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ECONOMIC GROWTH IN CHINA AND INDIA A Perspective by Comparison

Economic Growth in China and India

A Perspective by Comparison

Subramanian Swamy Member of Parliament, India

VIKAS PUBLISHING HOUSE PVT LTD

Preface This study is the outcome of my researches conducted at Harvard University when I returned there in June 1985 and spent one and a half years as a Visiting Professor of Economics, and subsequently for a short period in the Peoples Republic of China in NovemberDecember, 1986. My primary debt is to Professor Roderick Macfarquhar who made it possible for me to be at Harvard and was a source of cons¬ tant encouragement. I was also a part of his China-India seminar held at the Fairbank Center for East China of the university in which seminar I was able to present an earlier draft of this book in three presentations. Many scholars participated in these seminars and had given me valuable suggestions. It is not possible here to thank them all individually. My gratitude goes to Professor Dwight Perkins who read the earlier drafts and gave me detailed written comments which helped improve the subsequent draft. While I have been considerably influenced by Professor Perkins, he is not responsible for the errors in the revised draft, or for its conclusions. The library facilities and the friendly academic atmosphere of the Fairbank Center contributed very greatly to the speed with which I was able to complete my research. I wish to particularly thank Professors Merle Goldman, James Manor, Robert Lucas, David Lelyveld, Philip Kuhn and Benjamin Schwartz for incisive comments on various issues concerning this study made in the pleasant setting of the Coolidge Hall cafetaria. Dr. George Rosen was also kind enough to send me comments

on an earlier draft of the manuscript. My sister-in-law, Mrs. Mary Kapadia and Mrs. Line Boudreault of Les Services de Secretariat ML Inc., Montreal, Canada gave me timeless and valuable assistance in typing the drafts in manuscript. No words can be adequate to thank them enough. Financial assistance for travel to China in November-December 1986 received from the Ford Foundation is gratefully acknow¬ ledged. The author is also indebted to Kanchi Kamakoti Fund and Dr. S.K. Singh for a grant to meet other travel expenses in 1987. March 31, 1989 AB/16, Mathura Road New Delhi - 110 001, INDIA.

Subram am an Swamy

Contents 1

Introduction

1

2

The Initial Conditions

6

3

Growth Rate and Structural Changes: 1952-88

52

4

Efficiency in the Allocation of Resources and Equity in the Distribution of Incomes

117

5

Conclusions

154

Notes

162

1 Introduction

China and India are two ancient countries with over 4,000 years of recorded history. Together, the population of the two countries comprises forty percent of the world population. Today the two countries are economically in an underdeveloped stage, with low per capita income, but with several impressive scientific and tech¬ nological achievements Many of the facts and issues about these two countries are gigantic - population, size, history, and even the problems and complexities. Though today China and India are underdeveloped countries, it is significant that about two centuries ago, they were considered by the then contemporary standards, to be developed countries of the world. Dwight Perkins[l] has listed seven criteria for considering a country as a “pre-modem” developed country. He concludes that China of the eighteenth century was indeed such a developed country. By the same criteria India too is a “pre-modem” developed country. But China and India did not respond to the industrial revolution that in Europe transformed nations from poor peasant societies to modem developed ones. During the course of this period they failed to exploit the epochal innovations of modem economic growth. These two then-advanced nations failed to meet the challenge of modem economic growth. Why is it that China and

2

Economic Growth in China and India

India, which apparently had access to Western technology were unable to seize the opportunity, the “access,” and transform their economies along modem lines? Was it that the access was more apparent than real? Were there constraints and obstacles that stood in the way of such economic modernization? If so, what was the extent of such blocks to economic growth in the two countries? These are some of the questions that we shall attempt to answer in this chapter. The fact that China and India are so different from other developing countries in experience and endowments makes tradi¬ tional economic historians’ explanations of “backwardness” of nations in part incomplete and in part inapplicable. The basic cha¬ racteristics that historians have listed as preconditions for entering modem economic growth - such as commercialization of agricul¬ ture, a monetary system with pre-modem banks, existed in these two countries in the nineteenth century. Thus, there has to be a special explanation for these two countries. Besides, the usual explanation of the Weberian lack of motivation, or the left-wing thesis of imperialist drain of resources, do not mesh with the rich complexities in the evidence of the Chinese and Indian nineteenth century realities. The “drain” theory fails to grapple with a number of important issues. In the first place, it is not quite clear whether the drain of resources was the cause or effect of the lack of development in the two countries. Second, it does not allow for, or fails to explain, the inner contradictions of the imperialist interest groups. The drain theory has good explanatory power only when the “exploiters” can be portrayed as representing homogenous interests, but in the Chinese and Indian cases, the Western imperialists are clearly an amalgam of inter-regional and intra-regional heterogenous interests. Finally, the drain theory assumes that the subjugated country could, in the historical circumstances, have entered into modem economic growth prior to or independent of contact with the foreigners. This may well be true, but it is not something one can assume. Even if it is true, drain theory is not the only explanation consistent with this assumption.

Introduction

3

Basically then we have to examine two separate questions: (1) Whether or not China and India were sufficiently “equipped” to achieve modem economic growth and would have entered the fold of developed countries if only they had been left alone; (2) whether or not there are fundamental differences in the response patterns of the two countries to the economic challenges that highlight the prin¬ cipal factors that inhibited or encouraged economic growth in these two countries. There is also the interesting thesis articulated by Paul Cohen[2] recently that challenges the emphasis placed on the effect that Western challenge has had on Chinese responses in the nineteenth century. We here are primarily concerned, however, with how China (and India) responded to the challenge of new foreign tech¬ nology which undoubtedly there was, and not so much with the weight assigned to domestic versus foreign factors in the expla¬ nation of the economic history of the two countries. This is said in no way to detract from the study of Cohen. On the contrary, there is much merit in the view that a much more balanced view of the impact of Western influence on China and India needs to be taken. In India and about India, there has been much less intellectual ferment ot. this topic, although the responses to a provocative thesis of Western “paternalism” did lead to a more balanced view of the role of imperialism in India. What is the central concern of Chapter 2 is however the second question and we shall answer it on the assumption that the answer to the first question is basically negative, that is, it is incorrect to suggest that if India and China had been left alone in the nineteenth century, they would have joined the ranks of the developed countries in course of the subsequent hundred years. This assu¬ mption is based on the consensus view amongst scholars, and does not require further attention.

n Since 1977, the Chinese Government have been publishing data on a variety of economic variables and aggregates which describe the

4

Economic Growth in China and India

state of their economy. Some of the data published by the authorities are even in accordance with the concept adopted by the United Nations agencies. Thus for the first time data on per-capita GNP, and not merely net material product (NMP), have been published. While most of the new data are available in scattered sources, nevertheless the Chinese authorities have begun to issue statistical bulletins and yearbooks. These publications have made it easier to carry out statistical and quantitative analysis of the Chin¬ ese economy in a comparative perspective. The purpose of Chapter 3 is to assemble data on China’s macro¬ aggregates and make a comparative analysis with India's per¬ formance. India is a natural country of choice in a comparative study because of its similarity with China in size, population, and historical background. What further makes the study interesting is the difference between the two countries in the political and eco¬ nomic system as well as in the alternative policies that have been followed over the last twelve decades. In last decade both countries have moved away from their respective pet and peculiar adherence to socialism of the previous three decades although the extent of the distancing has been different for China and for India. One principal and clear conclusion that emerges from a study of recently published Chinese data is that the earlier estimates of Chinese performance, mostly by Western and Japanese scholars, have been generally upward-biased. Dr. Kang Chao has in an interesting study concluded: “In general, China watchers of the West have manifested a noticeable upward bias in their estimation, particularly for the years of depre¬ ssion. They not only understated the rates of decline by wide margins but also misplaced the turning points.”[3] As may be seen from the Chao study, both individual scholars and government agencies have committed the error of over estima¬ tion of Chinese performance. In the earlier study of this author [4], which Chao also refers to, the results obtained therein were closer to the subsequently published Chinese official data, although at the time of its publication (1973), scholars in the West had criticised the estimates as understating the Chinese growthf5].

Introduction

5

HI In Chapter 2 and 3, I have estimated the growth rate of the economies of China and India for the entire period 1870-1986. For this purpose I have used officially published national income data as well as data of other scholars, corrected for errorin scope, netness and valuation to bring these data as far as possible in conformity with the United Nations System of National Accounts (SNA). For the period 1952-86,1 have calculated the change in gross domestic production in 1970-71 purchasing power parity prices. I have estimated the growth rate for the period 1952-86, in Indian prices, at 5.1 percent per year for the Chinese economy, and 4.0 percent per year for the Indian economy. The annual growth rate of population during this same period is 1.9 percent in China and 2.2 percent in India, which made it possible for China to achieve a per capita income level in 1986 of $315 in 1970 purchasing parity prices, a little above that of India's $298. In 1952, the per capita level of China was much lower than India's, at $101 compared with the Indian level of $ 154 in parity prices. Earlier studies such as Eckstein (1975) also place the Chinese 1952 per capita income, calculated in their prevailing rates at levels lower than India's. According to Eckstein, the Chinese per capita income in 1952 was five sixth of India's. Malenbaum (1982) puts the Chinese per capita income in 1952 at a level 11 percent below India’s. These estimates are based on uncomected data of the Chinese economy. Chapter 4 is mainly concerned with the costs of achieving this growth in terms of resources expended, and the distribution of the incomes generated by this growth. This may be the first time that such a comparative analysis of productivities and equity has been made for India and China.

2 The Initial Conditions i We have chosen 1870 as the starting year for our study on the basis of the following considerations: First, China, whose first real exposure to Europeans came in the Opium War of 1840, did not experience the need to consider the mechanized technology that had industrially revolutionized a good part of Europe until after the T’aiping Rebellion and its aftermath. The realization that China should review its policy toward foreign technology came around 1870[6]. In India the internal turmoil and resistance to British imperial force continued from 1757 to 1857 when the so-called “Sepoy Mutiny” (alternatively called in India, the Great Uprising or the First War of Independence) was crushed by British-led forces. In 1860 the Government of British India came into existence and from around 1870 began to formulate policies for the Indian economy on a national basis. Second, it was not before 1870 that native entrepreneurs in China and India had become of sufficient numbers and strength to be able to acquire and deploy modem technology. In China the SelfStrengthening Movement of 1861-1895 had reached the second phase around 1870, and during this phase of the movement, industrialization as a goal became acceptable to the Chinese rulers in Peking. In 1870 Li Hung-chang, the moving spirit behind the

The Initial Conditions

7

Self-Strengthening Movement, launched on a major project to set up

the Tientsin Machine Factory. Soon after, other modem factory establishments emerged in China. Following the Tientsin Factory, another machine factory was established in Szechwan by Ting Paochen, and a textile factory in Kansu by Tso Tsung-Tang. Li Hung-chang also pioneered the “government supervised merchant undertakings” (Kuan-tu Shang-pan) as a model for economic enterprises. Capital in these enterprises came from private sources, but the Government as patron initially supplied the advance loans to start the enterprise. Foremost among such undertakings during the 1870’s were the China Merchants’ Steam Navigation Company, the K’ai-p’ing Coal Mines, the Shanghai Cotton Cloth Mills, and the Imperial Telegraph Administration^]. In India, Maneckji Petit, a Parsi entrepreneur, had launched a textile mill in 1854, but it remained an isolated effort of a farseeing individual. It was not until 1870 that the textile industry developed to the point where Lancashire began to take serious note of the potential threat posed by Indian enterprise^]. It was only after 1870 that the need to industrialize received widespread acceptance in India. A decade later, the first serious attempts were made by Tata to set up a steel mill. Third, foreigners who originally came to China to trade (on the most favorable terms they could get) later shifted their attention to starting local industries in the two countries. This led to the opening of factories in treaty ports and in the interior, the establishment of the first railway line in 1876, and the rise of the Chinese “comprador class” to assist foreigners. There are historical reasons why these developments could not take place earlier. One was the fact that even after the 1840 Opium War, China was strong enough to resist foreign attempts at operating outside the scope of the 1840 treaty. It was only after the T’aiping Rebellion and the failure of the T’ungChih Restoration that China had become weak enough to be unable to resist foreign penetration. Meanwhile, Europe itself had been transformed. Not only had Britain and France successfully indu¬ strialized, but also Germany, Italy, and the United States. The events in the 1860’s gave impetus to accelerated foreign impe-

8

Economic Growth in China and India

rialistic encroachment on China. Civil war had ended in the United States in 1865; the Meiji Restoration in 1868 (in Japan); the unifications of Italy and of Germany in 1870; and the emergence of the Third Republic in France; events which liberated the European” centrifugal energies” for externally oriented action[9]. The comple¬ tion of the Suez Canal in 1869, the cultural acceptance of Social Darwinism, the “divine missionaries’” passion to baptize “the heathens,” and social acceptance of the White Man’s Burden all gave thrust to the politico-economic pressures that foreigners built up in China. In India many of the same reasons operated, but because the British had by 1857 already settled the question as to who would rule India, a pan-European onslaught did not take place in India. Nevertheless, the date 1870 is significant for a different reason, which I shall mention here and elaborate on later. It was in 1870 that the Government of India (which was manned at the top entirely by Englishmen) began taking seriously the threat posed by the modem textile industry run and owned by Indians. In the steel industry, J amshed Tata (who pioneered the steel enterprise in India in the first decade of the twentieth century) had been in the 1870’s blocked from launching any such project. In fact, Tata had protested to Lloyd George, the British Prime Minister during the First World War stating that this as an “illustration of his contention that industrial enterprise in India was often thwarted by official opposition.” Examples of other industries as jute and tea point to a similar hardening of the British-ruled Government of India’s attitude to Indian entrepreneurship around 1870. Other factors too point to the importance of 1870 in Indian economic history. The first population census was held in 1871. The Indian Contract Act regulating commercial transactions was enacted as a statute in 1872. The Indian Evidence Act was also passed in 1872. The Indian Penal Code had been enacted as law only a couple of years earlier. India, around 1870, appeared institutionally thus not unprepared for modem economic growth. The year 1870 therefore appears as a plausible initial date for the study of the challenges and obstacles to modem economic growth

The Initial Conditions

9

in China and India. It is only after this date that the two Govern¬ ments responded to the pressures of the economic forces in a relatively organized way, and that natives and foreigners (who had come to these two countries a century earlier), tried to meet the challenge of the times. The year 1952 has been taken as the terminal date in this chapter. Both countries had established their respective new Republics by 1950, but, the years 1945-49 were years of civil strife in both countries, and therefore output levels of important economic aggregates in 1949 were well below their peaks of the early forties. The period 1949-52 is treated as years of recovery, an extension of the earlier history; and hence 1952 is taken as the terminal date of the historical period for the two countries.

II In this section we propose to look at some of the data that have become available in the two countries to estimate the national income and its structure for the period 1870-1952. The data, especially for China, are scatterred and fragmentary. Some are even of doubtful value. However, some scholars have attempted to collate these data and have derived consistent series on yield per acre, manufacturing output, and national income. These we shall use, to draw some broad inferences about the comparative macro and sectoral performances. Perkins[10] has done impressive work in deriving the per capita output in Chinese agriculture for the period stretching from the Ming Dynasty to the early 1950’s. Equally painstaking for India is the work of Blyn[ 11 ]. In this section, our analysis will be based on the data marshalled by Perkins and Blyn. According to Perkins, the foodgrains yield per cultivated acre in China more or less doubled between the fourteenth and nineteenth or twentieth centuries. Furthermore, there were few institutional changes in agriculture between the fourteenth century and the land reform and cooperative campaigns of the 1950’s. Perkins calculates that the per capita grain output between 1850 and 1933, and

10

Economic Growth in China and India

between 1933 and 1957, remained about constant. Since the growth rate of population during this period, implicit in Perkins ’ population data, was 0.6 percent per year, therefore a per capita constant output implies that output of grain in this period also grew at 0.6 percent. Perkins also gives grain yield data, according which yield per acre rose by 0.11 percent per year. Therefore the acreage under grain must have expanded at 0.49 percent per year during this period. In India, according to Blyn, the yield per acre in foodgrains did decline substantially, at the annual rate of 0.20 percent during the 56 years, 1891-1947. During this same period, acreage under foodgrains cultivation rose at the annual rate of 0.31 percent. Since population growth during these nearly eight decades was at the rate of 0.67 percent per year, this implies that the per capita foodgrains output in India declined at the annual rate of 0.56 percent per year. In other words, assuming that the 1870-91 trends are the same, the per capita grain output of India in 1870 would have been 1.55 the level in 1950. This implies that because Chinese per capita grain output remained constant and since in 1950, the per capita grain outputin China was 1.54 times that oflndia’s, therefore in 1870the per capita grain outputs in China and India were about the same. Thus, the 1950 gap in grain production per capita between China and India was due to the decline in per capita grain output in India, which gap was not there in 1870. For non-grain crops, the Perkins and Blyn data can be similarly used to show that yield per acre rose both in China and India during 1870-1950, but the growth was faster in China. In India, nonfoodgrains crop output per acre rose at the rate of 0.89 per year, while in China the annual increase was at the rate of 1.12 percent. All these figures are summarized in the Table 2.1. What clearly emerges from Table 2.1 is that during the eight decades preceding the founding of the popular Republics of India and China in the late forties, agricultural crops performed distinctly better in China than India, in aggregate, in per capita, and in terms of productivity (as measured by changes in the yield per acre). However in terms of output of cash crops, India’s performance was

The Initial Conditions

11 Table 2.1

Long

Term Growth Rate of Crops in China and India CHINA1 INDIA2 (percent per year)

Output Foodgrains Non-Foodgrains

+0.60 1.37

+0.11 +1.31

Foodgrains Non-Foodgrains

+0.49 +0.25

+0.31 +0.42

Yield per Acre Foodgrains Non-Foodgrains

0.11 +1.12

-0.20 -tO.89

0.60

0.67

+0.00 +0.77

-0.56 +0.64

Area

Population Per Capita Output Foodgrains Non-Foodgrains 1 2

1871-1957 1891-1974

Source:

For China: Perkins, D.H.: Agricultural development in China 13681968, Aldine, Chicago, (1969). For India: Blyn, George: Agricultural Trends in India, 1871-1947, University of Pennsylvania Press, (1966).

not much inferior to that of China. More significantly, in 1870 per capita grain production in China and India was about the same. By 1950, Chinese level rose 54 percent above India’s not due a faster per capita increase in China (in fact per capita output was constant), but because of a decline in per capita grain production in India. This higher per capita grain output in China translated itself in terms of higher Chinese consumption (in caloric terms) because foodgrains is the dominant part of the consumption budget in the two countries. In 1952, the

Economic Growth in China and India

12

average caloric value of food intake per capita was 1917 calories in China, and 1540 in India. This represents a 25 percent higher level of consumption in China compared with India, a disparity which is less than in terms of grain output. The gap in caloric values is smaller because of a higher level of production of milk and sugar in India. The decline in grain yield per acre in India was mainly due to the sharp decline in rice and coarse grain yields. Rice crop declined even in total output at the rate of 0.09 percent per year. These declines were in fact accentuated after World War I. This led to the li widening of the gap in the Chinese-Indian yield in food grain crops, as brought out clearly in the table 2.2.

Table 2.2

Ratio of Rice, Wheat and Cotton Yields: (China to India) CROP

1921-25

1947

Wheat

1.20

1.50

Rice

1.52

3.29

Cotton

2.00

2.07

Source:

1921-25: Buck, J.L. China's Farm Economy, University of Chicago Press, 1930. page 208. 1947: Economic Development in India and Communist China, Staff Study No. 6, Committee on Foreign Relations, U.S. Congress Washington D.C., 1956, page 9.

Thus, althought the yield per acre in China increased relative to India for all three crops, the relative increase in China is the maximum for rice crop. The question that is of interest is why this has happened. China was ruled by a feudal oligarchy during this entire period of 18701950, and had gone through political and military turbulence of the

The Initial Conditions

13

kind that India had not experienced; and yet, Chinese agricultural performance especially in terms of grain output was superior to India’s in this period. This contrast in performance raises questions of technological as well institutional issues. Data on irrigation, multiple cropping, and chemical fertilizer application all show China in 1952 to be more advanced than India. There was 42 percent more land in China under irrigation, 22 percent more land under multiple cropping, and 140 percent more chemical fertilizer application per acre than in India. Not only that, in India, irrigation and fertilizers were diverted as a part of British policy to cash crops marked for exports. The relatively higher level agricultural technology in China achieved under much more difficult political circumstance therefore points to the negative role of colonial Indian government in the nineteenth and early twentieth centuries. Indeed this is further supported by the fact that in 1939-40, the small share of the area irrigated by government canals in total area irrigatedf 12]. The decline in the yield per acre in foodgrains in India did not commence from the mid nineteenth century, but had begun from before. Raychaudhri[13] notes that yield per acre in wheat and rice were in early nineteenth century “very high” and compared favourably with the yields obtained in scientific agriculture in Europe. The decline in agricultural productivity as measured by the yield per acre was prolonged and may have stretched for nearly two centuries, from 1750 onwards. The central reason why the grain yield per acre declined in India and did not in China was due to the differing attitudes of the governments in the two countries. In China, the elite and the Ching i were greatly sobered by the Taiping Rebellion and chose not to extract revenue through the land tax without regard to the economic position of the peasant. The paochia and lichia indi¬ genous systems kept good records of the peasant conditions, and through a system of granaries helped the peasant in had times. In India too the Patels and Patwaris had earlier maintained this soci¬ ally conscious attitude, but the advent of British rule disrupted this indigenous system of checks and balances.

14

Economic Growth in China and India

The Government of India, manned at the top by British nationals (henceforth referred to as the Colonial Government) and the British Government in London saw their role in making India useful to the British economy. Two clear policy directions emerged from this commitment. First was to encourage in agriculture the growth of cash crops on the best lands, and second since agriculture was the main activity, to obtain funds for Government expenditure through land revenue. Certain international events too influenced the British need for cash crops. The American Civil War in 1864-5 led to the cessation of cotton supply to Britain, and hence Lancashire was in urgent need for cotton. India provided the alternative source, the access to which became easier after the opening of the Suez Canal. This led to swit¬ ching of fertile lands to cotton cultivation. Due to this aspect of colonial policy, hard hit were the fertile rice areas which were prog¬ ressively switched to the cash crops right up to the end of World War II. The Colonial Government’s statistician, Mr. S. Subramanian, states the following[14]: “Inspite of the best efforts on the part of the Agricultural Department in recent years to improve the quality and yield, the output of rice has obstinately refused to improve (sic)... had not the cash crops been comparatively more profitable it was a fair probability that the greater part of the increased area under irrigation would have been brought under rice cultivation”. But by far more important reason for the decline in grain yields was the colonial government’s policy on land revenue. The amo¬ unts of collection as well as the machinery for realization were such that it not only impoverished the self-sufficient village comm¬ unities, but disrupted the interdependence of groups within the village. As Chaudhari[ 15] states: “It was the revenue measure of the government that proved the greatest depressor in the rural economy. Even the pervasive disaster (famines) did not make the government relent in the matter of revenue collection.” In collecting land revenue, the Government had, of necessity, to assign responsibility for its payment and settlement on some person. The choice the colonial government made had a profound

The Initial Conditions

15

unsettling effect on the power structure within India society. Prior to the advent of the B ritish, rent collection was a collective responsibility of the panchayat, which was headed by a Patel who also lived in the same village. This made it necessary to evolve consensus and a willingness on the part of the Panchayat to share the economic setbacks of individual peasants of the village. The colonial land revenue system abolished this collective res¬ ponsibility of the panchayat. The new land tax was collected in mo¬ ney without reference to a cadastral survey or productivity paving the way for the rise of the money lender who woiild extend loans in his individual capacity to the cultivator to enable him to pay the fixed revenue. These assessments were excessive, according to Eric Stokes[ 16], and hence the indebtedness of the farmer especially in grain cultivation grew in an unprecedented way. The Famine Com¬ mission in its report in 1898 expressed much the same view[17]: “(Although the agricultural classes of India have not) at any known period of their history been generally free from debt... individuals and classes may have fallen into deeper embrarassments under the British Rule than was common under the Native dynasties which preceded it.” (Report of the Famine Commission, Part II, Chapt. Ill, Sect IV, Simla 1898). The colonial administration also introduced the modem courts of law in urban towns to enforce the payment of loans and taxes. Thus the English system of courts wrested the judicial power of the panchayats. The money-lender rose even more in authority since he had a decided advantage in being able to process his court petitions with greater facility in urban towns against the peasant. Quick auctions of lands were arranged by the authorities, and soon, the money lenders became non-cultivating owners of land, by first mining the peasant who had borrowed from him and had been in debt. In each village of India this basic pattern of change induced by the colonial land revenue system was common: the Patels and the principal cultivators who had formerly guided the affairs of the village were reduced to the status of tenants tilling the fields of the moneylenders and later quite dispossessed. A new class emerged in rural India dominated by the foreclosing creditor. Soon, more than two-thirds

16

Economic Growth in China and India

of the land came under tenants-in-cultivation in India, which compares with only 30% in China. Rents paid by the tenants were generally 30% higher than that paid by Chinese peasants while the interest rates on loans were two to three times higher. Cohn[ 18 J esti¬ mates that in the Varanasi division of U.P., in 50 years 1800-1850, 40 percent of the land had changed hands from the cultivator to the moneylender, although the ratio of agricultural debt to the value of agricultural land may have been no higher than 20 percent and debt service to income about 5 percent. Raymond Goldsmith! 19] rightly notes even such apparently moderate ratios constitute a heavy burden especially if one were to delete the zero-debt peasants (about 40 percent) and related these ratios to the income of the grain farmers. The extent of debt burden is confirmed by his data which show that the average amounts of the loans were low, thus indicating that the borrowing peasants were indeed quite poor already. This comprador class of money lenders that rose in this process was under no compulsion to innovate for agricultural progress. They were absentees from the farm, and saw their role naturally as serving the English masters in the towns. The aggregate land revenue collected by the government was sizeable despite the growing poverty and continued decline in agriculture. In the combined central and provincial budgets, the share of land revenue was 70 percent in the early nineteenth century and about 36 percent by the end of World War I. By 1946-47, the share of land revenue was only 7 percent, but nevertheless the abso¬ lute amount of land revenue grew 25 percent between 1865 and 1900, and 21 percent between 1900 and 1947 while the output of grain had declined during this same period. High land tax by itself does not obstruct agricultural development. Meiji Japan had much higher taxes than India, but the mobilized resources returned to agricultural colleges, research stations, and better technique. This did not happen in India, as we shall below, because of the naturally limited role the British saw for themselves in the development of Indian agriculture. In China, during the period of the Ch’ing dynasty from 1753 to 1908, land tax grew at an average rate of 0.4 percent per year which

The Initial Conditions

17

was lower than the growth rate of output from agriculture[20]. Phillip Kuhn[21] has pointed out that the Ch’ing dynasty, although weak in the later periods, nevertheless saw to it that the local elites did not come between the central government and the collection of the land tax. Indeed as Feuerwerker notes, it is the overall stability of the Chinese agriculture system that is most remarkable[22], In India, the situation was the opposite. A government of foreigners needs a comprador local elite to govern securely. The colonial government encouraged the growth of an intermediary class which was obliged to deliver a fixed and unchanging amount of revenue to the Government but was fully empowered by imp¬ erialist power to enable this class to extract what it could from the tenant cultivator. Thus, if a peasant in debt ran away or had died, the revenue collector could ask his neighbour to pay his debts as well! In contrast, the Chinese system was not feudal but bureaucratic (if even not dynamic) while the character of the Indian colonial agricultural system was really feudal. Thus, there had in reality under colonialism been a regression in the institutional framework of Indian agriculture. As Kuhn rightly concludes[23]: “(What signified India was that) its revenue system does not require existence of a cadastral survey: Quotas may be negotiated or purely customary rather than based on a standard measure of land of known productivity. Revenue systems such as this one, in which a central power secures a share of the agricultural surplus through indigenous strongmen, operating in a stratified pattern of authority and mutual obligation, suggest a “feudal” rather than “bureaucratic” organization.”

The colonial government’s decision to build such a feudal system for collecting land revenue was motivated by the political need to secure collaborators for imperial rule. After the 1857 Great Uprising, it became clear to the British that the peasantry especially in Rohilkhand and Oudh areas had aided and financed the revolt against British Rule. Therefore, to strengthen their political control on India, keeping the pressure on the peasants through the land revenue system seemed necessary to the colonial administration. The contrast between the response of an indigenous government

18

Economic Growth in China and India

faced with a peasant-inspired rebellion, which is the case of China after the Taiping Rebellion, and that of a colonial government in India after the 1857 revolt, is thus striking. The Chinese gover¬ nment responded by becoming more accommodative to the pea¬ sants, while the colonial Indian government hardened in its approach to peasants. This contrast in response also may also be a reason why during the whole period 1870-1950, China had only two major famines, while India had twelve. The contrast between an indigenous government and a colonial one can also be seen in the experience of the British-ruled and the Indian princely states. The table 2.3 summarizes the behaviour of the grain output in the these two regions of India. From table 2.3 we can infer that for the period for which data are available, namely 1920-21 to 1940-41, the states ruled by Indian princes compared to British India experienced a faster growth in output of grains and in the yield per acre. Because of this high growth rate in yield, the difference in the level of output per acre in foodgrains narrowed considerably to just 0.06 tons per acre. That is, while the per acre grain yield in 1940-41 in British-ruled India was 1.27 times the level in the Princely states, in 1920-21 the yield per acre of grain in the former area was about double the yield in the latter. The reason for the initially much lower yield per acre in Princely states was that the British-India comprised of the most fertile parts of India, while the Princes ruled in states most of which were of poor quality lands or plain desert areas. That is why the den¬ sity of population in British India (in 1941) was 341 person per square mile, while in Princely states it was only 130. Within British India, the wheat farmers of Punjab did not face the same hardships in land revenue because in the late 1840s, after a series of wars, the Sikhs had signed a treaty with the British, and one section of the Sikhs had sent soldiers to aid the British crush the rebellion in 1857 in Lucknow. The colonial government as a poli¬ tical measure subsequently enacted the Punjab Land Alienation Act and the Rent Act to safeguard the rights of the peasant. Rents in Punjab, therefore, could not be raised without court order. Such enactment were demanded by the leaders of the Freedom Move-

The Initial Conditions

19 Table 2.3

Comparative Performance and British Ruled and Princely States: INDIA

Units

Foodgrains Output

British India Princely States Source:

-0.35 +1.52

136.20 29.11

+0.25 +0.18

0.28 0.22

-0.60 +1.34

295.81 93.20

+1.34 +1.36

tons/acTe

British India Princely States Population

38.15 6.41 million acres

British India Princely States Yield Per Acre

Growth Rate (percent/year) (1920-21 to 1940-41)

million tons

British India Princely Slates Area under Foodgrains

Level 1940-41

millions

Subramanian, S: Statistical Summary of the Social and Economic Trends in India (Inter War Period), Office of the Economic Advisor, Government of India, New Delhi, 1945, pps. 6-9.

ment for the rest of the country but was denied by the British auth¬ orities on one pretext or another. This also explains why Punjab became agriculturally better off than the rest of the country by the mid-twentieth century. The colonial Indian government’s policy of exporting cash crops, and the introduction of the railways from the principal port cities to the hinterland, increased incomes which did accrue to the apex of the rural power structure, such as the neo-landed money¬ lender class. However, this money was not invested in improved

20

Economic Growth in China and India

agricultural technology because of the aversion of this new absentee class to agricultural activities on grounds of caste. Nor could it be channelled to industrial investment because till World War II, the colonial government’s policy was to restrict native Indian invest¬ ment in modem industry. Therefore, the increased incomes either went into conspicuous consumption or into hoarding precious metals like gold. Such attitudes are reflective of the uncertainties of the times despite political stability in India. It is a little like the attitude of the Chinese peasant in the post 1978 reform period in which he has diverted increased incomes to consumer durables, housing and hoarding rather than agricultural investment. By 1950, when India and China founded their republics, and commenced development through economic planning, China had a comfortable food surplus which enabled it to engage and finance rapid industrial growth, while India which suffered a two century long decline in foodgrain yields, had no such cushion or surplus and had to slow down its industrialization program to enable expending resources for the simultaneous improvement in agriculture. When the British first arrived in force in India in the eighteenth century, the central authority in Delhi was in a state of decline following the autocratic reign of the Moghul Emperor Aurangzeb. His successors in the dynasty had lost both the will and power to enforce the directives from Delhi. In contrast in China, when the British and other foreign powers arrived, the Ching dynasty was still in force. The Opium Wars of 1838-42 were almost eight decades later than the decisive battle of Plassey (1757) waged by Robert Give in India. Thus by the time the British had subdued India, the Chinese people were still free from significant foreign pressure. In fact, except for the 1857 Great Uprising, India did not put up much of a resistance to the West in the latter part of the nine¬ teenth century. But during the last five decades of nineteenth century China had put up a stiff fight against the foreigner, and the back of Chinese resistance was broken only after a decisive defeat in the last decade of the nineteenth century, at the hands of the Japanese which culminated in the signing of the Treaty of Shimonseiki (1895).

The Initial Conditions

21

This resistance that China put up explains the (relative to India) delay in the introduction of the nineteenth century western tech¬ nology such as railways, iron and steel industry, and modem cotton textile mills. Afterthe Opium Warin 1840, the Chinese Government became, not without reason, obsessed with the defense of the country. But this obsession had a negative character. In contrast, Japan’s desire to get the better of the foreigner had a positive character, and led to a national commitment to economic development[24], China thus found itself a “late-starter” even as compared with India. The first railroad was set up in China in 1876, (a one-third of a mile run). In India the first railroad was started in 1853, a twenty-five-mile mn. By 1911-1913, India had 26,176 miles of railroad; China only 6,000 miles. The first iron works was set up in China in 1894, while in India it was in the 1830’s in Porto Novo, near Madras. Even as late as 1933, China produced almost no steel, while India was producing 483,000 tons. The first textile mill was started in India in 1854; in China it was in 1880. By 1914 India had 260 mills, 6 million spindles, and 100,000 looms; whereas in China there were 8 mills, 339,000 spindles, and 2,000 looms. Thus, if the revolution of 1911 had not occurred, China by 1950 would have been very considerably behind India in the industrial development. Railways provide an example of how the Chinese Government, influenced by the conservative Chinese elite, obstructed the intro¬ duction of modem technology. In 1876 a British company, Jardine, Matheson & Co., built a railroad of one-third of a mile length. Later the line connected Shanghai to Kiangwan. In one of its runs, the train ran over a Chinese, and the local populace ripped up the fine. Later in 1881, Li Hsi-hung wrote to the Chinese emperor, giving “eight reasons” why railroads in China would be “infeasible” (e.g., will lead to corruption of officials); “eight reasons” why they would be “unprofitable” (e.g., they would transfer goods from one province to another without increasing production); and “nine reasons” why they would be “harmful” (e.g., they would make it possible for foreigners to penetrate into the interior). Only after the Treaty of Shimonoseiki in 1895 did the Chinese Government allow

22

Economic Growth, in China and India

the development of railroads. But the momentum could not be sustained - railroad mileage grew at an annual rate of 22.1 percent until 1911, but dropped thereafter to 2.2 percent per year. If the Chinese Government’s initial response was political and military in nature, the foreigners who seemed to have an “open chit” in 1895 also responded to railway development on politico-military grou¬ nds. Each foreign power was afraid that the other might use the increased communication to extend its grip on China. Conse¬ quently, a multiplicity of companies came up, there was gross underutilization of capacity and sharply rising costs[25]. Railways thus remained confined to the coastal area, haphazard and uncoordinated in sharp contrast to the position in India. It was not as if there were high risk in railroad investment. As in India, the investors in effect had a guarantee because it was the Chinese government which took the loans and underwrote them. In contrast, there was no debate or doubts within India regarding railways. Indeed, if there was any, it was in England on the advisability of allowing railway construction in India. The earliest offer to construct a railway line in India was made in 1844 by Dwarka Nath Tagore’s firm, Carr, Tagore & Co., a mining com¬ pany which offered to subscribe to one-third of the capital required to build a railway line from the port city of Calcutta northwest to the coalfields beyond the town of Burdwan[26]. The offer was not taken up. But with the rising pressure exerted on London by the English traders, especially those that had wanted to export cotton and opium from India, the British government finally agreed to enter into negotiations with officials of the East India Comapny to form the East India Rail (EIR). The terms offered were most attractive by the then prevailing conditions of depression of 18489 in England. The colonial Indian government agreed in 1848 to ensure for a period of 99 years a minimum return of 5 percent on the invested capital by guaranteeing to pay the deficit in the realized return. Further, land for laying the rails was free. With these guarantees, the EIR had no difficulty in raising in no time, all but one percent of the required capital in London itself. As Cottrell[27] has noted, around this time the British were under pressure to find

The Initial Conditions

23

overseas outlets for their domestic savings, and thus the colonial Indian government guarantee of a 5 perent dividend for 99 years was most attractive. Between 1850 and 1868, the colonial Indian government paid in sterling £15 million to cover the deficit in the rate of return (about 1-1/4 percent). Till 1900, the railways companies in India were in deficit, after which year they were in a position to contribute to the Government revenue. Till then, about 0.2 to 0.3 percent of the national income was paid out to cover the deficit in the dividend. But the impetus to railways growth really came from two political events. The first was the 1857 Great Uprising which convinced all doubting Thomases in London on the urgent need for railways. Most policy makers in Whitehall were convinced that had railw ays been there, the 1857 revolt could have been put down more quickly. The second was the growing fear in the 1880s and 1890s about a possible Russian invasion via Afghanistan. This fear led to the British building railway networks in northwest India, which constituted a change of earlier policy. Up until then the railway policy was merely to connect the ports of Bombay, Calcutta, and Madras to hinterland markets to facilitate exports of cotton and jute. Besides the British willingness, the Indians - unlike the Chinese - were ready for the railways too. As a consequence, India had acquired by the time of Independence in 1947, the fourth largest railway system in the world, for which they paid handsomely and fully. The advantage, despite the cost, placed India ahead of China in many important areas of consequence. For example, although during the eight decades 1870-1950, India had 12 famines and China had only 2, the total deaths in this period ascribed to starvation due to famines in the two countries were the same, about 13-15 million. The lower per famine death toll in India was in larger measure due to the existence of the relatively larger railway network. Indian advantage in railways, which was a combination of the British willingness to supply and the Indian readiness to accept - and pay the cost for it -is to be contrasted with the Chinese attitude. As mentioned earlier, the first railway line builtin China by Jardine, Matheson & Co. ripped up by the people one year later. Between

24

Economic Growth, in China and India

1876 to 1911, the Chinese government had to spend money to guard the rail lines lest the peasants on the route stole the lines and planks. Such was the hostility on the part of the Chinese people then to railway development. Since railway construction has a long gestation lag, the Chinese people even today suffer from a weak transportation system. The Traffic Intensity Ratio, measured as the ratio of the sum of tonne km of freight moved and passenger-km to the GDP in 1981 was 4.0 in China and 5.1 in India despite a rate of growth of freight and passenger traffic in China which was double that of India’s during 1952-81. Since the founding of the republics in India and China, China has had a severe famine due to drought in 1959-61, leading to deaths due to starvation (or induced by lack of food) to the extent of 30 million[28]. In 1965-67, 1979-80 and 1987, India had the same intensity of drought, but no deaths due to starvation were reported by any national or international agency. This difference in outcomes is in large measure due to the size of the Indian railways. This same fact also explains why India does not need to import food grains from abroad despite a lower per capita production (than China) while China has been importing 10-14 million tons every year. Because of the deficient railway network, it is clearly cheaper for the Chinese northern coastal areas to import wheat from abroad than transport it from the interior! These facts point to the possibility that the “social savings” from railways is higher in India than China. Hurd[29] and Huenemann[30] have estimated social saving for India and China respectively. The social saving for India was 9 percent of the GDP, while it was about • percent for China. These estimates appear to be a bit off the marie (too low for China and too high for India) espe¬ cially since the estimate of social saving for a large country like the United States is 1* percent, and for a small country such as Britain is 6* percent. Nevertheless, there is no doubt that railways did provide subs¬ tantial social saving in India. The saving would have been even higher had railway policy of the colonial Indian government been more oriented to promoting commercialization of agriculture and

The Initial Conditions

25

charging of cheaper rates for internal trade of goods and services. The Chinese social saving would have been much higher had not, as Huenemann states, the feudal lords “tried to expropriate the railways credit ratings”. The corruption and nepotism in railway administration was legion. By all accounts, Chinese bureaucrats ‘milked’ the railways without remorse. The railways in China did not promote economic growth because it was too small. But in India although the railways network was extensive, nevertheless it failed to foster economic growth because no structural changes resulted from its introduction. The reason for the minimal impact on economic growth in the two countries was in substance the same. Both the Chinese and Indian governments were status quoist in their attitudes, and certainly fearful of the des¬ tabilization that may result from the railways. The Chinese gover¬ nment feared subversion by the outsider and suspected the railways would be the instrument for that. The colonial Indian government remained concerned by the potential for destabilization by the insider particularly the Indian entrepreneur because of the nonparasitic economic power that would accrue from the railway facility. Yet the railways were needed to keep under check that very same potential. The British resolved this dilemma by having the railways, but making it difficult for any of the linkage benefits to reach Indian hands. Thus, the freight rates were designed to make internal trade less profitable than export. The access to railways measured by the fraction of per capita income required to pay in the 1920s to move 204 kilograms, 1500 kilometres away was 14 percent in India, compared to only 0.6 percnet in the US A and 1.3% in Britain[31]. Similarly, while it was demonstrated as early as 1865 in Byculla in Bombay, that locomotives could be produced in India (and these were supplied to the Princely states), Britain insi¬ sted on exporting 12,000 locomotives to India during the period 1865-1941. This represented 22 percent of total British production. Even in labour requirements, till 1925 Britain insisted on India importing for the railways, skilled personnel down to the plate layer. Nor did the Indian capital market benefit from the giltedged railway investment guarantee. London insisted till 1900 that the.

26

Economic Growth in China and India

entire capital for the railways be raised in England. After that year, the responsibility for investment was vested in the government of India. Finally, the incentives to cotton exports and the easy import of textiles into the interior made possible by the railways, destroyed the Indian handicraft textile industry rendering a large number of people unemployed. Kang Chao[32] comments on the “remarkable survival of the cotton handicraft textile industry in China”. It may well be due to the late arrival of the railways in China. Yet despite all these factors mitigating against the railway’s role in India’s economic growth, the fact remains that the net contri¬ bution of railways to India has been positive, and the rewards from the early investment in it are still felt today in modem free India. The contrast with China brings this out clearly. Had the British never come, it is appears plausible by a comparison with China, that the very same socio-economic factors that in China obstructed the introduction of railways would have obtained in India as well. The impact of the West on India as far as railways are concerned has in net terms been positive largely because of the favourable circumstances in which the foreigner found himself in India. It has been less positive in China for much the same reason.

Ill Although the railways came to India much earlier than in China, modem factory enterprises were established in a systematic way in the two countries about the same time in the 1890s. In India, there were sporadic efforts made to start these enterprises much earlier, but these efforts remained confined because of obstruction from the colonial government. Judging by the estimates of growth of manu¬ facturing output, for China derived by Chang[33], and for India those assembled by Morris [34], the industrial growth rate of the two countries was about the same: about 5 percent annually from World War I onwards. But by all important criteria, during the eight decades 1870-1950 both China and India had failed to industrialize. While, both India and China failed to industrialize, the reasons

The Initial Conditions

27

for their failure were quite different. Both were victims of imperialism, but the content of imperialism was different in the two countries. In China a Chinese Govemment[35] was besieged by five foreign governments for concessions. Throughout the century (1850 - 1950) wars had to be waged, and indemnity paid to foreign powers. Between 1842 and 1911, China paid indemnity 110 times. In the five years 1895 to 1900, China made indemnity payments to Japan equal to twice the national receipts for the Ch’ing Govern¬ ment in 1900. In China, thus a government by the Chinese had to combat foreigners. In India the government was that of the British, ruling over the native Indian people. There were, however, no wars, no combat, and no serious disorder or rebellion after 1857 or until 1942. During the period 1870 - 1942, thus, there was stability with no real challenge to the Government of “British” India. It is, therefore, significant that a Chinese government, functioning in disorder, war, and rebellion achieved almost the same growth rate as government by the British, operating in a remarkably stable environment with the tacit support of the literate sections of the population. This is significant because it is often asked why China was not able to utilize Western technology for economic advan¬ cement while Japan was able to. The question is often answered in terms of China’s cultural narcissism, her arrogance, and her intro¬ vert psychology[36]. If this were indeed true, it would be difficult to explain why the Government of India manned at the top entirely by the British was not able to achieve a rate of growth comparable to at least the Japanese level. It could be argued that the low growth rate in India was due to a lack of qualified native entrepreneurs, capable of introducing nineteenth century technology into India. Thus argument is not of much weight. It is significant that British investment in India was concentrated in railways, tea and coffee plantatioas, banks, mercantile establishments, coal, and jute mills. The notable omiss¬ ions in the above list are cotton textiles and iron and steel industries, which two industries were largely instrumental in the indus¬ trialization of Britain. Indians invested in these two latter-named industries, but not without first overcoming major hurdles placed

28

, Economic Growth in China and India

by the British Government of India. Why were the British invest¬ ments confined to these export and export-related activities? Why did the Government of India resist native initiative in other areas? The conventional wisdom that underlies the usual answers to the aoove questions are that the purchasing power of the native popu¬ lation is weak, so foreign investors have to concentrate on low capi¬ tal primary industries[37]. This is the small size of the market argument. Alternatively, it is sometimes argued that primary industries have a higher rate of return; consequently profit maxi¬ mization leads rationally to the neglect of the manufacturing sector[38]. This is the low rate of return argument. Both these arguments fail under close scrutiny. The size of the market argument is superficially dependent on the level of per capita income. But a country may have a low per capita income and yet a large market because of the population size and unequal distri¬ bution of income. These factors made it possible for Indians, nota¬ bly the Parsis, to successfully manage on the cotton textile industry. The British reluctance to gointo cotton textiles cannot be explained on the grounds that there was a lack of demand. In fact, so successful were the Indian investors. Petit and Davar, that there was alarm in Lancashire[39]. Iron and steel were never plagued by lack of demand either. By 1905 India was importing 615,000 tons of iron and steel. Railways claimed a sizeable portion of the iron and steel availability [40] and was a steady source of demand. The size of the market cannot expl¬ ain why British investments shied away from the cotton textiles and iron and steel industries. The rate of return argument is also unacceptable. Implicit in it is the hypothesis that foreigners chose fields of investment with high rates of return, leaving to native entrepreneurs the low-yield areas. This belief is not borne out by available statistical evidence. In cotton textiles the rate of return was higher than in coffee or tea plantations[41]. In some years the gross return was 38.8 percent During the 1880’s several cotton textile mills returned the entire invested capital within four years[42]. In iron and steel the same was true. Tatas made a good deal of profit and became the lowest

The Initial Conditions

29

cost producers of steel in the world as Table 2.4 reveals. For some years the Tatas paid dividends of 300 percent per year[43]. It is not only true that adequate demand and profitability existed for cotton textiles and iron and steel - more than even for plantation ventures - but also that the Government of India for many years actively resisted entry of Indian capital into these industries[44]. In Table 2.4 Comparison of Works Costs, United States of American and Canada with TISCO: 1923 Canada

USA

Jamshedpur

(Tons/$)

(Ton/$)

(Rs)

Pig Iron Total materials cost Labour cost

24.70 0.85

24.00 1.00

36.13.0 2.11.0

12.27 0.89

Steel Ingots Total materials cost Labour cost

24.75 1.10

30.00 1.50

70.4.0 5.12.0

23.42 1.92

Blooms Materials Labour

29.50 0.65

35.00 1.50

88.3.0

1.11.0

29.40 0.56

41.00

123.0.0

41.00

45.00

134.15.0 11.15.0

44.98 3.98

Rails Materials Bars Materials Labour Note:

39.00 4.50

(Ton/$)

TISCO mentions that “cost of pig iron at the blast furnace does not agree with the price charged to ingots in United States of American and Canada as they use an average price when charging to the open hearth furnaces”.

Source:

ITB, Evidence by the Tata Iron and Steel Company, Calcutta 1924, op cit, pp 256-57. Quoted in Datta, S: “Role of the Indian Worker in Early Phase of Industrialization"^Econ£>mtc and Political Weekly, XX, No. 48, Nov. 30, 1985.

30

Economic Growth in China and India

cotton textiles the Government of India in 1862 had imposed a 5 percent duty on piece-goods imports, not to protect domestic industry, but to raise the state revenue. But this duty evoked strong reaction in Lancashire. In 1871 the Manchester Chamber of Com¬ merce sent a strong memorandum to the Secretary of State for India demanding immediate total repeal of the duty. In 1874 a Committee appointed by the Government of India did not find that the duty significantly affected trade between India and Britain, and yet in 1877 the British Parliament unanimously passed the resolution repealing the duties because they were “protective in their nature.” As a member from Lancashire was to later explain in Parliament: We do not attack the Hindoo consumers, but we wage a war to the knife against the protected or bonussed mill-owner, who, in addition to natural advantages, wish to retain this burden on the shoulders of the people of India, not for the benefit of India, but to the detriment of India and for the sake of their own individual gain[45].

It was not as if the Government of India was to be outdone in such sentiments. Sir John Strachey, delivering his Budget speech on March 28, 1877, said: We are often told that it is the duty of the Government of India to think of Indian interests alone, and that if the interests of Manchester suffer it is no affairs of ours. For my part, I utterly repudiate such doctrines. I have not ceased to be an Englishman because I have passed the greater part of my life in India, and have become a member of the Indian Government. The interests of Manchester at which foolish people sneer, are the interests not only of the great and intelligent population engaged directly in the trade in cotton but of millions of Englishmen[46].

The British thus sought to create a “patriotic fervour” with a view to thwart those acting against “millions of Englishmen” and thus to obstruct Indian native initiative in cotton textiles. In i ron and steel as well, similar obstacles were created for Indian entrepreneurship. Tata who was on the best of terms with the colonial Indian Government, was nevertheless prevented from embarking on the venture of steel making by the colonial govern¬ ment till the turn of this century.

The Initial Conditions

31

If indeed the Government of India was hostile to native entrepreneurship, the question arises why the Government later allowed any investment in these industries at all. The answer lies in the fact that “British interests” were an amalgam of sub-interests, the final manifestation of which was not predictable in all situations for all times. From earliest times the British merchants ran into con¬ flict with the British parliamentarians, especially those with agra¬ rian backgrounds. This conflict had little to do with British policy toward India but with the fact that the riches from India made the landed aristocracy in Parliament contemptuous and envious of the merchants[47]. Similarly, in another illustration, the British Gover¬ nment of Madras had helped a Mr. Heatti to set up ah iron works in Porto Novo in 1830’s, to enable India to compete “on highly favo¬ urable terms with Swedish iron” in export of bar iron to England. Nowhere was there a consideration that the needs of domestic industrialization or the imminent expansion of railways, would be more profitable. The venture failed because the British iron industry itself grew very rapidly to become an exporter of the same item. In 1903, Lord Curzon gave a substantial subsidy to the British-owned Bengal Iron Woiks to produce steel. This too failed because of lack of interest of English capitalists., Tata, who had been repeatedly denied permission since 1880, was then asked to go ahead with his plans. His venture was now acceptable because Britain could not export enough steel to India. Belgium and Germany had become the principal exporters to India[48], In fact, as Tomlinson states[49], the colonial Indian government softened towards Indian entrepreneurship in general in proportion to the British decreasing international competitiveness. But British capital nevertheless remained confined to the extractive industries by choice. It is interesting to note that Tata who thereafter went to England to raise the capital for the steel industry project, had to return empty-handed after a year of unsuccessful negotiations, even though it was known to the English money market that it was a profitable venture. Tata thereafter raised the entire capital of £1.63 million within three weeks in India itself, on the platform of Swadeshi (roughly: national self-reliance), to become the lowest

32

Economic Growth in China and India

cost producer of iron and steel in the world (Table 2.4). The hypothesis that has considerable support in evidence may be expressed as follows: The slow industrialization, or at least the lack of rapid industrial growth in India, cannot be attributed to the lack of native entrepreneurship, insufficient size of the market, or the nonexistence of acceptable rates of return. It can, on the other hand, be ascribed to the unwillingness of foreign capital to enter into the basic industries despite the opportunity, and to the British Indian Government for placing obstacles in the path of indigenous investment[50]. The goal of economic growth was never formulated by the Government of India until it was transferred to Indian hands in 1947. On the other hand, native business groups, such as Tatas, engineers such as Visweswarayya, political leaders such as Dadabhai Naoroji, Tilak, and later Gandhi were fully seized by the need for industrialization from their own special perspectives. It was the combination of “British interests” and the underlying social ethos of the Government of India that they were there “to govern, to stabilize, and to administer,” but not to transform^ 1], that proved to be the main cause of India’s slow development[52]. The few estimates that we can find on the Government of India’s public investment allocation highlight this exclusive concern “to govern” to the exclusion of other development activity. Transpor¬ tation and communication (principally railways) was allocated about 65 percent of the investment; public buildings received 20 percent; agriculture and irrigation 12 percent; and industry, zero. Of the total gross expenditure of the Government of India, defense accounted for 40 percent, averaging about 3 percent of national income. The allocation for defense, however, constantly increased between 1870 and the 1940’s reaching 7.7 percent of national income in 1944. Significantly in the post-Independence budgets defense expenditure has been generally less than 4 percent of national income. The large and increasing expenditure for defense was, however, only partly due to the British concern to contain internal uprising. Other reasons were that the Government of India and Britain were

The Initial Conditions

33

concerned about a Russian invasion of India, especially during the late nineteenth and early twentieth centuries. Britain also sent Indian troops to China, Persia, Africa (and to the World Wars) as part of its imperial adventures. In World War I nearly a million Indian soldiers were deployed abroad (among them Gandhi before he became the Mahatma). The Government of India paid not only for the rising recruitment of Indian soldiers, but also for the British officers and soldiers who led them. Under the decree issued after the Great Uprising of 1857, it was stipulated that no Indian could hold commissioned rank in the army, and that for every three Indian soldiers, there had to be one British officer or soldier. This was the policy till World War II. In 1917 India’s defence budget in current prices rose to £30 million, or about twice the level reached forty years later in 1957! Only 12 percent of this outlay was on capital items. It is significant that all through the nineteenth and early twentieth centuries, British economists showed scant interest in England’s economic policy toward India. One exception was J.R. McCulloch [53], who remained critical of the Government of India’ policy of ignoring economic development and concentrating on raising revenues to administer India through the “erroneous Ricardian rent theory.” With other economists the single-minded concern was with how to administer India effectively. Both James Mill and his eminent son John Stuart Mill took the utilitarian view that providing good Government to the “defective Hindu” was an end in itself. John Stuart Mill in fact stated: “The question is, in what manner Great Britain can best provide for the government, not of three or four millions of English colonists, but of 150 million Asiatics who cannot be trusted to govern themselves[54]. Building on this misinformation or myth, Alfred Marshall wrote in his Principles of Economics that India was backward because of the Hindu cultural “bad habits” of ostentation and spending on festivals. In his testimony before the Committee on Indian Curr¬ ency, 1899, Marshall thought India should be provided foreign capital “to educate the natives themselves to store up capital.” Obviously the concept that the Government ought to provide

34

Economic Growth in China and India

economic leadership, in particular to provide credit and selective protective tariffs, was not favoured. This concept is what Gerschenkron identified as the key factor in the industrialization of the nineteenth century backward countries such as Russia. Thus India’s contact with foreigners or the West was a missed opp¬ ortunity and unfulfilled promise because the role of the colonial government (visualized as that of administering the natives efficiently) was obstructionist and blocked the proper transfer of technology. In fact, as Rhoads Murphy[55] infers, the social movements of Raja Ram Mohan Roy and Dayan and Saraswati, and the political moderation of Ranade could have laid the foundation for a fruitful collaboration between Britain and India, much as between Meiji Japan and the United States. But instead the British chose to become in India increasingly racist, beginning with Macaulay’s Minute on Education[56]. This racism then led to the national awakening first in 1857, and then to increasing confro¬ ntation through the preachings of Swami Vivekananda, to be followed by Dadabhai Naoroji, Aurobind Ghosh, Subramania Bharathi, and finally Mahatma Gandhi. The developments in China also show the same insensitivity of government to entrepreneurship. The first Chinese iron and steel plant was set up in 1894 in Hanyang, with machinery purchased in Europe. This was two years before the first Japanese works in Yawata. By 1914 Hanyang had completely failed, although Yawata boomed on cheap Chinese ore! Here again the reason is that the primary motivation of the Government was noneconomic in nature. The plant was located in Hanyang for “prestige” reasons[57]. No analysis of Chinese ore and coal was made, and yet officials sitting in Peking ordered Bessemer converters and found these produced steel with a high phosphate content, quite unfit for railroads. Because the site was improperly chosen, the company had to make huge outlays for drainage and leveling of marshy and low land. Furthermore, fat expense accounts were allowed, and after paying warlord-owners Sheng Hsuanhuai and others, there was hardly any plough-back of profits. Hanyang steel was then priced at £48.50per ton, which was higher than in other countries, notably India. The Chinese Government’s attempt to step up the rate of

The Initial Conditions

35

investment also failed because of the “bureaucratization” of pro¬ cedures. The Kuan-tu Shang-pan industrial organization could neither provide the Chinese investors with adequate capital nor underwrite the risk involved in new ventunes[58]. The same type of organization, however, proved to be a success in Japan. The reason for the failure in China is attributed by eminent Chinese thinkers such as Dr. Hu Shih[59] to a lack of “effective leadership” on the part of the imperial government of the Manchu dynasty. Dr. Hu Shih’s view was that the abstention of the government was crucial because nowhere else could leadership be located. This latter vacuum he attributed to “the accumulated deadweight of over a thousand years of Indianization” of China![60].The Investments carried out by the Kuan-tu Shang-pan organ¬ ization were too small to transform the economy. To undertake large investments, the government would have had to restructure the fiscal system. But revenues were declining because of civil wars, and expenditures were rising because of indemnities paid to foreign powers. The imperial government continually verged on bankruptcy. Besides this, private entrepreneurs also did not invest in these concerns. Almosts all the Kuan-tu Shang-pan organiza¬ tions suffered because of fat expense accounts and guaranteed dividends. The China Merchants Steam Navigation Company, which began very well, by 1900 fell behind the China Navigation Company (British-owned) because not enough profits were ploughed back into the company. The China Merchants’ Company made handsome profits, but due to its payment of an annual divi¬ dend of 15 percent during 1873 - 1914 failed to grow commensurately. The same malady afflicted the Hanyehping steel industry. The Imperial government did borrow heavily from foreigners. But of the total borrowings, 44 percent were expended on military and indemnity payments, 20 percent on administration, and only 5 percent on industrial development Indeed it may be concluded that the inability of the Chinese Government to commit the nation to a program of economic development and the failure of the Chinese elite and statesmen to persuade a conservative court in Peking, were responsible for the century-old stagnation in China. This inability and failure enabled western imperialism to take root in China. Even

36

Economic Growth in China and India

after imperialism confronted China, the response to colonialism was negative in contrast to that of Japan. China, compared to India, had some serious disadvantages as well. In India the efficacy and power of technology had been demonstrated by 1840. The Indian elite had by then been completely persuaded on this score. For China it was not until 1895 that the realization came in full force. Second, social reform movements began in India around 1820. Notable leaders, intellectuals, and spiritual men campaigned against archaic practices in India society. The Government of India was, however, most reluctant to push through reforms wanted by the social reformers for fear of “stirring up the native.” By contrast, in China the social reforms movement did not develop until 1890. Third, in terms of taxation and observance of laws, the Chinese investors were at a greater disadvantage than their Indian counter¬ parts. In India foreign investors had to pay the same taxes as indigenous investors and were subject to the same laws - at least as far as the letter of the law went. In China foreign investors did not have to pay Chinese taxes, nor were they subject to the stringent Chinese laws until 1942[61]. This placed the Chinese investor at a substantial handicap. Fourth, the Chinese Government’s thinking was absorbed with the need for defense. On one hand, they had to combat five foreign countries, and on the other hand, they had to expend huge sums to put down domestic rebellion. The Indian Government, in contrast, had greater opportunities to engage in economic development work because there was no foreign threat; the domestic revolt of 1857 had been put down very firmly, and there was no subsequent organized “insurrection” to repress. That the Government of India did not use the opportunity is another matter, and has been discussed above[62]. It is thus remarkable that China with all its limitations and instability achieved almost the same growth rate as India, which had had decades of uninterrupted political stability.

IV Although some data are available to estimate, if only tentatively,

The Initial Conditions

37

the growth rate in national income during 1870 -1950 for India, no such evidence is available for China. The earliest estimate for natio¬ nal income for China is for 1933, made by Wu Pao-san and later by T.C. Liu and K.C. Yeh[63]. D.H. Perkins has estimated gross domestic product for 1914 -1918 and 1933, but he has not gone any further back in time in his studies[64]. Several scholars have pointed to this vacuum[65], but no attempt to date has been made to splice together data to obtain a product series for the period 1870 - 1950. Even after 1933 the collection of data for national income was not systematic, and in any case where compiled, remained unpublished. It was only until 1946 that the Chinese Government took the estimation of national income seriously. In that year Professor Simon Kuznets went to China on the invitation of the Chinese Government to advise it on national income. Kuznets’ studies, and research done under his direction, however, remain unpublished. For India the position is better, largely due to the efforts of individual scholars[66]. Although each scholar has followed his own route to the national income aggregate, the final estimates after due adjustments are remarkably consistent. We shall use in this paper the adjusted estimates of national income as derived by Heston[67]. For China, we shall construct a crude estimate, for national and per capita product. The bases of this preliminary estimates are described below. For the year 1933 we have accepted Liu and Yeh’s estimate for national income[68]. For 1870 we have projected backward the 1933 estimate at the annual compound rate of 1.2 percent per year, derived by a weighted average of the growth rates in agricultural and nonagricultural sectors. The nonagricultural sectors, consisting of mining, manufacturing, communication, banking, transport, trade, and services were postulated to grow at the same rate as external trade in physical terms[69]. These subsectors were man¬ aged in the late nineteenth and early twentieth centuries largely in response to the pressures of external trade, and it appears reasonable that the growth rate of these subsectors in the aggregate was in proportion to the increase in external trade. Kuznets[70] has argued

38

Economic Growth in China and India

in another context that for large countries, such as China, the ratio of external trade to GNP is relatively small but that “this ratio would rise in response to the growth of the nonagricultural sectors.” This empirical fact provides us with a cross-check on our tentative esti¬ mate of national income. On the basis of a study by Chi-ming Hou[71], the growth rate of external trade is taken to be 2.5 percent per year for the period of 1870 - 1933. This rate is set equal to the growth rate of all nonagricultural sectors combined for the period 1870 - 1933.. The growth rate of the agricultural sector is estimated at the same rate as the growth of foodgrains output. The latter represents about 60 percent of the gross value of output in agriculture including animal husbandry. The growth rate of foodgrains output is estim¬ ated after deriving the output of foodgrain in 1870 on the basis of Perkins’ data[72]. According to Perkins, the yield of foodgrains in catty per shih mou[73] around 1873 was 243, about the same as in 1933. Perkins also provides data on area under cultivation, and states that 80 percent of it is in foodcrops[74]. On the basis of these figures we obtain the food-grain output at 2,343 million piculs[75]. Since the 1933 foodgrain output has been estimated by Liu and Yeh at 3,456 million piculs, the implicit compound growth rate of foodgrains output in 0.6 percent per year, which is the same as growth rate of population[76]. The agricultural sector as a whole is thus assumed to grow at this rate of 0.6 percent per year. Based on the fact that during 1870 -1933 the share of agriculture in total domestic product was about 70 percent, the growth of net domestic product is calculated at 0.6 x 0.6% + 0.3 x 2.5% = 1.2% per year. Through use of the 1933 Liu and Yeh estimate of net domestic product, and the above-calculated growth rate, the 1870 estimate of net domestic product is thus obtained. Table 2.5 summ¬ arizes the results obtained by this method, and by incorporating the Perkins estimate of gross value of agricultural production[77]. Using the estimates given in Table 2.5, we shall compare the long-term growth rates in China and India. It cannot be over¬ emphasized that the estimates for China are highly conjectural, and are submitted here primarily in the hope of stimulating the thinking

The Initial Conditions

39

of economic historians in this area. We hope, however, to indicate later on in this paper how the conclusions that one may reach on the basis of data given in Table 2.5 are strengthened by qualitative information obtained from Chinese economic history. Table 2.5 China: Estimate of Net Domestic Product, 1870-1952 (billion yuan) 1870

1885

1914-18

At 1933 prices

13.56

14.22

21.70

28.86

33.95

At 1952 prices

27.96

29.32

44.75

59.49

69.99

48.40

61.71

65.88

Perkins estimate of GDP in 1957 prices Source:

1933

1952

For 1870, see text. For 1885, the estimate is obtained as described in footnote 73. The 1914-1918 estimate is obtained First in 1933 prices by using the range estimated for gross value of agricultural production given in D.H. Perkins, Agricultural Development in China: 1368— 1968 (Chicago: Aldine, 1969). This estimate of gross value is multiplied by 0.913 to obtain the net value added. The nonagricultural sector value added is ap interpolated estimate using the 1870 and 1933 figures. Perkins’ estimates are obtained from his later study “Growth and Changing Structure of China’s Twentieth Century Economy,” in China's Modem Economy in Historical Perspective, D.H. Perkins, ed. (Standford: Stanford University Press, 1975). He estimates, by a different methodology from mine, the gross domestic product that is broadly consistent with my estimates in the text

We may now compare the long-teim growth rates of the Chinese economy, as measured by changes in NDP with those of the Indian economy. Table 2.6 indicates that the growth rate of national income over eighty-two years was slightly higher in India than in China. During 1870 - 1952, the growth rate in China was 1.1 percent per year, while it was 1.3 percent per year in India.

Economic Growth in China and India

40

Table 2.6 Net Domestic Product and Growth Rates in China and India 1870 - 1952 (billion parity yuan)

Year

(4)

(1)

(2)

(3)

CHINA 1952 prices

INDIA 1948-49 prices

Ratio of Product (1) + (2)

(5) Ratio of p>er capita Ratio of Populations product China-India (3) + (4)

1870

27.96

16.83

1.66

1.68

0.99

1914-18

44.75

28.98

1.54

1.71

0.90

1933

59.49

32.36

1.84

1.79

1.03

1952

69.99

49.83

1.40

1.58

0.89

Annual average growth rates (%/year) Net Domestic Product CHINA INDIA

Per capita Population CHINA INDIA

Product CHINA INDIA

1870/1914/18

1.0

1.2

0.5

0.4

0.5

0.8

1914-18/1933

1.7

0.6

0.8

0.9

0.9

-0.3

1933/1952

0.9

2.3

0.7

1.2

0.2

1.1

1870/1952

1.1

1.3

0.6

0.7

0.5

0.6

Sources: China: For 1870-1933, Table 2.5: For 1952 see Subramanian Swamy, Economic Growth in China and India (Chicago: University of Chicago Press, 1973).: The yuan estimates for India have been obtained at the parity rate of Rs. 1.8= 1Y.: India: For 1870-1933, the figures given in Heston, A. National Income “Cambridge Economic History of India: 1750-1970 (Cambridge, 1982) For 1952, see Swamy,op. cit., using the 1946-7 base prices. The ratio of population calculated from data in two sources. For China population figures are from Perkins, D.H.: Agricultural Development in China: 1368-1957, Aldine, 1970. For India, the data are from The Cambridge Economic History of India, op. cit. Angus Maddison, by a different method, has estimated the Indian pier capita growth rate for 1870-1913 at 0.7 percent per year. For source see Weston op. cit.

The Initial Conditions

41

The period of 1870 - 1952 has been for the purposes of this section divided into three subperiods, partly due to the availability of data. The first period is truncated at 1914 -1918, coinciding with the dates of World War I. Had more data been available, the period 1870 - 1914/1918 would have been further subdivided into 1870 1895; 1895 -1914/1918. The year 1895 was a crucial turning point in the economic history of both countries. If we exclude the period 1952 - 1986, the period that is postLiberation for China and post-Independence for India, the diffe¬ rence in the estimated growth rates of the two countries is suffici¬ ently small to be regarded as insignificant. A significant difference in growth rates exists during the period 1870 -1914 when India’s growth rate is 20 percent higher than the Chinese growth rate for the same period. Had we been able to divide this period into the subperiods 1870-1895; 1895 -1914/1918, the contrast would have been even greater. As later evidence will suggest, India did experience a relatively higher growth rate during 1870 - 1895, thereafter the growth rate dropped. On the other hand, the Chinese growth rate was sluggish up to 1895, and thereafter moved rapidly. It was during the year 1895 that the Treaty of Shimonoseki was signed by China to permit free entry to foreigners. During the period 1914/1918 - 1933, China had a significantly higher growth rate than India[78]. The difference is appreciable. However, for want of data we could not compare the growth rates of China and India for the period 1895 -1933. Had it been possible, we could have observed the shift in relative performance of the two countries in terms of growth rates, from 1870 - 1895 to this later period[79]. In the earlier period India had a higher growth rate than China. After 1895 this was reversed. The growth rate of population during the period 1870 -1952 was in India about 0.67 percent per year and about 0.6 percent in China[80], which implied a per capita annual growth of about 0.5 to 0.6 percent per year in both countries, which is about 5.1 percent - 6.2 percent per decade. As Table 2.7 shows, this is a low rate of growth, especially in comparison with countries that during the same period transformed themselves into modem developed

42

Economic Growth in China and India

nations, but nevertheless it is not negative as many economists writing in the field argue. Table 2.7 Growth of National Product, Population and Per Capita Product, Selected Countries Rate of growth per decade (%) Duration of period Years

Country

Total (years)

Product

Popu¬ lation

Per Capita Product

England & Wales

1855/59-1957/59

112.1

21.1

6.1

14.1

France

1841/50-1960/62

105.5

20.8

2.5

17.9

Germany

1871/75-1960/62

88

31.1

11.2

17.9

1839-1960/62

122

42.5

21.6

17.2

1879/81-1959/61

80

42.0

12.3

26.4

European Russia

1860-1913

53

30.2

13.8

14.4

China

1870-1952

82

11.4

6.1

5.3

India

1870-1952

82

13.2

7.2

6.0

United States Japan

Source:

For China and India, see Table 2.6. For the remaining countries see Simon Kuznets, Modern Economic Growth (New Haven: Yale University Press, 1966), p. 64.

We see from Table 2.7 that the growth rates in China and India are very low compared to such countries as the United States, Germany, Japan, and even Czarist Russia, which began their industrializaion post-1840. It is significant that the growth rates of these two Asian giants were lower than those of England and France even after the latter had completed the “Industrial Revolution.” Thus, India, whose per capita income in parity prices was one-fifth of the U.S. and one-half of Japan’s in 1870, fell behind to one fifteenth and one fourth respectively in 1950. What the figures in the table 2.8 show is that in 1885, the Chinese industrial sector was smaller than India’s in its contribution to the

The Initial Conditions

43

national product. But over the subsequent years till 1936, this sector’s contribution to NDP increased substantially in both countries. Table 2.8 Structure of National Product in China and India

(1885 - 1936) (percentages) Sector

Agriculture (A) Manufacturing (M+) Service (S) Source:

CHINA INDIA CHINA INDIA 1885 1936

CHINA INDIA 1952-56

66.8

51.9

62.9

43.8

45.3

48.8

5.2

10.1

18.9

15.2

16.1

16.6

28.0

38.0

18.2

41.0

38.6

34.6

China: 1885: Feuerweiker, A: “Economic Trends in Late Ching Empire 1870-1911”, The Cambridge History of China, Vol II, Part 2, (Cambridge University Press, U.K. 1982) p. 5. The reference year, of Feuerwerker is ‘1880s’, which we take as 1885. 1936: K.C. Yeh’s estimate quoted in Ramon Myers: Chinese Economy Past and Present (Wadsworth, Calif, 1980). India: Heston, Alan “National Income”, The Cambridge Economic History of India, Vol II, 1750-1970. The years 1885 and 1936 are financial years starting April 1.

The share of agriculture in national product declined in China and India, but the decline in India was much sharper because of the declining growth rate of the crop output, not so much because of a superior performance of the other sectors. After the founding of the Republic of India, the share of agriculture initially rose because of the improved performance of the sector due to the better policies followed during the first Five Year Plan period (1951-56) of Independent India. In China, the share of agriculture declined sharply after 1937 first because the Japanese occupation, and then the civil war (1945-49). This turbulent period was a serious setback for China especially in agriculture.

44

Economic Growth in China and India

V An interesting question that arises out of the above discussion is regarding the level of development, in comparative terms, that China and India had reached in the late Forties. In other words, did China and India start their respective modem post-war economic planning from the same or similar levels of development? Many general similarities existed between the economies of India and China at the time India achieved its independence in 1947 and the Communists assumed power in China in 1949[81]. Each had made modest beginnings toward industrialization. In the main, the existing modem factories in both countries were devoted to the production of light consumer articles, particularly textiles. The Japanese had developed heavy industry during their occupation of Manchuria, but this did not become integrated with the Chinese economy until later and after much of the equipment had been removed by the Russians[82], China and India began their develop¬ ment programs, therefore, from a point at which neither country had made any great progress in heavy industry. In each country a large percentage of the industrial production was from cottage and handi¬ craft industries. In addition, the new government in each country had to cope with extraordinary economic dislocations. In India, these dislocations resulted from the partitioning of the subcontinent to creat Pakistan at the time of independence in August 1947. India’s food position had been serious since the Burma Rice Bowl was separated from India in 1937. Food had been imported in quantity since about 1943. As a result of the partitioning, India while it retained about 82 per¬ cent of the population, received only 69 percent of the irrigated area, 65 percent of the wheat area and 68 percent of the rice area. West Punjab, Sind, and the Sylhet district of Assam, which annually pro¬ duced nearly a million tons of surplus grain, became part of Pakistan. India’s textile industry was disrupted as a result of the inc¬ lusion of extensive jute and cotton producing areas in Pakistan while the textile mills remained in India. Immediately the following partitioning, the Government of India was faced with the task of

45

The Initial Conditions

feeding and housing the millions of uprooted refugees. As a result of communal disturbances in the Punjab in the late summer of 1947, some 5 million refugees had crossed into India. India’s industrial production, which had expanded during World War II, had declined in the immediate postwar period. Reconversion to peacetime production had been slow. Machinery was worn out and the replacement of capital equipment was difficult. In adjudging the industrial development of China as of 1949, W. W. Rostow placed it on a par with that of postwar India and with Japan in 1920-25, Russiain 1913 and the United States in 1870[83]. The relative position of China and India just prior to the launching of their economic development programs is reflected in table 2.9. Table 2.9 Level of Key Indicators: China and India (at around the time of founding of the republic)

Indicator 1.

Per Capita

Unit

Year

China

India

Ratio

1970

1952

101

154

0.66

parity $ 2.

Population

millions

1952

574.8

367.0

1.57

3.

Birth Rates

per 000

1950

37.0

40.0

0.93

4.

Death Rates

per 000

1950

18.0

28.0

0.64

5.

Life Expectancy

years

1950

40.0

32.0

1.25

175.5

190.0

0.92

6.

Infant Mortality

per 000

1950

7.

Adult Illiteracy

percent

1950

25.0

20.0

1.25

8.

Calories

per capita

1952

1917.0

1540.0

1.24

9.

Foodgrains

mill, tons

1952

163.9

69.9

2.35

tons/ha

1931-7 2.5

1.3

1.90

1.0

0.6

1.56

10. Yield

Rice Wheat 11. Sugar

tons

1952

0.5

1.8

0.25

12. Irrigation

percent

1949

20.7

14.6

1.42

13. Cropping

Index

1949

135.4

111.1

1.22 Corn'd

46

Economic Growth in China and India India

Ratio

Unit

Year

China

000 tons

1951

129.0

53.7

2.40

15. Steel

mill, tons

1952

1.4

1.1

1.25

16. Cotton

million spindles

1956

7.2

12.4

0.58

Indicator 14. Ammonium Sulphate

Textiles

000 looms

1956

115.0

207.0

0.56

17. Coal

mill, tons

1952

66.0

39.3

1.68

18. Electric Power

billion KWH 1952

7.3

6.1

1.20

19. Crude Oil

mill, tons

1952

0.4

0.4

1.01

20. Cement

mill, tons

1952

2.9

4.1

0.71

21. Railways

000 kms

1950

25.7

54.8

0.47

22. Highways

000 kms

1949

130.2

391.8

0.33

23. Literacy

percent

1951

14.3

16.7

0.86

(000s)

1954

253.0

594.1

0.43

1952

32.6

72.1

0.45

31.4

17.8

24. Students Enrolled in Higher Education

25. College Graduates (000) Percentage in technological subjects Source:

Data called from official statistical abstracts of the two countries. For China the primary sources are publications of the State Bureau, Beijing, the World Bank, and Tsao, James: China's Economic Development Strategies and Their Effects on U S. Trade, USITC Publication No. 1645, February 1985, Washington D.C. For India, we have relied on Basic Statistics Relating to the Indian Economy, Center for Monitoring Indian Economy, Bombay, August 1984. The per capita dollars figures have been obtained from Table 34. The grain yield figures for India are different for the years 1936-39.

From Table 2.9, we see that just prior to the two countries commencing on planned economic development, China was ahead of Indiain per capita output terms, in foodgrains output, agricultural inputs (such as irrigation, double cropping and fertilizer), and in coal since the China-lndia output ratio for these commodities exceeded the population ratio. The fact that the population ratio of 1.57 exceeded the output ratio for all others implied that India was

The Initial Conditions

47

ahead of China in per capita terms for these other commodities. China was also ahead of India in terms of per capita calorie value of consumption and this is reflected in a better health level which is measured by lower death rates and higher expectation of life at birth. But India is ahead of China in the early 1950s in most important commodities of heavy industry such as steel, cement, electric power and crude oil. India is ahead in per capita production of light ind¬ ustry as well, such as cotton textiles and sugar. India is clearly ahead in railways and highways. Although literacy rates are higher in India in 1951, nevertheless the percentage of college graduates holding degrees in technolo¬ gical subjects was more in China. If we are to generalize on the basis of these ratios, we can say that at the dawn of planned economic development in 1952, China was clearly ahead of India in agriculture. This was, however, not so in 1870 when China and India were on a par. In other words, relative to India, China made much greater progress in agriculture during the period 1870-1952. India had, however, gone ahead in industry and transportation and as a consequence of which India’s per capita income in 1952 was about 54 percent higher than China’s. In other words, at the advent of planned economic development, China was better fed and healthier relative to India, while India had a superior industrial and transportation infrastructure. In 1870 both countries were, however, on a par, and the varying internal stability and the differential impact of the West on these two countries produced the kind of structural divergence that we see in Table 2.9. Tne position so described represent the initial conditions for the subsequent industrialization of China and India. These initial conditions are consistent with those obtained by other scholars as well, for example, Alexander-Eckstein. His estimates are given in Table 2.10. As we can see from the above table, Eckstein too places China ahead of India in agriculture and behind in industrial output circa 1950.

Economic Growth in China and India

48

Table 2.10 Eckstein’s comparison of China’s level of development in 1952

GNP- million (1952 $) GNP per capita (1952 $) Population - million

China

India

1952

1950

30 000

22 000

50

60

575

358

Birth rate (per 1,000)

37

38

Death rate (per 1,000)

17

24

Number of persons dependent on agriculture per acre 1.90

0.60

Paddy rice yield (ton per ha)

2.5

1.3

Wheat yield (ton per ha)

1.1

0.7

of cultivated land

Industrial Output Per Capita Coal (kg)

96

97

Pig iron (kg)

2.8

5

Crude steel (kg)

2

4

Electric power (kw)

0.005

0.01

Cotton spindles (units)

0.01

0.03

Cement (kg)

9

4

Source:

Alexander Eckstein: China's Economic Development (University of Michigan Press, 1975). Table 7, p. 214. Recently available official Chinese estimates of total population, death and birth rates in 1952 have been substituted for Eckstein’s figures. See World Bank: China's Socialist Transformation, Main Report, 1982.

There is at present no acceptable theory of which set of initial conditions is better for industrialization of a low per capita income country, but it is clear that China in the early fifties was better placed than India, to extract resources from agriculture to finance the planned industrialization program. Hence the heavy industry oriented strategy made more sense for Chinese planning than for India which relative to China required her to pay more attention to agriculture and which India did not till the crisis of 1966-67.

The Initial Conditions

49

Concluding Comments In the analysis of eight decades of Chinese and Indian economic history, we have been hampered by a paucity of data making it diffi¬ cult for detailed conclusions about the impact of the West on these two countries in a comparative perspective. On the basis of available, but fragmentary, data, however some broad inferences can be made on the basis of the following reasoning. First, the content of the contact with the West, which contact was certainly not voluntarily accepted by either China or India, was different for the two countries during the years under review, 1870-1950. In the case of India the West, represented by Britain, was in full political control of India. The Government of India was headed by a Viceroy who was answerable only to London. All top positions in the government were held by English¬ men. The Princely states, headed by Indian Kings while they conducted their own economic policy, were politically controlled by the Viceroy. There were areas controlled by the French and the Portuguese, but these were very small. Thus Britain was in a position to follow the policies as freely as it wished in an atmo¬ sphere of stability. After the 1857 Uprising had collapsed, there was no real threat of overthrow of Britain rule in India till 1942. In China, the Government was of the Chinese, first under the Ching dynasty, then by the Republicans such as Sun Yat sen and Chiang Kai shek. The contact with the West in the nineteenth century was in the form of repeated aggression by five powers, four Western and Japan, for concessions in trade and investments. The Chinese Government was, therefore, hardly able to function at any time in peace and stability. Second, despite the total stability in India, and the lack of it in China, the growth rate in per capita income over these eight decades (Table 2.6) was about the same, averaging an annual growth rate of 0.5 percent to 0.6 percent. This level, while by no means negative, is low by standards of those countries which industrialized during the late eighteenth and early nineteenth century, and considerably lower than the rates achieved by China and India post-1950. Third, while the overall per capita grpwth rate is similar.

50

Economic Growth in China and India

however, in terms of the structural changes in the national income, the performance of the two countries differ. The difference between China and India, in the pattern of structural change, when examined in further detail appears to have resulted from the policies pursued by the two governments. In particular, the colonial Indian government’s tax policy towards agriculture was exploitative to the extent of causing a decline in the yield per acre of foodgrains, and thus a lowering in the level of living. The Chinese agriculture experienced no such decline, as a consequence of which the per capita grain output which was on a par with India in 1870, increased over the eight decade period to reach 2.4 times the level in India in 1952. The Ching Government and the succeeding Republic Government, despite other failings, (perhaps because of weakness) did not disrupt the rural order in China as the colonial government had done in India. In fact, the Chinese Government was relatively more sensitive to peasants’ difficulties after the Taiping Rebellion. It is possible to suggest on such a comparative analysis that for agriculture indi¬ genous governments even if they are weak are less regressive than any colonial government. Strong indigenous governments (like Meiji Japan, or the post-1950 Indian and Chinese governments) actually promote agricultural growth. Although the colonial government in India introduced and developed a railway network to promote foreign trade and further its control of the Indian people, this network did not foster econo¬ mic growth because of the colonial government railway policy on line location and freight rates. Railways also did not promote structural changes through the linkage effect because the colonial government as a policy imported even semi-skilled labour from England. But despite the high cost paid for the railway, the experience of China suggests that had not the British been in the position that they had been in India, it is likely that railway development would have been considerably delayed. The existence of this railway network perhaps prevented the occurrence of the kind of famine in 1966-67 in India, which caused in China, in similar circumstances in

The Initial Conditions

51

1959-61, about 30 million extra deaths in starvation and famine. Furthermore, the failure of India to industrialize by utilizing Western technology cannot be explained by the conventional approaches. It is wrong to argue that the size of the market and demand was a limiting factor or that the social rate of return was inadequate to attract western technology. What inhibited India’s response was instead the Government of India which created obstacles for Indian initiative and entrepreneurship. The Govern¬ ment formulated no economic goal till 1930. Instead it extolled stability and good administration as ends in themselves, and used a substantial portion of the Government revenues to finance a large army for overseas operations. In China, the response to Western technology was unproductive because at first Chinese Government reaction to it was negative. Later, when the Chinese became aware of the economic potential of technology, bureacratization, absence of good leadership in gov¬ ernment, and civil war vitiated the possibilities of development. A conclusion that emerges from a comparative analysis of these two giant countries is that the resistance to the West, as a factor in the explanation of why these two countries failed to achieve modem economic growth before 1952, is irrelevant. Rather itis the absence of good leadership in the area where it would have been most effective - in the Government - that appears to explain the failure to industrialize the two countries. The reason for lack of leadership was that during most the eight decades the two governments were not popular. They emerged not out of either a revolution of the masses or out of a vote in democracy. Hence their motivations were statusquoist. Both governments were afraid of development and social change, and moved in that dire¬ ction only when threatened. This is further confirmed by the fact that after liberation in the late forties, when China and India had new but popular governments, both countries have developed much faster than before. There is thus no substitute for enlightened government.

3 Growth Rate and Structural Changes: 1952-88 i This chapter is about the economic growth of China and India during the post Liberation and Independence period 1947-86. The stable governments that emerged in the late forties in both countries expended great effort toward the transformation of their economies to modem industrial ones. Here I attempt to examine the success they achieved. That this is a hazardous and on occasion speculative undertaking scarcely needs stating. Nevertheless, since economic growth is a quantitative process, I have attempted to establish statis¬ tically at least a few important results. The definition of economic growth that we adopt here is due to Simon Kuznets[84]. To quote him: “A country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustment that it demands. The changing course of economic history can perhaps be sub-divideid into economic epochs, each identified by the epochal innovation with distinctive characteristics of growth that it generated.”

Kuznets identifed the sustained application of science and tech-

Growth Rate and Structural Changes

53

nology in the form of inventions to production as the epochal inno¬ vation of modem economic growth. And modem economic growth of nation is characterized by six features: 1. High rates of growth per capita and of population, both large multiples of the previous rates observable in those countries. 2. The rise in the productivity of inputs, i.e., of output per unit of all inputs is a large multiple of the rates observed in the past. 3. Structural Changes in production, measured specifically as (a) a decline in the share of industry, and later of services; (b) change in the scale of product units; (c) shift away from personal enterprise to impersonal organisation in form of corporate bodies. 4. Urbanization and secularization of the form of the society. 5. Increasingly global marketing of goods and services. 6. The “inverted U” trend in the inequality of income, i.e., an increase first, and then a narrowing of inequalities. It may not be possible to compare China and India in terms of all the six characteristics of the economic growth, due to a paucity of data. However, an attempt will be made to evaluate as many con¬ sistent series that we can reconstruct from official data, in com¬ parative perspective. It may in place here to point out that in the field of comparative studies, there is some dissatisfaction regarding at the adequacy of the concept of national income as a measure of welfare. Suggestions have been made to construct a welfare indicator which not only measures productive capacity of the economy, but takes into acc¬ ount indicators of health (such as life expectancy), education (such as enrolment in primary schools), and levels of living (such as caloric intake and housing). We shall attempt look at these indi¬ cations as well in the next chapter. In interpreting the quantitative results, however, there are two major difficulties. The first, for want of data, I shall only mention. There is tacit recognition that most actions that induce growth also impose costs and that the higher income obtained may not be worth the cost. In the context of the China-India comparison, this is a relevant question, for, say, if it turns out that the Chinese growth rate is.only • percentage point higher than India’s rate, one may ask:

54

Economic Growth in China and India

is this • percent worth the costs of social regimentation that the Chinese pay? Alternatively, if the Indian rate is • percent higher, is it worth the cost of gross inequality that is permitted in India? I cannot answer this question in any definite sense, because there is no theory on the trade off, if ever there can be one, between regimentation and inequality. The second difficulty in defining and comparing the economic growth of China and India arises when the meaning of product is considered. Essentially product is defined to convey some appre¬ ciation of the economic life of a country. But associated with such a definition are the thorny problems of scope, grossness, and valuation. If we are to understand modem economic growth in China and India, we must measure the magnitudes in tenns of the systems of ends, means, and values of the two societies. But these systems are quite diverse. Therefore, the yardstick to be used must be decided. In China-India comparisons, I propose the evaluation of Chinese concepts in Indian terms. I am, of course, more familiar with the latter, but, more important, a substantive argument supports this decision. One reason for studying two diverse systems, such as China and India, is to judge their relative efficiency in organizing the forces of production in order to raise the standard of living of the people. Since consumer sovereignty and market orientation even today play a greater role in the Indian economy, concepts evaluated in Indian terms are likely to have a wider significance for the measurement of living standards. For example, certain consumer services are excluded from national product according to the Chinese concept but included in the Indian concept. From the point of view of the criterion set out above, it appears more logical to include these services and evaluate product according to Indian concepts (which incidentally are derived from the system of national accounts used by the United Nations). To get an idea about the magnitudes involved in the recons¬ truction of the Chinese GDP from the officially published data on Net Material (NMP), or what is called as “National Income Produced” (NIP) by the Chinese State Statistical Bureau, contra-

Growth Rate and Structural Changes

55

sted with the magnitudes of the Indian NMP figures (reconstructed in reverse from GDP data to NMP) are presented in Table 3.1. Table 3.1 NMP and GDP in China and India: 1978 (current prices) CHINA

INDIA

ITEM (Billion Yuan)

%

(Billion Rupees)

Non-material Services

20.3

6.0

63.2

11.6

Depreciation

19.5

5.7

30.0

5.5

321.4

94.3

513.9

94.5

340.9 (113.2)

100.0

543.9 (120.7)

100.0

NDP GDP (market prices)

%

Figure in bracket indicates the ratio of GDP to NMP in percentage terms. Source:

CHINA: China: Socialist Economic Development, Annex A, p. 32, World Bank, 1981. INDIA: Estimates of Net Material Product for the Indian Economy, Monthly abstract of Statistics, Central Statistical Organi¬ zation, New Delhi, April 1982.

Table 3.1 shows that non-material services net value-added and depreciation account for about 12 percent of GDP in China and about 18 percent in India. Of course, the service sector proper is a larger proportion of the GDP. According to the World Bank, in China the share of NMP in GDP rose from 86 percent in 1957 to 88.3 percent in 1978. It is probable that this ratio has since declined because of the filip the service sector has received in the post-1978 Reforms. In India, the ratio of NMP to GDP has been declining since 1952, because of the rapid growth of the service sector.

56

Economic Growth in China and India

Aside from the scope problem in comparison, there is also the question of valuation of output. The problem is serious because the price system in China is largely artificial and set in the Economic Ministries without much regard to what economists know as the “marginal conditions”. In India, the prices are to a large extent determined in markets, albeit imperfect, and hence a comparison between China and India in financial terms requires corrections in data in addition to the usual index number problems[87]. Such corrections are novel, but are now being increasingly made in the China studies, although they had been routinely made in the study of Soviet and East European economics over almost four decades. It is proposed here to first look at the two economies, Chinese and India, in terms first of physical production (in Section II below), and then piece together the evidence to obtain financial aggregates of national accounts. This we shall attempt in Sevtion V.

II The main problem in a study of the Chinese economy is not so much the availability of data or even their unreliability, but the even changing concepts underlying the published official data. It is only now that we can begin to correct Chinese data for errors of commission and omissions in the scope, netness and valuation embodied in these data. My earlier 1973 study, referred to above, showed how Chinese prices distorted growth rates. Now we learn that Chinese foodgrains data unlike in India include soyabean which they did not earlier, and potatoes are included in grainequivalent terms at the rate of 5kgs of potatoes to 1 kg of grain from 1963. Earlier potatoes ’ grain - equivalence was calculated at the 4:1 ratio. Such are the hazards of using Chinese data uncritically and without scrutiny. Another problem that require to be sorted out before we can begin analysis of the data, is that of periodization. The growth in China and India during 1952-87 has not been even or smooth due to policy and extra-policy factors. Hence, to bring out the main features of the growth of 32 years, it is essential to consider the

Growth Rate and Structural Changes

57

output indicators by sub-periods as well. Without going into great detail, it seems proper to divide the period 1952-87, into the following three sub-periods: 1952-65, 1965-78, and 1978-87. The period 1952-57 covers the span of the first Five Year Plan of India (1951-52 to 1955-56), and China (1953-57). It is consi¬ dered by some scholars of both countries as a period of recovery from the after-effects of the events of the pre-Republic era. For many industrial commodities China did not recover its pre-1949 peak till 1956. Hence in calculating long-term growth rates, it is suggested as appropriate that we take 1957, and not 1952 as the base year for both countries as some scholars such as Dwight Perkins have done. However, we take 1952 as the base year bearing in mind the nature of the period 1952-57, since evidence on how long the rehabilitation of the two economies took, is not conclusive. The Chinese in their official publications prefer the base year of 1952. However, the inclusion of this period upward biases the Chinese growth rate. The next important year is 1978, which represents a turning point in the political sea-changes that both India and China underwent. In China, the chaotic Cultural Revolution was over by 1976, and the years after 1976 up until 1978 witnessed a petering out of the Maoist economic policies. In India, the Congress Party which had held power, albeit democratically, for all except three years of the year period 1952-87, had lost the elections in 1977. From 1966 to 1977, Mrs. Indira Gandhi had been Prime Minister and had followed Nehru’s socialist principles. These principles continued to hold in economic policy-making till 1978. Her successors, the Janata Party, brought the Fifth Five Year Plan em¬ bodying Nehru’s socialist goals, to an abrupt end in 1978, and proposed an alternative Sixth Plan to incorporate the right-of-center ideas of Mahatma Gandhi. Since 1978, both China and India have been pursuing through their Sixth (and later the Seventh) Five Year Plahs, more liberal economic policies. In China, these policies are popularly known as “reforms” and in India as “liberalization”. Thus, we may consider the period 1952-87 as divided into phase

Economic Growth in China and India

58

of socialist planning (1952-65), of turmoil (1966-77), and a period of reform (1978-87). It is on this basis that we have calculated the growth rates for comparative analysis. We begin this study by a comparison of levels of production in China and India for twenty six important commodities. TheTatio of Chinese output in physical comparable terms to Indian output is calculated and presented in Table 3.2. The terminal year in this comparison is taken as 1986 because of the fortuitous availability of data. Table 3.2 Ratio of Outputs: China to India: 1952-86

1986

PRODUCT

1952

1957

1965

1970

1978

1983

1.

Rice

1.99

2.01

1.06

2.08

2.04

2.37

2.06

2.

Wheat

2.42

2.67

1.26

1.23

1.54

1.89

1.21

2.40

1.94

3.

Foodgrains

2.35

2.46

2.07

2.01

2.07

4.

Oilseeds

0.79

0.76

0.47

0.45

0.49

0.84

1.17

5.

Tea

0.27

0.32

0.26

0.81

0.45

0.69

0.45

6.

Milk

0.01

0.01

0.02

0.05

0.04

0.05

0.08

7.

Meat

5.23

6.65

8.22

9.74

9.84

12.75

14.01

I.

Farm Output

2.03

2.27

2.13

2.28

2.30

2.82

2.26

8.

Cotton Cloth

0.77

0.77

0.85

1.20

1.17

1.21

1.14

9.

Sugar

0.25

0.34

0.42

0.36

0.39

0.55

0.64

10. Paper & Boards 2.72

1.22

3.09

3.09

4.35

6.24

6.01

11. Light Bulbs

1.20

1.60

2.56

3.24

3.72

3.44

3.51

12. Bicycles

0.67

1.03

1.13

1.81

2.43

4.42

5.83

13. Radios

1.31

1.84

1.15

1.83

5.84

18.60

20.12

14. TV Sets

0.00

2.00

4.00

1.20

0.86

4.34

3.72

15. Sewing Machines

1.43

1.66

2.87

10.01

23.16

31.81

33.88 ....Cont'd

Growth Rate and Structural Changes PRODUCT

59

1952

1957

1965

1970

1978

1983

1986

II. Light Industrial 0.80

0.92

1.72

2.17

3.54

5.63

6.12

16. 17. 18. 19.

1.68 1.01 1.20 0.15

3.00 3.47 1.70 0.29

3.30 2.43 2.04 1.50

4.64 4.51 2.08 1.99

6.09 8.97 2.50 4.88

5.13 4.10 2.63 2.05

5.23 4.14 2.40 2.09

III. Energy

1.61

3.03

3.16

4.37

6.83

4.79

4.76

20. 21. 22. 23. 24. 25. 26.

1.25 0.71 2.40 2.94 0.01 0.22 0.84

2.55 1.12 1.15 6.95 0.28 0.44 1.22

1.87 1.51 5.09 3.30 0.57 0.72 0.09

2.69 1.80 2.30 9.33 1.01 1.60 1.24

3.19 3.32 3.21 2.00 1.98 2.38 1.46

3.93 4.25 3.36 1.71 1.33 0.46 0.99

3.84 4.45 2.32 1.65 2.09 0.58 1.42

IV. Heavy Industrial 1.75

2.02

2.04

3.02

3.63

2.72

2.78

V. Total Output

1.51

1.66

1.94

2.51

3.26

3.87

3.77

VI. Population

1.57

1.59

1.54

1.51

1.47

1.40

1.38

Coal Crude Oil Electricity Natural Gas

Steel Cement Fertilisers Machine Tools Motor Vehicles Tractors Rail Wagons

Note:

Rows I, II and IV have been calculated using Chinese shares in gross value of output. Row III has been derived from shares in coal equivalents.

Source:

CHINA: Data for China have been called from diverse sources, including documents of Party Congress, The Ten Great Years, Beijing, 1959, the Statistical Year Book of China (1985), Beijing and U.S. Congress, Committee on Foreign Relations, Economic Development in India and China, 1956. INDIA: The 1986-87 (and earlier) Economic Survey, Ministry of finance, New Delhi. February 1987.

From Table 3.2 we see that the number of commodities for which Chinese output in absolute terms is less than India’s output, was 9

60

Economic Growth in China and India

in 1950, 8 in 1957, 8 in 1965, 5 in 1970, 5 in 1978 and 4 in 1986. The four commodities in 1986 were: tea, milk, sugar and tractors. In per-capita terms, the number of commodities for which Chinese levels were less than India’s were 18(1952), 14(1957), 14(1965), 10(1970), 7(1978), 7(1986). In 1986, in addition to the four commodities noted above, for which both the absolute and hence per capita Chinese levels were lower, wheat, cotton cloth, and oil¬ seeds enter the list. In other words, it is wrong to suggest that Chinese output levels are higher than India’s for all commodities either in absolute or per capita terms. For some commodities, Chinese output levels are far higher than Indian levels to the extent that the gap appears to be unbridgeable in the near future. In 1986, these commodities were six in number and include meat, paper, radios, sewing machines, bicycles, and coal. Except for meat, the other five commodities entered into this category only after 1970. In 1952, there were no commodities for which the output ratio was more than 5.0 to qualify entering this category. In 1957, meat and machine tools had output ratios exceeding 5.0. But in 1965, machine tools was replaced by fertilisers and the number of commodities was still only two. In 1970, again machine tools replaced fertilisers, but in addition sewing machines became the third element in the category. The structure of output ratios can be seen more clearly in the frequency table 3.3. From Table 3.3 we can see clearly that the frequency distribution remains unchanged between 1957 and 1965, and between 1978 and 1983. However it skews in favour of China between 1952and 1957 and between 1965 and 1978. The reason for this is that India matched Chinese performance in the earlier and later periods, i.e., 1957-65 and 1978-86, but could not keep up with China during 1952-57. During 1965-78, when China was suffering the effects of the Cultural Revolution, India was seriously affected by a massive recession in industry, drought, and two wars with Pakistan in 1965 and 1971. The Indian economy was also affected by some unthink¬ ing nationalization of some trades and industries. However, during 1978-86, the liberalization policies initiated in 1977 and carried

Growth Rate and Structural Changes

61

forward in the eighties accelerated India’s growth. This was also the period when China under Economic Reform accelerated its economic progress. Table 3.3

Frequency Distribution of Output Ratios (Percentages) 1952

1957

1965

1970

1978

1983

1986

Less than 1.5

69.2

53.8

53.8

38.5

30.8

30.8

30.8

1.5 -5.0

31.8

38.5

38.5

49.9

49.9

49.9

46.2

0.0

7.7

7.7

11.6

19.3

19.3

23.0

100.0 100.0

100.0

100.0

100.0

100.0

100.0

RANGE

More than 5.0 TOTAL Note:

The range gives the value of the output ratio while the distribution is in percentage of commodities.

Source'.

Table 3.2

In terms of product groups we find from Table 3.2 that between 1957 and 1978, there has been hardly any change in farm output ratio. Even in 1952 the per capita farm output in China was already higher than in India. The farm output ratio rose in from 1952 to 1957, but remained at the 1957 level till 1978. Thereafter, the ratio rose again till 1983 falling back to the 1957 level in the most recent years, 1986. In case of light industrial product group, Chinese output relative to India’s rose continuously from 1952 to 1986. However the spurt in the relative output of China was perceptible from 1978 to 1986. The pattern in the opposite sense emerges in the case ofthe energy products, a rise from 1952to 1978,and from 1978 to 1986, the energy gap measured by the Chinese output relative to India, moved downwards. In the case of the heavy industrial pro¬ ducts, there was a substantial rise in the ratio of outputs between 1952 and 1957, and then remained unchanged till 1965. Thereafter, there is another spurt in Chinese production relative to India’s till

62

Economic Growth in China and India

1978, after which year a relative decline is registered in the output ratio. Baspd on these 26 commodities, a pattern of growth is discer¬ nible which pattern emerges in a more detailed analysis of the economy in later sections of this paper. That pattern is this: On the whole, considering just these 26 commodities, the Chinese growth rate during 1952-86 is higher than the growth rate of India. (When the excluded commodities are added to these 26 commodities in a system of national accounts, the higher growth rate conclusion is not as easily apparent, the reasons for which we shall see in later sections). However, the growth patterns by sectors vary a great deal depending on the sub-penods considered. During 1978-86, for example, India’s growth in energy and heavy industrial sectors is faster than China’s, which is a reversal of the earlier trends. The above analysis is sketchy but i s aimed at providing an insight to the output structure in the two countries to serve as a background for the detailed analysis based on value aggregates in subsequent sections of this paper. Before concluding this section a few words of caution are necessary. Although we have been able to make quantity-ratio comparisons, we do not have sufficient information on the quality differences in products in the two countries. One Chinese econ¬ omist, Zhang Shu guang[85] has stated that “Of the 20,000 kinds of products turned out by the engineering industry, the majority are 1950s and mid-1960s models, of poor structure and function, low quality, short service and high production costs.” A similar view on Chinese product quality was expressed by a delegation of Asso¬ ciation of Indian Engineering Industries (AIEI) after a visit to the Canton Trade Fair. The delegation in its Report[86] stated that Indian manufacture of machine tools, cement machinery, compres¬ sors, motors and transformer were of superior quality compared to Chinese manufacture of the same. In China, industrial products like fertiliser, cement, and in some years even steel w^re produced in small plants whose quality of output was low. The shares of the small plant output in total production of fertilizer, coal, cement, and iron and steel have been quite high, varying betweeen 25 to 55

Growth Rate and Structural Changes

63

percent. (Since 1982, China has begun to close down some of these small plants because of their energy inefficiency). This may partially explain why despite a high coal output ratio of 5.23 in 1986, the electricity ratio for the two countries is not anywhere that high (being 2.40 in 1986). The quality differential may also explain while a high steel output ratio does not lead to an equally high machine tool output ratio. Making corrections for quality diffe¬ rentials in Chinese and Indian production is desirable but unfortun¬ ately for want of adequate data it has not been possible to do so in here.

Ill Comparative Performance in Agriculture Agriculture is the largest economic sector in the Chinese and Indian economy. This sector employs in both countires more than seventy percent of the working force, and feeds about forty percent of the world’s population. Agriculture makes three types of contribution to economic growth: (1) product contribution, (2) market contribution, and (3) factor contribution. The product contribution predominates in most discussions of agricultural performance. It is simply the contri¬ bution to the total output through its sectoral product. By denoting the rate of growth as r, the agricultural sector as subscript a, and the nonagricultural sector as subscript b, we have the following equation: r = w a ra + wur b b where w is the weight of the sector measured as a fraction of total product. Thus the contribution of the agriculture sector to the overall rate of growth, expressed as a percentage of the total rate of growth, equals (wtr Jr) x 100 and is termed the product contribution of the agriculture sector. Agriculture makes a market contribution by (1) purchasing either current inputs or producer goods from other sectors, mostly

64

Economic Growth in China and India

from the manufacturing sector, (2) purchasing consumer goods to satisfy increasing needs; (3) selling some of its product (“marketed surplus”) to pay for its purchases or to accumulate capital. The trends are important because they indicate the technological trans¬ formation of the agricultural sector and its modernization. Thus manufactured chemical fertilizers, machinery, and mechanical power replace less efficient inputs (organic fertilizers, machinery, and mechanical power replace less efficient inputs (organic fer¬ tilizer, draught animals, and wooden ploughs) which are produced within the agriculture sector. In order to pay forthese purchases, the marketed output of agriculture has to be increased. Thus the market contribution of agriculture is an important strategic variable which makes a structural contribution to modem economic growth. The third type, factor contribution of agriculture, is also impor¬ tant to economic growth, especially in countries with economic planning, such as China and India. This type of contribution occurs when resources are transferred from agriculture to the other sectors. The resources are, of course, capital and labour. Capital is trans¬ ferred either voluntarily, that is, by lending or investing in the nonagricultural sector, or involuntarily, through direct or indirect taxation. The experience of the most rapidly industrializing countries such as Japan and the U.S.S.R. shows that factor contri¬ bution of agriculture is most crucial. However, due to paucity of data, we are compelled to devote our attention to the product contribution and structure only. Within agriculture the cultivation of crops is the most important activity. The table 3.4 brings out this fact out clearly. It can be clearly seen from the table 3.4 that crop activity constitutes more than three quarters of the total agricultural output. The second most important agricultural activity is animal hus¬ bandry. Forestry and fisheries constitute less than five percent of the output in agriculture. Amongst the crops sown in the two countries, foodgrains and oilseeds account for about 84 percent each of the sowr^area in the two countries. These two categories of crops account for over twothirds of the output of crops. Therefore in assessing the comparative

65

Growth Rate and Structural Changes Table 3.4 Structure of Agricultural Output ACTIVITY

CHINA

INDIA

CHINA

1957

INDIA 1981

(Percentages) Crops

80.6

82.7

75.5

80.9

1.7

2.0

3.5

2.3

Livestock

12.9

17.9

16.8

15.6

Fisheries

0.5

0.4

1.5

1.3

Sideline

4.3

2.7

-

Forestry

Note: Sideline activity does not include brigade level or production team level industrial output, as has been the normal practice in China. That portion of the output has been taken out for inclusion in output value of industry. Source:

CHINA: Statistical Yearbook, Beijing INDIA: Economic Survey (annual). New Delhi

performance of agriculture in China and India, a detailed analysis of the performance of foodgrains output and of oilseeds is in order. The term “foodgrains” in China and India have different scope. In China foodgrains include potatoes, converted in grainequivalents. Up until the year 1963, the equivalence ratio was 4 kgs of potatoes to 1 kg of grain; thereafter it has been 5 kgs to 1 kg. Chinese food grains output also includes soyabean and sweet tubers. In India, potatoes, soyabean and sweet tubers are excluded from foodgrains scope. Furthermore, in China rice output is taken to include the husk, while in India the rice output is net of the husk weight. Therefore if we are to compare China’s foodgrains output with that of India’s, then first the scope of output has to be adjusted, to make the aggregates comparable. In Table 3.2 we did that prior to calculating the output ratio. In particular, to the Indian output we added soyabean, and grain-

Economic Growth in China and India

66

equivalent potatoes production; rice output was replaced by that of paddy, to bring the foodgrains output in line with the Chinese con¬ cept. Alternatively we could have redefined the Chinese output to make it comparable with the Indian concept. Table 3.5 gives the output figures for the two countries yearwise without any correction made on the scope of foodgrains output to make the two countries figures comparable. Table 3.5 Foodgrains output in China and India (million metric tons) INDIA

CHINA YEAR 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964

OUTPUT ANNUALCHANGE OUTPUT ANNUAL CHANGE 143 164 167 170 184 193 195 211 177

1965 1966 1967 1968

158 170 182 190 207 195 222 237 221

1969 1970

226 247

-

14.7% 1.8% 1.8% 8.2% 4.8% 1.0% 8.2% -16.1% -10.7% 6.9% 7.1% 4.4% 8.9% -5.8% 13.8% 6.8% -6.8% 2.3% 9.3%

51 59 70 68 67 70 64 77 77 82 83 80 81 89 72 74

.

15.7% 18.6% -2.9% -1.5% 4.5% -8.6% 20.3% -0.0% 6.5% 1.2% -3.6% 1.3%

95 94

9.9% -19.1% 2.8% 28.4% -1.1%

100

6.4%

109

9.0% Cont'd

Growth Rate and Structural Changes

67

CHINA YEAR

INDIA

OUTPUT ANNUALCHANGE OUTPUT ANNUAL CHANGE

1971

254

2.8%

1972

249 260

-2.0% 4.4%

275 280

5.8% 1.8%

286 283 304

2.1% -1.0% 7.4%

332

9.2% -3.3% 1.2% 8.6%

1983

321 325 353 387

1984

407

5.2%

1985 1986 1987

379

-6.9% 3.2% 2.8% -2.0%

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

1988

391 402 394

9.6%

105

-3.7%

97

-7.6% 8.2% -4.8%

105 100 121 112 126 132 110 130 133 130 152 146 151 144 138 164

21.0% -7.4% 12.5% 4.8% -16.7% 18.2% 2.3% -2.3% 16.9% 4.0% 3.4% -0.7% -4.2% 18.9%

Note:

As explained in the text, the scope of output is not comparable. The Chinese output includes rice husk, soyabean, grain-equivalent potatoes, and sweet tubers, while the Indian output excludes these.

Source:

Same as Table 3.4.

In the table 3.5, the Chinese foodgrains output is not comparable to the Indian output because of differences in scope. However, if we add to the Indian output the grain-equivalent weight of potatoes, the output of soyabeans, and the rice husk, we can obtain the comp¬ arable output. Alternatively, the same items can be subtracted from the Chinese output to bring it line with the Indian scope for a proper comparison. The magnitude of difference in results of the two approaches may be seen from the table 3.6. As we can see from the table 3.6, the gap between China and India in terms of foodgrains output is wider when we use the

68

Economic Growth in China and India Table 3.6 Foodgrains Output in China and India (Alternative Definitions) 1978

CHINA

INDIA

Chinese

304.77

147.59

2.07

Indian

238.07

131.90

1.81

0.78

0.89

DEFINITION

Ratio

RATIO

Note: Output figures are in million metric tons.

Chinese definition of scope than the Indian definition. The ratio of foodgrains output is 2.07 if we follow the Chinese definition, and only 1.81 if we adopt the Indian definition. The latter definition implies that the Chinese output has to be scaled down 22% to make it comparable to India. With this note of caution, we refer back to Table 3.5. We find that the year to year fluctuations in output are larger in number and magnitude in India than in China. In the years since 1952, the num¬ ber of years when the foodgrains declined absolutely is 15 in India and 9 in China. Considering the sharp shifts in policy that have taken place in Chinese agriculture and the near stability of approach in Indian agriculture, this is indeed surprising. The clear inference is that Chinese agriculture is better insulated against the weather than India’s. In fact if we employ the methodology of Lele and Mellor[87] to calculate the impact of weather on the foodgrains output, we find that the variations in output are +6% in China and +10% in India, confirming the inference made above. The relative greater instability in India’s foodgrains output is also brought out by the fact that during the entire period 1952-88, the longest span of continuously rising output is just three years, while it is seven years for China. However, in China the longest period to recover a previous peak in output was eight years while it

Growth Rate and Structural Changes

69

was five years in India. During the span of 36 years, 1952-88, the output fluctuations, or more precisely the amplitude of fluctuation cycle, was clearly also largerin India. In this period, the number of double-digit percentage change in output was nine in India and three in China. Indeed therefore it is an interesting finding that despite much greater political stability in India, and again unlike China, despite a steady policy towards agriculture, (nevertheless) the instability in foodgrains output is much greater in India compared to China. The reason for this is that the Chinese government have from the very beginning placed greater emphasis on providing modem inputs such as irrigation, fertilizers, and mechanical power to agri¬ culture. These modem inputs are priced high to effect a transfer of resources to finance industrial growth. In India, in the early sixties began a programme to provide a package of modem inputs to agri¬ culture which produced some spectacular results and which came to be termed the “green revolution”. But the programme remained limited largely to wheat and to some extent rice cultivation. The programme could be taken advantage of by the prosperous farmers only, and hence as a modernising programme its impact has not been widespread. Thus even as late as 1978 the level of inputs of a modem nature in foodgrains cultivation is higher in China than India. After 1978, when China began to accord the first priority to agricultural modernisation, the gap has become wider. In the table 3.7 we present the 1978 level of inputs in foodgrains cultivation for a quantitative appreciation of this finding. From the table 3.7 we can infer that the input levels in the Chinese foodgrains cultivation is significantly higher than in India except as regards the sown acreage and the area under the HYV programme. Not only that, but the growth rate of inputs other than sown acreage and labour is also higher in China. No wonder then that despite the sown acreage under foodgrains cultivation in China being less than in India, the total output in the former is more than double the output harvested in the latter in 1978. The yield per hectare in China is more than two and a half times than India. However the present level and growth of inputs in China relative

Economic Growth in China and India

70

Table 3.7 Input Structure in Foodgrains Cultivation: 1978 UNIT

INPUT

INDIA

CHINA LEVEL GROWTH (units) (%/year) (1970-80)

Sown area Labour Machines Fertilizer Corpping Irrigation HYVP

m.ha man/ha m.HP kg/ha Index % area % area

120.6 2.9 160.0 84.9 158.0 45.7 18.1

-0.1 1.7 23.6 17.5 0.6 4.0 4.9

LEVEL (units)

129.0 1.5 41.0 39.7 134.3 27.7 31.9

GROWTH (%/year)

1.0 1.9 12.9 16.0 0.4 3.0 4.6

Note:

m = million, ha = hectare, HP = horsepower, kg = kilogram. Index of multiple cropping = sown area (gross) - sown area (net), H YVP=highyielding varieties programme.

Source:

India: Official Government statistical abstracts. China: “Agricultural Development Programme” Beijing Review, March, 24, 1980. “China’s Agriculture and Its Future", China Reconstructs, August 1979.

to India raises the important question of potential output. Future expansion in inputs such as machines, fertilisers, and multiple crop¬ ping have less scope than in India. At the present state of technology and know-how, the Food and Agriculture Organization (FAO) esti¬ mates that India can easily double foodgrains output by application of more fertilisers, and through increased irrigation and multiple cropping. For China the cost of doubling output would be far greater than for India because of the high levels of input application already achieved in China. Take for example the multiple cropping index. It has already reached a high level in China. In Indian according to available statistics, not more than 40 percent of irrigated area has been covered by doublecropping. The yield per hectare of foodgrains in India is only two-fifths the level in China as consequence

Growth Rate and Structural Changes

71

of having a lower level of input application, and therein lies para¬ doxically India’s potential advantage over China in the years to come. During the last 35 years, the growth rate of foodgrains in China has been 2.8% per year which is the same rate as that obtained in India. This growth rate has been significantly higher than the growth rate of population in the two countries. According to official statistics published in the two countries the rate of population growth was 1.9% per year in China and 2.2% per year in India for the entire period 1952-87. Therefore, although the growth rate of output of foodgrains is the same in the two countries, in per capita terms the performance is slightly better in China. While the growth rate of foodgrains output is the same for the entire period, by sub-penods there arc some significant differences as the Table 3.8 shows. Table 3.8 Growth Rates of Foodgrains Output and Population (percentages per year) CHINA

INDIA

FOODGRAINS POPULATION FOODGRAINS POPULATION

PERIOD 1952/1965 1965/1978 1978/1987

2.1 3.0 3.5

1.8 2.2 1.3

2.0 3.5 2.7

2.0 2.2 2.4

1952/1978 1952/1987

2.5 2.8

1.8 1.9

2.8 2.8

2.3 2.2

Note:

The growth rates were calculated using the exponential tables. Average output for sub-periods 1952-65, 1965-78, 1952-87, were calculated for the centered years 1952,1965, and 1978. In the third row of the table, the growth rate has been calculated using the end year 1987.

Source:

Table 3.5.

Economic Growth in China and India

72

From the table 3.8 it is apparent that although the growth rates of foodgrains output for the entire period 1952-87 is the same in both countries, in China the acceleration has been especially sharp during the sub-period 1978-87, when the annual growth rate registered was 4.8% compared to India’s rate of 2.6%. During the period 1965-78, foodgrains output grew at rate of 2.9% per year in China compared to 3.4% per year in India. Thus inspite of a series of near calamities in China such as a terrible drought in 1960-61, failure of the Great Leap, the Cultural Revolution, the output of foodgrains grew at a significant rate even during 1965-78 period, but somewhat below India’s Green Revolution rate of 3.4 per cent. It is only after the advent of the responsibility system in 1979 that foodgrains output began to grow once again at high rates in China. For the period as a whole, 1952-87, the growth rate of foodgrains output is the same in the two countries, at 2.8 percent year. The growth rates have been attained differently in the two countries. In China the growth rate is almost entirely due to inc¬ reases in the yield per hectare, while in India about 39 percent of the increase in output is due to increase in acreage under foodgrains cultivation. Table 3.9 summarises the position. Table 3.9

Output, Area and Yield of Foodgrains (1952-87) Annual Percent Change CHINA INDIA Area

-0.1

1.0

Yield

2.9

1.8

Output

2.8

2.8

Source: Tables 3.5 and 3.6.

Because of a significantly higher growth rate in yield per hectare in China, the gap with India which was significant even in 1952,

Growth Rate and Structural Changes

73

widened even further. By the early 1980s, the actual structure of the yield per hectare is given in the Table 3.10. Table 3.10 Foodgrains Output and Yield by Crops: China and India CHINA (1980-82) I.

Gross Sown Area (million hectares) 1.1 1.2 1.3 1.4

Rice (Paddy) Wheat Com/Maize Others

II. Yield Per Hectare (ton/ha) II. 1 Rice (Paddy) II.2 Wheat II.3 Com/Maize II.4 Others III. Production (million tonnes) III. 1 Rice (Paddy) III.2 Wheat III.3 Com/Maize m.4 Others Source:

INDIA (1980-81)

115.0

128.0

33.0 28.0 19.0 34.0

40.0 22.0 6.0 60.0

2.9

1.0

4.4 2.1 3.1 1.8

1.6 1.6 1.2 0.4

329.0

132.0

148.0 61.0 61.0 59.0

63.0 36.0 7.0 26.0

CHINA: Agriculture to the Year 2000, World Bank, 1985, p. 58. INDIA: The Agricultural Situation in India, Government of India, 1985.

From the table 3.10 we can see that the gap in yield per hectare is quite wide - the least for wheat, and the most for the other food crops. Comparing these figures with those for the pre-1950 period

74

Economic Growth in China and India

given in Chapter II, Table 2.9, we can infer that the gap in yields has in fact widened, and the widening has continued to 1987. The superior performance of China in terms of yield per hectare is due to improved irrigation, better crop varieties and higher levels of chemical fertilizer use. Even before the new policies of Deng Xiaoping, China was ahead as shown in Table 3.7 above. In India, wheat production has been the beneficiary of these higher quality inputs (thus the term “green revolution"), and that is why the diff¬ erence with China in yields is the least in wheat. If indeed, India did not have the capacity to expand acreage under cultivation, an option that China hardly has, the growth rate in foodgrains output in China would have been much higher than India. As it is, the growth rates are equal at 2.8 percent per year, thanks in part due to expansion in the area under cultivation in India. The significant growth rate of 2.8 percent annually over three decades compares very favourably with the growth rates achieved by the two countries during eight decades 1870-1952, and has been made possible by the spectacular performance of wheat production (especially in India). PeterHazell[88] has estimated that almost one half of the increase in foodgrains output in India is due to wheat and about one-third due to rice. These two crops in fact account for nearly two-thirds of the output in both countries as the table 3.11 shows. The table 3.11 reveals that rice is the predominant food crop in both China and India, accounting for more than 44 percent of the foodgrains output. The share of wheat in total output has risen markedly in both countries. In China the share has gone up from 12.1 percent to 18.3 percent, while in India it has jumped from 11.3 percent to 25.0 percent. Table 3.11 also implicitly reveals that the growth in foodgrains output has been largely in wheat and rice in both countries. Coarse grains and protein giving grains (such as pulses in India and soya¬ bean in China) have relatively speaking, performed poorly. Thus the share of rice in foodgrains output in both countries remained about the same during the last thirty odd years; while the share of wheat rose significantly, more so in India than China.The share in

Growth Rate and Structural Changes

75

Table 3.11

Structure of Foodgrains Output (percentages) CROP

1950s

Rice (unmilled) Wheat Coarse Grains Protein Grains Potatoes

CHINA

INDIA

44.5 12.1 27.0 5.2 11.2

45.8 11.3 25.7 15.9 1.3

1980s CHINA INDIA 44.3 18.3 26.5 2.9 8.0

44.5 25.0 20.8 8.4 1.3

Note:

Coarse grains include millet, com, sorghum, etc. Protein grains include soyabean, and pulses.

Source:

Same as Table 3.15.

output of coarse grains and protein grains consequently declined. Table 3.12 brings out in figures the low growth rates of these grains. Table 3.12 Growth Rates of Subsidiary Grain Percent per year (1952-87) Grain Category

CHINA

INDIA

Coarse Grains

0.1

1.3

Protein Grains

-1.5

0.1

From table 3.12 we see that although foodgrains output as a whole increased at the rate of 2.8 percent per year, coarse grains and protein grains grew at much lower rates, well below the rate of population growth rate. Considering that coarse and protein grains are consumed by the relatively poorer sections of the populations in the two countries, and that the respective governments have placed the welfare of these sections as of priority concern in the five year

Economic Growth in China and India

76

plans, it is surprising that these grains have performed so poorly. This failure is due to a lack of adequate investment and modem inputs in the cultivation of these crops. While the rate of growth of foodgrains output has been about the same in the two countries, however, in per capita terms China is ahead of India because (a) the rate of population growth is lower in China, and (b) the Chinese per capita output was higher in China compared to India even in 1952 or 1949. Table 3.12 gives the quantitative magnitudes of the difference. The table 3.13 shows as we already know that even in 1952 the Chinese per capita production was about 58 percent higher than Indian level. In 1987 this difference rose to 62 percent. Table 3.13

Per Capita Foodgrains Output and Growth Level (kg/yr) 1987 1952

Trend Growth (%/year) 1952-87

CHINA

0.285

0.368

0.9

INDIA

0.180

0.222

0.6

RATIO

1.583

1.557

-

Note:

Foodgrains output includes potatoes, soyabean and unhusked rice in the Indian figures to bring it on part with the Chinese concept. The trend growth rates are calculated on moving averages, and not on end points 1952 and 1987.

Source:

Table 3.15 and 3.16.

Although, the growth rates in foodgrains output in both countries are equal, namely 2.8 percent per year, there is as stated earlier a difference in the growth in per capita production, 0.9 percent annually in China compared to 0.6 percent per year in India. This is due to a lower growth rate of population, taken to be 1.9 percent per year compared to 2.2 percent per year in India. The gap between

Growth Rate and Structural Changes

77

the population growth rates obtaining in the two countries is likely to increase in the coming two decades because of the differential impact of population programmes in the respective countries. China has launched on an ambitious family programme, while India has had to dilute its family planning programmes because of the backlash of coercive methods used during the 1975-77 period. Despite the higher level of per capita production of foodgrains in China, the Chinese Government has had recently to import considerably more foodgrains from abroad than India for managing the public food distribution system. Table 3.14 shows the extent of food imports in both countries. Table 3.14

Net Import of Foodgrains: Chinadndia CHINA

INDIA

Year

Net Import

Percentage Change

Net Import

Percentage Change

1952

-1.53

-0.9%

3.93

6.7%

1953

-1.81

-1.1%

2.04

2.9%

1954

-1.68

-1.0%

0.83

1.2%

1955

-2.05

-1.1%

0.60

0.9%

1956

-2.50

-1.3%

1.39

2.0% 5.7%

1957

-1.92

-0.9%

3.63

1958

-2.66

-1.3%

3.22

4.2%

1959

-4.16

-2.4%

3.86

5.0%

1960

-2.66

-1.7%

5.13

6.3%

1961

+4.45

+2.6%

3.49

4.2%

1962

+3.89

+2.1%

3.64

4.6%

1963

+4.46

+2.3%

4.55

5.6%

1964

+4.75

+2.3%

6.26

7.0%

+3.99

+2.0%

7.45

10.3%

+3.55

+ 1.6%

10.34

14.0%

1965 1966

Cont’d

Economic Growth in China and India

78

INDIA

CHINA

Net Import

Percentage Change

Year

Net Import

Percentage Change

1967

+1.71

+0.7%

8.67

9.1%

1968

+2.00

+0.9%

5.69

6.1%

1969

+1.55

+0.7%

3.85

3.9%

1970

+3.24

+1.3%

3.58

3.3%

1971

+0.55

+0.2%

2.03

1.9%

1972

+1.83

+0.7%

-0.49

-0.5%

1973

+4.24

+1.6%

3.59

3.4% 5.2%

1974

+4.48

+1.6%

5.16

1975

+0.93

+0.3%

7.54

6.2%

1976

+0.61

+0.2%

0.68

0.6%

1977

+5.69

+2.0%

0.08

0.1%

1978

+6.96

+2.3%

-0.82

-0.6%

1979

+10.71

+3.2%

-0.33

-0.3%

1980

+11.81

+3.7%

-0.48

-0.4%

1981

+13.55

+4.2%

0.52

0.4%

1982

+14.87

+4.2%

1.58

1.2% 2.7%

1983

+13.00

-12.6%

4.07

1984

+6.88

-47.1%

2.37

-6.7%

1985

+3.5

-49.1%

-0.34

-114.3%

1986

+1.3

-62.9%

-0.03

-108.8%

1987

+9.23

+610.0%

+2.07

Source:

China: India:

n.a.

Statistical Yearbook, 1986, Beijing and China Daily.. Economic Survey, 1987-88, New Delhi, 1989.

Table 3.14 shows that since 1976, China has been a net importer of foodgrains and in increasing quantities. This is surprising because the growth rate of foodgrains output h&d also accelerated after 1976. But there are three reasons why China had to increase its foodgrains import. One is that since 1957, the per capita food production had remained about the same, and therefore the new leadership under Deng Xiao ping wanted to compensate the

Growth Rate and Structural Changes

79

Chinese urban massed by augmenting food availability through extra imports. The second reason is that the Chinese transportation system had been in great disrepair since the Cultural Revolution, and therefore it was easier and less costly to feed the coastal urban people with grain shipped in from Canada, USA and Australia, than with grain brought in by railroad from the interior. Third, since during this period, the per capita income in China is growing faster than in India, the demand for foodgrains has also been rising at a faster rate than in India. The deficit in foodgrains is thus made up through imports. In India, where the railroad system is in a relatively better shape, the levels of import have declined with increasing foodgrains prod¬ uction. Between 1956 and 1975, India was importing substantial quantities of foodgrains. From 1976 the decline in food imports has been quite sharp. For three years running, 1978, 1979 and 1980 India had become a foodgrains exporter. This is in contrast to China which was a exporter of foodgrains till 1961 after which it has remained a net importer. As stated earlier, since 1976 China has become a big importer. However it should be noted that as a per¬ centage of foodgrains output, the net imports of foodgrains has never exceeded the modest level of 4.2 percent, while in India except in the late 1970s the ratio of net imports to foodgrains output was generally above 4 percent, reaching 14 percent in 1966. In conclusion the foodgrain output analysis for China and India shows that despite an equal rate of growth of 2.8 percent per year, there are on a deeper look some fundamental differences in performance. First, the entire increase in food output in China has been due to increase in the yield per hectare, while in India a little less than one-third is due to increase acreage under foodgrains cultivation, and the rest of about two thirds of the increased output is due to increases in the yield per hectare. Second, the level of inputs in foodgrains cultivation in China has already reached relatively high levels. Fertiliser application in China is more than double the level in India. Mechanical power is four times higher, while irrigated area is 65 percent higher. Labour per hectare is almost double level in India. All this point to the fact that further

Economic Growth in China and India

80

increases in yield per hectare in China will require a higher cost in terms of inputs relative to India. In fact studies on factor produc¬ tivity^] show that in China total factor productivity declined since 1957 till 1978, while in India it increased atalow rateoverthe same period. All this points to the conclusion that given technology progresses at the same rate in both countries, the potential for increased foodgrains output is greater in India than in China. In non-foodgrains crops, called cash crops, the picture is not so clear. In Table 3.15, are present some estimates by selected crops to highlight this fact: Table 3.15

Yield Per Hectare of Cash Crops: China and India: 1979-81 (metric tons per hectare) CHINA

INDIA

Peanuts

1.5

0.8

Rapeseed

0.9

0.5

47.8

51.8

Tea

0.3

1.5

Jute

3.5

1.2

Source:

China - Agriculture to the Year 2000, World Bank, 1985, p. 65.

Sugarcane

From the table 3.15, we can infer that for oilseeds, Chinese yields are considerably higher, almost double the yield in India. For sugar¬ cane and tea, the yields in India was very much higher. These yields are higher due to historical reasons of being foreign exchange earners for the Indian economy. Hence, the best quality lands were shifted to the production of sugarcane, while investments in tea plantation in terms of modem agricultural inputs was kept high. Jute was an export commodity too, but the best jute growing areas went to Pakistan in 1947. The growth rates in terms of cash crops is given in Table 3.16.

Growth Rate and Structural Changes

81

Table 3.16

Growth Rates in Cash Crops Output: China and India (Annual percentages) CHINA

Period

Oilseeds

Fibres

INDIA All Cash Crops Oilseeds

All Fibres Cash Crops

1952/65 1965/78 1978/87

1.60 0.40 13.40

5.00 2.30 20.20

3.30 1.20 14.40

3.10 1.90 2.00

4.40 1.80 -0.10

3.50 2.60 2.61

1952/87

3.20

6.00

4.50

2.00

2.12

2.62

Source:

Same as Table 3.10.

It is evident from the table 3.16 that the growth rate in cash crops during the period 1952-78, before the economic reforms in China, was significantly higher in India. However, the impressive growth rates achieved by China in the reform peiiod 1978-87, and the lack¬ lustre performance in India, combined to give China a higher growth rate for the period 1952-87 as a whole. This has been made possible by greater application of inputs such as fertilizers (for agriculture as a whole, fertilizer application in China was 116 kgs per hectare, while in India it was 31 kgs per hectare in 1980. In 1986, the gap was even wider). But equally imp¬ ortant is the change brought about by the Chinese government in the prices paid for agricultural commodities and the prices charged for inputs produced in industry. For example, the fertilizer price to crop price since 1980, is typically about 40 percent less in China when compared to India. Furthermore, unlike in foodgrains output, the acreage under cash crops cultivation increased in China (1.9 percent per year during 1952-87), accounting for 42 percent of the increase in cash crops output. In India, acreage increases accounted for 47 percent of the growth rate. Since the growth rate of foodgrains output in China and India for

Economic Growth in China and India

82

the years 1952-87 is about the same at 2.8 percent per year, and that of cash crops is higher in China at 4.5 percent per year compared to 2.6 percent per year in India, it is easily inferred that agricultural crop output growth rate is higher in China. And since, crop output comprises nearly 80 percent of all agricultural activities, therefore, over the three decades and more (1952-87), Chinese agriculture grew faster than India. This over-all superior performance of China over India in agriculture is largely due to the spectacular growth rates achieved by China since 1978. In section VI below, we exa¬ mine the agricultural sector’s performance by subperiods, and ind¬ eed find that the growth rate of this sector is the same for China and India for the sub-period 1952-78 but the Chinese growth rate signi¬ ficantly exceeds India’s in the period 1978-87. We shall briefly discuss the implications of these results in Section VI. In fact, if it were not for the policies of Deng Xiaoping initiated in December 1978, the performance of Chinese agriculture in terms of total factor productivity (a concern of Chapter IV) or rates of return to investment, would have been significantly inferior to India’s. An indication of the effect of the period on such indicators as labour productivity is given in Table 3.17. Table 3.17 Labour Productivity in Chinese and Indian Agriculture (constant prices) CHINA

INDIA

Level Annual Growth Level Annual Growth 1980 Rate (%) 1980 Rate (%) (Yuan) 1952-78 1952-87 (Rupees) 1952-78 1952-87 Net Output in Agriculture (billions)

107.03

2.7

3.6

196.00

2.2

2.4

Labour Employed (millions)

297.65

2.0

2.0

151.86

1.5

1.6

Net Output per Labour 359.58

0.7

1.6

1290.66

0.7

0.8

Source:

Same as Table 3.10, with augmented data from newspapers.

Growth Rate and Structural Changes

83

Thus, we can see from Table 3.17 that although the growth in labour productivity is the same in the two countries for 1952-78, it is nearly double in China compared to India if we consider the whole period 1952-87 inclusive of the Reform years. How long the Chinese agricultural boom will last, and whether such agricultural progress in India is possible remains to be seen. But it is a fact that Chinese foodgrains output has not equalled or exceeded the peak year output in 1984 in the subsequent two years 1985 and 1986, and again fell below the 1984 four years later in 1988. IV Industrial Performance Both China and India have given pride of place to industrial development in their five year plans. Both countries have consi¬ dered that by according priority in resource allocation to industry their economies would become self-reliant. Such concern was partly due to their similarity of historical experience especially with regard to colonialism. After three decades of planning, the structure of the industrial output in the two countries that has resulted is given in the table 3.18. The contrast in industrial development in China and India comes out even more clearly when we consider growth rates of the various industries. These growth rates are presented in Table 3.19. From table 3.19 it is apparent that for the period 1952-87 as a whole, Chinese growth rates is higher than the Indian rates for each and every of the selected key industries. The China-India gap in growth rates is maximum for textiles, metallurgy and chemicals, and the least for machinery and electric power. What is however interesting is that the over-all growth rate in industrial production has decelerated in both countries over the two periods (1952/78) (pre-reform/hberalization) and 1978/87 (post-refoim/liberalization). For the period as a whole, China’s annual growth rate is 10.3 percent, substantially higher than India’s growth rate of 6.1 percent per year. Further, the deceleration in industrial output is across the board for India, while for China, food processing and textiles which

Economic Growth in China and India

84

Table 3.18 Composition of Gross Industrial Output (percentages) INDUSTRY

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Food, beverages & tobacco Textiles Apparel, leather, footwear Wood products & furniture Paper & Paper products Chemicals, rubber & plastics Miscellaneous manufacture Petroleum & coal refining Building materials Nonferrous metals & mining Coal mining Petroleum & coal extraction Machinery & metal products Electricity Total

Heavy Industry share Light Industry share

INDIA

CHINA 1979

1984

1976

1984

11.4 13.0 3.0 1.2 1.3 12.3 6.0 3.6 3.4 9.0 2.5 2.1 27.3 3.9

12.3 15.4 3.4 1.8 3.5 11.8 9.2 2.8 4.1 2.5 2.8 2.0 25.0 3.4

17.8 15.4 1.4 0.5 1.2 14.6 2.0 5.5 3.2 10.9 2.1 0.7 18.8 5.9

17.2 12.6 0.7 1.1 2.8 13.4 1.8 6.0 3.5 14.5 2.2 0.8 19.5 3.9

100.0

100.0

100.0

100.0

70.1 29.9

63.6 36.4

63.7 36.3

65.6 34.4

Source:

China: Statistical Year book of China, Beijing, Annexe D page 16. For China the year is 1979, for India 1976. India: National Accounts Statistics, CSO, February 1986, New Delhi.

Note:

Light industry is sum of rows (1) to (5), and the remaining is heavy industry.

were relatively inferior performers earlier, substantially improved their performance in the economic reform period 1978-87. This reflecLs the focus of the Chinese planners in the economic reform - to give priority attention to agriculture and light industry. The deceleration in both countries in industrial production is

85

Growth Rate and Structural Changes Table 3.19

Growth Rates of Selected Industries China-India (1952-87) 1952/78 CHINA INDIA Food processing Textiles Paper Products Building Materials Electric Power Coal Petroleum Metallurgy Machinery Chemicals

6.1 6.6 8.0 11.1 13.7 8.8 19.0 12.0 15.0 16.5

Gross Industrial Output

10.7

Source:

4.4 1.5 7.1

1978/87 CHINA INDIA

1952/87 CHINA INDIA

10.5 4.2 13.5 7.0 13.4 8.5

8.9 12.1 6.7 7.8 6.2 1.9 2.9 5.1 6.9 9.8

2.2 0.2 5.9 4.1 7.0 7.9 5.1 2.5 4.6 5.2

6.5 7.5 7.8 10.6 12.5 7.7 16.4 10.9 13.7 15.4

4.0 1.3 6.9 6.9 9.9 5.0 12.0 6.2 11.8 7.4

6.4

8.5

4.7

10.3

6.1

1J5

Same as Table 3.18. Supplemented with Seventh Five Year Plan (1985-90): MidTerm Appraisal, Planning Commission (India), p. 123, and China: Economic Performance in 1987 and Outlook for 1988, Central Intelligence Agency, USA.

partly due to the cut back in public investment in heavy industry. In China, it is also due to the shift in focus towards light industry since 1978. In India, an additional reason is the growing inefficiency in the use of investment resources, as measured by the rising incre¬ mental capital-output ratio. We shall have occasion to return to this pint in greater depth in Chapter 4. However, it is worth emphasizing that the results obtained here depend on the prices used in calcula¬ ting the value aggregates. As has been stated earlier, one of the major difficulties in com¬ parative analysis of Chinese and Indian performance is the diffe¬ rence in the price system of the two countries. The Chinese price system in the industrial sector is an administrative one which does not reflect the underlying demand and supply constraints. Thus a

86

Economic Growth in China and India

commodity in great demand and acute shortage may be assigned a low price on social and political consideration. It may not, there¬ fore, be available in the shops, or rationing may be enforced for its distribution. Such administrative measures may be necessary in times of crisis, but in China this has been the rule. Similarly, for a good in abundant supply, the Chinese planners have fixed a high price for it for the purposes of collecting revenue. This led to stock¬ piling andinventory accumulation, but the Chinese authorities have persisted with the high price. All these infirmities jn the adminis¬ trative price system makes comparative analysis difficult especially in calculation of growth rates. The undesirable economic conse¬ quences of the administrative price system has now been recog¬ nised by the Chinese planner, and a major overhaul of the price system is now on the cards in China. In India the price system is not a perfect market-reflecting system. Part of the economy has administratively determined prices such for steel and fertilisers, and further complicated by a complex trade tariff wall, but by and large the prices in the Indian economy are relatively better indicators of the market conditions of demand and supply. At least, producers and consumers are free to respond to signals from the market place. Therefore, one way to get a more accurate assessment of the comparative performance of China and India is to measure Chinese output in Indian prices. This is what the author did in his earlier study. Another way is to consider disag¬ gregated output data in physical quantities and compare their growth rates. This will obviate the need for value aggregates. But this has already been done in Table 3.2, from which table we can infer that in even in physical outputs the conclusion is valid that China has done relatively better than India during the 35 years, 1952-87. The following conclusions are also apparent from that Table, and relevant to note here. First, except for machine tools and freight wagons, the Chinese growth rate in selected industrial outputs is substantially and significantly higher thaq India. Second, the growth rates calculated by sub-periods arc generally lower during the period 1970-78 compared to 1957-70, and the trend average of 1957-83, and this conclusion is valid for both

Growth Rate and Structural Changes

87

countries. In other words, there was a deceleration in growth rates of industrial products in the 1970s in China and India. This conc¬ lusion of industrial deceleration is further strengthened if we con¬ sider trie period 1952-57 in the calculation of growth rates. Third, growth rates during the sub-period 1978-87 exhibit certain inte¬ resting features. In India, for a majority of industrial products considered, the growth rate is higher than in 1970-78 thus implying that the deceleration momentum has considerably weakened in the 1980s. Judging by product sub-groups, the energy sector has shown remarkable acceleration in India in the post-1978 period. In China too there has been a change in the level of the growth rate since 1978. But this has been largely in light industries. In the case of the heavy industries there has been a further reduction in the rate of growth since 1978. This has been as a consequence of deliberate economic policy now being pursued in China. The causes for industrial deceleration have been much discussed in India. The consensus appears to be that because public invest¬ ment grew at a slower rate since 1966, and that the cut back in the rate of investment allocation fell hardest on the infra-structural sec¬ tors, hence the bottlenecks that emerged slowed the industrial growth. Further, the efficiency of capital declined as measured by productivity indexes, and this decline was across the board. Recent estimates[90] place the aggregate factor productivity decline in Indian industry at -0.7 percent per year. Labour productivity rose at the rate of 2.5 percent per year, and this was largely due to the process of capital deepening rather than to the rise in efficiency of labour. In China too the total or aggregate productivity declined, but the decline was even sharper according to the estimates of R.M. Field[91]. Field’s estimate of the index of productivity reveal a dec¬ line of -3.1 percent per year. Gene Tidrick has also estimated total factor productivity in Chinese state run enterprises[92]. He esti¬ mates that the decline in TFP is anywhere from 0.6 percent to 1.5 percent annually. In China, unlike in India, there was no cut-back in the rate of public investment till 1980. In the subsequent years, 1980, 1981 there was a decline, but by 1982 the earlier rate was restored. China had achieved a faster industrial growth because of a huge investment effort which more than compensated for the

88

Economic Growth in China and India

greater inefficiency in the use of capital (e.g., the energy elasticity of industrial output is twice as high in China as compared to India). As in India, labour productivity in industry rose but at a higher rate of 4.4 percent per year. This rise is also largely attributable to capital deepening in Chinese industry as in India. Therefore, although China achieved a higher industrial growth compared to India, it was also at a higher cost and with greater inef¬ ficiency in factor use. However, both countries will have to devote their attention in the future to the productivity aspect in planning industrial grwoth since both countries have reached a plateau in the level of saving-income ratio in the economy. The recent emphasis in China under the leadership of Deng Xiaoping to give priority attention to modernization reflects the concern in the leadership about productivity and the high cost of industrialization[93J. The data presented in Table 3.2 and 3.19 do not cover the entire industrial sector within the context of national accounts. For exam¬ ple, small industrial output in rural areas has been excluded from Table 3.19. Unregistered enterprises have been excluded from the industrial sector in India. Hence, we now need to look at the performance of industry as a whole in the framework of national accounts to get a complete picture. We have in Table 3.20 estimated the growth rate in the entire industry based on value aggregate for the period 1952-87. These estimates reaffirms that during 1952-87, Chinese industry grew at an impressive rate of 9.6 percent per year compared with India’s rate of only 4.8 percent. If we truncate the period of calcultion to the pre¬ reform period 1952-78, the growth rates are 9.0 for China and 4.6 for India showing that the gap in performance is almost as wide as for the whole period 1952-87. However, as we have noted above and shall see in greater detail in Chapter IV, this higher growth rate has been achieved at a much higher cost in terms of resources and energy utilization in China.

V There is little need to deal extensively with problem regarding

Growth Rate and Structural Changes

89

the estimation of national income of China because a considerable literature is already available. As already mentioned above in Section I, the Chinese definition of product is that of material pro¬ duct measured in net terms and at constant market prices, whereas the Indian definition is that of national income (including services) in net terms' at factor costs. I quote a Chinese economist to clarify the definition used in China: Po I-po: “The national income is the total value of production of industry, agriculture, building industry, plus the value created by transport and commercial workers, i.e., total value of production minus depreciation charges of the means of production. In other words, it is the net value of production.”{94] For example, the part of transport and postal and telecommu¬ nication serving material production is included, but the component serving consumers is not All commercial trading agencies are included. These subsectors of service are easily identified from Chinese publications. But in the case of a laundry washing factory uniforms, or a doctor treating factory casualties, the official Chinese practice is unclear. It seems reasonable to conjecture that these services are treated like transport services and are included if they serve production. Second, the national income is net in two senses: (1) depre¬ ciation, or rather obsolescence, is subtracted; and (2) cost of pro¬ duction is also deducted. It is necessary to bear this in mind because when Chinese economists talk of “means of production consumed” they refer to both items. Third, all products, whether “marketed” or produced for own consumption, are included. The nonmarketed portion is evaluated on a “representative basis.” This vague term presumably means that ad hoc methods are adopted. The reliability of such methods is, of course, in doubt Fourth, pure trading agencies are included, and their contribution is obtained simply by multiplying the difference bet¬ ween retail and wholesale price by the quantity. This means that ultimately, national income is evaluated in retail prices in China. The international standards are different: the term “market price”

90

Economic Growth in China and India

implies those prices at which the goods and services were bought or could have been bought, and not necessarily retail prices[95]. Also, “trading agency” in China means a change of “ownership”, and no value is added to the product because of the transfer. In other words, more is included than is standard international practice. Fifth, the Chinese product is at market price, neverin factor cost. Thus, the Chinese and Indian concepts of national income differ in five respects: (1) certain services to the consumers, for example, laundry but not restaurant services, are excluded in China but not in India; (2) utilities serving consumers are included in India but not in China; (3) banking and insurance are excluded in China but included in India; (4) services of professors, musicians, etc., are ex¬ cluded in China but not in India; (5) all production, whether exchanged or not, is included in China but not in India; the amount of nonprimary production performed by producers outside their own trade and consumed by themselves is excluded. In effect, China’s concept of production is wider than that of India. In pra¬ ctice, this difference is even larger; India excludes even own-trade nonprimary production if only because of lack of data. Measurement of obsolescence is quite difficult. It is based on the judgement of the national income statistician. It is his estimation of the economic life of fixed capital and is quantitatively larger, never less, than physical depreciation if a country is experiencing modem economic growth. India follows the standard U.N. practice; econo¬ mic life is estimated, and straightline obsolescence is taken. Unfore¬ seen obsolescence is written off as a capital loss. But given the tax exemptions associated with economic expansion and modernizati¬ on, this write-off is rarely necessary. In China, as in many other socialist countries, the tendency is to understate obsolescence primarily by overstating the physical life of the equipment. Inves¬ tment, in turn, is overstated, but little can be done about it because of lack of data. Therefore, some caution must be exercised in inter¬ preting investment data. The main differences in scope and netness are summarized in Table (next page). Thus, in estimating the GDP of China in comparative

91

Growth Rate and Structural Changes Treatment of Specific Problems of National Account? CHINA and INDIA ITEM Scope of primary activity.

CHINA

INDIA

Standard U.N. All major produce such as rice, wheat, etc., as well as minor agricultural produce and rural industries.

Services of general government assets. Factor income from abroad

Uncertain Excluded

No imputation Investment income only; other factor incomes are included with nonon-factor services

Valuation of primary product.

Retail prices

Wholesale prices prevailing in the primary market

f*rovisions of capital consumption. Valuation of provisions for capital consumption.

Underestimated

Standard U.N.

Book value

Change in stocks. Valuation of total.

Standard Net. market prices

Book value generally but replacement cost basis in agriculture Standard Net, factor cost

perspective, there are four distinct problems: The first is the conversion of the figures of Net Material Product (NMP) to conform with the internationally accepted definition of GDP, laid down by the United Nations in its System of National Accounts (SNA)[98j. The second problem is the choice of base year to derive the con¬ stant price estimates of GNP. Usually the choice in theory is posed as between the first year and terminal year prices because the the¬ ory is often expounded in a two-point comparison framework[99]. The thinl problem, directly relevant in comparative analysis, is that of choice of reference "rices when comparing China with other

92

Economic Growth in China and India

countries[100]. Thus, while comparing China with India, for example, should we use Chinese, Indian, or some third country prices to evaluate the national income? The reason why the choice of reference prices is important is that the relative prices reflect (underoptimum conditions) the marginal rates of utilities and tech¬ nical transformations[101]. Consumers and producers readjust their income and investment allocations respectively to the signals that these relative prices send, even if the market is not perfectly competitive in countries which are not central planned economies (CPE). China however is such an economy and hence its relative price is (even today) artificially set to achieve specific planning goals and not to send market signals for investment allocation. For example, China has traditionally set industrial prices artificially high relative to agricultural prices to obtain resources from agri¬ culture to finance industrial development Communes were req¬ uired to purchase the industrially produced inputs irrespective of the price. Since Chinese industrial output has been growing fast, evaluation of national income in Chinese prices upward biases the growth rate in GNP. Hence in a comparative framework, the calcul ation of the comparative growth rates in own country prices, may bias the performance in favour of China. Correction for this bias is therefore necessary. These are the four problems that we intend to grapple with, and propose some solutions drawn from economic theory. In 1982, research was sponsored by the World Bank to assess alternative methods of computing the per capita dollar GNP levels and growth rates of CPEs. It covered eight countries: Bulgaria, Cuba, Czechoslovakia, the German Democratic Republic, Hungary, Poland, Romania and the U.S.S.R. The report authored by the principal investigator for the project, Paul Marer, was published recently[102j. The eight country studies and two background papers were published separately in the World Bank Staff Working Paper series. The main report provides valuable insights into the problems related to the estimation and comparison of the GNPs and GNP growth rates of the CPEs. The report concluded that adequate GNP data in national

Growth Rate and Structural Changes

93

currencies can be derived for most CPEs by adjusting official data about net material product in the light of statistical and other information known to country experts. It further concluded that the best method generally applicable to CPEs for converting such GNP data from local currencies into dollars would use conversion rates based upon purchasing power parity (PPP). In developing estimates of Chinese output per capita in dollars, the first task is to adjust the figures published by the State Statistical 3ureau for aggregate output, calculated in the NMP concept, to GDP or GNP. The general approach used in socialist countries for computing the national income and output is explained in United Nations, Basic Principles[ 103]. But it will be useful to describe briefly against that background the considerations governing the adjus¬ tments made in this paper. (a) In relation to the distinction between GNP and GDP, the official Chinese national accounts are in the spirit of GDP rather than GNP. That is, they are concerned with productive activity

taking place on the territory of the China rather than with income received by the residents of China. Since the Chinese balance of payments involves little in the way of international factor pay¬ ments, the difference between GNP and GDP is negligible in the case of the China. (b) Two alternative approaches to estimating Chinese output according to western concepts are: (1) to build a set of national

income and product accounts from disaggregated data, and (2) to take NMP as officially reported, and add to it an estimate of output contribution in nonmaterial spheres, most services, and depreciation. The first appraoch has been used extensively in research on the Soviet economy. This approach involves development of an arti¬ culated set of accounts, adjustment of the figures to some sort of factor cost valuation, and estimation of a value in dollars. It is always useftil to have the detailed recalculation that provides a whole set of accounts rather than a single GNP number. But such a full reconstruction is a costly time consuming undertaking. Based

94

Economic Growth in China and India

on the Soviet studies experience, I feel that adding depreciation and an estimate of value-added in non material sectors is a good short¬ cut method for expanding Chinese NMP to GNP, and that the resulting numbers arc as likely to be in the same error band as the results of more elaborate calculations[104], Moreover, the adjust¬ ment can now be made conveniently and expeditiously basically from the standard data available in the State Statistical Bureau year books, articles in Chinese journals, and supplemented by the exten¬ sive World Bank studies on China. As already stated above, in estimating the national income of China, a major difficulty lies in calculating the net value-added of the services sector. Relative to data on other “material” sectors, the data on this sector is largely unavailable since conceptually the communist do not reckon with it in national accounting. Thus a large component of transportation, all of communication, posts and telegraph, banking and commerce, and Government administration are outside the purview of estimation. According to the World Bank[105], the distinction between material and nonmaterial production in China is that all activities and services contributing to the production of goods are material; all other services are nonmaterial. Essentially, all personal and most public services are excluded from the concept of material production. In terms of the International Standard Industrial Classification (ISIC), the follow¬ ing activities are viewed as nonmaterial: 6320 810 820 831 832

910 920 931 932 9331

rooming houses, camps and other accommodations financial institutions insurance real estate business services other than machinery and equipment rentals and leasing (except 8324: engineering, architectural and technical services) public administration and defense sanitary and similar services education services research and scientific services medical, dental and other health services

Growth Rate and Structural Changes

934 935 939 941 942 949 953 959 960

95

welfare institutions business, professional and labour associations other social and related community services motion (picture and other entertainment services (except 9411: motion picture production) libraries, museums, botanical and zooligical gardens, and other cultural services not classified elsewhere amusement and recreational services not classified elsewhere domestic services miscellaneous personal services international and other extra-territorial bodies

Some additional activities in the ISIC groups are treated as nonmaterial activities: (a) certain services incidental to transport (part of ISIC 7191), such as tourist agencies and tourist development services; (b) certain types of activities included in engineering, archi¬ tectural and technical services, notably those not connected with construction (part of ISIC 8324); and (c) part of veterinary services, namely those not connected with agriculture (part of ISIC 9332). Another major difference is that the ownership of dwellings is not treated as an activity, and no imputation of rent is made. Amongst the students of the Chinese economy (outside China), a controversy has raged on the estimates of this sector. A useful survey of this controversy is given in D.H. Perkins’ study[106]. In this section, we propose to take advantage of certain official publications in China which deal with the scope and nature of the “non-material” sector, and use this literature to estimate the net value-added in this sector. A number of approaches have been taken by schQlars in the past to estimate the net value-added in the service sector. Each approach has produced a widely different result, causing confusion. For exa¬ mple, Liu and Yeh[107] and Alexander Eckstein[ 108J have postul¬ ated the growth rate of the service sector to equal the growth rate of national income. D.H. Perkins[ 109] has taken it to equal the growth

96

Economic Growth in China and India

rate of population, while Demberger and Fasenfest[ 110] have assu¬ med the net value-added in the service sector to grow at the same rate as the mean of the industrial growth rate and that of population. The rationale for each of these approaches is ad hoc, and has not been adequately reasoned out in the respective publications. We have proposed in the earlier study (1973) a different approach, that of first estimating the gross domestic product, and then obtaining the estimate of the service sector as a residual by subtracting the independently calculated net value-added in agriculture and indu¬ stry' from gross domestic product. We had estimated the gross pro¬ duct from estimates of National Income Produced (NIP) which is another name for NMP. Estimates of NIP were obtained from official sources, and now conveniently available in a recent official Chinese publication, namely the Statistical Yearbook of China, 1987. In that publication, the NIP series year by year from 1949 to 1986, is given in current market prices. Smce 1985, the State Statistical Bureau has started issuing Communiques in April of each year in which GDP figures in current and constant prices are given. But the problem of getting GDP from NIP still remains for the earlier years. In this study, we shall use the officially published share of serv¬ ices in GDP as the basis for calculating the corrected share of the tertiary sector. Also, we can reconstruct from the NIP series, the GNP, and therefore, the GDP by adding on a ratio of the NIP which would measure the net value-added on the excluded service sector[lll]. Depreciation is taken as to be 5.7 per cent of GDP. Thus, GDP can be estimated, and therefore the net value-added in the services sector, as a residual. In calculating the GDP by applying ratio to the NIP series, care has been taken to account for the recent importance given to the service sector. The Chinese economists have recognised recently that services are an important part of national production moving away thus from the classic Marxist position. It has been argued in one of their publications[l 12] that the contribution of the service sector to national income should be doubled by the year 2,000 viz., the rate of growth of the service sector should be twice as high as the growth rate of

Growth Rate and Structural Changes

97

the national income. Whether this is achievable or not remains to be seen, but the goal if attained would alter fundamentally the structure of Chinese GDP. Based on the data assembled as described above, the estimates of national income have been calculated. As already explained, the fact that Chinese pricing is peculiar, administratively determined, and there is no scope for producers and consumers to take them as maiketsignals. It may thus be useful to remember here an aspect of Chinese pricing practice, their impact on structure of GNP, and on the relationship between GNP at factor cost and at Chinese “market” prices. They are not in constant prices. The Chinese sometimes use the term “comparable” prices which needs explanation. The SSB’s procedure for obtaining “comparable” price NMP involves, first, estimating NMP in current prices; and second, defla¬ ting the current price series by price indexes to derive constant price series in the subperiods: 1952-57, 1958-70,1971-80, and 1981 to date, and linking the constant price series into a chained index which the SSB designates an index in comparable prices. Prices that have been used as valuation basis in NMP include the following: Chinese Prices by Types Output of Sector

Price

Type

Major farm products Other farm products

State procurement price Negotiated prices Market prices

Major industrial products

Factory prices Factory prices Negotiated prices Contract or budget prices Freight rates, Postal rates Transfer prices, Wholesale prices, Retail prices

Unified price Floating price. Freely fluctuating prices Unified prices Floating prices

Other industrial products Construction Transportation Commerce

Source'.

Floating prices Unified prices Unified prices. Floating prices

Yeh Rung chia “Chinese Price Structure and the Measurement of Economic Growth”, 1986 (Unpublished)

98

Economic Growth in China and India

Agricultural or industrial products prices are essentially pro¬ ducers’ prices. When the products are used as inputs, these prices would be the producers’ prices plus distribution costs. Cons¬ truction, transport and communications, and commerce sell their products or services at both producers’ and users’ prices. Except for the rural market prices of a small number of farm products, all prices are administratively set by the state authorities. Once they are set, they generally remain unchanged for long periods of time. The fundamental question is: to what extent these prices correspond to the theoretical prices reflecting marginal preferences of the consumers under the welfare standard, or to the marginal productivities of the factors under the efficiency standard? The optimum conditions for these theoretical prices are never fully met in the real world, so that one would be asking too much of the Chinese prices to correspond precisely to either standards of valuation. In the present context, the divergence between China’s actual prices and theoretical prices is of concern to the extent that it affects the growth rate calculations. Setting prices with little regard to market forces has indeed resulted in a number of irrationalities in the price system: (1) Low agricultural prices compared to what would have prevailed under free market conditions, and compared to industrial prices. (2) Low construction prices relative to industrial prices. According to Yeh, the construction prices are low because the profit rate for construction is set at only 2.5 percent, considerably lower than the average profit rate of 12.7 percent for industries closely related to construction, such as machine-buil¬ ding, cement, ship-building and metallurgy. (3) The revenues and profits of the commercial sector are also relatively low because the prices of many consumer products such as grain, vegetable oils, cotton cloth and coal sold by the state trading enterprises are deliberately set at low levels relative to costs in orfier to subsidize the consumers. (4) Relative prices of certain goods and services are irrational. For example, the prices of basic essentials such as rice, flour, edible vegeable oils are low, when those of less essential goods, such as candy and bakery products are high; the low-grade

Growth Rate and Structural Changer

99

textiles are priced low and the high-grades ones high; the prices of products using agricultural inputs are low and those of products using industrial inputs high. In the producer goods sector, raw materials and fuels are priced low and products with high degrees of fabrication are priced high. In the energy sector, coal is priced too low, and oil, too high. In the transport sector, freight rates for transport on the Yangtze River or along the sea coast are higher than those for transport by rails, even though costs of water transport are lower. Yeh states the problem of over-estimation in growth rates succinctly: “In at least two of the five sectors of NMP, industry and agriculture, the official indexes of net output in comparable prices are clearly biased upwards because of price distortions. In the case of industry, the bias is due to the use of a gross output deflator that is too low. In the case of agriculture, the bias is caused by the use of the single deflation method which overlooks the fact that agricultural output prices had risen much faster than agricultural input prices. There are also problems with the deflators for construction, transportation and commerce about which little is known. Clearly further exploration is needed.” Chinese prices are poor measures of either factor cost or contribution to welfare. They differ from factor costs by arbitrary

profit markups (high in some cases, negative in others); by turnover taxes, and by the absence of realistic interest or rent charges and quasi-rents[l 13]. They are not reflective of marginal conditions of welfare because of disequilibrium in the markets for final consumer goods, and because of the absence of a mechanism by which the Chinese people can express their preferences regarding the allocation of income between consumption and saving. As is well known, there are basically two simple ways to calculate the constant price estimates of GNP for any counry between two time points. One is to use the initial year prices, and the other is to use the terminal year prices. The growth rate calculated with the former set of prices may be called the Laspeyres rate, and that calculated with the latter set may be called the

100

Economic Growth in China and India

Paasche’s rate. The pioneering work of Alexander Gerschenkron[l 14] for the Soviet economy, established empirically that the structure of prices and output changes in such a way that the Laspeyres rate always exceeds the Paasche rate of growth. This path of change in the structure of output and prices is called the Gerschenkron effect. Briefly, the Gerschenkron effect is the phenomenon of relative prices of goods and services being negatively correlated with the relative output levels over time. The Gerschenkron effect obtains in China, while however in India the opposite phenomenon has been observed - that of a positive correl ation. (In that case, the Laspeyres rate becomes less than the Paasche’s rate). If the Laspeyres rate is more than the Paasche rate in China, which rate is more accurate? From a “production potential” point of view, Bergson[115] has shown that along any ray from the origin towards the production possibilities frontier, the Paasche rate is a more accurate measure of changes in true output In terms of welfare, the answer depends on the curvature of the utility surfaces. Thus from a production potential viewpoint, the Paasche rate is more accurate for China. By the same logic, but with the Gerschenkron effect reversed, the Laspeyres rate is a better measure for India’s growth rate. Therefore, in a comparative analysis of Indian and Chinese economies, it is essential that the constant price estimates of China’s GDP be in the latest year prices, while India’s GDP be in the initial year prices. However, scholars have to take the constant price estimates as those published by the Government statistical agencies. It is possible to shift the base year of a given time series by assuming that the underlying price indexes satisfy certain of Irving Fisher’s tests, such as time reversal and factor reversal tests[16], but such an assumption is quite severe. In other words, in actual practice we may have no choice but to accept the base year already chosen for us by the publishing official agency. The current practice of Governmental bodies is to choose the base year more from statis¬ tical convenience than from theoretical considerations. Thus,

Growth Rate and Structural Changes

101

economic data series, e.g., for GDP were first published in China and India in 1952 prices, then as years passed, the base year was more or less arbitrarily shifted to later years. At present, the most complete series are available in 1970 prices, which is neither in the beginning nor the end of the series, but in the mid point of the period 1952-87. The direction of the bias in the rate of growth in the involuntary choice of 1970 as base year is as follows: For China, the growth rate estimate will be upward biased, while for India it will be downward biased. As stated earlier, the way the Gerschenkron effect works out in China and India, the best estimates of the change in true output is obtained when Chinese output is evaluated in the most recent year prices (Paasche ’s rate), while for India, the valuation is in the initial year prices (Laspeyre’s rate). The next set of problems arise when we try to convert the Chinese yuan and the Indian rupees estimates of the constant price GNP to a common currency unit. There are three alternatives: (1) evaluate the Indian output in Chinese prices; (2) use Indian prices to evaluate Chinese output; (3) or convert both Chinese and Indian estimates to a third common currency, most commonly the U.S. dollar. In each alternative, there is a further choice between using the official ex¬ change rate and the purchasing power parity (PPP) rates. There is now a wide consensus amongst scholars engaged in international comparisons that exchange rate conversions in comparative analysisfl 17] are misleading and hazardous. The official exchange rates which are normally used for con¬ verting the estimates of different countries in national currencies has been found to be inadequate particularly in the present context of floating exchange rates. The problem was considered by the UN Statistical Commission at its thirteenth session in 1965 (and sub¬ sequently at the fifteenth session in 1968). At this session it was agr¬ eed that a project be organised with the participation by UNSO, together with other international organisations and assistance from the participating countries to estimate the PPP. The project has been conducted to date in four phases. Thd results of Phases I, II and III of the project have so far been published. The

102

Economic Growth in China and India

Reports are devoted mainly to the development of a methodology for a meaningful international comparison of gross domestic pro¬ duct (GDP) per capita. In Phase I the methodology was applied to ten countries, while in Phase II the methodology was extended to cover six other countries. Besides, developing the methodology for a systematic comparison of a large number of countries, the reports also presented the results of the exercise. This was partly as an aid to the methodological work and partly as an end in itself. The number of countries covered in Phase III is much larger (34). In this Phase some additional methodological problems have also been considered. The more important of these are problems of developing short cut methods for extrapolating the bench-mark comparisons to the years between the bench-mark years and of estimating the real per capita income by the use of ICP method for countries that are not participating in the Project. In summary besides expanding the ICP approach to cover more countries, Phase III was to consider the problem of developing a method that would make it possible to express the real gross per capita income and the components of gross domestic product for different countries (participating and non-participating) in different years at constant prices when results of bench-mark years for participating countries only are available. Phase IV just completed covers 59 countries for the year 1980. In none of these phases, China was covered, although India was included. A comparison of real per capita GDP converted (i) with official exchange rate and (ii) in international dollar is given in table 3.20 for India for the reference years 1970,1973,1975 and 1980 which correspond to Phase I, II, III and IV respectively. The International dollar has different purchasing power at the GDP level for different countries and it differs substantially more for the developing countries than for the developed countries, when compared with the exchange rate with reference to the US dollar. For instance in the case of India the ratio of per capita GDP in international dollars and in national currency is estimated to be 2.44 for the year 1975 against the exchange rate of 8.38. In other words, the current price per capita GDP of India in 1975 expressed in inter-

Growth Rate and Structural Changes

103

Table 3.20 Per Capita Income of India Using Purchasing Parity Power (PPP) Index Exchange rate

Year

ER

ER + ERDI = PPP

Per capita GDP Converted by exchange rate

(Current Prices)

s 1970 1973 1975 1980 Source:

7.499 7.742 8.376 7.893

2.24 2.53 2.44 3.09

in international dollars

99 129 144 239

s 331 394 495 610

Exchange Rate Deviation Index (ERDI) 3.35 3.06 3.43 2.55

Answer to Unstarred Question No 944 answered on July 14, 1982 in Lok Sabha (Indian Parliament), New Delhi by the Minister of Planning.

national dollars works out to 495 and that expressed in US exchange rate deviation index (ERDI) for India is given by 495 + 144 = 3 .43 for Phase III of the Project (reference year 1975). For India between 1973 and 1975 the ERDI has changed from 3.06 to 3.43. This is due to both change in prices as well as the change in official exchange rate from 7.742 to 8.376. In 1980, due to a decline in the rupee value of the dollar, the ERDI declined. During 1980-85, we expect this ratio to have risen again. The reason for the high exchange rate deviation index for India and other developing countries lies in the fact that the ratio of international dollar versus national currency at GDP level is very much lower than the official exchange rates in these cases. In order to ascertain the factors responsible for such variations in ERDI between countries it is essential to examine the procedures adopted for obtaining the prices of goods in international dollars. Contrary to the basis of determination of exchange rates, the overall purchasing power parity is derived from the prices of

104

Economic Growth in China and India

individual commodities in international dollar which is the weigh’ ted average of the purchasing power parity adjusted prices of the same commodities with same specifications in different countries, the weights being the corresponding quantities entering the GDP of the relevant countries. Thus, this index takes into account both the traded and non-traded goods, totality of which enter GDP as opposed to the prices of only the traded goods being one of the points for consideration while formulating the exchange rates. The relation beween the national price structure of the traded and nontraded goods relative to the corresponding international price struc¬ ture in individual countries therefore becomes an important factor in this context. Thus, for traded goods the national versus inter¬ national price structure is more evenly spread between countries though for the developing countries it varies somewhat. The corres¬ ponding ratio for non-traded goods is less than unity for developing countries and larger than unity for developed countries. This implies that non-traded goods when measured in international dollars are costlier than in the respective national currencies for developing countries, and for the developed countries the reverse in the case. This is also reflected by the distribution of expenditure between traded and non-traded goods expressed in national and international prices. In other words, the conversion of GDP in international dollars as compared to the conversion of official exchange rates has a differential effect on the ERDI of developing and developed countries because the prices of non-traded goods for developing countries are higher than those in developing countries. The methodology adopted for determining the international prices is defective to the extent that the application of this method pushes up substantially the international prices of non-traded goods for developing countries. As a result the share of traded and non-traded goods in total GDP changes substantially in international prices as compared to those at national prices and becomes higher. In the case of India these affect the ERDI substantially, because the ratio of national price structure to international price structure is the lowest for India amongst all the participating countries. It is possible that this price structure is the result of high weightage of

Growth Rate and Structural Changes

105

rural prices (which are particularly low for services) and the low levels of income of educational and similar other services (with equivalent qualifications) in relation to the world market. When evaluated at international prices the share of non-traded goods in case of India increases to nearly 50 percent as compared to less than 30 percent in national prices. The data input for ICP consists Qf the expenditure of GDP recast into 152 detailed categories and the national average prices of sample of items within each detailed category, the sample of items being similar in quality in all the countries to the extent possible. No satisfactory methods have, however, so far been developed for mea¬ suring output and determining prices for certain non-traded goods and services like own account construction, education, government administration, recreation and cultural services, medical care and health. Identification of internationally comparable measures of educa¬ tional services to determine output, productivity and quality differ¬ ences in such services is an insurmountable task. This is also true of medical care and health. In the case of general government and cultural and recreational services it is even more problematic as these are not provided to individuals but to the community as a whole, and each individual is a beneficiary of these services. In the case of hospital services the quality differences become more com¬ plex especially in an international price comparison for hospital bed days, physicians’ visits, etc. Further, often the pricing of medical services in a country is not possible because the services are directly provided by the Government, or the consumer pays only a small fraction of the social cost. This is also true in such cases where free education is provided by the Government. In respect of construction activity, problems of identifying specifications, which are similar in quality in different countries arise. For example, in the case of construction of buildings for residential purposes prevailing in developed countries are quite different from those of the developing countries. Judging by the experience of India as explained above, there is every reason to believe that in the Chinese case too the PPP rates

Economic Growth in China and India

106

based dollar incomes would be different from the exchange rate converted figures One of the earliest calculation of PPP rate for China was made by the present author[ 118]. Later Kravis[l 19] has attempted to apply the 1CP techniques to China for the year 1975. HoweverTaylor[ 120], Ahmed[ 121 ], and the Wharton Econometric Forecasting Associates (WEFA)[122] have incorporated a much wider sample of commodities, although the results of Ahmed like that of Kravis appear implausible. In particular they claim that the yuan is under valued. The estimates are summarized in the Table 3.21. Table 3.21 Purchasing Power Parity Rates for China

AUTHOR 1. 2. 3. 4. 5.

SWAMY (1973) KRAVIS (1980) TAYLOR (1986) AHMED (1983) WEFA (1984)

Source:

OFFICIAL EXCHANGE YEAR OF REFERENCE RATE (Y/$) 1952 1975 1979 1980 1981

2.43 1.86 1.56 1.50 1.71

PPP RATE (Y/$)

ERDI

4.13 0.94 2.09 0.89 2.91

0.59 1.98 0.75 1.69 0.59

See footnotes 118 to 122. The exchange rates are from World Bank: China: Socialist Economic Development, Annex A, 1981.

If we base our conclusions on Swamy for 1952, Taylor for 1979, and WEFA for 1984, we may conclude that the Chinese yuan is over-valued, with a ERDI much less than one. Indeed, even the Chinese authorities have now recognized that fact, and hence as part of the reforms, they have devalued the yuan vis-a-vis the dollar. The rate of exchange now in autumn 1988 is officially fixed at 3.76 yuans per dollar. Prior to this devaluation, the Chinese government had fixed an internal settlement rate of 2.8vyuans per.dollar to settle the accounts of enterprises earning foreign exchange. This procedure has now been abolished in view of the devaluation 123].

Growth Rate and Structural Changes

107

The problem of choice of reference price still remains. If we apply the spatial version of the Gerschenkron effect to India-China comparisons then clearly Indian Prices would be the choice because the relative industrial-agricultural price ratio moves in the same direction as the relative output ratio as we shift from India to China. The same direction of movement is visible as we shift from India or China to the U.S. A. And therefore a comparison between India or China with U.S. should be carried out in U.S. prices. This is what we now propose to do. For purpose of calculating the growth rate of national income as well as the level of per capita income for international comparison, it is necessary that the rate of exchange between the currency and the dollar be determined. As has been documented above, the official exchange rates are not appropriate. Even within China, it is indirectly acknowledged that the official rate of exchange is not anywhere near the equilibrium rate. Rather, a purchasing power parity rate is more suitable for conversion into dollars, because the purpose here is to compare the growth rate, and the level of per capita income of China with India. Although, the current official exchange rate of the dollar for the Indian Rupee was Rs. 12.34 on June 1, 1985 and was Rs. 7.49 in 1970, the detailed study of the Indian Government body, the Central Statistical Organization, gives the parity rate at Rs. 2.24 to the dollar for the year 1970. If these data are updated, then the current parity rate worics out to Rs. 3.09 to the dollar for the year 1981. If we calculate China’s parity rate using certain published price data, the 1981 rate is 2.91 to the dollar. The sector wise parity rates thus calculated is given in table 3.22. From Table 3.22 it is interesting to note that, taking the dollar as the standard, while the Indian Rupee is considerably undervalued, the Chinese Yuan is overvalued. Sectorally, the Yuan over¬ valuation is most for the industrial sector, while for the rupee the undervaluation is the most in the service sector. In other words, if the national income is calculated in parity doll¬ ars, then the Chinese growth rate will be less than when calculated at official exchange rate because the slow growing agricultural

Economic Growth in China and India

108

Table 3.22 Purchasing Power Parity Rate of Exchange: China-India (Y/$) China(l) (1979)

(Rs./$) India(2) (1980)

Agriculture Industry Services

1.67 2.50 1.55

3.81 4.97 2.03

2.28 2.00 1.31

GDP Official Rate

2.09 1.56

3.09 7.89

1.48 5.06

EDRI

0.75

2.55

3.42

Sector

Source:

(Rs./Y) col.2/col. 1

Official Rate: Xinhua, release for China, and Central Statistical Organisation, New Delhi, for India. The PPP rates for China have been obtained from Taylor, Jeffrey: "Chinese Price Structure in International Perspective" (unpublished). March 5, 1986. For India, communication from the Government, May 2, 1986.

sector will get a higher weight than the fast growing industrial sector. The effect of using parity rates on the rate of growth is brought out clearly in the Table 3.23. From Table 3.23 we see that the growth rate in gross domestic product is lowered by use of purchasing parity exchange rates for China. In an India-China comparison, the conclusion that the Chinese growth rate is “substantially higher” than India’s, derived by an uncorrected calculation in Yuan or in dollars using official exchange rates, may have to be modified in light of this inference. In per capita terms, the contrasts in using purchasing parity rates for conversion to dollars and the official exchange rates, are even more marked, as may be seen from Table 3.24. Thus, we note that in terms of gross domestic product divided by population, India’s per capita income in 1986 is much fewer than China’s in valuation which uses the official exchange rates, as also

109

Growth Rate and Structural Changes Table 3.23 Price Structure Correction and Growth Rate in Net Domestic Product: China-India (1970 prices; percent per year) CHINA

INDIA

5.5 4.6

4.2 4.2

Our Correction Using:

Own Prices (1957-84) Indian Prices (1957-84) Perkins Correction Using:

1952 Price Base (1957-79) 1978 Price Base (1957-79)

5.2 4.2

World Bank Correction Using:

Own Price (1957-79) Indian Prices (1957-79)

5.3 4.6

if we use purchasing power parity exchange rate in conversion to dollars. The level of per capita income is however low in both countries. The estimate of Chinese per capita income of $300 plus is however consistent with the estimates of the World Bank and the Chinese State Statistical Bureau. It is however higher than the estimate of Albert Keide ($206) and lower than Dwight Perkins’ figure of $500. The difference arise because of the assumption on exchange rates, price base and the share of the Service sector. The fact that per capita incomes of the two countries are so low is by itself not surprising. India’s per capita ihcome is, even today, lower than Pakistan’s, and hence one cannot, on this fact, alone argue that Pakistan is more developed than China or India. The level of per capita income has to be considered along with the inequality in incomes and structure of production to make a meaningful comparison. However, it is significant that over the period 1952-87, the per capita income did rise for both countries, for China by 212 percent, India by 93 percent. By 1986, China had a per capita income on a level higher than India after starting from way below

Economic Growth in China and India

110

Table 3.24 Per Capita Gross Domestic Product- China-India (Constant 1970 prices) INDIA

CHINA

PERIOD Official Exchange Rate ($) Current Prices 1952 1965 1978 1984 Source:

S37 $78 $206 $303

1979 Parity Exchange Rate ($) Constant Prices 101 122 171 315

1980 Official Exchange Rate ($) Current Prices

Parity Exchange Rate($) Constant Prices

55 104 184 292

154 181 232 298

Ratio of Percapita Income in Parity Prices China + India

0.68 0.68 0.74 1.05

For China, the 1978 GDP figures are calculate from NMP official figures in current prices, and inflated by thirteen percent of excluded services, the estimate of which is given in Beijing Review October 10, 1983. The 1952 and 1965 figures for GDP are similarly calculated. The 1986 GDP figures is from Communique on the Statistics of 1986 Economic and Social Development, State Statistical Bureay, Beijing Review No. 9, March 21,1987. The parity figures are calculated using the data in Table 3.22. For India: Central Statistical Organization: National Income (1960-61 to 1986-87), September 1987 and other official publications.

in 1952. The structure of the gross domestic product in purchasing power parity rates, in terms of the share of the agricultural, industrial and service sectors, underwent a change in keeping with the known Kuznetsian formulation. Table 3.25 shows this clearly. From the Table 3.25 we can infer that in 1986, the Chinese and Indian GDP structure is basically different in the shares of industry and services. China has a much higher industry share, while India has a service sector which is bigger than the agricultural sector. Both countries experienced the well-documented Kuznetsian decline in the share of agriculture that takes place in most countries

Growth Rate and Structural Changes

Ill

Table 3.25 Structure of Gross Domestic Product: 1952-86 (Percentage shares) Sector

1952

1965

1978

1986

Agriculture China India

57.9 596

46.2 49.6

39.0 42.9

31.6 36.9

Industry China India

10.5 14.5

21.7 19.8

38.4 21.8

48.1 21.9

Services China India

31.9 25.9

32.1 31.6

22.6 35.3

20.2 41.2



Source:

For China, based on data given in “Tertiary Industry Takes Off in China” Beijing Review, No. 526, Feb. 9, 1987. The shares are calculated in 1970 constant parity prices, unlike the Chinese official data, which are in current yuan. See .also “Service Industries Need Development”, Beijing Review, April 4-10, 1988.

with increase in per capita income and industrialization. In China, the decline is sharper. By 1986, the share of agriculture in GDP is lower than India’s, the level of the share having been smaller in China at the beginning of its development experience in 1952. The decline in the share of services in China since 1965 may cause some surprise, but on reflection it should not. It is due to the effects of the Cultural Revolution as outlined in the data source of the Table 3.25. The rise in the share of service however began from 1981. The same pattern emerges in the structure of employment and relative output per worker ratios as Table 3.26 shows. The Kuznets Disparity Index (KDI) given in the table 3.26 measures the dissimilarity in the output and employment structure. If KDI=0, it means no dissimilarity. If KDI equals infinity, then it means that the two structures are totally dissimilar. As development lakes place, this index increases in value first, and then declines.

Economic Growth in China and India

112

Table 3.26 Structure of GDP and Employment: 1986 (Percentage shares)

A M S Kuznets Disparity Index (KDI) Source:

INDIA

CHINA

SECTOR P

E

R

P

31.6 48.1 20.2

74.0 14.0 12.0

0.42 3.44 1.68

36.9 21.9 41.2

3.80

E 70.0 13.0 17.0

R 0.53 1.68 2.42

2.57

Same as Table 3.25 for GNP. For Employment, See China: Socialist Economic Development: Appendix A, World B ank, 1981, and Beijing Review, April 4-10, 1988. The Kuznets Index is the sum of the deviation from unity of the ratio of product share (P) to employment share (E), given as R in the table. A is agriculture, M is industry and S is service.

Calculated for China and India, this index shows that the Chinese output and employment structure are more dissimilar than India. The relative product per worker ratios are also very different in the two countries. Whatever differences are there in magnitudes, agriculture and services in India have a relatively higher labour productivity level since these sectors are more competitive in India. Since the KDI value is higher in China than India, it shows that in terms of structural changes, the Chinese economy has moved further along the curve of development than India. It is now possible to estimate the growth rates in the Chinese economy by subperiods in the 34 years span of 1952-86. TTiis is because of the Chinese authorities decision to publish regular annual statistical abstracts to meet their informal obligation to international agencies. To calculate the growth rate, we have carried a 3-year moving average on the product series for both countries in order to eliminate the influence of the weather cycle. The growth rates have then been

Growth Rate and Structural Changes

113

estimated using the exponential curve as an approximation on a point-to-point basis. The periodization for the two countries is done as follows: the centered years 1953, 1965, 1978, 1985 have been chosen because these years represent important dates in Chinese and Indian policies. The estimate for 1953 thus, for example, obtained by taking the arithmatic average of the figures for 1952, 1953 and 1954, centering on 1953, and so on. On this basis, the calculated growth rates using purchasing parity rates in constant 1970 prices for both countries are given in Table 3.27. Table 3.27 Growth Rates in GDP Aggregates and Per Capita (Percent per year) CHINA

INDIA

GDP

Per capita GDP

1952/65 1965/78 1978/86

3.3 4.8 8.8

1.5 2.6 7.5

3.5 4.0 5.3

1.5 1.8 2.9

1952/78 1952/86

4.0 5.1

2.2 3.2

3.8 4.0

1.6 1.8

Years

Source:

GDP Per capita GDP

Same as Table 3.24. Population growth rates are from Table 3.8.

From the Table 3.27 we can infer that Chinese growth rate for the period 1952-86 is significantly higher in China than India. The difference in growth rate is even more marked when we consider the per capita product because the Chinese claim a lower population growth. In the period 1978-86, the Chinese state that their population grew at only 1.3 percent per year compared to India’s 2.2 percent. This Chinese claim may be accepted here with some caution. Nevertheless, the gap in per capita product growth rate during 1952-86is substantial: 3.2percentperyearinChinaand 1.8

114

Economic Growth in China and India

percent per year in India. In fact, in all sub-periods too as Table 3.27 shows, the per capita growth rate in China is decisively higher not so much because of the gap in growth rates in national income but due to a much lower population increase in China. For the period 1952/78, before the Economic Reform initiated by Deng Xiao Ping began, the Chinese and Indian economic growth rate as measured by the annual rate of increase in Gross Domestic Product in constant parity prices, was about the same, around 4 percent per year. It is however during 1978/86 period that China’s growth performance in GDP is spectacular and outstrips India, despite the latter’s improved performance in this penod. If this trend continues to 2000 AD, then China’s per capita income would be double that of India’s in the beginning of the 21st century. By sub-periods that we have chosen here, the acceleration in growth rates has taken place in both countries. For the period 195278, the growth rates in China and India are not very different. The really sharp acceleration in growth rates takes place during the most recent years, 1978-86 due to the policies of reform and liber¬ alization in the two countries. We can also infer from the table 3.27 that both China and India have moved to higher level in growth rates in the 1980s. For China, surprisingly, the Cultural Revolution has not been as bad economically as portrayed in official propaganda. Judging by smoothed moving average data, the Chinese appear to have moved consistently to higher levels in growth rate in time. In the case of India, there has been a slower upward shift in the growth rate, and it appears to have broken through the “3*% per annum” barrier which many economists thought limited India’s capacity to incr¬ ease. Sectorally, the growth rates also provide interesting insights as we can see in Table 3.28. Table 3.28 shows the sectoral pattern of growth rates. For the period as a whole, 1952-86, China is ahead of India in performance in agriculture, and very far ahead in industrial growth (about double India’s growth). It is only in the service sector that India is ahead of China. Judging by sub-periods, industrial deceleration in India is

115

Growth Rate and Structural Changes Table 3.28 Growth Rates by Sectors: China and India: 1952—86 (percent per year) CHINA

INDIA

A

M

S

1952/65 1965/78 1978/86

1.6 3.5 6.2

8.8 9.2 11.6

1952/78

2.5

1952/86

3.4

Source:

A

M

S

3.6 2.1 7.4

2.7 3.1 1.6

5.8 5.0 3.6

4.6 4.9 6.4

9.0

2.7

2.8

4.6

5.1

9.6

3.8

2.7

4.8

5.5

Same as Table 3.11 and 3.12.

apparent. The Chinese industrial economy has however accelerated from a high annual 8.8 percent in 1952-65 to 11.6 percent in 197886. In India, the deceleration is from a modest 5.8 percent annually to an unimpressive 3.6 percent in 1980s. In Agriculture, both countries have experienced an acceleration in growth rates during 1952-78. This is largely due to the investments made in modernizing agriculture in the late sixties and seventies especially in cash crops, and subsidiary agricultural activities. However, due to Economic Reform, China was able to substantially accelerate the growth rate in 1978-86, while India’s performance dropped particularly due to the failure of the monsoons in 1985-86, and 1986-87. ' As the present structure of output and growth rate stands, India cannot easily close the gap in growth rates with China unless it modernizes and raises the productivity of investments in agri¬ culture and industry. India has not put in the same effort as China in the aggregate in raising output. China’s investment effort has been huge, investing up to 34 percent of the GDP, largely for industrialization. India’s effort has however not been negligible. At present, India invests more than 24 percent of the GDP in the

116

Economic Growth in China and India

economy. Because the Chinese have been relatively more ineffi¬ cient in the use of these resources, they could not realize a higher rate of growth. The incremental capital/output ratio in China is 5.7 compared to 4.5 in India for the period 1952-86, compared to 3.9 for similarly semi-industrialized countries. Furthermore, China is now reducing its rate of investment and plans to reduce it down to below 28 percent. Therefore, if India-engages in a special effort to cut the cosrof economic growth and make efficient its resource utilization, it could close the gap in growth rates with China. We shall examine this question in greater detail in the next chapter.

4 Efficiency in the Allocation of Resources and Equity in the Distribution of Incomes i One measure of the cost of growth is the incremental capital output ratio (ICOR) which simply is the ratio of the rate of investment to rate of growth. Using the methodology of the World Bank studies on China, we estimate that the average value of the ICOR was for the period (1952-85) was 5.7 in China and 4.5 in India, suggesting that China’s use of capital resources was more inefficient than in India. Although while India was relatively more efficient than China in the use of resources, as measured by the ICOR, nevertheless in comparison with other low-income and middleincome countries - during 1965-80 the ICOR for these countries was 3.4 - India is considerably more inefficient. Further more, as Table 4.1 shows, while India is relatively more efficient than China during the pre-reform period 1952-78 only, during the latter post1978 period, the ICOR of China drops below India’s level, showing that with the greater use of market, China achieved a higher level of capital productivity - as measured by the ICOR - than India. India’s and China’s investment rates are roughly twice that of

Economic Growth in China and India

118

Table 4.1 Incremental Capital Output Ratio in China and India (Gross Domestic Investment as a ratio of incremental GDP) CHINA

INDIA

1952/65

7.6

4.0

1965/78

5.2

4.5

1978/85

4.3

4.8

1952/85

5.7

4.5

Source:

World Development Report, 1987, World Bank corrected for prices.

otner low income economies, and comparable to the rate in many upper middle income and industrial economies. However, both the countries are not getting adequate returns from the investments made, and that much needs to be done to increase the efficiency of capital assets through policies that induce the best choice of proj¬ ects, improve maintenance of capital stock, ensure efficient imple¬ mentation, encourage competitive efficiency and relative critical infrastructural bottlenecks. The recentmacro-economic evidence on returns to investments India (Incremental capital-output ratios or ICORS) over the past decade is presented in Figure 1. Notable are the large swings in the primary and especially the secondary sectors, the high level in the secondary sector, and the declining trend in the tertiary sector. For the economy as a whole, these result in a decline from about 6.5 at the start of the period 1973-74 to 4.3 in 1978/79, followed by a climb back to 5.8 by 1982/83. The latter reversal has major consequences for India’s growth potential; if it persists, it will, at a macro investment rate of some 25% of GDP, limit the growth rate to about 4% per year. In China, the incremental capital-output ratio, after due correction was 5.7, without making any assumptions about relative

119

Source: World Bank (1985).

Efficiency in the Allocation of Resources and Equity

120

Economic Growth in China and India

prices. This is above (i.e. worse man) the average of 4.6 for other low-income countries, most of these countries themselves use capital inefficiently. But it is also much higher than normal for a country that has grown as fast as China (the average for middleincome countries was 3.9), and that has devoted so little investment to “nonproductive” uses such as housing. Although calculations for different time periods are not easily possible, the aggregate ICOR in China apparently decreased between the 1952-65 and the 196585. It is difficult to assess if all of this fall in the Chinese ICOR is due to increased efficiency. It could well be due to the structural changes in investment allocation, of the rising share of light manufacturing in national output and the sharp rise in agricultural growth. Aggregate ICORs have risen in most other developing countries, including India which suggests that increased efficiency in China is an unusual trend to be the whole explanation. On the other hand, however, the Chinese ICOR has apparently been unusually high during 1952-78 despite a significant decline in the share of investment allotted to construction. The high level in ICOR tends to confirm the view that investment in China over the first three decades since Liberation in 1949 has indeed been inefficient, and appears to be due to the failure of the Stalinist strategy of plan¬ ning, the Great Leap fiasco, and the turmoil of the Cultural Revolution. According to the World Bank studies, the proportion of total investment accounted for by increases in inventories and work in¬ progress was, on average, one quarter in 1977-1979 (and close to 30% in every year since 1957 for which the necessary data are available). In India this ratio was 8%. Differences of definition and coverage (especially the convention in China and other centrally planned economies of treating expenditure on unfinished cons¬ truction projects as an increase in inventories rather than as fixed investment) preclude comparison with other developing countries. For a sample of seven other developing countries (Pakistan, South Korea, Malaysia, Sri Lanka, Thailand, Colombia, Mexico) in 197578 the average ratio of inventory (excluding unfinished const¬ ruction) to total (gross of depreciation) investment was about 7%.

Efficiency in the Allocation of Resources and Equity

121

For a sample of six industrialized countries (Canada, France, Italy, Federal Republic of Germany, USA, UK), it was about 4%. For six centrally planned economies, this proportion in 1975-78 ranged from 13% (German DR) to 37% (USSR), with an average of 24%, which is similar to the rate in China. But in most of these countries, -is in China, there is micro-economic evidence that inventories are inordinately high, due to mismatches between demand and supply, inability to guarantee supplies, and lack of incentives to economize on working capital which bottle necks are obvious consequences to students familiar with the Soviet style heavy industry oriented planning. The significantly higher level of the ICOR in China relative to India is also brought out in a comparison of the actual consumption of output of materials used in production. In Table 4.2, we have selected three crucial material inputs of production — steel, energy and frieght transport. Table 4.2

Materials Use in Output: China and India : 1980 (Consumption per US $ GDP) MATERIALS

UNITS

Steel

(metric ton/$ million)

Energy

(Kg CE/S million)

Freight Transport

(ton-km/S)

Source:

China:

CHINA

INDIA

RATIO

2.90

1.70

1.64

127.30

98.40

1.30

3.10

1.67

1.86

Economic Structure in International Perspective, Annex 5,

World Bank, Washington, D.C., 1985 p. 32

From Table 4.2 we can infer that scarce inputs such as steel, energy and frieght transport have been used in significantly larger quantities per $ of GDP in China than India. Even for energy, which input there is a world-wide consciousness on the need to conserve,

Economic Growth in China and India

122

China’s consumption per $ is 30 percent more than in India. This inefficiency can be appreciated in greater detail when we calculate the consumption elasticity and propensity to consume of energy given in Table 4.3. Table 4 3

International Energy Comparisons Growth rate of energy production (% per year) 1952-80 1980-85

Energy Energy consumption consumption per dollar elasticity of GNP 1957-80 1979

Energy consumption per person 1979

China

9.6

6.2

1.8

2.5

644

India

2.9

9.6

1.1

1.1

196

Low-income countries

n.a.

7.0*

1.6

0.9

174

Middleincome countries

n.a.

4.9*

1.2

0.8

976

Note:

Figures for countries other than China and India refer to 1960-78. The elasticity coefficient is calculated as energy consumption growth divided by GDP growth.

* Hydropower evaluated on a somewhat different basis. Source:

World Bank: Long-Term Development Issues and Options, Washington D.C.. 1985 and the World Development Report, 1987.

From the Table 4.3, it is apparent that China’s use of energy is much more wasteful than India’s. In terms of consumption elasti¬ city, average consumption or the income propensity, China has higher (i.e. worse) ratios than India. To further confirm the relative Chinese inefficiency in the use of resources, we may refer to calculations based on input/output analysis. In Table 4.4, we have presented estimates of the extra

Efficiency in the Allocation of Resources and Equity

123

amount of material input resources required in China to generate the same vector of final demand that obtains in India, using Chinese input'output tables. Table 4.4

Additional Inputs Required in China Meet India’s Final Demand : 1979-80 (percentages) Sector 1. 2. 3. 4. 5. 6. 7. 8. 9.

Agriculture Coal, Petroleum & Other Mining Food Processing Textiles, Wood & Other Manufacturing Paper, Chemicals, Metal Products, Metallurgy & Building Materials Machinery Construction Public Utilities and Transport Commercial & Non material Services TOTAL

Source:

Additional Input Required 78 222 58 189 19 293 2 7 -78 34

Same as Table 4.2

The table 4.4 suggests that on the whole, China would require 34 percent more intermediate output, or input to sustain the same final demand levels as India. The additional inputs required are largest for the capital goods sector, and the least in the tertiary sector. What is surprising however is that even in agriculture China requires more inputs than India. It is only in the pure services sector that China requires less resources than India. It is now recognized widely in economic literature that the growth in output may be more than, or less than commcnsurate with the rate of increase of inputs into production. The difference is termed as total factor productivity (TFP). Estimates of the growth in TFP provide an indication of the change in output per unit input

124

Economic Growth in China and India

In the simplest case, in which there is a single homogenous output resulting from a homogenous labour force, the rate of total factor productivity is just the difference in the rate of growth of output and that of labour employed. Most of the problems associated with the measurement of TFP growth arise because the real world is not so simple. When there are multiple outputs and multiple inputs, the question of what weights are to be used to construct a single index of output and a single ’Index of inputs naturally arise. This is the classic but thorny index number problem. The precise decomposition of output growth into that due to cha¬ nge in outputs and that due to TFP rests on the nature of the pro¬ duction function and the methodology pioneered by Robert Solow [124], The literature in the field has new mushroomed with the application of the knowledge of the theory of index numbers [125], In a competitive environment where factors are paid the value of their marginal products, the elasticity of output with respect to a factor input is equal to the factor’s share in the value of output.The methodology for measuring total factor productivity growth has consequently been to estimate the growth rate of output less the weighted average rate of growth of identified inputs, where the weights are the shares of each factor in the value of total output. In a single commodity, single-factor economy, the rate of TFP is also the rate at whirh real returns to the factor of production can increase. In that context, the importance of TFP is evident. The significant question is how such a concept generalizes in the multi¬ factor case. In the multi-factor case, with a single output, the rate of TFPis the rate at which real incomes to all factors of production can increase, consistent with unchanged factor shares. A higher rate of TFP is consistent with higher attainable growth rate of real incomes for ail factors of production. In a country producing many commodities with a single factor of production, con fronted by given world prices for all its produced goods the rate of TFP in each industry will equal the rate at w hich real income to the single factor of production can increase in that industry. If we assume perfect mobility, then we can Assume that factors would rapidly shift out of industries experiencing below-

Efficiency in the Allocation of Resources and Equity

125

average rates of productivity growth into the industries with higher rates. Indeed, if one industry’s rate of productivity growth were more rapid than any others, one would expect all resources even¬ tually to be allocated to that industry, in which case real incomes would be able to grow at the rate of growth of productivity of that industry. Finally, consider the case in which world prices of all commodities are given, but there are many outputs and several factors of production. If I FF rates were the same in all industries, with factors receiving equal rewards in all occupations initially, the rate of TFP would indicate the rate at which real incomes could increase. Suppose, instead, that some industries increase producti¬ vity more rapidly than others, then if real returns to factors remain equal across all industries, the industries with rapidly rising productivity would expand, as the rate of increase of real factor returns would fall short of their TFP rates; industries with belowaverage rates of TFP would experience contraction. Stated another way, the economy-wide rate of TFP provides an indication of the rate at which real factor returns can grow; the rate of TFP in individual sectors, relative to that economy-wide rate, indicates what is happening to the competitive position of an individual industry given those world prices. Thus, an industry experiencing a rate of TFP equal to the economy-wide average would find its competitive position unchanged as it increased payment to factors of production within the industry at the average rate. It would have no incentive either to expand or to contract production, given the factor prices. A comment is necessary about changes in the qualities of factors of production. There is considerable evidence that a major contri¬ butor to increases in output per unit of input (quality-unadjusted) in the now-developed countries has resulted from increasing the quality of the labour force. Consideration of TFP in the developed countries has attempted to measure the importance of quality imp¬ rovements in factors of production alongside quantitative increases in physical capital and other inputs. We could estimate the growth in TFP as a function of quantities

126

Economic Growth in China and India

of labour, capital, and other inputs only and later divide the resulting estimate as attributable to improved qualities of factor of production, transfer of resources from less to more productive sectors, to technological progress or technical efficiency. This requires vast data which we do not have for China or India. Thus, in this chapter, TFP is estimated as a function only of quantities of inputs, and no quality adjustments .are made.

II A theoretically more sound approach to assess the inefficiency in the use of resources is to estimate total factor productivity. Such an endeavour is difficult scarcely needs stating. However, since 1980 there has been a larger flow of data from China not only for the recent period, but also updated version of data series for the fifties and sixties. Based on these data, an estimate has been made below of the change in total factor productivity in the two economies. Table 4.5 once again confirms the earlier finding of greater inefficiency in the use of input resources in China relative to India. Total factor productivity has actually declined in China, while in India TFP contributed about 28 percent of the growth rate in national product. However, as Table 4.6 shows, the Indian rate of change in TFP compares poorly with Japan (4.5 percent) and Korea (4.1 percent). In the latter countries, the contribution to the growth rate of the economy is double that in India. Sectoral analysis of TFP is even more hazardous and difficult. But evidence assembled by scholars such as Anthony Tang, Jan Prybyla, and Gregory Chow for China and by Brahmananda, Ahluwalia and others for India, reveal some interesting trends. For the period as a whole for which we have data the TFP growth rate in agriculture in China (during 1952-80) was negative at -0.5 percent per year. In India, the TFP (1950-80) growth rate in agriculture was positive at +0.5 percent per year. In industry, the growth rate of TFP is also positive in India at +0.4 percent per year. For China, we do not have any estimate for the industrial sector as

127

Efficiency in the Allocation of Resources and Equity Table 4.5

Change in Total Factor Productivity : China and India: (percentage per year) (growth rates) CHINA INDIA (1952-81) (1950-80)

Variable

Labour Force Capital Stock Gross Domestic Product

2.5 9.9 5.0

1.7 4.8 4.0

TOTAL FACTOR PRODUCTIVITY

-0.5

+1.1

Note:

Capital and Labour have been combined in the ratio of 0.4 to 0.6 to obtain the total factor input growth rate.

Source:

China: The growth rates of labour force and capital stock are for 195281 assumed valid for 1952-84. Basic data are from China: Long Term Developmental Issues and Options, Annex 5, World Bank, Washington, D.C., 1985. The GDP growth rate is from Chapter 2. India: Data are from official sources, supplemented by analysis in Brahmananda, P.R.: Productivity in the Indian Economy, Bombay, 1982

a whole, but Gene Tidrick has estimated, for state-owned enterprises, that for the period 1957-82, TFP declined at the rate of -1.5 percent per year. (See Table 4.7). If we add on his estimates for 1952-57, then we obtain at TFP decline of -0.3 percent per year for the entire period 1952-82. While there are no specific estimates m ade for the Chinese service sector, it is deducible that TFP growth in that sector should have been close to zero because of the already derived rates for agriculture and state-owned industry. In India, the growth in total factor productivity in the service sector was positive at 1.5 percent per year. The productivity estimates by subperiods also show some interesting trends. For China, the years 1957-78 are characterized by sharp decline in total factor productivity. In agriculture, Prybyla estimates, TFP decline (1957-75) between 1.5 to 2.2 per cent per

Economic Growth in China and India

128

Table 4.6

International Comparison of Total Factor Productivity Growth TFP growth (% p.a.) Brazil 1950-60 1955-70 1960-74 Korea 1955-60 1955-70 1960-73 Spain 1959-65 Japan 1952-71 1952-64 1953-71 1955-71 1955-70 1960-73 US 1947-60 1960-73 USSR 1950-60 1960-70 1970-75 Average for 19 developing countries Average for 12 industrialized marked economies

Source:

3.7

TFP share of output growth (%)

2.1 1.6

54 34 22

2.0 5.0 4.1

47 57 42

5.0

44

3.8 5.1 5.9 2.9 5.6 4.5

38 53 58 25 55 41

1.4 1.3

38 30

1.9 1.5 0.1

32 29 3

2.0

31

2.7

49

World Bank: China: Economic Structure in International Perspective, Washington D.C., 1985, p,39.

year, while Dembergercalculates the TFP decline (1957-79) forthe economy as a whole at 2.75 percent annually. A more plausible estimate is of Yeh who calculates the economy-wide TFP annual

Efficiency in the Allocation of Resources and Equity

129

Table 4.7 Output, Inputs and Factor Productivity in China’s State-Owned Industry 1952-82 Index (1957 = 100) 1962

1. 2. 3. 4.

5. 6. 7.

Net output Labour input Capital input Total factor inputs (40% labour, 60% capital) Labour productivitv (1+2) Capital productivity 0+3) Total factor producitivity (1+4)

38.4

1978

1982

100 100 100

221.7 165.5 353.0

1,102.9

468.3 1,494.2

50.9

100

278.0

824.3

1,083.8

56.3

100

134.0

148.6

162.8

97.5

100

62.9

54.8

51.2

75.4

100

79.7

73.3

704

Average annual growth rate (%) 1965-78 1978-82 1957-65

1957-82

Output 21.1 Total Factor inputs (40% labour, 60% capital) 14.5 10. Residual (8 -9) 6.6

Source:

1965

68.2 39.4

1952-57 8. 9.

1957

10.5

8.0

13.6 -3.1

604.2 406.6

762.7

6.0

8.5

8.7

7.1

-0.7

-1.1

10.0 -1.5

Tidrick, G: Productivity Growth and Technical Change in Chinese Industry, World Bank Staff Working Papers Washington, D.C., 1986,

P-4-

decline at 1.5 percent. It is only during 1952-57 and 1980-85 that the TFP has increased either sectorally or nationally. In India, there is a decline in factor productivity in agriculture (-0.8 percent annually) during the 1960’s prior to “green revolution” (see Table 4.8). As regards, the TFP in industry, Ahluwalia estimates that in manufacturing, the decline in the period 1959-60 to 1979-80 was anywhere between 0.2 to 1.3 percent per annum. For industry as a whole, Brahmananda’s figures reveal a

Economic Growth in China and India

130

Table 4.8 Growth in Total Factor Productivity in the Indian Economy (percent per annum) 1st Decade 2nd Decade 3rd Decade Entire Period (1950-60) (1960-70) (1970-80) (1950-80)

1. 2. 3. 4. 5.

6. 7. 8. 9.

10. 11. 12.

13.

Agriculture and allied activities Forestry Fishery Mining & Quarrying Manufacturing 5.1 Registered 5.2 Unregistered Electricity, Gas & Water Construction Railways Transport by other means 9.1 Road Transport 9.2 Air Transport Communications Trade, hotels & restaurants Banking & Insurance 12.1 Commercial Banking 12.2 Life Insurance Real Estate

14. Public Administration 15. Other Services 16. NDP Source:

TFP

TFP

TFP

TFP

1.40 1.22 1.04 2.93

0.75 0.35 1.35 -2.16

-0.75 -2.85 0.16 -6.75

0.47 -0.22 0.82 -2.00

0.77 4.12

0.63 2.35

-1.70 -1.90

0.10 1.52

4.12 2.31 2.62

1.36 -0.16 0.08

0.40 -1.02 0.74

1.96 0.38 1.15

3.36 3.65 5.31 1.99

0.42 0.86 5.17 0.32

2.89 2.81 4.04 3.46

2.23 2.95 4.84

3.58 2.85

3.50 0

-2.07 2.14

1.67

-0.72 0.49

1.31 -1.21

1.49 4.44

0.69 1.24

2.78 1.96

1.87 0.45 0.02

2.29 1.00

1.92

1.12

-

2.23 0.58 1.96

1.49

Brahmananda, P.R.: Productivity in the Indian Economy, Publishing House, Bombay, 1982.

1.15

Himalaya

decline only for the decade of 1970’s, at 1.43 percent per annum. The broad conclusion however is thus: Total factor productivity

Efficiency in the Allocation of Resources and Equity

131

grew at a faster rate in India compared to China. For China the TFP growth was largely negative even after including the First Plan and post-Mao periods, while in India, TFP change was on the whole positive (although by international standards, India had much lower growth in TFP). By this measure, China’s performance has been relatively more disappointing. Although Chinese output growth has been high at 5% per year, this growth has been achieved only through an even faster rate of growth of inputs. At this rate, China cannot maintain its growth rate in the future. Certainly, without more efficient use of capital, energy, and other materials it is unlikely that China could sustain the post-1978 growth rates or achieve the high rate of industrial growth needed to meet the target of quadrupling agri¬ cultural and industrial output by the year 2000, set by the leadership in 1981. Already, the rate, of growth of energy in China has sharply decelerated from 10.0 percent per year (1965-80) to 6.2 percent per year (1980-85) during the same period, India’s energy output gro¬ wth rate increased from 5.5 percent per year to 9.6 percent per year. A particularly significant feature of Chinese industrial performance during the past 25 years has been the relatively rapid growth of capital in comparison to both labour and output. Labour productivity (output per worker) was raised by capital deepening as in India, but this was more than offset by a decline in capital productivity. China thus had the worst of both worlds - slow emp¬ loyment growth without any increase in total factor productivity. This double fault is receiving serious attention of the Chinese leadership since 1984. Also disappointing in another respect is the failure of TFP to rise in spite of a high rate of investment, which could be interpreted as a failure of upgrade technology in the past 25 years, and thus a strong justification for the open door policies of Reform and Mode¬ rnization pursued since 1980. During the 1950’s the Soviet Union helped establish new industries and transfer technology with 156 major construction projects worth US$ 2.7 billion. With the abrupt withdrawal of Soviet assistance in 1960, and continuing trade obstacles placed

132

Economic Growth in China and India

principally by the USA, China had no alternative but mastering the 1950’s vintage Soviet technology, replicating it, and adapting it to Chinese conditions. As a consequence technology imports were limited to about $280 million in the 1960’s. Despite resumption of technology imports from Japan, Western Europe and U.S. in the seventies [126] the level of Chinese technology continues to lag behind that in most advanced and many less developed countries. It is estimated that only 20% of China’s present industrial tech¬ nology is of I960’s and 1970’s vintage while another 20-25% is backward but can still serve present needs. Of the remaining 5560%, 35% urgently needs to be renovated or scrapped (because of excessive energy consumption, outmoded products, etc.) and 2025% should be gradually scrapped (Ma Hong 1982). There is also abundant evidence from individual sectors of wide-spread use of old and inefficient equipment or production of low quality products. It is because of this technological backwardness that the Chinese Government has embariced on the program of four modernizations. In India too there has been a conscious plan to upgrade technology in economy and defence since 1978. The electric power equipment and fertilizer industries received the first priority concern in the late 1970’s, but since 1982, attention has been given for such modernization to consumer as well as capital good industries. However, it is not necessary that mere upgradation of technology would lead to a rise in total factor productivity. As Nichimizu and Page have noted [127], total factor productivity growth does not distinguish between technological progress (TP) and technical efficiency (TE). TFP is the sum of TP and TE. Thus high rates of TP can co-exist with deteriorating TE.... due to, for example, failures in achieving technological mastery or even short-seen cost minimizing behaviour in a quasi-fixed vintage capital framework. And because of this, TFP may not rise or even decline even if TP has increased. Technological progress is the consequence of innovation or modernization (i.e., adoption of new technology) by the best practice industries or firms. On the other hand, technical

Efficiency in the Allocation of Resources and Equity

133

efficiency is obtained by the diffusion of the best practice in tech¬ nology achieved through learning by doing, improved managerial practice etc. Thus, the level and modernity of technology in use is not the only determinant of TFP. Stagnant or declining TFP is there¬ fore not necessarily due to the failure to induct more equipment. The future trend in TFP in China and India would be upward with the introduction of modem technology only if the following conditions are satisfied: (1) If the latest vintage technology from the West reduces the level of at least one input without raising the level of other input(s). Merely because an innovation raises the TFP in one country, it does not follow that its transfer to another country will yield the same result. (2) The New technology is understood, mastered, digested and finally adapted for local conditions. Productivity gains from new technology can be realized only through “learning by doing” as Kenneth Arrow had conceptualized or by “learning by using” as Rosenberg had proposed. There is thus no quick technological fix as Gene Tidrick has noted in his study [128]. (3) The allocation of resources in the five year plans remains as efficient as before, and that there is no reallocation of funds to more inefficient sectors. The new technology should also be used at a level where the economies of scale are properly exploited. Otherwise the new technology and innovation will not produce any increases in TFP. Failure to exploit economies of scale has denied both India and China an important source of productivity growth. In 1978 China produced 150,000 motor vehicles in 130 separate production enterprises in 26 provinces under the jurisdication of several minis¬ tries. In India, five dispersed automobile factories produced less than 100,000 cars. Gene Tidrick has recorded many of these exam¬ ples. In 1982 China produced 190,000 refrigerators in 103 factories. Many of these have imported technology from abroad, where a single factory often produces 1 million or more units. At present production cannot meet domestic demand but in a few years China will undoubtedly be over-producing refrigerators in too many

134

Economic Growth in China and India

small-scale and inefficient factories 1129]. This exact same pattern obtains in the television producing industry in India. In bicycles, an estimated 140 enterprises in China produced 24.2 million units in 1982. Industry experts claim that the profit break-e, en production point is about 300-500,000 units. Only 11 enterprises produce this number of bicycles. In watches, the cost of production fell 25% in China with each doubling of production scale. The average cost of production of all other watch producers in China is 83 % higher than that of the largest producer. In spite of the advantages of scale and impending over-supply it has been difficult to control establish¬ ment of new small-scale factories. The failure of TFP to measure the product innovation dimension of technological change means that China’s performance has probably been even worse than TFP comparison with India would indicate. While the rest of the world has shown substantial techno¬ logical progress through product innovation which goes largely unmeasured in TFP, product innovation and quality improvement has been slower in China. Many Chinese product designs have remained unchanged since their introduction. For example, the Liberation brand truck is based on a Soviet model which in turn is based on a US model from the 1930’s. In other examples, Chinese machine tools are slower, less precise and have a shorter life than machine tools in other countries; Chinese ball bearings last only one-fifth to one-half as long as the best of foreign ones; China still produces low-efficiency industrial boilers; and 40% of Chinese nitrogen fertilizer is still low-quality and unstable ammonium bicarbonate. The Association of Indian Engineering Industries (AIEI) has documented these quality differences with India, after a visit to the Canton Trade Fair.

m The question that arises from the above data analysis is: Why is a command economy such as China’s, more inefficient in the use of resources than an economy like India’s? The findings of the above sections are surprising because it had been widely believed

Efficiency in the Allocation of Resources and Equity

135

that the Chinese economy was more disciplined and efficient than the Indian economy. In the final analysis, the reason for the greater inefficiency in China is primarily the irrational price system and th$ weak transportation network. In China, prices have been set under the directives of the Central Planning Ministry, while in India the practice has been to allow most of the prices to be determined by the market forces. Despite the otherwise impressive economic reforms, China has not carried out yet comprehensive restructuring of the price system. Thus, the administratively determined prices do not reflect the factor scarcities or the marginal conditions of efficient allocation of resources. They do not in India too, but the price system in India is a closer reflection of the workings of the market forces. In particular, the market, however imperfect, sends signals which the producers and consumers can respond to in order to optimize decisions. In China, this is the crucial aspect that is missing: the capacity to receive and send the market signals. No bureaucratic machinery has yet been devised in real life to substitute for that. Hence, resources like energy, steel and transport even if scarce get misutilized, and lead to low and declining productivity in its use. Another aspect of the price system in a market envi¬ ronment, is that it creates incentives for producers and consumers to make the right decisions, and expand resources efficiently. In India, the private sector working in a market environment compared to the public sector in those industries producing the same product (i.e., fertilizer, steel, power), trade services and transport, achieve a higher rate of return and a much lower ICOR. A similar comp¬ arison in China between the yield on private plots versus yield on communes brings out the same contrast. In fact, in 1980,7 percent of the total area (private plots) produced 30 percent of the agri¬ cultural output! However, in irrigation, where China prices water resources more rationally than India, the efficiency in the use of water is according to P.K. Rao [ 130] one and a half times greater in China. Rao estim¬ ates that a similar efficient pricing in India would enable irrigation systems to support a 6 percent growth rate in agriculture as com-

136

Economic Growth in China and India

pared with the present 3 percent now. Another reason for the greater inefficiency in the Chinese economy is the weaker transportation network which in turn contri¬ butes to market fragmentation and regionalization. Surpluses of one area in China cannot be easily used to cover the deficits in other areas. This relative weakness in the transportation network is bro¬ ught out by the fact that even in 1984, the amount of frieght moved in billion tonne-km per square kilometre of China is lower than India. In 1952, this ratio was 0.5, and in 1984 this ratio rose to 0.9. But unlike India, where the rail and road network is more evenly spread out in the country, the Chinese transport network has largely regionalized to the eastern sea board. In terms of passenger traffic, this contrast between India and China is even more sharp. In 1979, the number of passenger-km travelled by rail in China was 121 billion compared to 199 billion in India. In air travel, the figures were 3.5 billion in China and 4.2 in India. For travel by road, the passenger kilometre figure in China was 60 billion, while in India it was 250billion. Considering that Chinese population in 1979 was about 45 percent more than India’s, the differences in per capita term thus were even wider, making China’s level just one-third the level in India. It is thus the view of the author that the double combination of an irrational price system and a weaker transportation network that has so far made for a more inefficient economy in China. However, since the Chinese transportation network is now expanding at double the rate of India, and that China is seriously considering price reform, this advantage of India may not last long. We conclude that given that China and India with per capita incomes around $300 but having attained high rates of gross domestic investment - exceeding 24 percent thus being close to the limits of savings and investment potential - will have to make a substantial improvement in the efficiency of resource utilization. It is this which will be the main vehicle for further acceleration in growth in the 1990s. Whatever acceleration has been achieved since 1978 in the two countries has come about largely through a com¬ bination of policies centering on liberalization of the economy. The

Efficiency in the Allocation of Resources and Equity

137

liberalization will have to be carried forward for continued prog¬ ress, such as through a major price and tax reform. But the key to accelerated progress in both countries is in policies designed to raise the productivity of inputs in the economy. The comparative analysis of China and India in terms of TFP also indicates that the command economy like China is less efficient (i.e., less output per unit input) than an inefficient imperfect market economy like India. This result is consistent with the recent unpublished researches of Abram Bergson who found from cross-sectional study [ 131 ] of East and West European coun¬ tries that about 25 percent of the higher TFP in non-command economies was merely due to that fact - that they were non-com¬ mand economies!

IV We have seen above how resources in China have been allocated less efficiently and less productively than in India. In this section, we propose to examine if the incomes generated by the allocation of these resources have been distributed more equitably in China than India. The presumption is that the distribution is more egalitarian in China. It is not easy to estimate the distribution of income for either China or India. However, for China there has been in recent years some data assembled which make it possible to indicate, with some margin of error, the level and direction of inequality. For India, better data have been available for some time due to the work of individual scholars[132] and one non-govemment research agency, the NCAER[133]. There are two methodological ways to approach the problem of the distribution of income, the first method is that of factor shares, in which the concern is with the division of income amongst the various factors of production, such as labour, capital, land etc. The second method is that of size distribution in which individuals or household are ranked by income and then grouped by population shares, called quantiles or percentiles. An important disaggregation

Economic Growth in China and India

138

of the size distribution suggested by Simon Kuznets is to view it as the sum of intra-sectoral and inter-sectoral divisions of income. This present author was the first to provide the algebraic expression for the Kuznets suggested disaggregation [134]. The distribution form that we shall consider here is the size dis¬ tribution of personal incomes by deciles. In particulars, the chara¬ cteristics of the distribution will be described here by four numbers: (i) the share in income of the poorest 40 percent of the people; (ii) the share in income of the richest 10 percent of the population; (iii) the ratio of urban to rural per capital income; (iv) the Gini Coefficient. In Table 4.9, we summarize the available evidence.

Table 4.9

Key percentiles of the Size Distribution of Income: China & India CHINA (1979) Rural

Urban

INDIA (1975-76)

National

Poorest 40 percent 20.1 30.0 18.4 Richest 10 percent 22.8 15.8 22.5 Per Capita Income -2.2Ratio (urban to rural) Gini Coefficient

0.31

0.16

0.33

Rural Urban National

20.2 16.9 18.5 27.6 34.1 31.4 -1.7-

0.39

0.42

0.42

Note:

Data on China are for 1979, while for India 1975-76.

Source:

China: The World Bank; Socialist Economic Development, 1982. India: National Council for Applied Economic Research (NCAER) Household Income and its Disposition, New Delhi, 1980.

From the Table 4.9 we note that in China the urban inequality measured by the Gini coefficient is quite low, and less than the ineq¬ uality in the rural sector, it is the exact reverse in India where the urban inequality is large and exceeds and the disparity in the rural

Efficiency in the Allocation of Resources and Equity

139

areas. This difference in pattern of inequality is reflective of the economic system in the two countries. In urban India, the right to inherit, hold and trade in assets and property, the freedom to migrate from the villages to the cities, and the relatively small budgets of the local governments for housing, social security and health are res¬ ponsible for the higher urban inequality compared to China. In the rural areas, the disparity in incomes, measured by the Gini coeffi¬ cient, is only slightly less in China. In fact, if we allow for a margin of error in the data, the difference is not significant. This non¬ significant difference in the Gini coefficient for rural areas is surpri¬ sing because of the fact that the Chinese Peoples Republic is foun¬ ded on the proud legacy of agarian revolution, land reform and col¬ lectivization of agriculture. However, we propose to argue that the result is plausible if we take into account the fact that the quality of land and income from it varies very greatly regionally, much more so than in India. Besides, the fact that internal migration from rural to urban areas is hardly permitted, and that the arable land per capita is much lower in China compared to India, it seems resonable to expect that the inequality for the rural areas as a whole may not be much lower than in India, despite the peasant revolution in China. The relatively greater disparity in incomes for China as a whole, compared to the disparity in Chinese rural and urban sectors resp¬ ectively is also due to the income differentials in per capita terms. As was noted for the first time in Swamy[135], the ratio of urban to rural per capita income if large, can make the national size distribution to be more unequal than the sectoral distributions. Because of this, although the rural inequalities are about the same, while the urban inequality is much lower in China, the national income disparity measured by the Gini coefficient in China is not much narrower than in India. The pattern of income inequality in India is reflective of the differences in asset ownership, and market, “entitlements” inclu¬ ding access to education. The level of the inequality is sizeable. In China, the inequality is due to regional income differentials and official “entitlements” such as migration and work licences, hous¬ ing permits, etc. As a consequence, the national disparity in inco-

140

Economic Growth in China and India

mes as a whole, measured by the Gini coefficient, is not much lower than India’s. We shall now look at these inferences in greater detail and examine the extent of data available to support the detailed inferences. The above main result, that the inequality in the size distribution measured by the Gini coefficient is not very different in China (alth¬ ough less) compared with India, is consistent with two aspects of empirical research in this area. First, it is possible to infer that the inequalities in the size distributions of China and India can be rank¬ ed by the Gini coefficient because the underlying Lorenz curves are non-intersecting. Second, the observed marginal difference in the income inequalities between the two countries is in keeping with the inferences drawn about the income distribution differences bet¬ ween East European socialist and Western market economies[ 136]. The theoretical arguments supporting these empirical findings have been well surveyed by Debroy[137]. As stated above, if inequalities obtain in India due to market entitlements and asset ownership, it does so in China too because of official entitlements and a system of class stratification that emerges in communist countries. With a growing body of evidence on the narrow diffe¬ rence in inequalities in socialist and market economies (terms being relative), to which this present study can be added, a plethora of arguments from Marxists have been advanced. These range from the thesis that the class stratification in socialist economies is non¬ antagonist (while in market economies they are) to the neo-Marxist line that stratification in a socialist society is justified on the grounds that it represent the scientific division of labour. (In between the Trotskyite position that China, USSR, et al, represent the failed variety of socialism). The present Chinese arguments about rejecting the “iron rice bowl”idea suggest that the Chinese leadership leans to the latter view: that inequality is based on the division of labour. Such a view is close to the Hindu formulation of jati as a basis for inequality: Is there, therefore, a convergence? Examination of this thesis would take us for afield. Our primary interest here is to study the comp¬ arative economic structure of inequality to the extent that data on

Efficiency in the Allocation of Resources and Equity

141

China and India permit us. As developed in an earlier study[138], the structure of national inequality can be viewed as being determined by the following: (i) Inter-sectoral income differences measured by the ratio of urban to rural income per capita. (ii) The weight of the urban or rural sector measured by the pro¬ portion of population residing in these sectors. (iii) Intra-sectoral inequality measured by the size distributions within the rural and urban sectors. From the understanding of this structure of national inequality we can draw two important inferences: First, without any change in the inequality within rural and urban sectors, urbanization would lead to a decrease in inequality in China and an increase in India merely because the weight of the urban sector would increase. Such increase in weight would decrease disparities in China because urban inequality is less than rural inequality. In India, the opposite obtains. Second, even if there is no change in the intra-sectoral in¬ equalities, a rise in the inter-sectoral income difference would wid¬ en the national disparity in incomes. If the inter-sectoral differential reduces, the disparity will also narrow. Generally, the intra-sectoral inequalities change slowly. Hence the trends in the national inequality is dependent largely on the direction and extent of change in the weight of the urban sector and the ratio of urban to rural incomes. Urban-Rural Differentials There is much evidence pointing to a narrowing in China’s urban-rural income gap in recent years. However till recently, the gap was larger in China compared to India, and also widening since 1965. As Rawski notes: “Wages in the.... industrial sector, inclu¬ ding country-level plants, are much higher than incomes of agricul¬ tural workers. This pay differential.... is now reinforced by an ideol¬ ogy that identifies industrial workers as the ‘vanguard of the prole¬ tarian ’, by the steadily widening gap in productivity between indus¬ trial and agricultural workers, and by limited but very real political strength of urban workers”[139]. Some estimations of the urban

142

Economic Growth in China and India

rural differential have had a range of as 2:1 to 3:1 [140]. Table 4.10 gives the estimates of urban-rural per capita income gap for China and India. Table 4.10

Inter-Sectoral Income Differences in China and India (1952-84) (Ratio of Per capita income in urban to rural sector) CHINA 1952 1957 1965 1978 1980 1984 1986 Source:

2.30 2.28 1.99 2.36 2.18 2.10 1.95

INDIA 1.45 1.62 1.66 1.64 1.72 1.68 1.71

China: 1952-57: Based on consumption ratio given in Roll, Charles R: The Distribution of Rural Income in China, Garland Publishing House, 1980. 1965-78 Lardy, Nicholas: “Agriculture and Production Planning” New England China Seminar, Nov. 12,1980. 1984: Using Sutter, Robert Reform in China and Its Implications, Congressional Research Service, Library of Congress, Report No. 85-98F, May 28, 1985 corrected for personal incomes. The 1986 figures are from “Urban Living Standards Improved in 1986” Beijing Review No. 7, Feb. 16,1987. India: 1952-65: Swamy.S: “The Case of India” Review of Income and Wealth, June 1967. 1978-86: Author’s estimates.

We see from Table 4.10 that ratio of urban to rural personal income declined in China till 1965, and then rose up until 1978, and then declined again. The increase in this ratio between 1965 and 1978 was largely due to the Cultural Revolution during which period peasants sideline income was curbed, and “moral” incen¬ tives replaced the task rates in collective income distribution, on the model of t)azhai brigade[141]. During the years 1952to 1957, and 1978-84, the ratio declined because of policies pursued in the agricultural sector. In the earlier period the ravages of the civil war

Efficiency in the Allocation of Resources and Equity

143

were repaired and industrial inputs were made available to agriculture. In the later period, the Deng Xiaoping-led reforms have caused an agricultural boom, raising peasant income faster than urban workers and employees incomes. In India, this ratio shows no particular trend after 1965. The rise in the ratio till 1965 is due to the urban biased planning based on the Soviet model adopted in the Second Plan (1955-60). The impli¬ cations for the size distribution of the trends in the inter-sectoral income differential measured by this ratio will be discussed below. But it is to be noted that a rise in the ratio alone will lead to a wide¬ ning of the national income distribution. The Weight of the Urban Sector The second factor in the structure of the income distribution is the weight of the urban sector, measured by the proportion of the total population residing in that sector. For most countries, the urban inequality is greater than the rural inequality. India is not an exception to this rule, but China is. Therefore a rise in the weight of the urban sector alone will lead to a rise in the national inequality in India, and a decline in the Chinese national inequality. With this commeni, we present below the estimates of the weight of the urban sector. Table 4.11 shows that the urban sector in China is smaller than in India. Further while it grew in India significantly, there is no clear trend towards urbanization in China. The trends (or the lack of it) in China is a result of the policy of preventing internal migration. During the Cultural Revolution, population was actually trans¬ ferred to rural areas, which is revealed in the above table as a decline in the weight of the urban sector from 1965 to 1978. The subsequent rise in the share of urban population from 11.5 percent to 13.3 percent is perhaps the correction to the Cultural Revolution aber¬ ration. Thus, we may conclude that the weight of the urban sector increased in India, but remained more or less constant in China. The national inequality in China was not therefore affected by urbanization per se, while in India urbanization contributed to the increase in national inequality.

Economic Growth in China and India

144

Table 4.11 Proportion of Population in the Urban Sector: CHINA: INDIA (percentages) Year

CHINA

1952 1957 1965 1978 1984 1986

12.5 13.6 12.6 11.5 12.4 14.3

Source:

INDIA 17.2 17.7 19.2 23.0 24.4 24.6

China: 1952-78: Perkins, D. and S. Yusuf: Rural Development in China, World Bank and 1984: Author’s estimate. Chinese data on rural/urban population have to be used with care. See Peking D.H. “Reforming China’s Economic System” Journal of Economic Literature, 1987 (forth coming). India: Based on linear interpolation of Census data.

Intra-Sectora! Inequality We shall now consider in detail the inequalities in the size distribution of personal incomes per capita within the two sectors, rural and urban. To begin with, we shall consider the available evidence on intra-rural sector inequality.

Rural Inequality The studies on rural inequality in China can be divided into two categories: those that find significantly large income differentials in the rural sector and those that do not[142]. Most fall into the latter category, especially analyses based on limited survey data. Since such survey data is based on small samples in regions not nece¬ ssarily representative of China (if any region could be considered “typical” for China), this bias is almost expected. In general, it seems that the disparity is sm aller when data are from selected intra¬ brigade and inter-team level! 143]. Added to this is the impre¬ ssionistic opinion based on not seeing beggars or shanty towns in selected tours of China.

Efficiency in the Allocation of Resources and Equity

145

There is little doubt that land reform and collectivization was successfully completed in China, and that it led to some reduction in equality. Vermeer has, however, questioned the extent land re¬ form had influenced income redistribution. “The 1950 Land Reform made all tenants into owners, and clan holdings and temple holdings were dissolved. Its effect on actual per capita income distribution was not as clean as it may seem. Clan lea¬ ders and temple societies often had supported poorer members by pro¬ viding relief, labour opportunities or social welfare. If the clan was a social mechansim to mitigate material inequality, then before land reform the degree of inequality between clan members may have been far less than it appears from distribution of formal ownership alone.”[144]

This selective view of geographical differences plays a large role in people’s impressions on the inequality of income distribution in rural China. In a country the size of China, different regional endo¬ wment of resources, both natural and industrial, should make subs¬ tantial contributions to inequality. In fact, William Parish in his interesting study (see note 140) has estimated the Gini coefficient in the rural household income distribution at 0.31 for 1973-75 which implies that the inequality in per capita incomes would be even more than the World Bank studies indicate because there is negative correlation between household size and income levels. In India, for unconvincing reasons, the Government has stuck to its decision not to collect evidence on income distribution either nationally or by sectors, although a lot of public money has been spent on detailed surveys of consumer expenditure. It has been left to scholars or private research agencies to splice the fragmentary data to calculate the income distribution. We present in Table 4.12 the available data. Table 4.12 suggests that since 1952 there has been a slight narrowing of the inequality in China, and significant widening in India. The gainers in China have been surprisingly the top 20 per¬ cent, and not surprisingly the bottom 20 percent. An explanation of the rise in the share of the top 20 percent is again in regional differences. It is the richer eastern coastal provinces which had

Economic Growth in China and India

146

gained the most from public investments in agriculture. The losers are the second and third lowest 20%. It is difficult to explain why this should be so, but it is not out of place here to conjecture that in China these two quantiles represent the Chinese middle-income peasants and those in medium rich regions.

Table 4.12 Size Distribution of Personal Income: Rural Sector (percentages)

Quantile Group

CHINA 1979 1952 (1)

Bottom 10% Bottom 20% Bottom 40% Second 20% Third 20% Fourth 20% Top 20% Top 10% Gini Coefficient 0.87

Source:

5.1 11.3 26.3 15.0 17.4 21.3 35.0 21.6 0.33

(2) 6.2 11.4 20.1 8.7 16.7 23.8 39.4 22.8 0.31

INDIA 1953-55 1975-76 (3) 4.0 8.0 18.0 10.0 16.0 22.0 44.0 29.0 0.34

(4) 2.5 6.3 16.9 10.6 15.0 21.4 46.7 31.5 0.39

China: 1952: Roll, R.C.: The Distribulion of Rural Income in China, Garland Publishing House, 1980. 1979: World Bank, data fitted to lognormal distribution. India: 1953-55: Roychoudhary U. and M. Mukherjee, National Accounts Information System, MacMillian, 1984. 1975: Household Income and Its Disposition, National Council of Applied Economic Research, New Delhi, 1980, p.8.

The losers in the Indian rural scene are clearly the bottom and top 10 percent groups, and the third lowest 20 percent quantile. The bottom 10 percent are the landless labourers with no land at all. The real wage of agricultural labourers has declined in India between 1952 and 1975. The top 10 percent were the zamindars and ver\

Efficiency in the Allocation of Resources and Equity

147

large land owners who certainly have suffered losses in the land reform programs of the last thirty-five years. The gainers are the bottom 40 percent and the top 20 percent. While the poorest of the poor (bottom 10%) have not gained relatively from the deve¬ lopment of the Indian economy, other sections of the poor who have greater access to health and rural development programs have cer¬ tainly benefitted from economic growth. Similarly, the green revo¬ lution has benefitted the top 20 percent of the rural population. All these inferences are of course limited by the quality of data on income distribution. But the diverse and fragmentary data all points to one important conclusion: that the rural inequality in China is not very different from that in India, although the gap in inequality coefficients was negligible in the early 1950’s, and increased by the 1970’s.

Urban Inequality The picture is however very different in the urban sector. Available evidence suggests that urban inequality is remarkably low in China. In Table 4.13, we present the available evidence. The Gini ratio for China is extremely low, in fact lower than for any country in the world for which estimates on the income distribution are available. According to the survey made by Shail Jain, Gini ratio for East European countries varied from 0.21 for Bulgaria to 0.26 for Poland[145]. It is impossible that the World Bank estimates for urban inequality is biased down-wards because of incomplete quantification of perquisites and subsidies in the Chinese wage structure. In fact, on survey data, William Parish estimates the urban sector Gini coefficient at 0.25. The World Bank studies advance three main reasons for the much lower level of urban inequality in China: First, and with the exception of interest on savings deposits, there is no private property income (rents, dividends and profits), which tends to be highly unequally distributed in other countries. Second, there is' almost no income from self-employment - a category that (since it includes everything from successful businessmen and independent professionals to street-hawkers) also exhibits a high degree of

Economic Growth in China and India

148

inequality in other countries. Third, the distribution of wages and salaries is comparatively equal, primarily because the relative pay of managerial, professional and technical employees is much lower than in most other developing countries. (Wage differences among manual workers, by contrast, are not very different from those in other countries). Accepting the World Bank data in Table 4.13, it can be inferred that the Chinese urban income distribution is much more egalitarian than the Indian case. Obviously this has been possible because of a tight wage-price control which is possible only in an authoritarian urban setting. In the rural areas, the income is as much related to an asset - land - as to labour. Hence greater inequities are possible in the rural areas. Table 4.13 The Size Distribution of Personal Incomes: Urban Sector (percentages) Quantile Group Bottom 10% Bottom 20% Bottom 40% Second 20% Third 20% Fourth 20% Top 20% Top 10% Gini coefficient

CHINA (1980) 4.0 10.2 30.0 19.8 20.1 21.7 28.2 15.8 0.16

INDIA (1975/76) 2.3 5.8 15.7 9.9 14.0 20.9 49.5 33.6 0.42

Source: Same as Table 4.12.

Overall National Income Inequality The above discussion in perspective suggests that the national income inequality in China will be as high or higher than urban or rural inequality. This is because the urban-rural income ratio is

Efficiency in the Allocation of Resources and Equity

149

quite large, while the weight of urban sector is quite low. This is deducible using the formula developed earlier[146], for C the national inequality measured by the coefficient of variation (Cr and Cu are coefficients of variation in the rural and urban sector): ^ WrCr2 + WuCu2X2 + WrWu(X - l)2 Wr + Wu X Where Wr and Wu are weights of the rural and urban sector respectively, and X is the urban-rural income ratio. Since for most income distributions, the Gini ratio and the coefficients of variation are functions of each other, hence this formual is equally valid for Gini ratios. From this formula we can deduce that the national inequality C can be greater than Cr or Cu for appropriate value for X and Wu. With this knowledge, we now construct the national income dis¬ tribution for China and India. The results are presented in Table 4.14. Table 4.14 National Size Distribution of Personal Income (percentages) Quantile

CHINA (1979-80) (1)

Bottom 10% Bottom 20% Bottom 40% Second 20% Third 20% Fourth 20% Top 20% Top 10% Gini coefficient Source:

Same as Table 4.12

4.3 8.9 18.4 9.5 18.1 22.2 39.3 22.5 0.33

INDIA (1975-76) (2) 2.3 5.8 15.7 9.9 14.2 20.8 49.3 33.9 0.42

Economic Growth in China and India

150

Thus, we see from Table 4.14, that the national inequality in China is more than the inequality in the urban or the rural sector, but is significantly less than the level in India, as measured by the Gini coefficient. The national inequality level in India is typically the average level in developing countries, and is the same as the urban inequality within the country. The conclusion to be drawn from Table 4.14 is that the avail¬ able data support the widely held presumption national inequality in China is less than the inequality in India, but contrary to popular impression, the difference in equality levels is not as wide. Poverty Measurement It is now well recognized that the inequality in the size distri¬ bution of income does not give much of a clue on the level of poverty. To obtain an appreciation of the poverty level, it is necessary to define an income level - the poverty line - below which it can be presumed that the recipient is not living up to minimum subsistence standards. What that income level is of cou¬ rse frequently a subject of dispute. However, there are official state¬ ments available which clearly state such a minimum income level for the two countries and which we accept here for sake of obta¬ ining an idea about poverty in two countries. For China, the earliest statement is from the Vice Minister in charge of the State Agri¬ cultural Commission Mr. Du Runsheng who stated that to subsist. Table 4.15

Population Below the Poverty Line: CHINA: INDIA

Year 1979 1984 Source:

CHINA (Millions) (Percent) 239.0 110.0

31.0 11.0

INDIA (Millions) (Percent) 320.0 272.4

52.4 36.9

Sun Peijun “War on Poverty in China and India" Academy of Social Sciences, Beijung (unpublished), 1986

Efficiency in the Allocation of Resources and Equity

J51

the Chinese peasant needed a minimum annual income of 120 yuan[ 147]. To subsist in the urban sector, 240 yuan was considered necessary in 1981 [148]. The most recent statement is from Sun Peijun, a scholar with the Chinese Academy of Social Sciences, who places the “poverty line” at 200 yuan for 1984. In India, the poverty line has been taken by the Government to be that level of expenditure per capita at which it is possible to consume 2,400 calories in rural areas, and 2,100 calories in urban areas. This implies in 1979-80 prices an annual per capita expenditure of Rs. 912 (rural) and Rs 1056 (urban). By these definitions, the estimate of the number of people living below the poverty line in 1979 in China was 31 percent[149] and 48.4 percent in India. This means 239 million in China and 320 millions in India. It is estimated! 150] that in 1982, the percentage of the poor may have dropped dramatically due to the agricultural reforms in China, and the various anti-poverty programs in India[ 15.1]. Thus, in 1984 according to Sun Peijun, the number of people living poverty below subsistence is put at 110 million in China and 272 million in India[152], Whether such a dramatic drop in the number of persons below the poverty line is possible in such a short period is open to question. However, even if these figures are valid, it does point to the fact that although the number of really poor people is much smaller in China, nevertheless, they still represent in absolute size larger than ninety-five percent of the countries of the world. It cannot be said that China is anywhere near abolishing poverty. Finally, while we have not discussed the quality of life issues in the study since it would require venturing afield, a comment is nevertheless in order here. As the table 4.16 shows, China is far ahead of India in all social indicators of the quality of life such as morality, fertility, literacy and nutrition. In fact, China’s levels are more in line with those of developed countries, except of course in nutrition which are between the average levels of developed and underdeveloped countries. Some of the quality of life indicators were already high when China began economic planning in 1953 (see Table 2.9). In the

Economic Growth in China and India

152

Table 4.16 Health and Welfare Indicators: China and India >

India

China

1965

Developed Developing countries countries 1985 1985

1965

1985

Birth rate

39.0

18.0

45.0

32.8

13.0

30.0

Death rate

13.0

7.0

20.0

11.9

9.0

14.0

3.6

2.3

5.1

4.5

90.0

35.0

151.0

89.0

9.0

71.0

54.0

69.0

45.0

57.0

76.0

61.0

Fertility rate Infant mortality Expectation of life at birth No. of hospital beds per 1000 population

1.06

2.07

0.61

0.74

7.14

1.26

No of doctors per 1000 population

0.3

0.6

0.2

0.3

1.9

0.2

50.0

70.0

30.1

43.5

97.0

52.0

2034.0 2602.0 2100.0 2189.0

3417.0

2470.0

Literacy % Average Calorie consumption Source:

World Bank: World Development Report 1987, Oxford University Press, 1987.

case of nutrition levels measured by the calorie value of food consumed, the Chinese 1931-37 levels were higher than even the 1965 level. Nevertheless, the progress China has made compared to India, in the quality of life indicators especially health and literacy, has been impressive. This is not to suggest that there are no serious problems of quality of life left in China. According to Chinese official statements[153], the number of illiterates in China number about 200 million. As stated earlier, there are about 100 million people below the poverty line. Recently death rates have increased and the expectation of life has declined following the withdrawal of commune-based free public health services. Nevertheless, it is a tribute to Chinese planners that despite a low

Efficiency in the Allocation of Resources and Equity

153

per capita income, the Chinese people were able to enjoy a physical quality of life almost on par with that of developed countries. The summary conclusion of this study therefore is: that during the three and a half decades 1952-87, while there were many fluctuation in the economic performances of the two countries, the broad inference is that China has outperformed India in growth, equity and in physical quality of life, but not in efficiency in the use of resources. However, the gap in performance is not very large. If

the past-1978 performance is excluded, then the performance is nearly the same. It is essentially the Four Modernizations strategy and Reform initiated by Deng Xiaoping which has been enabled China to put a real distance in its performance with India.

5 Conclusions In the analysis of nearly eleven and a half decades of Chinese and Indian economic development, we have naturally been hampered by a paucity of data making it difficult for detailed conclusions abo¬ ut the two countries China and India in a comparative perspective. However, on the basis of-available, albeit fragmentary data, some broad conclusions can be reached which are stated below. First, although both countries suffered because of Imperialism of the West, the historical content of the contact with the West, was different for the two countries during the years under review, 18701950. In the case of India, the West, represented by Britain, was in full political control of India. Thus Britain was in a position to follow policies freely in an atmosphere of stability. In China, the Government was comprised of the Chinese, first under the Ching dynasty, then of the Republicans such as Sun Yat sen and Chiang Kai shek. The contact with the West in the nineteenth century was in the form of repeated armed intervention by five powers-four Western, and Japan,-for concessions in trade and investments. The Chinese Government was, therefore, hardly able to function at any time in peace and stability. But despite the stability in India (and the lack of it in China) the growth rate in percapita income over these eight decades was about the same, averaging an annual growth rate of 0.5 percent to 0.6 percent. This level, while by no means negative, is low by standards of those countries which indus-

Conclusions

155

trialized during the late eighteenth and early nineteenth century, and considerably lower than the rates achieved by China and India in the post-1950 period. The pre-1950 period difference between China and India in the pattern of structural change when examined in further detail, is consistent with the consequence flowing from the policies pursued by the two governments. In particular, the colonial Indian govern¬ ment’s tax policy towards agriculture was insensitive and harsh to the extent of causing a decline in the yield per acre of foodgrains, and thus lowering the level of living. The Chinese agriculture experienced no such decline in yield, as a consequence pf which the percapita grain output - which was on a par with the level in India in 1870 - increased over the eight decade period, to nearly two and a half times the level in India. The Ching government and the succeeding Republic Government despite other failings, perhaps because of weakness, did not disrupt the rural order as the colonial government had done in India. In fact, the Chinese Government was relatively more sensitive to peasants’ difficulties after the 1860 Taiping Rebellion. It is possible to suggest on such a comparative analysis that for agriculture, indigenous governments - even if they are weak - are for progress, less regressive than any colonial government. Strong indigenous governments actually promote agricultural growth as did Meiji Japan, or the post-1950 Indian and Chinese governments. Second, although the colonial government in India introduced and developed a railway network to promote foreign trade and further its control of the Indian people, this network did not foster economic growth because of the colonial government’s railway policy on line location and freight rates. Railways also did not promote structural changes through the linkage effect, because the colonial government as a policy imp¬ orted eveh semi-skilled labour from England. But despite the'high cost paid for the railway, the experience of China suggests that had not the British been in the position that they had been ih India, it is likely that railway development would have been considerably delayed. The existence of this railway network perhaps prevented decades later in India in 1966-67, the occurrence of the kind of

156

Economic Growth in China and India

famine which cost China in 1959-61 between 16 to 30 million lives. A conclusion that emerges from a comparative analysis of these two giant countries is the thesis that the resistance to the West, as the main explanation of why these two countries failed to achieve modem economic growth before 1952, is without substance. Rather it is the absence of good leadership in the area where it would have been most effective - in the Government - that appears to explain the failure to industrialize. The reason for lack of leadership was that the two governments were not popular, not emerging out of either a revolution or out of a democracy, and hence by motivation were statusquoist. Both governments were afraid of development and social change, but moved in that direction only when threatened or under great pressure from events. This is further confirmed by the fact that after liberation in the late forties, when China and India had new but popular governments, both countries have developed much faster than before. There is thus no substitute for enlightened government, which cannot be but indigenous in character. A well motivated government cannot be imported. In 1952, China was better placed than India in agriculture, but quite behind in manufacturing and transportation. In terms of indicators of health and expectation of life, China was decisively ahead of India perhaps because of a better level of nutrition afforded by a relatively more advanced agriculture. However, due to retarded manufacturing and services sectors, the Chinese per capita income in parity dollars was substantially lower than India’s in 1952. Third, since 1952, in comparative terms, China attained a higher growth rate in national income than India during the three decades and more, of planned economic development. The estimated gro¬ wth rate for China during the 1952-86 period was 5.1 percent per year, and 4.0 percent per year for India. These growth rates have been estimated after subjecting the available statistics to detailed scrutiny, and after reworking these data for the price system distortions. At these levels of growth rates, China and India belong to the group of moderately growing developing nations. Although growth

Conclusions

157

rate in aggregate is not vastly different for the two economies, in per capita terms, however, due to the lower growth rate in population in China, the China-India differential is substantial. The Chinese annual per capita growth rate during 1952-86 was 3.2 percent while in India it was 1.8 percent per year. Because of this difference in growth rates, China’s 1986 per capita income in 1970 purchasing power parity rates was $315 compared to India’s $298. In current prices and on exchange rate conversion, the per capita income of China would be $303 compared to India’s $292. Thus, we note that in terms of gross domestic product divided by population, India’s per capita income in 1986 is lower than China’s in valuation which uses the official exchange rates. This difference in per capita incomes does not vanish even if we use purchasing power parity exchange rate (for conversion to dollars) and in constant 1970 prices. However, the level of per capita income of about $300+ is quite low. The fact that per capita incomes of the two countries are so low is by itself not surprising. China’s and India’s per capita incomes are, even today, lower than Pakistan’s, but one cannot, on this fact alone argue that Pakistan is more developed than China or India. The level of per capita income has to be considered along with the inequality in incomes and structure of production to make a mean¬ ingful comparison. However, it is significant that over the period 1952-86, the per capita income did rise for both countries, for China by 212 percent, India by 93 percent. By 1986, China had a per capita income on a higher level than India after starting from way below in 1952. The sectoral pattern of growth mies for the period as a whole, 1952-86 shows that China is ahead of India in agricultural performance. It is very far ahead in industrial growth (about double India’s growth). It is however only in the service sector that India is ahead of China. The trend in industrial growth rates in both countries are also different. The Chinese industrial economy has accelerated from a high annual 8.8 percent in 1952-65 to an even higher 11.6 percent in 1978-86. In India, the growth rate decelerated from a modest 5.8

158

Economic Growth in China and India

percent annually to an unimpressive 3.6 percent in 1980s. In agri¬ culture, both countries have experienced an acceleration in growth rates. This is largely due to the investments made in modernizing agriculture in the late sixties and seventies especially in cash crops, and subsidiary agricultural activities. However, Indian agriculture appeal's to have lost its steam in the post 1978 period when China sharply accelerated its growth by initiating economic reform. Dur¬ ing this period, Indian agriculture performed relatively poorly. On the whole, China’s investment effort has been huge, investing up to 34 percent of the GDP, largely for industrialization, compared to India’s 25 percent. Because the Chinese have been relatively more inefficient in the use of these resources, they could not realize a much higher rate of growth. The incremental capitaloutput ratio in China was 5.7 compared to 4.5 in India for the period 1952-85 (compared to 3.4 for similarly semi-industrialized coun¬ tries). However, China is planning now reducing its rate of invest¬ ment, and to brought it down to below 28 percent. Therefore, if India engages in a special effort to streamline and make efficient its resource allocation and utilization, it could close the gap in growth rates in GDP with China. This will, however, not be easy because China too has been of late paying a great deal of attention to raising the productivity of investment. The year to year fluctuations in foodgrains output are larger in number and magnitude in India than in China. In the years since 1952, the number of years when the foodgrains output declined absolutely is 14 in India, and 8 in China. Considering the sharp shifts in policy that have taken place in Chinese agriculture and the near stability of approach in Indian agriculture, this is indeed surprising. The clear inference is that Chinese agriculture is better insulated against the weather than India’s. The reason for this is that the Chinese government has from the very beginning placed greater emphasis on providing modem inputs such as irrigation, fertilizers, and mechanical power to agriculture. These modem inputs are however priced high to effect a transfer of resources to finance industrial growth. In India, in the early sixties began a programme to provide a package of modem

Conclusions

159

inputs to agriculture which produced some spectacular results and which came to be termed the “green revolution”. But the progra¬ mme remained limited largely to wheat and to some extent rice cultivation. The programme could be taken advantage of by the prosperous farmers only, and hence as a modernising programme its impact has not been widespread. The level of inputs in foodgains cultivation in China had already reached relatively high levels. Fertiliser application in China is more than double the level in India. Mechanical power is four times higher, while irrigated area is 65 percent higher. Labour per hectare is almost double the level in India. However, the present level and growth of inputs in China relative to India raises the important question of potential output. Future expansion in inputs such as machines, fertilisers, and multiple cropping have less scope than in India. At the present state of technology and know-how, India can easily double foodgrains output by application of more fertilisers, and through increased irrigation and multiple cropping. For China the cost of doubling output will be far greater than for India because of the high levels of input application already achieved in China. During the last three decades and more, the growth rate of foodgrains in China has been 2.8% per year which is the same rate at that obtained in India. This growth rate has been significantly higher than the growth rate of population in the two countries. This same growth rate has been attained differently in the two countries. In China the growth rate is almost entirely due to increases in the yield per hectare, while in India about 39 percent of the increase in output is due to increase in acreage under foodgrains cultivation. If indeed, India did not have the capacity to expand acreage under cultivation, an option that China hardly has, the growth rate in foodgrains output in China would have been much higher than India. As it is, the growth rates are equal at 2.8 percent per year. The growth rate of 2.8 percent annually over three decades compares very favourably with the growth rates achieved by the two countries during eight decades 1870-1952, and has been made possible by the spectacular performance of wheat production

160

Economic Growth in China and India

(especially in India). However, coarse grains and protein giving grains (such as pulses in India and soyabean in China) have relatively speaking, performed poorly. While the share of rice in foodgrains output in both countries remained about the same during the last thirty odd years; and the share of wheat rose significantly (more so in India than China), the share in output of coarse grains and protein grains consequently declined. Considering that coarse and protein grains are consumeu by the relatively poorer sections of the populations in the two countries, and that the respective governments have placed the welfare of these sections as of priority concern in the five year plans, it is sutprising that these grains have performed so poorly. This failure is due to a lack of adequate investment and modem inputs in the cultivation of these crops. Fifth, the growth rate in industry estimated for the period 195284, show that Chinese industry grew’ at an impressive rate of 9.6 percent per year compared with India’s rate of only 4.8 percent. However, this higher growth rate has been achieved at a much higher cost in terms of resources and energy utilization in China. Estimates place the aggregate factor productivity decline in India industry at -0.7 percent per year. Although labour productivity rose at the rate of 2.5 percent per year, this was iargely due to the process of capital deepening rather than to the rise in efficiency of labour. In China too total or aggregate factor productivity declined, but the decline was even sharper. Estimate of the index of factor prod¬ uctivity reveal a decline of -3.1 percent per year. Total factor productivity in Chinese state run enterprises declined anywhere from 0.6 percent to 1.5 percent annually. China had achieved a faster industrial growth because of a huge investment effort which more than compensated for the greater inefficiency in the use of capital. Therefore, although China achieved a higher industrial growth compared to India, it was also at a higher cost and with greater inefficiency in factor use. However, both countries will have to

Conclusions

161

devote their attention in the future to the productivity aspect in planning industrial growth since both countries have reached a high plateau in the level of saving-income ratio in the economy. China achieved a higher level of equity in the distribution of income compared to India. Measured by the Gini index, the in¬ equality in the size distribution of incomes in China was 21 percent less than in India. What is interesting is that the difference in extent of inequality in incomes is not very much largely due to greater regional inequality in China. This regional disparity is manifested in a low arable land availability per capita. It is interesting that rural inequality in China is not very different from that in India despite all the revolutionary upheavals in China. It is the urban sector in which China exhibits impressive equity in incomes, and not in the rural sector! In terms of poverty levels, illiteracy and health, China has done decisively better than India, aithrough the gap is not as wide as presumed. For China, even in the mid-80s, there were 110 million very poor people and 200 million illiterates.

Notes 1. 2.

3.

4.

Perkins, Dwight H (ed.) China’s Modern Development in Historical Perspective, Stanford, 1975. Cohen. Paul: Discovering History in China, Columbia University Press, 1984. The same theme has also concerned scholars for references see Kumar, Dharma, “Economic History of Modem India,” Indian Economic and Social History Review, IX (1972). Chao Kang\ “The China Watchers Tested” China Quarterly, 1981, p. 97-104. See also Myers, Ramon: “How Well Did American Economists Understand Communist China’s Economy ? Issues and Studies, November, 1984. S wamy, Subramanian: Economic Growth in China and India: A Comparative Appraisal, 1952-70, University of Chicago

Press, 1973. 5.

6.

7. 8.

Malenbaum, W: “Modem Economic Growth in China and India” Economic Development and Cultural Change,

October, 1982 for a survey. See J.K. Fairbank and Teng Ssu-vu, China’s Response to the West (Cambridge, Mass.: Harvard University Press, 1954), p. 118, See also DJI. Perkins, “Government as an Obstacle in Industrializaion: The Case of Nineteenth Century China,” Journal of Economic History, XXVII, No. 4 (1967). Albert Feuerwerker, China’s Early Industrialization (Cam¬ bridge, Mass.: Harvard University Press, 1959), pp. 9-10. A.K. Sen, “Pattern of British Enterprise in India: 1854-1914, “in Social and Economic Development, B. Singh and V.B.

Notes

163

Singh, eds. (New Delhi, 1965), p. 420. 9.

C.Y. Hsu Immanuel, The Rise of Modern China (Oxford: Oxford University Press, 1970), p. 376.

10.

Perkins, D.H., Agricultural Development in China 13681968 (Chicago: Aldine, 1969).

11.

Blyn, George: Agricultural Trends in India 1891-1947 (University of Pennyslvania Press, 1966).

12.

Subramanian, S: A Statistical Summary of the Social and Economic Trends in India (In the Inter-War Period), Office of the Economic Adviser, Government of India, New Delhi, 1945, Table VI.

13.

Raychaudhari, T: “The Mid-Eighteenth Century Back¬ ground” in The Cambridge Economic History of India, Vol II,

14.

Cambridge University Press, 1982 (henceforth: CEHI). Subramanian, op. tit., page (X).

15.

Chaudhari. B.B.: “Rural Power Structure and Agricultural Productivity in Eastern India: 1757-1947” in Agrarian Power and Agricultural Productivity in South Asia,

Desai,

Meghnad, Sussane Rudolph, and Ashok Rudra (eds.) Oxford University Press, 1984. 16.

Stokes, Eric English Utilitarians and India (Clarendon

17.

Press, 1959), Page 134. Brodkin, E.I.: “Proprietary Mutations and the Mutiny in Rohilkhand “Journal of Asinn Studies, XXVIII, No. 4

18.

August 1969, page 667. Cohn, Bernard: “The Initial British Impact on India” Journal of Asian Studies, XIX, No. 4, August 1960, page 418.

19. 20.

Goldsmith, Raymond: The Financial Development of India, 1860-1977, Oxford University Press, 1983, page 47. Wang, Yehchren: “The Fiscal Importance of the Land Tax in the Ching Period” Journal of Asian Studies, XXX, No. 4,

August 1971. 21. Kuhn, Phillip: “Local Taxation and Finance in Republican China” in Jones, Susan (ed): Select Papers from the Center for. Far Eastern Studies, The University of Chicago,

164

22.

23. 24.

25.

26. 27. 28.

29. 30.

31. 32.

Fronomic Growth in China and India

No. 3, 1978-79. Feuerwerker, A: “Economic Trends in the Late Ching Empire: 1870-1911” in The Chambridge History of China, Vol II, Part 2, Cambridge University Press, 1982. Kuhn, op. cit., page 101. Henry Rosovsky, “Japan’s Transition to Modem Economic Growth,” in Industrialization in Two Systems - Essays in Honor of Alexander Gerschenkron (New York: Wiley, 1966). A. Rosenbaum, “Railway and Economic Development - The Case of the Imperial Railways of North China: 1901-11,” Modem China, Vol. 2, 1976, pp. 227ff. Thorner, D.: “The Pattern of Railway Development in India”, Far Eastern Quarterly XIV, No. 2, February 1955, p. 179. Cottrell, P.L.: British Overseas In vestment in the Nineteenth Century, Macmillan, 1975. Ashton, B.,Hill,K, Piazza, A. andR.Zeitz, “Famine in China, 1958-61” Population and Development Review, 10, 1985, pages 613-645. Hurd, John: “Railways” CEHI pp. 737-761. Huenemann, R.: The Dragon and the Iron Horse: The Economics of Railways in China: 1879-1937, Harvard University Press, 1984. Hurd, op. cit. See also footnote 51 below. Chao, Kang: Cotton Textiles Industry in China, University of Michigan Press, 1984.

33.

Chang, J.K. Industrial Productions in Pre-Communist China, Aldine, 1972.

34.

Morris, M.D.: “The Growth of Large Scale Industry to 1947” CEHI, pages 553-676.

35.

The Ch’ing Dynasty was regarded by eminent Chinese as a “foreign” government prior to the Self-Strengthening Movement; a revival effort was made to identify China with

36.

the Ming Dynasty, but after the failure of the T’aiping Rebellion, this effort ended. Fairbank and Teng, op. ciL

37.

Ragner Nurske, Problems of Capital Formation in

Notes

165

38.

Underdeveloped Countries (Oxford: Oxford University Press, 1953). See also his “Comment on International Investment,” in Survey of Contemporary Economics, B.F Haley, ed. (Homewood: Irwin, 1952), Vol. II, p. 350. For details see D.H. Buchanan, The Development of

39.

Capitalistic Enterprise in India (New Yorx, ' 934). Sen, op. cit., p. 414.

40. 41.

Lovat Fraser, Iron and Steel in India (Bombay, 1919), p. 53. Buchanan, op. cit., p. 308.

42.

Meade King (Parliamentary Papers, 1888>, who said that “it will doubtless make the English masters envious.” G. Slater, “The Steel Industry in India”, Economica, Old. Ser. (1925), p. 64.

43. 44.

45. 46. 47.

48.

49. 50.

This is not to suggest that there was absolutely no foreign investment in these two industries, but that it was only a trickle. For example, of the 345 cotton mills in 1921, only nine were owned by Europeans. Sen, op. cit., p. 421. Ibid., p.422. Arnold Sherman, “Pressure from Leadenhall: The East India Company Lobby”. Business History Review”, VI, No. 3 (1976), 239-35. See Chamberlain Enquiry Commission: Trade of the British Empire and Foreign Competition (1895), quoted in Sen, op. cit, p. 426. British investments in India was 20.4 percent of total British foreign investment. By 1913 this share declined to 10.1 percent. Tomlinson, B.R. The Political Economy of the Raj, Macmillan, 1979. This hypothesis does not give weight to the factors usually advanced, such as (1) destruction of domestic handicrafts; (2) unfavorable balance of trade and the consequent drain of resources; (3) imperialistic machination such as brainwashing and loot. These, according to the present author, are not causative at all, although they may be factually correct. At the same time, the preoccupation of some scholars with “Western

166

51.

52.

53. 54.

55. 56.

Economic Growth in China and India challenge” as the factor of economic change, is difficult to comprehend. The term “West” itself has not yet been satisfactorily defined, and it is doubtful if it ever can be. The railways could have contributed to major agricultural change because the Indian peasant appeared to have been responsive to transport cost-cutting effect, but unfortunately, the railways remained an administrative vehicle. See John Hurd II, “Railways and the Expansion of Markets in India,” in Explorations in Economic History, XII (1975), 263-88. The same was true of the Chinese Government for a different reason. See Alexander Eckstein, “! The Economic Heritage,” in Economic Trends in Communist China, Eckstein et al., eds. (Chicago: Aldine, 1968). J.R. McCulloch, “Revenues and Commerce of India,” Edinburgh Review (March 1827). Ralph B. Price, “The ‘New Political Economy’ and British Economic Policy for India”, American Journal of Economics and Sociology, XXXV (Oct, 1976). Murphy, Rhoads: The Outsiders; Western Experience in India and China (Univ. of Michigan Press, 1977). In 1835, Lord Macaulay prepared a Minute on Education which became the basis for English language education in India. In that besides disparaging Sanskrit literature, he stated that the objective of education was to create “ a class of Indians in blood and colour, but English in tastes, in opinions, in morals, and intellect”. Later while defining British Policy, Viceroy Sir John Lawrence (1864-69) declared that “We (British) are here by our moral superiority, and by the Will of Providence”cf.Journalof Asian Studies, XVII, No. 4, August 1958, p. 570.

57.

See A. Feuerwerker, “China s Nineteenth Industrialization; The case of the Hanyehping Coal and Iron Company,” in The Economic Development of China and Japan, Cowan, ed. (London: Allen & Unwin, 1964).

58.

A. Feuer, “A Review of ‘K’aiping Mines: 1877 - 1912’ by E.C. jCarlson” (Cambridge: Harvard University Press, 1957),

Notes

59.

60.

61. 62.

63.

64. 65.

66.

67. 68. 69.

70. 71.

167

in Journal of Asian Studies, XVIII (1958 - 1959), 286. Chi-ming Hou, “Some Reflections on the Economic History of Modem China: 1840 - 1949”. Journal of Economic History, XXIII (1968), p. 599. Hu Shih:“The Indianization of China: A Case in Cultural Borrowing”, Harvard University Tercentennial Anniversary (1936), p. 247. Chiang Kai-Shek: China’s Destiny (Chungking, 1943), Ch. II. This environment of stability in India, surprisingly, did not encourage foreign investment either. In 1938, foreign investment (cumulative) was £3.1 billion in India, whereas in China it was £3.5 billion. Wu Pao-san, National Income of China, 1933 (in Chinese), Shanghai, 2 vols., 1947; Ta-chung Liu and Kung-chia Yeh, The Economy of the Chinese Mainland (Princeton: Princeton University Press, 1965), p. 65. Perkins, D.H.: Agricultural Development in China 1368 1968 (Chicago: Aldine, 1969), p. 30. Hou Chi-ming, “Some Reflections on the Economic History of Modem China (1840 - 1949),” Journal of Economic History, XXIIII (1963), 597. For a survey see Krishan G. Saini, “The Growth of the Indian Economy: 1860 - 1960,” Review of Income and Wealth, ser. 15 (1969). Heston, A, “National Income”, CEHI, pp. 376-462. Liu and Yeh, op. cit., p. 66. John K. Chang, (“Indexes of Industrial Production in Mainland China, 1912 to 1949,” Ph.D. thesis. University of Michigan, 1965) estimates the 1912 - 1949 industrial growth rate at 5.5 percent per year, lending support to our estimates above. Simon Kuznets, Six Lectures on Economic Growth (Glencoe: Free Press, 1959), p. 104. Chi-ming Hou, “External Trade, Foreign Investment and Domestic Development: The Chinese Experience: 1847 -

168

Economic Growth in China and India 1936,” Economic Development and Cultural Change, X

72. 73. 74. 75. 76. 77.

78.

79.

80. 81. 82. 83.

(1961), 21-41. Perkins, op. cit. 2 catties = 1 Kg., and 15 shih moo = 1 hectare. Ibid., p. 16. 100 catties = 1 picul. In 1870 the population of China was 350 million, and in 1933, 500 million. Although our estimate is tentative and meant to indicate rought order of magnitude, it does corroborate other national estimates arrived at by different methodologies. For example, Perkins estimates the 1914-1918 GDP in 1957 prices at 48.4 billion yuan. After adjusting for price base, this is remarkably close to our estimate in Table I above. A. Feuerwerker (“The Chinese Economy ca. 1870 - 1911,” in The Cambridge History Vol. 5 of China; J.K. Fairbank, ed.; Cambridge University Press, 1970) estimates the 1880’s (1887?) GDP at 3,338.8 million taels, which when converted to NDP 1933 yuan, is 14.22 billion yuans. This means that the growth rate between 1870 and the 1880’s was 0.3 percent per year, corroborating our findings based on other materials. Perkins’ (“Growth and Changing Structure”) data yield an annual growth rate in GDP of 1.4 percent for the 1914/1918 - 1933, which is lower than our estimate of 1.7 percent per year. For 1933 -1952 Perkins ’ estimate is 0.3 percent per year, which is also lower than our estimate of 0.9 percent per year If we use Feuerwerker’s (op. cit) estimate, then we obtain China’s growth rate for 1885-1933 at 1.5 percent per year, while India’s growth rate for the same period was E2 percent per year. Perkins, op. cit., p. 14. Economic Development in India and Communist China, US Congress (1956). See Report of the Destruction of Industries in North China, Chinese Delegation to the United Nations, 1948. New York. For estimates, see Rostow, W.W. Prospects for Communist China, Wiley, New York, 1954.

Notes 84. 85. 86. 87.

88.

89. 90. 91.

92. 93. 94. 95. 96. 97.

98.

169

Kuznets, Simon “Modem Economic Growth: Findings and Reflections” American Economic Review, 63, June, 1973. Zhang Shuguang: “Reform in the Economic Structure” Social Sciences in China, March 1982, p. 61. Report of the Delegation to the Canton Trade Fair, A1EI, New Delhi, 1980. Lele, U and J Mellon Estimates of Change and Causes of Change in the Foodgrains Production in India, New York State College of Agriculture, 1964. Hazel, Peter: Instability in the Foodgrains Output in India, International Policy Research Institute (IFPRI) Washington, 1981. Tang, A. Food Production in the Peoples Republic of China, IFPRI, 1980. Ahluwalia, I.: Industrial Growth in India, Oxford University Press, 1984. Field, R.M. “Growth and Structural Change in Chinese Industry”, China Under Four Modernization, U.S. Congress Washington D.C., August 13, 1982. Tidrick, G.: “Productivity in Chinese State Industrial Enterprises” (unpublished) 1985. In India, similar concerns are being expressed on the need for greater efficiency in the investment. Documents of the Chinese Communist Party Eighth Congress, Peking, 1957. System of National Accounts, Unstatistical Office, New York, 1964. A System of National accounts and Balances, Series F, United Nations Statistical Office, New York, 1971. Keren, M. andJ. Weinblatt “A Geometrical Approach to Real Income Comparisons: A Comment” Economic Journal, 94, June 1984. See also Swamy, Subramanian “Analytical Notes on the International Comparison of Real Incomes” Economic Journal, June 1984, and Samuelson, P.A.: Reply, samejournal. Kravis, I.B., Heston, A. and Summers, R. International Comparisons of Real Product and Purchasing Power

170

Economic Growth in China and India (Baltimore: Johns Hopkins Univ. Press, 1978).

99. Samuelson, op. cit. 100. Marer, Paul: Dollar GNPs of the USSR and Eastern Europe Johns Hopkins University Press, 1985. 101. United Nations (U.N.) Statistical Office, “Comparisons of the System of National Accounts and the System of Balances of the System of National Accounts and the System of Balances of the National Economy”. Part two. “Conversion of Aggregates of SNA to MPS and Vice-Versa for Selected Countries.” Series F, No. 20 (Part II) (New York: United Nations, 1981). 102. Campbell, R.W.: “The Conversion of National Income Data of the USSR to concepts of the Systems of National Accounts in Dollars and Estimate of the Growth Rate”. World Bank Staff Working Papers, No. 777, 1985. 103. China: Socialist Economic Development, Annexe A, p. 25, World Bank, 1981. 104. See his “Issues in the Estimation of China National Product”. Quantitative Measures of China’s Economic Output (edited by A. Eckstein) Michigan, 1978. 105. T.C. Liu and K.C. Yeh: The Economy of the Chinese Mainland, Princeton, 1965. 106. A. Eckstein “Economic Growth and Change in China”, China Quarterly 1973, page 232. 107. D.H. Perkins, op. cit. 108. R.F. Dernberger and D. Fasenfest “China’s Post-Mao Economic Future” in Chinese Economy Post-Mao, Joint Economic Committee, US Congress, Vol. I, 1978. 109. According to Yu Youhai: “US $1000 by year 2000” Beijing Review, No. 43, Oct. 27, 1980, non-material product plus depreciation on fixed capital “account for only 12 to 13 percent” of GNP. In India, in the years 1970-78, the ratio of NMP (or NIP) to NDP varied between 12 to 13 percent. See “Estimates of Net Material Product: 1970-71 to 1978-79” Monthly Abstract of Statistics, Central Statistical Organi¬ zation, New Delhi, April 1982. See also: Li Rongxia “Tertiary Industry Takes Off in China” Beijing Review, Nos.

Notes

110. 111.

112.

113.

114. 115.

116.

117.

118. 119. 120. 121.

122.

171

5 et 6, February 9, 1987 for the share of services in A DP. Yu Youhai, op. cit., p. 18. Swamy, Subramanian: “Retail Price Index in the Peoples Republic of China”. Review of Economic and Statistics, August 1969. Gerschenkron, A.: A Dollar Index of Soviet Machinery Output: 1927/28 to 1937. The Rand Corporation, Report R197, Santa Monica, 1951. Bergson, A.: Real National in Soviet Russia since 1928, Harvard, 1961. See also Toda, Y.: “An Index Number Approach to International Comparison of Consumption “Review of Income and Wealth, Ser 17, No. 4, 1971. Swamy, Subramanian: “Consistency of Fisher’s Tests” Econometricam, July 1965. Kravis, Irving: “Comparative Studies of National Income and Prices”. Journal of Economic Literature, Vol. XXII, March 1984. Swamy, Subramanian: Economic Growthin China and India: A Comparative Appraisal 1952-70. University of Chicago Press, 1973. Kravis, Irving: “An Approximation of the Relative Real per Capital GDP of the Peoples Republic of China”. Journal of Comparative Economics 5(1), March 1981. Taylor, Jeffrey: “China’s Price Structure in International Perspective” (unpublished) March 5, 1986. Ahmad, Sultan: “International Comparison of Chinese Prices” (unpublished) 1983. Wharton Econometric Forecasting Associates quoted by Taylor, op. cit. In the Beijing Review (May 13, 1985), it is admitted that the foreign exchange certificate (FEC) given to foreigners has a nominal value of 1 Renminbi, but fetches 2 Renminbi in the “black” market. The internal settlement rate for public enterprises is 2.81Y to the $. Since January 1, 1985, this settlement rate has been abolished. As of January 1,1986, the dollar now officially exchanges for 3.1 yuan. Solow, R. “Aggregate Production Function and Productivity”

172

123.

124.

125.

126.

127. 128. 129. 130.

131. 132. 133. 134.

135. 136.

Economic Growth in China and India Review of Economic and Statistics, 1957. Samuelson P.A. and S. Swamy: “Invariant Economic Index Numbers and Canonical Duality” American Economic Reviews, September, 1974. During 1970-77 China signed contracts for 26 projects of nearly $4 billion, including several fertilizer, synthetic fibers, and petrochemical plants as well as a steel mill and coal mining equipment. Even more contracts were signed beginning in 1978, but some of these were subsequently cancelled in the period of readjustment. See “China’s Importation of Technology,” Almanac of China’s Economy 1981. During the period 1980-86, China utilized nearly $20 billion in foreign loans for modernization. Nishimizu, M. andJM. Page Jr. ‘Total Factor Productivity Growth, Technological Progress, Technical Efficient Change: Dimensions in Yugoslavia 1965-78”, Economic Journal, 19, 1982, p. 920-93? Tidrick, Gene: “Productivity Growth and Technological Change in Chinese Industry”, World Bank Staff Working Papers No. 761, 1986. Op. cit. Rao, P. K: “Intensive Agriculture and Irrigation Returns”, Unpublished, 1985. Personal communication. For details see: Swamy, S: “Structural Changes and the Distribution of Income by Size: The Case of India”, Review of Income and Wealth, June 1967, and also Jain, Shail: Size Distribution of Income, World Bank, 1975. National Council of Applied Economic Research (NCAER). Swamy, (1967) op. cit. Swamy, Ibid. Wiles, P. J. D, Markowski S: “Income Distribution under Communism and Capitalism: Some Facts”, Soyiet Studies, Vol. 22, 1970. Debroy, B: “Beteille on Inequality”, Artha Vijnana, India, Vol. 26, 1984. Swamy, S, op. cit.

Noies

173

137. Raw ski, Thomas G. Economic Growth and Employment in China, World Bank Publication. New York: Oxford University Press, 1979, p. 67. 138. Whyte, M.K.. “Inequality and Stratification in China”, China Quarterly, 1981.

139.

140.

141.

142. 143. 144. 145. 146. 147.

148. 149. 150.

151.

See also Parish, William, Egalitarianism in Chinese Society”, Problems of Communism, Jan-Feb 1981. The World Bank study concludes that in real terms this ratio rose during 1957-79 because urban per capita income rose at the rate of 2.9% per year compared to the rural growth rate of 1.6% per year. The World Bank study on China estimated the Gini coefficient in rural China at 0.31 in its 1982 study, but revaluated it at 0.26 in its 1985 study. For a critique see Vermeer, E. B: “Income Differentials in Rural China”, China Quarterly, No. 91, September, 1982. For a fuller survey of such critiques see Julie Yao: “Income Inequality in China”, Paper for Economics 910 course. Harvard University, 1986. Op. cit., p. 4. Shail Jain, op. cit. Swamy (1967), op. cit. Prybyia, Jan: “Economic Problems of Communism: A Case Shady of China”, Asian Survey, 1982. Beijing Review, April 26, 1982. World Bank: China: Long Term Development Issues Options, 1985, p. 18. Also Sun Peijun: “War on Poverty in China and India” 1986 (unpublished) Chinese Academy of Social Sciences, Beijing. World Bank, op. cit., and Sun, op. cit. Planning Commission: The Seventh Five Year Plan, New Delhi, p. 4. For India, op. cit, and for China: Sun Peijun: “Waron Poverty in China and India” Discussion Paper, Chinese Academy of Social Sciences, Beijing, 1986 pp. 1-3. Zhang Shaowen: “Combating Illiteracy in China” Beijing Review. February 16, 1987.

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