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China and India are leading the shift in the centre of economic gravity towards Asia, and the economic prospects of economies throughout the world have become increasingly dependent on sustained demand in the two Asian giants. Continued success cannot be taken for granted, though. We know from history that growth trajectories are not sustained on autopilot.
Indeed, both countries are aiming at adjusting their growth and development strategies to deal with problems that have emerged and major challenges ahead. Their 12th five-year plans (5YPs) reflect their visions and objectives. However, adjusting growth and development strategies is complex and difficult from both economic and political economy perspectives. Thus, there is a lot of uncertainty about the direction of policy and about whether and how China and India will adjust their pattern of growth.
This paper, written as part of the Fung Global Institute’s research project on the Evolving Growth Models in China and India, is a first step towards exploring the issues involved. It tentatively characterises the existing economic growth patterns and problems; summarises how governments want to adjust their growth strategies; introduces some key features of the policymaking process and some of the institutional and political economy problems; and sketches some tentative economic scenarios.
In Section 2 we tentatively characterise the existing economic growth pattern in both countries. Policy- wise, opening up and gradual market-oriented reform in China were combined with a strong role of the government in channelling resources to industry and investment. Indeed, growth has been particularly industry- and investment-oriented. This has served China well in important regards, allowing for sustained high growth without major macro stress. However, it has also led to important imbalances.
India has since the mid-1980s also embarked on market-oriented reform. India’s policies have typically not explicitly targeted at industrialisation and investment as much as in China and India’s growth pattern has been less industry- and export-oriented. India’s potential GDP growth rose over time because of higher investment and total factor productivity (TFP) growth. However, expectations and demand ran ahead of the supply side in recent years, leading to macroeconomic tension. Moreover, fiscal pressures have re-emerged. Meanwhile, in both countries, making growth more inclusive is a major challenge.
Section 3 discusses how both governments want to adjust their growth strategy to sustain growth and development and meet domestic and global challenges. The 12th 5YPs reflect those aims.
China wants to transform the pattern of growth towards consumption and services in order to reduce the imbalances. A second major objective is industrial upgrading and moving up the value chain. This calls for reforms to channel new resources to new sectors and support more full migration to the cities.
India’s highest profile objective is to raise economic growth. Other key goals are: faster overall development and urbanization, strengthening governance and developing infrastructure to support this growth, and making growth more inclusive. To keep rapid growth economically sustainable calls for having a strong supply side. Realistically, much of this will have to come from higher TFP growth. India lags China substantially on all key determinants of TFP growth as suggested by the cross country evidence. The paper indicates how all these determinants are affected by governance.
Section 4 tentatively brings up institutional and political economy issues. In both countries the key obstacles to implementing the 12th 5YPs are of an institutional and political economy nature.
This section identifies some features of China’s governance system that seem to have supported the consistency and comprehensiveness of policymaking and planning, and to have aligned the incentives of different parts of the government and individual officials in recent decades. However, it remains to be seen whether China’s policymaking process can successfully deal with a changed and wider set of policy objectives. The section discusses the limited success in recent years in changing the pattern of growth and raising the role of consumption, pointing to political economy reasons.
In India, political economy issues are major bottlenecks to more progress on the key objectives of the 12th 5YP. In the face of short term costs or costs to specific groups, it is hard in India to reach agreement among all stakeholders on projects or reforms, even those with clear overall benefits. However, there are some signs that progress has been made in this regard, especially in some states. This is notwithstanding the current macroeconomic challenges.
Section 5 presents some tentative scenarios. In China the key uncertainty is how rapidly China will re- balance its pattern of growth. The ability to reach the government’s growth targets is not much doubt and China should be able to grow at about 8 per cent per year on average until 2020. In India the key question is whether the key obstacles to raising potential growth can be overcome. Our base scenario has growth in India at around 7.4 per cent on average until 2020. To achieve the 12th 5YP target of 9 per cent without lifting dramatically the investment to GDP ratio requires higher TFP growth and thus more progress on governance.
The views expressed in this article are the author’s own and do not necessarily reflect Fung Global Institute’s editorial policy.