other hard currencies, reaching in March 2014 almost 4 US$ trillion, the largest value in the world. Finally, China could rapidly expand the resources administered by its four sovereign funds. In 2014 the main wealth fund (CIC) administered about 650 billion US$, of which around $200 billions invested abroad49. There was, therefore a deep global imbalance, in particular between China and the United States. In the last two decades China has provided the US with a huge and growing amount of goods. Thus, the US trade balance has been in deep structural deficit with other countries, and especially with China, while China’s trade balance has been in structural surplus. However, China has used a large part of dollars accruing to China for their exports to the United States to buy US financial and real assets (Treasury bills, US bonds, US shares and firms). There has been, therefore, a sort of re-equilibrium and a deep and growing interconnection between the two great economies. However, China has recently begun to stimulate the rise of its internal demand in order to reduce its dependence on export, while the rapid rise in shale gas production in the US has contributed to reduce the American current account deficit. Moreover, China has tried to reduce the share of their financial assets in US dollars, in47. See World Bank (2014). 48. For a comparative analysis of international financial positions, see Lane, Milesi-Ferretti (2001), (2011). For China, see Guonan, Zhou (2009) and Prasad, Ye (2012). 49. See Anderlini (2014). http://www.ft.com/intl/cms/s/0/64362b08-f61a-11e3-a03800144feabdc0.html#axzz3QbDC6oLS.

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creasing the share of yen and euro assets. Recently, China has proposed to some Asian, African and Latin American countries to do trade exchanges directly paid with their goods or their national currencies. Finally, in September 2012, China proposed to pay oil imports in yuan rather than in US dollars. If this trend will be consolidated there will be a gradual weakening of the dollar as the dominant international currency and a progressive rise in the international status of China’s currency. In the long-run the US and Europe’s de-industrialization process will provide China with such large financial means to gradually shift a substantial part of global financial power from New York, London, Frankfurt and Tokyo to Hong Kong, Shanghai and Shenzhen, although the United States are trying to re-industrialize some productions, thanks to the low prices of shale gas and energy, and to increase their exports in modern services. 2.19. The dark side of China’s rapid economic growth The phase of very rapid, and partly fordist-toyotist, growth of the Chinese economy has been accompanied by serious economic and social problems. 1) The danger of excessive dependence of China’s economy on exports of manufactured goods. 2) The rapid increase in economic and social inequalities. 3) The increasing dependence on energy imports and the very fast rise in pollution, which can seriously undermine the quality of life for the present and future generations. 4) The rapid ageing of the population. 5) Heavy bureaucracy and extensive corruption. 6) Lack of democracy and of several important civil rights. 7) Bad working conditions and almost no welfare for a large number of workers internally migrating without official authorization. In the following pages we will concentrate mainly on the first six aspects, having already treated of the last point in paragraph 2.17.

China in world economy

2.20. Excessive dependence on exports The first problem is the other side of the extraordinary success in industrial growth and in the exports of manufactured goods. The Chinese economy has expanded the production of several industrial goods very fast and, since the 1990s, has rapidly penetrated foreign markets, but this has created a series of problems. There have been an excessive dependence of Chinese industry on exports and an over-production of some goods in the world market. This has contributed to determine a series of severe re-adjustment problems of entire industrial sectors in most industrialized and emerging countries. There have been increasing reactions from other countries, which, in the present context, might originate strong protectionist pressures in the United States and other foreign countries. Internally, the extraordinarily rapid rise in investment in the Chinese industry has contributed to determine such a rapid rise in labour productivity that a 6-7% rate of growth of real GDP, would not be enough to ensure a rise in total employment and therefore would lead to a vast and socially disruptive expansion in unemployment. An example is given by the consequences of the great financial crisis of 2007-8. In 2008-9 the reduction in the rate of growth of Chinese exports has contributed to lead to a fall in China’s GDP real rate of growth from 14.2 in 2007 to 9.2 in 2009. There has been, even in presence of an important government’s stimulus package, a consistent decline in the rate of growth of aggregate demand, a rise in unemployment and the necessity of a return to rural areas of many unemployed people. It would be therefore important to reduce the long-run rate of growth of labour productivity, in order to increase employment even in presence of a reduced rate of growth of GDP. This might be accomplished through the reduction in the rate of growth of investment in industry and the channelling of more resources to agriculture and to services, and especially to social security, the health system, public education, banking and financial services in rural areas and environmental policies. This policy would contribute to increase internal consumption, reducing the incentive to save, partly caused by the poor welfare system and the high cost of private education. It could also reduce the economic instability due to export volatility and better, at the same time, the quality

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of life because of the improvement in environment and in social services. 2.21 Inequality, poverty and welfare Secondly, there has been a strong increase in the inequality of income distribution. In 1978 in China inequality among families or individuals was very low in comparison with most other countries, but after the economic reforms it continued to grow. In the 2000s they had become very high. According to the head of China’s National Bureau of Statistics, in 2012 in China the Gini index on income distribution had reached 47.450. So, it was much higher than in several industrialized countries such as Sweden, Japan, Germany, France, Italy and even higher than in the United States. In 1978 in China there were already consistent income inequalities among the rural and the urban areas and among different provinces, but they enormously increased in the period of rapid growth, though in the last few years some of the poorest provinces have began a timid catching up. Overall income inequality increase has crucially depended on three aspects: the rise in both rural and urban inequalities and the rise in urban/ rural per capita income ratio, while regional inequalities have been spurred by the high concentration of investment and industry in SEZ and, in general, in the coastal areas. Even if it is too early to interpret the trend of growing economic inequality as persistent and irreversible, or, on the contrary, as the first ascending phase of a Kuznets’ inverted u-shaped curve51, it is most likely that these trends have increased social discontent, although the improvement of economic conditions in several low-income people, due to the very rapid growth, has dampened social tensions. The large increase in income inequalities among families has contributed to raise inequality in the access to higher education although inequality in basic education has decreased52. Especially in the urban industrializing areas, better

50. See http://www.reuters.com/article/2013/01/18/us-china-economy-income-gap-id USBRE90H06L20130118. 51. See Kuznets (1955). 52. See Saccone (2008) and (2012). On inequality in China see also, for example, Galbraith, Krytynskaia,Wang (2004), Kanbur, Zhang (2004), Chen, Zhou (2005), Sicular (2013).

China in world economy

job opportunities and better wages are offered to people with university or post-graduate education, who generally have also a higher social capital. There is therefore the danger that current inequalities in income and higher education will determine further larger income and wealth inequalities in the future. In China it is very difficult to obtain adequate data on wealth inequality. However, two rough indicators can give an idea of the very rapid growth of private wealth in China. The 2014 Forbes list of the 500 richest people in the world includes 32 Chinese multi-billionaires (in US dollars), plus various Hong Kong tycoons, while in 2003 the number was zero for China and three for Hong Kong. In the 2014 Forbes ranking of the largest public companies in the world, China held the first three positions and five of the top ten companies, as many as the dominant capitalist country, the United States. In the first Forbes list, in 2003, China had been completely absent from the top ten list. To be very rich or a top manager of a very large corporation usually makes possible to have high savings and therefore huge incomes from interests, dividends, capital gains and real estate rents. Thus, the very fast growth of the Chinese economy and the rise of private firms and of the size of giant state corporations have nurtured a rapidly growing class of super-rich also in China, who have often maintained close ties with the political and bureaucratic powers. All this has contributed to enlarge the economic gap between ordinary workers and the growing class of new rich families. However, the rise in income and wealth inequality has been accompanied in China by a reduction in absolute poverty. As we can see in table A4 in the statistical appendix, the World Bank poverty index has fallen from 85% in 1990 to 18.6% in 2011. Still, there has been a dangerous polarization of poverty in certain rural internal zones, and in poor suburban quarters in the major cities. The living conditions of poor peasants in rural areas and of illegal internal immigrants in the cities have been worsened by the lack of adequate pensions and the heavy increase in costs of housing, health care and education.

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2.22 Energy and the environment The rapid industrialization and urbanization process, the increase in the use of private means of transportation (cars, trucks, motorcycles, etc.) in recent years and the growing diffusion of PCs, domestic electric appliances and air conditioning units have very rapidly increased both energy consumption and energy production, energy dependence from abroad53 and air and water pollution. The rise in energy consumption has been extraordinarily rapid. As table 2.19 shows, total energy consumption has increased by over 6.3 times from 1978 to 2012 while total energy production has increased by about 5.3 times in the same period. Around the mid-1990s China has passed from being a net energy exporter country to a net-importer position. China’s dependence on energy import, especially for oil and natural gas, has skyrocketed in the 2000s, so that China has become the second largest net energy importer in the world and will soon become the top importer. Table 2.19. Energy production and energy consumption in China (in million tons of SCE) Years

Total energy consumption

1978

571.4

Total energy production 627.7

1980

602.8

637.4

1985

766.8

855.5

1990

987.0

1039.2

1995

1311.8

1290.0

2000

1455.3

1350.5

2005

2360.0

2162.2

2010

3249.4

2969.2

2011

3480.0

3179.9

2012

3617.3

3318.5

Source: NBS of China (2014), tables 8-1 and 8-2.

The reaction of Chinese government to the rapidly increasing energy dependence has been the attempt at establishing solid relations with oil producing Middle East, African and Latin American countries. This led to a rapid growth 53. See Ma, Oxley, Gibson (2009).

China in world economy

of Chinese financial aids, FDIs and construction works in these countries, but sometimes also to some neo-colonialist attitudes in Chinese operatives. There was also the attempt at increasing nuclear energy, hydro-electric power and other renewable energy sources, to encourage energy saving policies and to boost the research on cleaner usage of coal and renewables. Since China seems to have big resources of shale gas and shale oil, there has been also the drive to make exploratory researches in this field, which, however, can create severe environmental problems. The reaction of Chinese government to growing environmental damages had at first been inadequate and delayed, although in recent years several environmental measures have been introduced, both because of the 2008 Olympic games in Peking and of the growing perception of the negative consequences of pollution and global warming. Notwithstanding all these efforts, China remains a highly polluting country. In terms of total CO2 emissions, China has surpassed the United States, though its per capita emissions are much lower than US and European standards. The heavy CO2 emissions are partly due to the fact that China, being rich in coal reserves, uses very extensively coal for the production of electricity and domestic heating. In 2012 coal accounted for 76.5% of total energy production, while crude oil and gas accounted for 8.9% and 4.9%, and nuclear plus renewable sources accounted for 10.3%. Moreover, certain areas of the country face worsening problems of poor water quality, or lack of fresh water, while indiscriminate urban expansion is destroying a large part of the historical and natural heritage. In addition, the circulation of motor vehicles is increasing so rapidly to determine severe problems of congestion and air pollution. However, in such a bleak picture, there are some encouraging signs. There have been some recent effective anti-pollution measures and the increase of incentives for renewables. These incentives are not only directed to the production and exports of products such as solar panels and wind-mills, but are also aimed at a larger diffusion of renewables in the country. Moreover, on October 12, 2014, in the APEC conference, president Obama and president Xi made an historical an-

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nouncement. In 2025 the United States would reduce the carbon emissions at about 26-28% of the 2005 level, while China pledged to reach peak emissions by 2030, and to increase the use of green energy (solar, wind, etc.) up to 20% of total energy production in 2030. 2.23. Ageing and other fragilities Several other weaknesses have increased in China in the last decades. First of all there is the phenomenon of ageing. The tighter demographic measures taken in the 1970s and the one-child policy54 officially adopted since 1979 have led to a sharp reduction in the fertility rate and a progressive deceleration in the rate of growth of population. This has helped economic development, but has created many social problems, including a large imbalance between males and females in the population, because of the traditional preference accorded to males in most families. The economic advantages (demographic dividend) of the last four decades were mainly due to the rapid fall in the dependency rate for young children and the large increase of the population in active age because of the delayed effects of the high birth rates in the 1950s and 1960s and the progressive rise in life expectations. However, the situation is rapidly changing. As we can see in table 2.20, while children and young people (age 0-14) have constantly diminished from 1982 up to 2012, the percentage of people in active age (15-64) has increased till 2010 and then has begun to decline, while the number and percentage of aged people (65 and over) has continuously increased. While the dependency rate of children has decreased, the dependency rate of old people has progressively increased, so that even total gross dependency rates has begun to grow since 2011. Excessive ageing of the population determines growing negative economic and social consequences. Not only ageing increases the costs of pensions and health services, but also it can progressively undermine economic dynamism. Older people tend to be more risk-averter than younger people. They tend to create less start-up enterprises,

54. Actually several exceptions to the rigid rule of one-child were allowed and some ethnic groups were exempted. In 2014 there was a further attenuation of the norm.

China in world economy

to avoid product and process innovations, to prefer safe financial assets to more risky productive ventures. Table 2.20. Some demographic indicators in China: 1982-2012 Year

Total population (millions)

Aged 0-14 (%)

Aged 15-64 (%)

Aged 65 and over (%)

Gross dep. ratio (%)

Children dep. ratio (%)

Old dep. ratio (%)

1982

1016.5

33.6

61.5

4.9

62.6

54.6

8.0

1987

1093.0

28.7

65.9

5.4

51.8

43.5

8.3

1990

1143.3

27.7

66.7

5.6

49.8

41.5

8.3

1995

1211.2

26.6

67.2

6.2

48.8

39.6

9.2

2000

1267.4

22.9

70.1

7.0

42.6

32.6

9.9

2005

1307.6

20.3

72.0

7.7

38.8

28.1

10.7

2010

1340.9

16.6

74.5

8.9

34.2

22.3

11.9

2012

1354.0

16.5

74.1

9.4

34.9

22.2

12.7

Note: dependency ratios in columns 6-8. Source: BNS of China (2014) table 3-4.

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Another important flaw in Chinese economy is the financial system. The rapid economic growth has strongly contributed to greatly expand the Chinese banking and financial system, but the four main Chinese banks are structurally weak because they have to finance several ailing state firms. Moreover, the Chinese stock exchange markets (Shanghai, Shenzhen and part of Hong Kong) have registered phases of dangerous speculative bubbles, which have been controlled by the government and the Central bank with increasing difficulty55. Finally, China’s major banks back almost exclusively big state enterprises, while smaller private firms must heavily recur to self-financing and the help of local informal financial circuits, and have often difficulties in financing their rapid expansion. The other great challenges confronting China are connected with its opaque judiciary system and its convoluted property rights situation, but above all with its social and po-

55. See Chiarlone, Ferri (2007), Sau (2009).

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litical problems. There are two main questions. For how long can an authoritarian, single-party state continue to withstand the pressures of ethnic and religious divisions (for example in Tibet, and for Muslim minorities) and of growing inequalities between regions and families, in a new China where the market is propagating values very different from those instilled by Communist ideology? For how long can the country continue to suppress the dissatisfaction of millions of young people, many of whom have studied abroad or are increasingly influenced by satellite TV and internet? Several people might grow increasingly impatient of corruption, of the lack of civil rights and of rigid hierarchies and privileges of party bureaucrats. The continuation of a good economic performance would surely attenuate these problems, but what would happen in the case of a severe economic depression? 2.24. Conclusions If, as it is likely, in the next years the rate of growth of China’s economy will continue to be much faster than the one of the United States, China will soon surpass the United States as the largest economy in the world in terms of total GDP in PPPs., both for Conference Board EKS data and on the basis of conservative World Bank estimates56. However, for some decades China will continue to register a per capita GDP and a human development index inferior to that of United States. For several years China will also continue to have a technological, military and political power inferior to the US, although rapidly growing over time. However, if for one or two decades China will be able to conserve an important surplus in the balance of current account, its international financial power will rapidly increase and its currency will be rivalling both the US dollar and the euro. Several important factors might alter this scenario. First, social and political tensions might occur because of the intrinsic contradiction between a growing economic liberalization and a rigid authoritarian one-party political system. Secondly, the large diffusion of corruption, high and increasing economic inequalities and exceedingly low wages in some sectors and areas might lead to social tensions, disrupting labour dis56. According to Conference Board-GGDC GK and IMF estimates China has already surpassed the US in total GDP in PPPs.

China in world economy

putes, and periods of rapid surge of wages. Thirdly, growing pollution and congestion problems in urban areas might require costly anti-pollution policies and a reduction of the rate of economic growth. Moreover, the necessary improvement in the welfare state (pensions, health, public education, etc.) will tend to reduce the existing very high rate of saving and of capital accumulation. The excessive dependence on exports might be dangerous and ought to be mitigated by a policy tending to increase internal demand, policy that has been too timidly commenced in recent years. Moreover, China will increasingly face the problem of rapid ageing of the population with its negative effects on public expenditure for health and pensions and on the overall dynamics of the economy. Finally, China will gradually lose the advantages of economic backwardness and of the fordist-toyotist model of growth and of the possibility to rely on rapidly increasing exports. By a matter of fact China’s political leaders are well aware of some of these weaknesses. They have recently acknowledged the necessity to pass to a structurally more balanced model of development, allowing a greater increase of wages and the internal market, promoting the expansion of a green industry, fighting corruption, fostering the growth in some of the poorest internal provinces, improving a little bit the welfare state, relaxing the demographic restrictions, and permitting a gradual appreciation of the Chinese currency against the US dollar and the euro. All this will lead to a reduction in the rate of growth of the economy, as the Report China 203057 jointly prepared by the experts of China’s Development Research Council and the World Bank, has foreseen. So, China will probably remain for some decades the major country with the fastest rate of growth, but probably its economic performance will be gradually worsening.

57. See World Bank, Development Research Center of the State Council, the People’s Republic of China (2013).

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China: main political and economic events (1949-2014) Years or Periods

Main events

1949

China’s communist party’s army defeats the nationalist forces and gains the control of mainland China. Founding of the People’s Republic of China.

1949-52

Reconstruction of the economy with the support of the Soviet Union and of Chinese experts often trained in the USSR. 1950-1953 Korean war. China’s and Soviet Union’s military support to North Korea against South Korean, US and allied forces. 1950: Annexation of Tibet.

1953-57

Five years plan, largely modelled on Soviet ‘s type plans. Relatively good economic performance.

1958-61

Great Leap Forward and its failure. Severe economic crisis. Famines and deaths in the poorest rural areas. 1960: Break up between the Soviet Union and China. Severe economic crisis.

1961-66

Period of re-adjustment. More importance given to experts and material incentives. Some reduction in Mao Zedong’s political power. Economic recovery and expansion. 1962. Sino-Indian frontier war. 1964. First explosion of a Chinese atomic bomb.

1966-69

1966: Mao Zedong launches the Cultural revolution and regains complete control on the Communist Party. Diffusion of Mao’s little red book. Intellectuals, managers and experts are persecuted by red guards and often sent to do manual jobs in rural labour-camps. 1969. Sino-USSR border conflict.

1970

1970. Attempt to return to some political and economic order reducing the excesses of the cultural revolution. First satellite launch with a “Long March” rocket.

1972

Visit to China of US president Richard Nixon. Beginning of a normalization of US-China relations, culminated in 1979 with the establishment of diplomatic relations.

1976

Mao Zedong’s death and political struggle, with the defeat of the “gang of four”.

1977

Deng Xiaoping, rehabilitated, seizes the power.

1978

Beginning of deep economic reforms, first in agriculture and then in industry and services. Institution of SEZ. Beginning of the phase of rapid economic growth.

1979

The authorities impose the “one-child” demographic policy.

1982

China’s Constitution.

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China in world economy

1989

Tianammen square’s mass protest and brutal military repression. Jiang Zemin replaces Zhao Ziyang (who was contrary to Tiannamen’s repression) as general secretary of Chinese Communist Party. Opening of Shangai and Shenzhen stock-markets.

1993

Jiang Zemin becomes president.

1997

Death of Deng Xiaoping (February 19). Demonstrations, bombs and deaths in Xinnjiang. Hong Kong returns under China’s sovereignty (July 1).

1998

Zhu Rongji becomes prime minister. Reaction to a limited deceleration in the economy. Massive restructuring of State enterprises in difficulty through mergers, sales and closures.

1999

Macao returns under China’s control.

2001

China enters the WTO.

2002

Hu Jintao replaces Jiang Zemin as general secretary of the Communist Party.

2003

Hu Jintao replaces Jiang Zemin as president. Launch of the first Chinese manned spacecraft.

2004

China signs trade agreement with ten South-East Asian countries.

2006

Completion of the Three Gorges dam, with its vast hydroelectric capacity, but its severe social and environmental impact. China-Africa summit in Beijing leading to important business agreements.

2007

Legal recognition of private ownership, informally tolerated since the late 1980s.

2008

Anti-China protests in Tibet. China-Russia treaty ending border disputes. Olympic Games in Beijing. Stimulus package (586 million $) to reduce the negative impact of global financial crisis.

2009

Russia-China agreement for oil supply in the next 20 years. New protests and ethnic violence in Xinijang.

2012

Scandal Bo Xilai, a regional party leader, and his wife. Congress nominates Xi Jinping general secretary of the Communist party.

2013

March: Xi Jinping becomes president. Anti-corruption plans. Economic policies attempting to increase internal demand and to relax one-child policy and regulations for internal immigrants.

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2014

Riots in Xinijiang. China-Vietnam tensions. Protests in Hong Kong. Russia-China agreement for a 30 years gas furniture worth 400 billion $.

2015

The “Asian Infrastructure investment bank” (AIIB), promoted by China, is accepted also by the United Kingdom, France, Germany and Italy.

The Economic Rise of China and India Vittorio Valli

3. India

3.1. Introduction Like China, India experienced a steep relative economic decline during the final decades of the 19th century and in the first half of the 20th century. While in 1870 India had a total GDP higher than the United Kingdom and the United States, though with a much lower per capita GDP and technological level, in 1913 and 1946 India’s total and per capita GDP went down dramatically with respect to the US and other industrialized countries. India’s total GDP in percentage of the US level fell from 137.1% in 1870 to 39.5% in 1913 and 19.8% in 1946 (see table 3.1). If we consider the present borders, accounting for the division between India and Pakistan, the fall was even larger, going down to 16.3% in 1946. This impressive relative economic decline was partly due to colonial exploitation and the short-sighted centre-periphery economic policies of the British Empire, which concentrated the industrialization process principally in the centre of the empire, the United Kingdom. In 1947 India finally gained its hard-won independence from the British Empire, but this great historical turning point was preceded by a civil war between Hindus and Muslims and the ensuing split of Muslimmajority Pakistan from Hindu-majority India. There followed

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a period of disorders and conflict, with the assassination of Gandhi in 1948 and the contested annexing of the Indian local kingdoms, which had formerly been semi-independent, although in practice they had been largely subject to the British power. Table 3.1. GDP, per capita GDP and population in India: 1870-1947 (US = 100) 1870 (a) Real GDP (c) Real per capita GDP (c) Population

1913 (a)

1946 (a)

137.1

39.5

19.8

1946 (b) 16.3

21.8

12.7

6.8

6.7

628.7

311.1

289.1

241.7

(a) India before the partition between India and Pakistan; (b) India with the present borders; c) data in PPPs GK. Sources: Maddison (1995), pp. 106, 183, 197 e (2001), pp. 203.

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3.2. The phases of economic development In the 1947-2014 years we can distinguish five main phases in India’s economic development, partly associated to tragic political events or drastic changes in political and economic strategy: a) The Nehru era (1947-1964); b) the years of social and political instability (1964-beginning of 1966); c) the period dominated by the strong personality of Indira Gandhi (1966-84), in power from 1966 to 1977 and from 1980 to 1984; d) the phase of Rajiv Gandhi (1984-1991); e) the years of economic reforms and the acceleration of growth (1991-2014). Table 3.2. India’s economic growth (average annual compound rates of change) 194750

195064

196466

196684

Real GDP

1.5

4.1

-1.5

3.5

5.2

6.7

Population

1.2

2.0

2.2

1.9

2.1

1.7

Real per capita GDP

0.3

2.1

-3.6

1.6

3.1

5.0

198491

19912013

Sources: Maddison (2001), p. 203 and Conference Board-GGDC (2014). Our elaborations on GDP data in PPP GK for the years 1947-50 and PPP EKS for all the succeeding years.

India in world economy

As we can see in the first three columns of table 3.2, the Nehru period was a phase of a very slow growth in the first three years, and then of a discreet acceleration of growth in the 1950-64 years1. In the whole 1947-64 period, there was the continuation of a slight relative economic decline, although some economic reforms contributed to reduce poverty. The second period (1964-66) registered an economic slump, while Indira Gandhi’s years led to an increase of the rate of growth of real per capita GDP (+ 1.6) and an attenuation of relative economic decline. The Rajiv Gandhi’s years and, even more, the 1991-2014 period registered a progressive acceleration of growth and a phase of rapid relative economic ascent. However, some social problems, such as mass poverty, poor housing, little schooling for a relevant part of the population, inequalities and pollution, remained very severe and in certain cases continued to worsen. 3.3. The Nehru era In the period 1947-64, Jawaharlal Nehru, the leader of the Congress party, held almost complete power. Until 1950 Nehru was in part influenced by Patel, the political leader of the conservative wing of the Congress party, but after 1951 he became much more autonomous in his actions. India is a Union of States embracing a number of different ethnicities, language and castes, including substantial minorities of Muslims (about 11%) and other religions different from Hinduism (about 9%). What Nehru sought to create – on the whole with fairly good results – was an internally secular and democratic State, externally neutral between the two blocs. However, in foreign policy India had to confront recurring frictions and bloody wars with Pakistan over the issues of Kashmir and East Pakistan, and with China over certain border areas. With regard to economic policy, Nehru’s approach, favouring a mixed economy that incorporated some socialist elements, was only in part successful. It comprised some degree of agricultural reform, considerable protectionism and strong intervention of the State in the economy through economic planning and heavy regulation of the private sector. The agricultural reforms were limited 1. For Indian’s main historical and economic events, sea, for example, Torri (2007) and Basu (2007).

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in scope, and resulted in the break-up of some large landed estates and the partial expropriation of absentee owners, but did not seriously alter the balance of power in the countryside between the wealthy, influential landholders and the impoverished peasants. The “green revolution” of the 1960s and 70s, done through improvements in seeds and the use of fertilizers and agricultural machines, helped to increase agricultural output and productivity, especially in the cultivation of wheat, but was unable to solve the problems of poorer villages with mixed crops, often worsening the situation of peasants without land or with only a little fraction of land. In general, there was a period of heavy-handed, bureaucratised economic planning, which relied on numerous state-owned enterprises, along with a few large private family groups and a myriad of formal and informal private small and micro enterprises. State regulation of private companies, priority on heavy industry, and an “import substitution” policy imposed through protectionist barriers were important features of Nehru’s economic strategy. Although this policy helped creating a production base within the country, it reduced internal and external competition, technological innovation and both static and dynamic efficiency. The need to obtain countless authorisations from the public administration for each small step of any production initiative discouraged entrepreneurship. Moreover, the heavy bureaucratic machine fuelled widespread corruption and collusion, which further impaired internal competition. During the Nehru era (1947-1964), India’s economy had to face mounting difficulties. This was partly the result of the relatively high population growth rate per year (+1.8% in the 1947-64 period) and an inadequate dissemination of basic education. The relatively high rate of growth of population during that period made it difficult to achieve a rapid rise in per capita product and hence a substantial reduction in the mass poverty of families. During the years 1947-64 real per capita GDP increased by 1.8% per annum, as the resultant of a 3.6% real GDP growth rate and a 1.8% population growth rate. From the point of view of education, this period saw a widening of the gap between a relatively consistent number of new university graduates, for the most part from the middle and upper classes, and an utterly inadequate level of basic education for the majority of the population. Not only was

India in world economy

public commitment to basic education wanting, but deep economic and social inequalities in the country, and stubborn remnants of the strict caste system, meant that a large part of the population was unable to pay for an advanced education of its children. So the Indian educational system was bipolar, furnishing good experts, medicine doctors and engineers, but it was weak in the basic and intermediate education of a vast part of the population. In Nehru’s era, also the effort in R. & D. expenditure was relatively low and the introduction of new techniques from more economically advanced countries was hindered by the protectionist policy and the severe limits to FDI inflows. 3.4. The years of social and political instability (1964-65) In the years 1964-65, the more conservative wing of the ruling Congress party wielded power, pursuing some liberalizing economic policies. However, the mixture of confused economic policies and poor agricultural crops led to a sharp economic crisis, which contributed to reduce GDP, per capita GDP and labour productivity. 95

3.5. Indira Gandhi In January 1966 the advent to power of Nehru’s daughter Indira Gandhi marked a return to some elements of socialism in the country’s economic policy. Indira, who held power from 1966 to 1977 and from 1980 to 1984, launched a nationalization of the country’s 14 major private banks, and then of some industrial companies. She tried to develop the economy and better allocate the financing of banks, which previously had favoured principally the big corporations. Indira Gandhi also sought to implement more radical reforms in agriculture and a policy of population control through an unpopular sterilisation campaign, advocated chiefly by her son, Sanjay Gandhi. The result of this temporary attempt was a modest contribution to the slowing down in population growth. A stronger reduction of the fertility rate and population growth happened later on, in the 1990s and 2000s, when urbanization, higher education of women and industrialization began to have their well-known effects on demographic trends, reducing the rate of growth of the population. On the whole, in the 1966-84 years, in large part politically ruled by Indira Gandhi, there was a slight acceleration in the

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rate of growth. The average annual rate of growth of real per capita GDP rose to 1.6%, while the rate of growth of real GDP went up to 3.5%, but some of the basic social problems, such as the permanence of a vast bulk of poverty and illiteracy in rural areas and in cities’ slums, remained unsolved. In 1984, after the “Golden Temple” massacre of Sikh extremists by Indian troops, there was the dramatic assassination of Indira Gandhi by her Sikh bodyguards. 3.6. Rajiv Gandhi Indira’s son Rajiv Gandhi came to power and switched to a more liberalist economic policy. Moreover, he launched measures aimed at favouring the expansion of the software industry, particularly in the region of Bangalore. State intervention in the economy was cut back in favour of private initiatives, and the protectionist barriers started being taken down. The average annual real GDP and real per capita GDP growth rates went up to 5.2% and 3.1% in the years 1984-91. However, succumbing to the same fate of her mother, also Rajiv Gandhi was assassinated in 1991, leaving the heritage of much of his political power to his wife Sonia Gandhi and his sons. 3.7. Economic reforms and the acceleration of economic growth After the assassination of Rajiv Gandhi, various governments succeeded each other to power, with the alternation between executives led by the right wing BJP party and the National Congress party. However, in different forms, all governments continued, and amplified, the liberalist economic policy both internally and externally. This fostered an acceleration of economic growth (per capita GDP went up to 5.0% per year in the period 1991-2013), but contributed to rise the economic and social inequalities in the country. This was also due to the still-high illiteracy rate among adults, and the generally wide disparities in the level of education of the population. Nevertheless, over the past quarter of century, India has made substantial progress reducing the gap with the wealthier industrialised countries. In 2014 India was the third economy in the world in total GDP PPPs after the US and China, having surpassed Japan since 2011. In terms of per capita GDP, however, the gap, although gradually diminishing, remains enormous. In 2013, according to GGDC EKS estimates, In-

India in world economy

dia’s per capita GDP in PPPs was 8% of that of the US and approximately 38% of China’ s level. In the last two decades India has also become an increasingly important exporter, and has benefited from strong FDI flows from other countries, and a significant process of diversification and consolidation of its industrial structure. Finally, it should be noted that, just as there exists a “greater China”, made stronger by its bonds with overseas Chinese, there are large numbers of Indians in many parts of the world who often maintain significant economic and social ties with their homeland. They assure a relevant flow of remittances to the Indian economy. Moreover, several India’s software-firms have been created by Indian microelectronics experts or entrepreneurs, formerly working in Silicon Valley in California, or elsewhere in the United States or in Europe. The acceleration of economic growth, which has occurred in the second half of the 1980s and even more from 1991-92 onwards, was partly due to economic reforms and partly to the exploitation of some of the advantages of relative economic backwardness and of the fordist model of growth, as we will see in next paragraph. Economic reforms were deep. There gradually was a partial liberalization of external trade and of inward and outward FDI (foreign direct investment). Moreover, India entered WTO in 1995. There was also a progressive relaxation of the great number of regulations for business activities, which had made it difficult starting or enlarging economic activities and could create plenty of occasions for the corruption of public officials. All this contributed to the acceleration of growth, to increasing productivity, internal competition and international competitiveness, but had mixed effects on employment and negative effects on inequalities. The employment performance was mixed, with years of relative good growth and years of almost jobless growth. In 1991-2013 total employment increased at an annual rate of about 2.2%, lower than in the 1970-91 years (+ 2.8%), and in the rural areas the fall in the rate of growth was particularly strong. Moreover, the rise of employment was mainly concentrated in informal jobs, while formal employment was in several years almost stagnant. However, social and economic inequalities increased, as long as a limited part of the population could fully benefit from the acceleration in the rate of economic growth.

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3.8. Economic backwardness and the fordist model of growth As anticipated in the first chapter, one of the main advantages of “economic backwardness” is the possibility to transfer workers from low-productivity sectors, such as agriculture and some traditional service sectors, to higher productivity ones, such as industry and modern services. In India this advantage had been exploited in a limited way in the 19471992 period, largely because of the relatively slow growth of industrial activities in those years and the segmentation of the productive system in the formal and the informal sector, of which we will treat in detail in the next paragraph. However, as we can see in table 3.3, in the 1993-2012 years there was a marked acceleration of the relative importance of industry and services, both for employment and value added, and a more rapid decrease of the share of agriculture. In the whole 1978-2012 period in India the relative importance of agriculture constantly decreased both for value added and employment, but this trend was much less pronounced than in China, where industry had been able to absorb a much higher proportion of labour force. Moreover, in India services had surpassed industry both for employment and value added very early, in the 1970s, while this occurred in China only in recent years. Other important characteristics of the employment situation in India are summarized in table 3.4. Table 3.3. Employment and value added by sector in India: 19782012 (percentages) 1978

1993

2004

2012

Employment Agriculture, forestry, fishing

71

64

57

49

Industry

13

15

18

24

Services

16

21

25

27

100.0

100.0

100.0

100.0

Total

Value added Agriculture, forestry, fishing

44

33

22

18

Industry

24

28

28

26

Services Total

32

39

50

56

100.0

100.0

100.0

100.0

World bank development indicators (2014), BRICS (2014).

India in world economy

Table 3.4. India, China and Brazil: employment indicators Countries

Employment rate (% (2012)

Unemployment rate (%) (2012)

Employment index 2013 (1978 = 100)

India

34.8

2.2

244.6

China

56.8

4.1 (urban)

165.1

Brazil

47.8

6.1

203.7

Source: BRICS (2014) for the first two columns, Conference board-GGDC (2014) for the third column.

In 2012 the employment/ population rate in India was very low, particularly for women, if compared to other emerging economies as China and Brazil. In 2012 India official unemployment rate was relatively low, though higher for urban than for rural labour force. However, the growth of employment in the 1978-2013 years had been considerably higher in India than in China or Brazil, but we must remember that also the rate of growth of population and labour force had been higher than in the other two countries. The fordist model of growth was applied in India from 1991 onwards, about a decade later than in China. Its application has been much less deep and extensive, also because of the lower level of development of the country with respect to China in the last three decades. In addition, India has registered a much lower rate of saving and investment than China. Moreover, it has had a delayed, less wide and less rapid industrialization process than China and its middle class is much less numerous. Finally, in India the fordist model, which is largely based on economies of scale and of network, has been mainly applied to the relatively limited formal sector of industry (which accounts for about one fourth of employed people in the sector) and to a few, although important, modern services, such as banking, insurance, telecommunications and software. The persistence of a large informal or unorganized sector in the economy represents a severe limit to the possibility of spreading the advantages of economies of scale to a large part of the population.

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3.9. Formal and informal economy The formal sector of the economy is constituted in India by regular firms, which have a relatively greater productivity, higher wages, a presence of labour unions and a certain respect of industrial relations, laws and contracts, state regulations and the tax system. The informal or un-organized sector is composed by millions very small firms, with very low productivity and wages, and comprises petty employers, self-employed, contributing family workers and informal employees not covered by social security or other employment benefits. Informal employment comprises people working informally both in the informal and in the formal sectors2. In 200910 in India in non-agricultural activities the informal sector employed a large part of informal workers (81%), while the formal sector employed the remaining 19%. However, informal employees represented almost 52% (37.4 million people out of 72.2) of total employees of the non-agricultural formal sector (see table 3.5)3. In India informal employment is particularly wide. In 200910 in the non-agricultural sector it comprised about 84% of the employed people, much more than in Mexico (54%), Brazil (42%) and in most other emerging countries (see table 3.6)4. In India informal employment is also predominant in agricultural activities and for the whole economy it has increased in recent years more rapidly than the formal one.

2. More precisely, in 2003, informal employment was defined by ILO as comprising: (a): own-account workers and employers employed in their own informal enterprises; (b) members of informal producers’ cooperatives (not established as legal entities), if any; (c) own-account workers producing goods exclusively for own final use by their household (if considered employed given that the production comprises an important contribution to the total household consumption and is included in the national definition of employment); (d) contributing family workers in formal or informal enterprises; and (e) employees holding informal jobs in formal enterprises, informal enterprises, or as paid domestic workers employed by households. In line with the international definition, countries for which data are shown, define employees holding informal jobs as employees not covered by social security as employed persons, or as employees not entitled to other employment benefits. (ILO, 2014) http://laborsta.ilo.org/informal_economy_E.html. 3. See ILO (2012), http://laborsta.ilo.org/applv8/data/INFORMAL_ECONOMY/201206-Statistical%20update%20-%20v2.pdf. For a comparison with other countries see also Dougherty, Escobar (2015). 4. China’s percentage (32%) is not strictly comparable because takes into account only six main cities. See http://laborsta.ilo.org/informal_economy_E.html.

India in world economy

In India the great economic divide between formal and informal sector reduces the possibility to have economies of scale and high levels of productivity in the economy, as long as there is the persistence of a very large informal sector with poor technologies, limited education levels and low and often stagnant productivity. Table 3.5. Formal and informal employment in non-agricultural sector in India, 2009-10 Millions

%

Total employment

222.3

100.0

Informal employment

185.9

83.6

Formal employment Informal sector Formal sector

36.4

16.4

150.1

67.5

72.2

32.5

Formal employment in the informal sector

1.6

0.7

Informal employment in the formal sector

37.4

16.8

Source: ILO/Wiego Informal employment data-Base (2012).

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Table 3.6. The informal economy in selected emerging countries (a) Countries

Informal employment in non-agricultural sector (%) (b)

Informal employment in non-agricultural sector (millions)

Total

Female

Male

Total

Female

Male

India

83.6

84.7

83.3

185.9

34.9

151.0

Mexico

53.7

57.8

50.8

20.2

9.0

11.2

Brazil

42.2

45.9

39.2

32.5

15.9

16.6

China (c)

32.6

35.7

30.1

36.0

17.2

18.8

Turkey

30.6

32.6

30.1

4.9

1.1

3.8

(a) Latest year available: 2009 or 2010, India 2009/10, China 2010. (b) % of total employment in non-agricultural sector. (c) Six main cities only. Source: ILO/Wiego Informal employment data-Base (2012).

If we look also to the composition in the informal sector by the status in employment (table 3.7), we can notice that employers, own-account workers and members of producers’ cooperatives held a larger percentage than employees, and

The Economic Rise of China and India Vittorio Valli

that a substantial proportion of women helped in the firms as contributing family workers. Table 3.7. Employment in the informal sector by status in employment in India, 2009-10 (%) Status in employment

Total

Women

Men

Urban Rural

Employers, etc. (a)

47.0

41.2

48.1

48.9

45.1

Contributing family workers

11.2

26.5

8.2

11.7

10.7

Employees

41.9

32.3

43.7

39.4

44.1

Total

100.0

100.0

100.0

100.0

100.0

(a) own-account workers, members of producers’ cooperatives. Source: ILO/Wiego Informal employment data-Base (2012).

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It is not easy to comprehend the strong resilience of the informal sector of the economy if we do not consider the strong interconnections between the informal and the formal sectors of the economy and the role of the caste system. In fact, the informal sector and, more generally, informal employment help the formal sector of the economy in many ways. The firms of the formal sector are often able to pay less their informal workers than formal ones. In addition these firms receive from the informal sector many goods and services at very low prices, because of the cheap labour costs and often indecent working conditions prevailing in informal firms. People belonging to the formal economy greatly benefit also, as consumers, from the low prices of many goods and services provided by the informal sector (in particular agricultural and industrial products of the traditional sectors, retail trade and petty services). As Basile has sustained5, informal economy constitutes an essential part of Indian’s particular brand of capitalism. Not only it contributes to produce almost half of Indian GDP and to employ the majority of the labour force, but also it gives flexibility and cheap goods and services to the system. However, all this happens at the price of great social costs and intrinsically precarious jobs or incomes of many workers. The permanence of this system is basically due to the interplay

5. See Basile (2013). See also the review of Torri (2014) on Basile’s book.

India in world economy

of institutional aspects and the caste system operating as a powerful social regulator. While, for Basile, informal economy and the caste systems are closely interlinked and represent a permanent feature of Indian capitalism, according to several other authors the phase of rapid growth and market forces might progressively dismantle these traditional forms of social division and attenuate the severe economic exploitation of a large part of the labour force. Probably the future will be somewhat in the middle: economic growth will change many things, for good or evil. However, deeply set-traditions, as castes, ethnic and religious divisions, as well as the weight of powerful economic and financial interest groups, will persist, making it difficult to reach an inclusive development. 3.10. Social problems Notwithstanding the phase of rapid growth, there is still the problem of the destitution of large segments of the population, and of the deep and sometimes growing economic and social disparities. In 2013 in India average per capita GDP was about 8% that of the US, the adult illiteracy rate was over 37%, life expectancy at birth was 66 years, the mean years of schooling were only about 4.4 and a vast mass of people lived in poverty. According to World Bank estimates, in 2010 the persons with an income of under 1.25% a day in PPP were almost 390 millions and accounted for 32.7% of the entire population. There was also a great gender disparity, both in employment and in per capita income, and the child death rate was a horrid 6.3%. As regards income or consumption inequalities, since 1990 the situation has worsened. Gini index has increased from 30.8 in 1994 to 33.9 in 2010, the share of consumption of the poorest 10% of the population has diminished, while the share of the richest 10% has risen (see table 3.8). Moreover, earnings inequalities measured by the ratio of the wages of the 10% best-paid workers to those of the 10% least-paid ones, is in India very high and has almost doubled from 1993 up to 20086. However, in other aspects, some small progresses had been accomplished. Adult illiteracy rate has somewhat diminished 6. See OECD (2011), p. 58.

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and mean years of schooling have risen, though remaining very low. Gender employment and education disparities for younger generations have diminished; infant mortality, though remaining very high, has decreased; life expectations at birth, per capita GDP and the human development index have increased, though the position in the world ranking of HDI has remained more or less stable. Table 3.8. Social indicators in India Indicators

104

Rank or value 1990

Rank or values 2013

HDI, Human development index (rank)

134

135

Inequality adjusted HDI (rank)

134

135

Life expectancy at birth (years)

58

66.4

Mean years of schooling

3.0

4.4 (2012)

Expected years of schooling

…

11.7 (2012)

3.8%

8%

Gini coefficient for income distribution

30.8% (1994)

33.9% (2010)

Income share: poorest and richest 10%

4.0; 26.0 (1994)

3.7; 28.8 (2010)

Poverty: < 1.25 $ a day, PPP, millions

463.6 (1994)

388.9 (2010)

Child deaths (% of live births)

11.5%

6.3%

Adult illiteracy rate (a)

51.8%

37.2%

…

6.4

Per capita GDP in % of US level

GNI per capita: male/female ratio (b)

(a) 1991 and 2005-12; (b) estimates in 2011 PPP. Sources: UNDP (1993) and (2014), Conference Board-GGDC (2014), World Bank (2015).

In general, these data confirm that a great part of the existing and increasing polarization in the Indian society is associated to the permanence of the caste system and the large divide between informal and informal employment.

India in world economy

3.11. Inclusive or exclusive growth? In the last decade there has been a growing economic and social literature on inclusive growth or inclusive development. The term has been used in different ways and different contexts, but in general it means the search for a development path that could determine not only higher incomes, but also a reduction in poverty and inequalities and an improvement in health and education levels for the whole population of a country, and not only for a restricted group of privileged people7. If we ask the simple question: has India in its phase of rapid growth achieved an inclusive growth? the answer is probably negative. The data illustrated in table 3.8, show that, though for many social indicators there has been some progress from 1990 to 2013, this it is not true for income inequalities, as measured by Gini index. Moreover, as we know, the relative level in the world HDI ranking has not improved. Finally, up to 2013, the absolute level of poverty, adult illiteracy, workers’ vulnerability, health conditions and disparities in gender income and employment, have remained very high. There is a strict linkage between the lasting divide between formal and informal employment, income inequalities and the lack of inclusive growth in India. As is stressed also in an OECD report8,usually informal workers have lower wages, more unstable jobs and limited opportunity for human capital accumulation and career progression. Moreover, informal workers have low opportunities to obtain formal jobs, so that they often remain entrapped in low-paid “bad jobs”. Finally their children, being unable to get an expensive high-quality education, risk continuing the same destiny. 3.12. Conclusions India’s economic growth has accelerated since the mid 1980s and even more from 1991 up to now, though with increasing problems after the global financial crisis.

7. On the concept and measure of inclusive growth, see, for example, Anand, Tulin, Kumar (2014), OECD (2013), (2014). See also the analyses based on an important data-bank constructed by Sanjay Reddy and others on income and consumption in the world economies (Reddy 2015). See finally the useful concept of DQI (development quality index), introduced by Basu to compare China and India development performance (Basu, 2009). 8. See OECD (2011), p.55. See also Jütting, De Laiglesia (2009).

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However, economic growth has not been sufficiently inclusive, or more precisely it has included only a small, though a little growing, share of people belonging to the middle and upper middle class, a little over ten per cent of total population. The limited access to formal employment has reduced the potential advantages of the application of fordist-toyotist elements in India’s industry and modern services, while the absence of a comprehensive land reform has contributed to maintain most peasants’ families in very precarious economic conditions Profound caste, ethnic, religious differences, as well as the lasting divide between formal and informal economy have prevented from eliminating massive poverty in rural areas and in city’s slums and from reducing the marked polarization existing in education and in health conditions and the large economic differentials among Indian states. Economic growth has not reduced, but partly exacerbated, social divisions.

India in world economy

India: Main political and economic events (1947-2014) Years

Political events

19471964

1947: Great Britain permits the partition of India between Pakistan and the Indian Union. August 15: independence of the Indian Union and Pakistan. In India Nehru (Congress party) holds power from 1947 to 1964. First war between India and Pakistan for the control of Kashmir. 1948 (30 January): Gandhi’s assassination. 1949: cease-fire and partition of Kashmir. 1950: Approval of the Constitution of the Indian Union. 1955: Bandoeng Conference. 1962: frontier-war between China and India.

19641966

19661984

May 27: death of Nehru. Shastri prime minister. 1964-66: political instability, with tensions between factions of the Congress party. 1965. Second India-Pakistan war on Kashmir. 1966. January 10: armistice (Tashkent declaration). January 11, Shastri’s death. 1966: Indira Gandhi, Nehru’s daughter (INC)(a) becomes prime minister and holds power in years 1966-1984 except for 197780. 1971: Indian-Pakistan war on Eastern Pakistan, which gains independence as Bangla Desh.

Main economic trends and policies

Mixed economy, with a large intervention of the State in the economy. Five-years plans and some elements of socialism, but also presence of many private firms. Formal sector and a very large informal sector in the economy. Strong protectionism and import-substitution policy. Beginning, in the 1960s, of the “green revolution” with a substantial rise in rice production, but several social problems in rural areas. Relatively good rate of growth of real GDP (4.1%) (b) in the 1950-64 period, after three very difficult years.

Partial reduction of the role of the State in the economy. “White revolution”, attempt at increasing milk production. Economic crisis. Real GDP rate of growth: - 1.5 % (b). Partial return to Nehru’s economic policies. Nationalization of private banks and partially failed attempt at better redistributing access to credit. Partial agrarian reform. Discreet economic performance: real GDP rate of growth: + 3.5% (b).

107

1975: first explosion of an Indian nuclear bomb. 1977-80: prime ministers: M. Desai and then C. Singh (both of Janata Party); from Jan. 14, 1980 Indira Gandhi. 1984: October 31, Indira Gandhi’s assassination.

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19841989

Rajiv Gandhi, Indira Gandhi’s son, prime minister. (Indian National Congress Party)

Partial liberalization of the economy. Acceleration in the growth of the economy (+ 5.9).

19891991

Janata Dal (JD), a coalition of parties opposing the Congress Party, gains power: prime ministers V.P. Singh from December 1991 to October 1990 and then Chandra Sekhar. 1991, May 21, assassination of Rajiv Gandhi

Further liberalization measures. Slow down in the rate of growth (3.2%) (b).

19912014

Different governments: Prime ministers: 1991- 1996 P.V.N. Rao (INC) 1996 Vajpayee (BJP) 1996-7 H.D.D. Gowda (JD) 1997-8 I.K. Gujral (JD) 1998-2004 Vaipayee (BJP) 2004-14 M.Singh (INC) From May 2014, N. Modi (BJP)

More liberist economic policy both domestically and externally. Sharp reduction of state regulations, of external tariffs and some relaxation of constraints on FDI and portfolio capital movements. Phase of rapid growth: real GDP: + 6.7% in the 1991-2013 years (b).

Notes: (a) Indian parties or coalitions: INC (Indian National Congress), JD (Janata Dal), BJB (Bharatiya Janata Party); (b) Real GDP rate of growth = Annual average compound rates of change of real GDP in PPP EKS (Source: Conference Board-GGDC).

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4. A Comparison

4.1. The pyramid of development In order to better understand the main differences between China’s and India’s economies, their period of rapid growth and the persistence of severe social problems, it is useful to introduce a new concept, the pyramid of development 1. In the last decades there has been a wealth of critical analyses of economic growth, as opposed to development, of the great limits of the concept of GDP and of the possibility to measure happiness2. The debate has been very significant and has rapidly touched the border of ethics and of philosophy. I will follow a much simpler approach, assuming that the main objective of economic policy is to improve the quality of life of the population, the vertex of our development pyramid. This final objective can be reached if it is possible to attain four important intermediate objectives: a) a high rate of employment, b) an adequate level of income and welfare, 1. See Valli (2014) and figure 4.1. 2. See, for example, Stiglitz, Sen, Fitoussi (2009) for the limits of the concept of GDP; Nisbet (1969) and Arndt (1978), for growth and development; UN, World Happiness Report (2013) for the concept and measure of happiness.

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110

c) a low level of inequalities in income and wealth; d) a decent environment. High employment rates (the percentage of employment on the population in active age), both for men and women, are very important because a decent job helps obtaining the means of subsistence and preserving the dignity of a person and of her family. An adequate level of income, social welfare and equity in income and wealth distribution are essential in order to command sufficient means for food, housing, education, health care, etc. for the whole population3 and to avoid disrupting social tensions. Finally, the preservation of both natural and historical environment is vital to ensure better health and climatic conditions and the possibility for the current and future generations to benefit from the beauty of art, culture and undamaged landscapes. In order to reach these intermediate objectives, it is essential to maintain an adequate level of investment in physical and human capital. In modern industrialized and post-industrial societies it is particularly important to make massive investment in knowledge, through good schools and universities, important R&D activities and a large diffusion of humanistic values and of scientific and technological knowledge. Finally, in the medium-long run, it is also very important to strive to maintain two basic constraints: a relatively stable equilibrium in the balance of payment and a sound public finance. Large deficits in the balance of current account lead to rapidly increasing external debts. This erodes confidence in the national currency and may determine an extremely dangerous vicious circle: devaluation - high inflation - further devaluation, etc. Large public deficits and public debts powerfully undermine the freedom of action in national and regional governments and the possibility to have enough resources to achieve their main economic and social objectives, because of the great burden of the service of the debt.

3. For a more comprehensive analysis, see, for example, Sen (1992) and the recent debate on “inclusive growth”.

Figure 4.1. The pyramid of development

111

4.2. Systemic aspects The pyramid of development can be useful to compare China’s and India’s economic trajectories, but the latter are also strongly influenced by systemic, demographic and geographical aspects. China’s and India’s economies belong to countries with extensive and deep systemic differences. Some of these differences are due to history.

The Economic Rise of China and India Vittorio Valli

112

Before independence China had possessed for many centuries a large empire embedded in the Buddhist and Confucian tradition. After the end of the empire, the ensuing internal struggles and the occupation of a part of the territory by the Japanese troops, China saw the sharp conflict between the nationalist party, led by Chiang Kai-shek, and the communist movement, led by Mao Zedong. When the latter prevailed, founding in 1949 the People’s Republic of China, the country was rapidly converted to the Marxist-Leninist approach followed by the Communist party. Since the main historical experience of a socialist country with a dominant communist party was then the Soviet Union, it is comprehensible that China tried at first to implement several aspects of the Soviet Union’s way of governing the economic system. As we already know, most means of production became public and were given either to the State or to collective institutions. Moreover, the plan supplanted the market as the main mechanism of coordination and regulation of the productive system and the most important economic decisions were centralized. However, since the economic reforms begun in 1978, China’s systemic aspects gradually, but radically, changed. As we have described in paragraph 2.2, China has become the economy of the triple mix. A complex mixture of planning and market, of public and private ownership of the means of production, of centralization and de-centralization coexist in a difficult equilibrium, shaped in different measure in successive periods by ideology and political choices, by heavy forms of corruption and by the necessity to maintain some level of consensus among the population, whose preferences tend to change over time. Especially since the 1990s, China has also very rapidly opened its economy to foreign trade and inward FDI, and this has injected foreign capital, knowledge, but also additional forms of labour exploitation in the economy. More recently, China has also rapidly increased its outward FDI, but has always maintained strict controls on capital movements and on the rate of exchange. If we pass to the case of India, we must remember that at the end of the 1940s and at the beginning of the 1950s India had to face the enormous problems associated to the process of de-colonization and the traumatic partition between India and Pakistan. As regards economic policy, Nehru tried to

A Comparison in world economy

Table 4.1. Main systemic differences between China and India a) in the 1950s China

India

Mono-party political system

Democracy

Planned economy with a rapidly decreasing space for the market

Mixed economy, with some planning and some market and a heavy regulatory role of the State on major private firms

Public ownership of the means of production, with a rapidly decreasing presence of private firms

Mainly private ownership of the means of production, with also some important public enterprises

Great centralization of main economic decisions

Some decentralization of main economic decisions, but subject to public regulation and permits

Mainly formal economy, but large Sharp division between formal and presence of workers without permit informal economy for internal migration, under the Hukou system Relatively closed economy, especially after the conflicts with the USSR at the beginning of the 1960s

Largely closed economy, with a policy of import-substitution

b) in the 2010s China

India

Mono-party political system

Democracy

Economy of the triple mix

Mixed economy, much less regulated than in the mid 1980s

Open economy, with some restrictions on capital movements and FDI

Open economy, with some restrictions on capital movements and FDI

establish a heavily regulated mixed economy, with a certain space given to private firms and the market, but with a strict regulation imposed both by the central government and, locally, by the single states, to the main corporations. Any important economic decision, such as the opening of a new factory, had to pass through a lengthy and complex authorization process governed by the central and local public authorities. Since this procedures were demanded only to big and medium-size corporations, but not to millions of small and micro economic activities, there was a sharp and increasing divide

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114

between the formal and the informal sector of the economy, which we have analysed in paragraph 3.6. The country was also a rather closed economy, with relatively few international economic relations and an import-substitution policy. The severe regulation system and the import-substitution policy were attenuated in the second half of the 1980s and especially since the reforms begun in 1991. So India became an open economy, but conserved several restrictions on capital movements and on inward FDI. Tables 4.1 and 4.2 give a synthetic description of the differences between the two countries and of the main changes occurred over time. While politically the two systems are very different, for the economic model we can depict some convergences. However, the planning strategies remain more effective in China while the division between informal and formal sector is much more important in India. 4.3. Demographic, geographic, and social differences Demographic factors have an important interconnection with economic development. Population trends influence in many ways the economy, while economic trends and policies heavily influence health and hygiene conditions, birthcontrol practices, fertility rates, migrations and the choices of couples over the decision to generate a child. At the end of the 1940s and at the beginning of the 1950s, China and India shared some aspects of the demographic profile. Both the countries were predominantly rural countries, with a large importance of agriculture, many illiterate people, and very limited state welfare as regards pensions and health. It was then natural to have large families, mainly because a relatively high number of children assured help in the fields and better security in old ages. In general in developing countries, at first health and hygiene improvements contribute to increase the rate of growth of population. Then economic development, industrialization, urbanization and higher education for women tend to gradually reduce the fertility rate. As we already know, since the 1970s in China a drastic demographic policy of birth control heavily contributed to reduce the rate of growth of population, so that at present China risks an excessively rapid ageing of the population. In India the attempts to introduce forms of birth control were weaker and more er-

A Comparison in world economy

Table 4.2. Some demographic, geographic and social differences Population (thousands), 2013 Rate of growth of population (%), 2013 Life expectations, 2013 % of female population, 2013 % of population over 65 years, 2013

China

India

1,357

1,229

0.5

1.3

76

65

48.2

48.3

9

5

Fertility rate (births for woman), 2014

1.55

2.51

Surface (square km)

9.561

3.287

Inhabitants for square km

138.4

340.6

15

54

Arable land (% of total) Energy dependence (% of total use), 2011 Fragmentation in society

% of population of minority ethnic groups Religious differences

11

28

Substantial (e.g. internal immigrants)

Very strong (caste system)

Consistent

Very large

Limited

Strong

Caste differences

None

Strong

Income differentials

Strong

Medium

Absolute poverty

Limited

Wide

Sources: Conference Board – GGDC, World Health Organization, World Bank.

ratic and the process of industrialization was less extensive and more delayed than in China, so that a substantial decline in the rate of growth of population happened mainly in the last two decades. In any case, as we can see in table 4.2, in 2013 the rate of growth of population was much lower in China (+ 0.5) than in India (+ 1.3) and the fertility rate was also substantially lower in China. The percentage of people over 65 years on total population was in 2013 much higher in China (9%) than in India (5%), confirming China’s rapidly growing problem of ageing, while India will not seriously incur in this problem for at least three decades. Moreover, by 2025, according to current forecasts, India will surpass China in total population. It must also be stressed that both China and India have a percentage of female on total population slightly exceeding 48% while most other countries had a percentage higher than

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116

50%. This was due to the elimination of baby girls before or after conception. In China this happened mainly because of the rural traditional preferences for males and the one-child policy, while in India it depended on traditional preferences for males and the heavy financial burden associated to girls’ dowries. As regards geographic differences, we must remember that China has a much larger territorial extension than China, but a lower population density and a much lower percentage of arable land. Total and per capita arable land are larger in India, while forests, but also deserts, are much more extensive in China. China has a larger endowment of raw materials, such as coal, oil, natural gas, rare hearth elements and several other minerals. However, as we already know, since the mid 1990s, China has become more and more dependent on imports of energy products, such as oil and natural gas, but in 2011 it was, in any case, much less dependent than India. Finally, society in China is less fragmented than in India, though also in China there are massive forms of discrimination and important ethnic differences. In 2011 almost 253 million people were illegal migrant workers in China, with less welfare rights than legal workers4. Moreover, about 8.5% of total population was composed of several ethnic groups (Uiguri, Tibetan, etc.) not belonging to the han majority. But in India social diversity is even more accentuated, with the persistence of sharp caste divisions and great ethnic and linguistic differences. Moreover, in India there are important religious divisions. The 2011 India’s census estimated that all the religious communities comprised almost 1.029 billion people, of which about 828 millions were Hindus (80.5% of total), 138 millions Muslim (13.4%), 24 millions Christians (2.3%), 19 millions Sikhs (1.9%), 8 millions Buddhists (0.8%), 4 millions Jains (0.4%) and 14 millions (0.7%) of other religions5.

4. National Bureau of Statistics of China (2012): “Statistical Communiqué on the 2011 National Economic and Social Development”, http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=migrants&channelid=9528&record=3. 5. http://censusindia.gov.in/%28S%28apu1lnjhsg5ixc45qof4ebis%29%29/Census_ And_You/religion.aspx

A Comparison in world economy

4.4. Main economic differences The pyramid of development presented in paragraph 4.1 may help to select some of the main indicators for an economic comparison of the two great Asian countries. As we know, in 2013, both total and per capita GDP in PPPs EKS were much higher in China than in India (see table 4.3). However, according to World Bank Gini index estimates, in 2010, income distribution was more unequal in China (42.1) than in India (33.9). That index was even higher in China than in a capitalist country with relatively high income inequalities, as the United States (41.1). The employment rate (total employment divided by total population) was considerably higher in China than in India, especially for women, though we must remember that the number of children for household, and women’s unpaid homework are considerably higher in India than in China. However, total employment has increased more in India than in China in the whole 1978-2013 period, but in India the rise in employment is mainly due to the informal economy, which comprises about 85% of the employed people in the non agricultural sectors, while in China it regards about a third of the employed labour force. Pollution and environmental damages have been much higher in China than in India, partly as a consequence of China’s greater industrialization and economic growth and partly because of the great delay and inadequacy of Chinese environmental policies (see table 4.4 and paragraph 2.22). Both the investment rate (investment divided by GDP) and the rate of growth of real investment have been much higher in China than in India, though the gap has somewhat diminished since 1992. Also knowledge has increased more rapidly in China than in India. In 2012, the level of expenditure in R. & D. in percentage of GDP was 2% in China and 0.8 in India, while the average years of schooling of the population were 7.5 in China and 4.4 in India and illiterate adults were much more numerous in India than in China. In 2013 the human development index was better in China than in India, though the gap would be smaller taking into account income inequality. As regards the main constraints (inflation, public finance and the balance of payments) in the last two decades India has experienced a worse performance than China. In particu-

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118

Table 4.3. China and India: some comparative indicators Indicators

China

India

GDP in PPPs EKS in % of the US, 2013

90.1

30.8

Per capita GDP in PPPs EKS in % of the US, 2013

21.1

8.0

Rate of change of real GDP PPPs EKS (1978-2013)

8.5

5.9

Rate of change of real GDP PPPs EKS (1992-2013)

9.3

6.8

Rate of change of real per capita GDP EKS (19782013)

7.4

4.0

Rate of change of real per capita GDP EKS (19922013)

8.6

5.1

Rate of change of total employment, 1978-2013

1.5

2.6

Employment rate (Employment/ population, %), 2013

56.5

39.4

Gini index on income distribution, 2010, World Bank

42.1

33.9

Poverty index (% people < 2 $ a day in PPPs, 2011

5.5

19.7

Human development index, 2013, position in ranking

91

135

Gross capital formation in % of GDP, 2013

49

30

Rate of change, real gross investment (2007-2013)

11.7

6.7 (a)

Mean years of schooling, 2012 (US: 12,9; Italy: 10.1)

7.5

4.4

Illiteracy rate (% of adult population, age > 14)

4.9

37.2

Expenditures in R&D in % of GDP, 2012

2.0

0.8

% value added in agriculture, 2013 (World Bank)

10

18

% value added in industry, 2013 (World Bank)

44

25

% value added in services, 2013 (World Bank)

46

57

Annual rate of change of consumer prices, 20002013

2.5

7.1

Exports of goods and services in % of GDP, 2013

26

25

Imports of goods and services in % of GDP, 2013

24

27

Degree of openness (b), 2013 (World Bank)

25

26

Current account balance in % of GDP, 2012

2.3

- 4.9

Stock of inward FDI in % of GDP, 2013 (UNCTAD)

10.4

12.1

Stock of outward FDI in % of GDP, 2013 (UNCTAD)

6.7

6.4

Energy net dependency (% of use) 2011 (World Bank)

11

28

(a) 2007/8-2012/13 for India (b) (Exports of goods and services + imports of goods and services) /2 in % of GDP. Source: Conference Board-GGDC (2014), World Bank (2014), UNDP (2014), UNCTAD (2014), China BNS, OECD (2014), Reserve Bank of India (2014). Handbook of Statistics on the Indian Economy (2014).

A Comparison in world economy

lar in the 2000s China has registered less inflation than India and a structural surplus in the balance of current account, which has progressively improved its international financial position, while India has suffered from frequents deficits in her balance of payments. As regards indicators about economic institutions (see table 4.4) we can use four indicators: the polity index, the corruption index, the global competitiveness index and the ease of doing business. For the polity index, which tries measuring the level of democracy, India is naturally in a much better situation than China, while for corruption both the countries are in an unhappy situation though China appears marginally better than India. As regards global competitiveness and the ease of doing business China performs better than India, while for environmental levels and policies China seems to be in a worse situation than India. Table 4.4. Economic institutions and environment China

India

Polity index, from - 10 to + 10 (full democracy), 2014

-7

9

Corruption perception index (rank and score), 2013

80 (0.40)

94 (0.36)

Global competitiveness index, 2013-4 (rank and score)

29 (4.84)

60 (4.28)

90

142

Ease of doing business, June 2014, rank CO2 per capita emissions, thousand metric tons, 2012

6.2

1.7

Ecological footprint per person, 2010

2.3

0.9

Source: Polity data set, Transparency international for corruption, World economic forum, World Bank (2014), Global footprint Network (2014).

If we consider environmental indicators, we have the confirmation that China has much larger CO2 emissions than India. In 2010 for total emissions China had largely surpassed the US and had a level over four times higher than India, while for per capita emissions it had reached over a third of the US level, but 3.6 times the level of India. For a more general indicator, as the global per capita ecological footprint, in 2010 China had a level about 2.5 times higher than India.

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The Economic Rise of China and India Vittorio Valli

Conclusions

From the economic comparison between the two countries in the post second world war period emerges that historical events and systemic characteristics have powerfully contributed to shape the two economies. Geographic and demographic factors have also played an important role. However, the strategies in economic policy have moulded the economic performance of the two economies and have led to important social and environmental consequences. China is, at present, a more industrialized, more polluted, less democratic and more unequal country than India, but India has a even more segmented social structure, with the heavy burden of great caste, ethnic and religious divisions and a much larger diffusion of informal jobs, absolute poverty and illiteracy than China. However, both countries have shown a period of great economic dynamism and have great expectations for the future. China has registered a much longer period of rapid growth, has surpassed the economic level of India in the 1980s and then has continued to show a higher rate of growth. However, India has an intrinsically less vulnerable political system, because democratic rules permits to better

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122

dilute social and political pressures. Moreover, China begins to face the serious problems associated to the excessive ageing of its population, while for some decades India might benefit of the advantages of a younger population. It is most likely that on the long run the rate of economic growth of China and, with some delay, also of India, will progressively diminish converging toward the secular trend of richer countries. If the two countries will repeat the experience of Japan and of some European countries, this might happen when their per capita GDP will approach about two thirds of the level of the United States, but also in this case the world economic equilibria would be completely changed. Because of the sheer dimension of their population, China and India would reach, with two thirds of the US per capita GDP, a size of their internal market and a total GDP corresponding to about 2.5 times the level of the United States. This event might happen in about four decades for China and in about six or seven decades for India. Of course, forecasts of this sort are highly unreliable, because they are fundamentally based on slightly corrected past trends, and they cannot take into account the great political, military and natural unforeseeable events that might occur in such long periods. As regards the quality of life of their entire population the expectations are even more uncertain. In both countries there is the need of much more effective, but costly, welfare and environmental policies. In absence, in both countries, of radical policies against inequalities and asymmetries in jobs and education opportunities, a part of the population will remain destitute and deprived for most elementary basic needs. While in China greater access to civil rights would be necessary, in India it is essential that there be gradual dismantling of the caste system and reduction of the role of the informal economy, but these changes will be made difficult due to deep and long-standing historical, social and cultural factors.

Appendix

The Economic Rise of China and India Vittorio Valli

A. Statistical Appendix

Table A1. GDP in PPP in selected countries. 1950-2013 (US=100) Country

1950

1973

1978

1990

2013

China

9.5

11.8

12.9

20.7

90.1

India

10.3

9.0

10.3

12.8

30.8

United Kingdom

24.0

19.3

17.7

16.4

15.1

100.0

100.0

100.0

100.0

100.0

USSR - Russia

35.0

42.8

37.0

34.3

15.8

France

15.3

19.6

19.3

17.9

14.1

Germany

18.6

29.1

27.8

25.2

19.9

Italy

12.2

17.8

17.9

17.2

11.5

Japan

11.3

36.0

36.2

40.9

29.0

Brazil

5.5

10.2

12.1

11.5

12.5

USA

Table A2. Per capita GDP in PPP: 1950-2013 (US=100) Country

1950

1973

1978

1990

2013

China

2.6

2.8

3.0

4.6

21.1

India

4.4

3.5

3.5

3.8

8.0

United Kingdom

73.0

72.4

70.2

71.2

75.7

100.0

100.0

100.0

100.0

100.0

USSR - Russia

29.7

36.3

35.7

29.7

35.3

France

54.9

81.0

78.5

77.0

68.0

Germany

41.4

78.2

79.2

79.1

77.5

Italy

39.5

68.7

70.8

75.8

59.5

Japan

20.6

70.1

70.1

82.9

72.3

Brazil

20.8

20.9

22.9

19.1

19.4

USA

Note: GGDC EKS for the years 1950-2013, Sources: Conference Board-GGDC (2014), our elaborations. The data refer to 2003 frontiers, with the exception of USSR - Russia, which refer to USSR until 1990 (in GK) and to Russian Federation in 2013 (in GGDC EKS).

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126

Table A3. Macroeconomic indicators in China: 1990-2014 Year

Population

Real GDP

Real per Employed Real capita people GDP/ GDP employed people

Real GDP (China NBS)

1990

1.5

3.5

2.0

2.0

1.5

3.8

1991

1.4

6.6

5.2

1.5

5.1

9.2

1992

1.2

9.7

8.5

1.1

8.6

14.2

1993

1.2

9.7

8.5

1.0

8.7

14.0

1994

1.1

10.0

8.9

1.0

9.0

13.1

1995

1.1

15.1

14.0

0.9

14.2

10.9

1996

1.1

2.1

1.0

1.1

1.0

10.0

1997

1.0

5.3

4.3

1.3

4.0

9.3

1998

1.0

0.3

- 0.7

1.2

- 0.9

7.8

1999

0.9

3.6

2.7

1.1

2.5

7.6

2000

0.8

9.0

8.2

1.0

8.0

8.4

2001

0.7

10.7

10.0

1.1

9.6

8.3

2002

0.7

12.4

11.7

0.7

11.7

9.1

2003

0.6

15.1

14.5

0.6

14.5

10.0

2004

0.6

10.1

9.5

0.7

9.4

10.1

2005

0.6

11.3

10.7

0.5

10.8

11.3

2006

0.6

12.7

12.1

0.4

12.3

12.7

2007

0.5

14.2

13.7

0.5

13.7

14.2

2008

0.5

9.6

9.1

0.3

9.3

9.6

2009

0.5

9.2

8.7

0.3

8.9

9.2

2010

0.5

10.4

9.9

0.4

10.0

10.4

2011

0.5

9.3

8.8

0.4

8.8

9.3

2012

0.5

7.7

7.2

0.4

7.3

7.7

2013

0.5

7.5

7.0

0.3

7.1

7.7

2014

0.5

7.0

6.5

0.2

6.7

7.5

Note: Annual % rates of change for columns 2-7. Data in PPPs EKS for columns 3-6; data from China National Bureau of Statistics for column 7. Sources: Conference Board-GGDC (2014) (projection for 2014); China NBS.

Statistical Appendix Statistical Appendix

Table A4. Other macroeconomic indicators in China: 1990-2013 Year

Exports in volume (a)

Imports in volume (a)

1990

- 3.3

- 16.7

Balance of current accounts in % of GDP

Prices (a), (b)

5.8

Exchange rate: renminbi per 1 US$ 4.7832

1991

24.8

21.8

6.9

5.3233

1992

22.4

35.9

8.2

5.5146

1993

3.7

38.8

15.2

5.7620

1994

32.1

9.0

20.6

8.6187

1995

11.3

11.4

13.7

8.3510

6.4

8.3142

1.5

8.2898

1996

17.4

14.5

1997

32.1

11.4

4.1

1998

14.1

10.7

3.1

- 0.9

8.2791

1999

11.1

13.7

1.9

- 1.3

8.2783

2000

21.4

22.1

1.7

2.0

8.2784

2001

11.3

14.1

1.3

2.1

8.2770

2002

20.8

22.6

2.4

0.6

8.2770

2003

18.4

21.7

2.6

2.6

8.2770

2004

18.8

19.6

3.6

6.9

8.2768

2005

23.4

12.7

5.9

3.9

8.1917

2006

23.4

14.7

8.5

3.8

7.9718

2007

22.2

16.3

10.1

7.6

7.6040

2008

9.5

5.2

9.3

7.8

6.9451

Poverty ratio (%) (c) 85.0

79.6

66.2

61.9

50.7

36.0

28.3

2009

- 10.2

4.9

4.9

- 0.6

6.8310

2010

27.7

20.4

4.0

6.6

6.7695

23.2 18.6

2011

10.3

12.0

1.9

7.8

6.4588

2012

7.0

8.2

2.6

2.0

6.3125

2013

8.7

10.8

2.0

1.7

6.2000

Notes: (a) % rates of change, (b) GDP deflators, (c) the poverty ratio is estimated through the percentage of people living on less than $2 a day on total population. Sources: World Bank (2015) for columns 2, 3, 4 (2004-2013), 6, 7; OECD (2005) column 4 (1998-2003) China NBS (2014) for column 6.

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128

Table A5. Macroeconomic indicators in India: 1990-2013 Year

Population

Real GDP

Real per capita GDP

Employed people

Real GDP/ employed people

Real GDP (official data)

1990

2.1

5.2

3.1

3.5

1.7

5.5

1991

1.8

1.5

- 0.3

4.5

- 3.0

1.1

1992

1.8

5.3

3.5

2.0

2.3

5.5

1993

1.8

9.2

7.4

5.7

3.5

4.8

1994

1.8

6.3

4.5

2.1

4.2

6.7

1995

1.8

7.1

5.3

2.1

5.0

7.6

1996

1.8

7.8

6.0

2.1

5.7

7.5

1997

1.8

4.2

2.4

2.2

2.0

4.0

1998

1.8

6.6

4.8

2.3

4.3

6.2

1999

1.8

7.9

6.1

2.4

5.5

8.8

2000

1.8

4.1

2.3

1.9

2.2

3.8

2001

1.8

5.4

3.6

5.3

0.1

4.8

2002

1.7

3.8

2.1

2.5

1.3

3.8

2003

1.7

7.9

6.2

2.7

5.2

7.9

2004

0.7

7.0

6.3

2.7

4.3

7.9

2005

2.7

9.4

6.7

2.9

6.5

9.3

2006

1.2

9.0

7.8

2.4

6.6

9.3

2007

1.6

9.2

7.6

2.1

7.1

9.8

2008

1.6

6.6

5.0

2.0

4.6

3.9

2009

1.4

8.5

7.1

0.1

8.4

8.5

2010

1.4

9.2

7.8

0.1

9.1

10.3

2011

1.4

6.2

4.8

0.4

5.8

6.6

2012

1.3

4.9

3.6

1.8

3.1

4.7

2013

1.3

4.1

2.8

1.7

2.4

5.0

Notes: (a) Annual % rates of change for columns 2-7. Data in PPPs EKS for columns 3-4 and 6; (b) the Indian data refer to the year from April 1 to March of the succeeding year; (c) Data in column 7 are official non PPP Indian data. Sources: Conference Board-GGDC (2014), Reserve Bank India (2014). Recent official CSO revised data for 2012 and 2013 are + 5.1 and + 6.9, for 2014 + 7.4 (projection).

Statistical Appendix Statistical Appendix

Table A6. Other macroeconomic indicators in India: 1990-2014 Year

Exports in volume

1990

11.1

1991

9.7

1992

4.9

1993

13.8

19.3

1994

13.0

22.6

1995

31.4

1996

6.3

1997 1998 1999 2000

Imports in volume

3.4

Balance of current accounts in % of GDP

Prices GDP deflator

Exchange Poverty rate: ratio rupee (%) per (b) 1 US$

- 3.0

10.7

17.50

0.0

- 0.4

13.8

22.74

21.1

- 1.2

9.0

25.92

- 0.4

9.9

30.49

- 1.0

10.0

31.37

28.1

- 1.6

9.1

32.43

- 2.4

- 1.2

7.6

35.43

- 2.3

13.2

- 1.3

6.5

36.31

13.9

20.8

- 0.9

8.0

41.26

18.0

7.0

- 1.0

3.1

43.06

18.2

4.6

- 0.6

3.6

44.94

2001

4.3

2.9

0.7

3.2

47.19

2002

21.1

12.0

1.2

3.7

48.61

2003

9.6

13.9

2.3

3.9

46.58

2004

27.2

22.2

- 0.3

5.7

45.32

2005

26.1

32.6

- 1.2

4.2

44.10

2006

20.4

21.5

- 1.0

6.4

45.31

2007

5.9

10.2

- 1.3

5.8

41.35

2008

14.6

22.7

- 2.3

8.7

43.51

2009

- 4.7

- 2.1

- 2.8

6.1

48.41

2010

19.6

15.6

- 2.7

9.0

45.73

2011

15.6

21.1

- 4.2

8.5

46.67

2012

5.0

6.6

- 4.7

7.2

53.44

2013

8.4

- 2.5

- 1.7

6.9

58.60

81.7

129

75.6

68.8

Notes: (a) % rates of change for columns 2, 3 and 5; (b) number of people living on less than 2 $ a day in % of population. Sources: World Bank (2015), for columns 2, 3, 5, 7, IMF (2015) for column 4, Reserve Bank of India (2014) for column 6.

The Economic Rise of China and India Vittorio Valli

B. The revision of GDP data in India

130

In 2015, CSO (the Central Statistics Office) of India has introduced an important revision of GDP measurement in India. The main changes are the following: a) the passage from GDP at factors costs to GDP at market prices as the basic GDP concept; b) the change in the prices’ basis year from 2004/5 to 2011/12 for the calculation of GDP at constant prices; c) the introduction of more accurate estimates of the contribution to GDP of the informal economy, notably taking in better account services made by informal workers within the industrial firms. d) the appraisal of industrial value added on the basis of the analysis of firms, rather than plants. According to CSO experts and the ministry of finance these changes did improve the reliability of data, better approaching the international standards. However, some commentators have expressed their doubts on the validity of the revision, which contributes to generate substantially higher rates of growth of real GDP for 2014 and 2015, and a sizable increase in the share of industry in total value added. For ex-

The revision of GDP data in India

ample the 2013/2014 rate of growth of real GDP has passed from the previous data of about 5% to the current estimate of 6.9%. Moreover, the projection for the 2014-15 year has passed from less than 5% to 7.4%, a rate higher than the one foreseen for China. The share of manufacturing industry in GDP has been raised from 12.9% to about 17%, while the share of services has considerably dropped, from about 57% to 50.9%. Some authors have advanced the suspicion of a possible manipulation of statistical techniques for political reasons, though the finance ministry has repeatedly assured the complete independence of India’s Central Statistics Office.

131

The Economic Rise of China and India Vittorio Valli

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The Economic Rise of China and India Vittorio Valli

List of names

Adelman I., xii Adriana, xiii Aglietta M., 10, 133 Ahlstrom D., 28, 133 Amighini A., 30, 56, 133, 135 Anand R., 105, 133 Anderlini J., 77 Andreff W., 54 Aoki M., xii Arndt H.W., 109 Atkinson A.B., 22, 28, 133 Bai M., 45, 49, 139 Balcet G., xiii, 54, 57, 134 Banerjee A., 22, 134 Basile E., 102, 134 Basu K., 93, 134 Basu S.R., 10, 134 Bell D., 18, 134 Bensidoun I., 56, 134 Blanchard O., 65, 134 Bo Xilai, 89 Boltho A., xii, 14, 19, 52, 134 Bonazzi G., 16, 134 Borst N., 70, 134 Boyer R., 10, 134 Braverman H., 12 , 134 Browning M., 68, 134

Bruni L., 139 Bruns J.W., 59 Bruschieri S., xiii, 57, 134 Bruton G., 28, 133 Cao S., 68, 137 Chamon M.D., 68, 135 Chan Kam Wing, 70, 135 Chen Z., 80, 135 Chenery H.B., xi Chiancone A., xiii Chiang Kai-shek, 26, 112 Chiarlone S., 30, 85, 135 Chou En-lai, 35, 36 Cipolla C., xi Comim F., 139 Cozzi T., xii Cristadoro R., 68, 70, 135 Dalmazzone S., xiii De Laiglesia J.R., 105, 136 De Vries G.J., 45, 50, 135 Deaglio M., xiii Deleyne J., 30, 135 Deng Xiaoping, xii, 36, 42, 88, 89 Desai M., 108 Dougherty S., xii, 30, 100, 135, 136

141

The Economic Rise of China and India Vittorio Valli

142

Escobar O., 100, 135 Ferri G., 85, 135 Fewsmith J., 30, 135 Fitoussi J-P, 4, 109, 139 Fodella G., xi, xii, 30, 135 Ford H., 10, 11, 12, 139 Franco F., 12, 135 Friedman E., 30, 135 Fuà G., 9, 13, 135 Galbraith J.K., 80, 135 Gandhi I., V, 92, 93, 95, 96, 107, 108 Gandhi R., V, 92, 93, 96, 108 Gandhi Sanjay, 95 Gandhi Sonia, 96 Garrone G., xiii Gasparini I., xi Geary R.C., 6, 25 Gerschenkron A., 4, 9, 13, 136 Ghandi M., 92, 107 Giavazzi F., 65, 134 Gibson J., 62, 82, 137 Gilley B., 30, 135 Gini C., 42, 43, 80, 103, 105, 117, 118 Gosen J., 63 Gowda H.D.D., 108 Gramsci A., 4, 101, 136 Grossman G., xi Guonan Ma, 77, 136 Guggiola G., xiii Gujral I.K., 108 Hays J., 57 Herd S., 30, 136 Hicks J. R., xii Holliday G.D., 39, 135 Horioka C.Y., 68, 135 Hu Jintao, 89 Hua Guofeng, 36 Huang Yi, 73, 74, 136 Huxley A., 11, 136 Jiang Zemin, 42, 89 Jütting J., 105, 136 Kanbur R., 80, 136 Karlin A., 54, 136 Khamis S.H., 6, 25 Kimble C., 58, 140 Krugman P., 65, 136 Krytynskaia L., 80, 135 Kumar N., 105, 133 Kushnir I., 65, 136 Kuznets S., 80, 136

Lane P.R., 77, 136, 137 Lardy N.R., 30, 137 Leibenstein H., xi Lemoine F., 56, 134 Loungani P., 73, 74, 135 Lusardi A., 68, 134 Ma H., 62, 82, 137 Maddison A., xii, 5, 6, 11, 12, 14, 18, 14, 37, 44, 92, 137 Mao Zedong, 26, 32, 34, 35, 88, 112 Marconi D., 68, 70, 134 Martinot E., 62, 63, 137 Mathews J. A., 62, 137 Melander A., 71, 137 Migheli M., xiii Milesi-Ferretti G.M., 77, 136 Modi N., 108 Modigliani F., 68, 137 Moon W., xii, xii Morishima M., xii Musu I., xii, xiii, 37, 137 Nardozzi G., xii, xiii Naughton B.J., 30, 137 Nehru J., V, 92, 93, 94, 95, 107, 112 Nisbet R.A., 109, 137 Nixon R., 88 Nuti D.M., xi O’ Rourke, 60, 138 Onoe H., xi, xii Oxley L,, 62, 82, 137 Pelikanova K., 71, 136 Perkins D.H., 30, 138 Piketty T., 22, 28, 133, 134, 138 Piore M. J., 18, 137 Prasad E.S., 68, 77, 135, 137 Pugno M., 139 Qian N., 22, 138 Rao P.V.N., 108 Reddy S., xii, xiii, 105, 138 Ren R., 45, 49, 139 Rosovsky H., 9, 138 Ruet J., xiii, 57, 134 Sabel C.F., 18, 137 Saccone D., xiii, 45, 50, 53, 80, 138, 139, 140 Saez E., 22, 137 Salvini G., 30, 138 Santagata W., xiii

List of names

Sau L., xiii, 85, 138 Sen A., 4, 34, 109, 110 , 137, 138, 139 Shastri, L.B., 107 Sicular T,, 80, 139 Signorelli M., xii Silva F., xii, 7 Singh C., 108 Singh C.S., 108 Singh M., 108 Singh V.P., 108 Stiglitz J.E., 4, 109, 139 Sun Yat-sen, 26 Sward K., 12, 139 Sylos Labini P., xii Szirmai A., 45, 49, 139

Vajpayee A.B., 108 Valli V., 10, 12, 20, 28, 45, 54, 109, 134, 139, 140 Vecchione E., xiii

Tan Hao, 62, 136 Targetti F., xii, xiii Targetti Lenti R., xii, xiii Tecchio N., xiii Timmer M.P., 50, 138 Torri M., xii, 93, 102, 138 Tulin V., 105, 133

Ye Kuang S., 28, 133 Yeh Lei, 77, 137 You-Tien Hsing, 38, 140

Wan J., 68, 135 Wang Hua, 58, 140 Wang Q., 80, 135 Wang Gewei, 73, 74, 135 Weber M., xiii, 30, 52, 134, 140 Wing Thye Woo, 37, 140 Wu Jinglian, 42 Wu H.X., 5, 137 Xi Jinping, 89

Zhang X., 80, 136 Zhou Haiwen, 77, 135 Zhou Y., 80, 134 Zhu Rongji, 89

Ünal D., 56, 134

143

finito di stampare per i tipi della Accademia University Press in Torino nel mese di giugno 2015

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The Economic Rise of China and India

Vittorio Valli is emeritus professor of Economic Policy at Turin University. He taught at Bocconi and at the Universities of Padua and Turin. He was visiting professor at the Universities of Kyoto, Roskilde, Nice and at Seoul National University and visiting scholar at Berkeley and Brown. He teaches “Comparative economic development” at Turin University. He was the fist president of AISSEC (the Italian Association for the study of Comparative Economic Systems) and EACES (The European Association for Comparative Economic Studies). He is the co-director of the “European Journal of Comparative economics” and of OEET (the Turin Center on Emerging Economies).

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aAccademia University Press

The Economic Rise of China and India

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ccademia university press

Vittorio Valli

Vittorio Valli

The last decades have witnessed the spectacular rise of two great Asian economies: China and India. China has moved first. Since 1978 sweeping economic reforms have radically transformed the country. China has grown at a historically unprecedented high rate of growth and has conquered an important share of the world market and a relevant position in foreign direct investment. The book analyses the main determinants and the weaknesses of China’s process of very rapid growth. Great attention is given to structural changes, to the importance of the insertion in the third wave of the fordist model of growth and in the globalization process, to the deepening of income inequalities, to the rising social, environmental and demographic problems. India has begun its process of rapid growth almost fifteen years later than China. Though very high, its average rate of growth has been lower than that in China. In its period of rapid growth India has introduced weighty reforms, liberalizing external trade and investment and reducing the regulations in the internal market. Though important and accompanied by sizable structural changes, India’s period of rapid growth has not solved the deepest social problems in the country. It has created a modernized larger middle class, but limited in size with respect to total population. The crucial divide between the informal and the formal economy and the different castes, ethnic groups, languages, religions, has limited the inclusiveness of the growth process. The final chapter of the book is devoted to a brief, but revealing comparative analysis of China’s and India’s economies in their periods of rapid growth.

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