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Growth, industrialisation and inequality in China and India. Jayati Ghosh. Asian century?. Driven by perceptions of growth prospects of China and India in particular.
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Growth, industrialisationand inequality in China and India Jayati Ghosh
Asian century? • Driven by perceptions of growth prospects of China and India in particular. • Both China and India have large populations covering substantial and diverse geographical areas, large economies with even larger potential size. • Current “success stories” of globalisation: two economies that have apparently benefited. • Success defined by the high and sustained rates of growth of aggregate and per capita national income; the absence of major financial crises; and substantial reduction in income poverty.
Not similar economies:Institutional conditions • India was a “mixed economy” with large private sector, so essentially capitalist market economy with the associated tendency to involuntary unemployment. • China was mostly a command economy, which until recently had a very small private sector; there is still substantial state control over macroeconomic processes in forms that have differed from more conventional capitalist macroeconomic policy.
Rates of GDP growth and investment • The Chinese economy has grown at an average annual rate of between 9 and 10 per cent for three decades, showing volatility around high trend. • India’s economy broke from “Hindu” rate of 3 per cent in the 1980s, to annual rates of 5-6 per cent, until recently average growth rate was 8-9 per cent. • The investment rate in China fluctuated between 35 - 45 per cent over the past 25 years, compared to 24 - 34 per cent in India. • Aggregate ICORs (incremental capital-output ratios) have been around the same in both economies. • Infrastructure investment from the early 1990s has been just under 20 per cent of GDP in China, compared to 2 per cent in India.
Structural change over four decades • China: “classic” pattern, moving from primary to manufacturing sector, which has doubled its share of workforce and tripled its share of output. • India: Move has been mainly from agriculture to services in share of output, with no substantial increase in manufacturing, and the structure of employment has not changed much. Share of the primary sector in GDP fell from 60 per cent to 25 per cent in four decades, but share in employment still more than 60 per cent.
Occupational distribution • Changes in output shares have not been accompanied by commensurate changes in the distribution of the workforce. • The proportion of all workers engaged in primary activities as the main occupation has remained stubbornly around 60 per cent, despite fall in the primary sector’s share of national income.
Chinese characteristics • After 1978, decollectivization, price increases, and the relaxation of local trade restrictions on most agricultural products • Spurred the takeoff of China's agricultural economy from 1978 to 1984. Grain production increased by 4.7 percent per year, and fruit, red meat, and fish production grew by 7.2 percent, 9.1 percent, and 7.9 percent respectively. • Agricultural growth decelerated after 1985, but the country still enjoyed agricultural growth rates that outpaced the rise in population. • Agriculture contributed more than 30 percent of GDP before 1980, it fell to 16 percent in 2000, and its share of employment fell from 81 percent in 1970 to 59 percent in 2000. • The share of primary products, especially those from agriculture, in total exports was over 50 percent in 1980, it fell to only 10 percent in 2000. Over the same period, the share of food in total exports fell from 17 percent to 5 percent.
Trade patterns • China: Rapid export growth involving aggressive increases on world market shares, based on relocative capital attracted by cheap labour and heavily subsidised infrastructure. This in turn required suppression of domestic consumption. • India: Lower rate of export growth, with cheap labour due to low absolute wages rather than public provision and poor infrastructure development. So exports have not yet become engine of growth, except in modern services.
India: Not a mercantilist success • India has not run trade surpluses, and even current account has mostly been in deficit. • Recent export growth part dominated by Chinese market, part of broader Asian production hub. • Services growing share of Indian economy, but “new services” other than finance and real estate still small (5 per cent of GDP and less than 1 per cent of total employment). • Basic development project far from complete.
Only China truly mercantilist • 2008: China recorded a trade surplus of $361 billion and a current account surplus of $390 billion. • India recorded a merchandise trade deficit of $92.4 billion. Even if the net surplus from services export is taken into account the deficit stands at $76.4 billion. • Net exports has been a trigger for growth for China, but not so for India.
Is China different? • Similar to the first-tier East Asian industrialisers? • The Chinese economy’s export dependence, as measured by the total value of exports as a percentage of GDP, rose from 21 percent in 1991 to 40 percent in 2006, while the average of Japan, Taiwan, and Korea never exceeded 20 percent. • Chinese private consumption as a percentage of GDP has dropped from 50 percent in 1991 to 38 percent in 2006, while the figures for Japan and Four Dragons always have stayed above 50 percent since takeoff.
US market dependence • The US constitutes the single most important market for China’s exports, only surpassed by EU as a whole recently. • China is the biggest exporter to the US among all Asian exporters. In 2005, China’s total export value to the US reached 163 trillion, in comparison to 136 for Japan and 141 trillion for all Four Tigers combined.
Sino-centric export model • China has emerged as the most important destination of other Asian exporters. • Japan’s export to China as percentage of total export increased from 7.1 in 1985 to 13.5 in 2005 (with a concomitant drop of export to US from 37.6 to 22.9). Both South Korea’s and Taiwan’s export to China rose from zero in 1985 (under Cold War) to 22 in 2005 (with a simultaneous drop of exports to the US from 36 to 15 for Korea and from 18 to 15 for Taiwan)
Can China emerge as an alternative growth pole for developing Asia ?
So what explains Indian GDP growth success? • Boom dependent upon greater global integration, with both trade and financial liberalisation playing roles. • Financial deregulation encouraged capital inflows, sparked a retail credit boom and combined with fiscal concessions to spur consumption among the rich/middles classes especially in urban areas, leading to rapid increases in aggregate GDP growth. • Constrained fiscal policies, poor employment generation and persistent agrarian crisis reduced wage shares in national income and kept mass consumption demand low. • Rise in profit shares and middle class demand generated higher rates of investment and output over the upswing. • Public spending as principal stimulus for growth was substituted in the 1990s with debt-financed housing investment and private consumption of the elite and burgeoning middle classes. • So this Indian growth story is not so different from the speculative bubble-led expansion of several other developed and developing countries in the same period.
The Chinese case • Elasticity of employment with respect to GDP over 1995-2008 was 0.03. So a 1 percent increase in GDP was associated with a .03 percent increase in employment. This includes agriculture where employment is declining. • In secondary (manufacturing and construction) and tertiary sectors, output elasticity of employment was 0.13 for both, also very low.
Unorganised and migrant workers in China • These data leave out the increasing proportion of unorganised workers, most particularly the rural migrants. Many of them are self-employed. • Rural-urban migrants currently estimated to be around 150 million (half the urban work force). • Recent CASS survey shows that in 2005 a majority of migrant workers were in informal activities and typically faced long hours of work for all days of the week, for less than minimum wages and with poor residential conditions.
Poverty reduction • China: Officially 4 per cent of the population now lives under the poverty line, unofficially around 12 per cent. (Reflects earlier asset redistribution and basic needs provision in China under communism, plus larger mass market and recent role of agricultural prices.) • India: Official poverty ratio much higher and persistent, currently 28 per cent. Food deprivation is much higher.
Poverty reduction in India depends upon • a relatively egalitarian path of growth • increases in agricultural productivity that help raise wages and keep food prices under control • expansion of non-agricultural employment, including in rural areas • direct public action in the form of poverty eradication programmes aimed at generating productive employment for the poor.
Poverty and inequality in China • While Chinese growth has been consistently high across time, poverty reduction has been concentrated in particular periods. • The reduction was concentrated in two relatively brief periods between 1979 and 1999: (1) the first five years of the reform period – i.e., 1979-1984, and (2) the middle three years of the 1990s. Both were period of rising farm incomes. • So poverty reduction in China has not depended on GDP growth but on a fall in rural-urban and income group-wise inequality., • Growth is increasingly associated with and predicated on inequality, making it harder for China to deliver the kind of poverty reduction it did manage to sustain in the early 1980s and mid-1990s.
Human development • China: earlier extensive public provision of health and education: universal education until Class X, and public services to ensure nutrition, health and sanitation. (In the 1990s, higher fees and some privatisation of such services led to reduced access and worsening indicators; since 2002 revival of public spending in these areas.) • India: the public provision of all of these has been extremely inadequate throughout this period and has deteriorated in per capita terms since the early 1990s. Since 2004, slight increase in education spending but still well below China; government health spending still very low.
Inequalities • In both economies the recent pattern of growth has been inequalising. • China: spatial inequalities – across regions – have been the sharpest. More recently, vertical inequalities have grown, especially in urban areas and for migrant population vis-à-vis others. • India: vertical inequalities and the rural-urban divide have become much more marked.
Most important problems are currently the same • Limits to current growth model in terms of both external and internal viability: • China: high export-high accumulation model which requires constantly increasing shares of world markets and very high investment rates. Already signs of reduced unit values of exports and stagnation/decline of manufacturing employment. • India: IT-enabled services experiencing current boom, but competitive threat from other countries. Also this not enough to transform India’s huge labour force into higher productivity activities. • Agrarian crisis • Inadequate generation of employment in terms of “decent work” • Public neglect of social sectors • Growing inequalities.
Problems with recent boom • Countries competed to send cheaper goods to Northern markets. • The financial bubble in the US attracted savings from across the world, including from the poorest developing countries, so that the South transferred net financial resources to the North even when they received large capital inflows. • A net transfer of jobs from North to South did not take place, as technological change in manufacturing and new services meant that fewer workers could generate more output. • Livelihood crises in the South generated short term movements of labour migration that also subsidised production and accumulation in the North.
Global output recovery already over • Basic problems in financial sector are still not addressed (and now real estate, sovereign debt issues) and increased risky behaviour because of moral hazard of bailouts. • Policy response has been to encourage renewed bubbles based on earlier growth model. • US cannot be engine of global growth in the immediate future. • Weak employment recovery so sources of new demand constrained. • Severe procyclical policies are still being imposed on BOP constrained economies by IMF and other international agencies.
New commodity price surge • From mid 2008 commodity prices started falling as index investors started to withdraw. • Another bubble now: Most important commodity prices have been rising again. • FAO food price index now above previous peak. • But global demand and supply for most commodities remains broadly in balance; for some, both output and stock holding have increased. • However, longer term supply issues are important for food and other agricultural commodities because of policy neglect and persistent agrarian crisis.
New forms of primitive accumulation drove Indian boom • Nature: Expropriation of peasantry from land, privatisation of water and other natural resources, over-extraction and degradation. • Petty production: Simultaneous destruction of viability (of peasant cultivation) and creation of new petty producers because of lack of employment generation. • Use of informal labour: Especially women, and in unpaid and “underpaid” forms, which has subsidised “modern” industry and services. • Use of social categories (gender, caste, religion) to reinforce surplus extraction in accumulation process. • Failure of “human development” is an indicator of this continued reliance on inequality for accumulation.
This creates challenge and new opportunities for progressive alternatives • Process can continue for some time as region remains favoured destination for mobile global capital • But limits to this growth process are increasingly being felt: in finance (bubble will burst eventually), in internal imbalance (agrarian crisis and rising food prices), external imbalance (BOP problems), in ecology, in employment and livelihood and associated social tensions. • New rights-based demands (employment guarantee, food guarantee, education guarantee) generate need of system to respond, in however limited a form. • New awareness among Left of need to mobilise among different categories of workers and others.
Need for financial regulation • “Savings glut” not because of inadequate financial development: countries with large savings surpluses (such as Malaysia, Indonesia and South Korea) have very deregulated and globally integrated financial systems. • Insufficient financial widening and lack of inclusion of small and medium firms, producers, cultivators and informal sector producers is still a major constraint. • Capital management techniques are required to control destabilising flows of cross-border capital • Crucial interaction between food prices and deregulated finance needs to be recognised and dealt with. • No country has developed without directed credit.
Asia needs a new development strategy • Mercantilist obsession with increasing net exports must be revised. • Greater emphasis on more trade within the Asian region and South-South trade. • Need to shift to wage-led and employment-led growth domestically. • This is important because the global crisis is not over, it is still unfolding; and the causes of the crisis have still not been dealt with globally.
Elements of alternative strategy • Generation of good quality productive employment is the most critical variable. • Need growth strategy that allows and encourages labour productivity increases overall while significantly expanding expenditure – and therefore income and employment opportunities – in social sectors. • Major role for state intervention, through direct public investment and through fiscal, monetary and market-based measures that alter the structure of incentives for private agents.
