Tiger Economies: China and India

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Abstract

This paper entails an analysis of two ‘Tiger Economies’; China and India. A brief explanation of why the two economies are regarded as ‘Tiger Economies’ in addition to their history is given in the introduction. The researcher compares the two Asian economies by considering a number of elements. Firstly, an analysis of the two economies on the basis of their economic growth and the model adopted is outlined.

In this part, the researcher shows why the rate of economic growth for the two countries differs. The difference in their economic growth is associated with the divergent economic model adopted. For example, China adopted a fast track growth model while India adopted a gradual growth model.

In the second part, the author compares the two economies on the basis of their foreign trade balances which the author shows that they differ. The reason for the difference in their trade balance is associated with the economic sector that each country emphasizes on in its global trade. For example, China emphasizes on the manufacturing sector while India concentrated on the agricultural and services sectors.

The resultant effect is that the two countries competitive in the global market differ. The difference of the two economies with regard to their exchange rate regime is evaluated in part three.

In part four, the author evaluates the two countries investment efficiency whereby China emerges to be the most efficient with regard to investment compared to India. Their respective per capita consumption is illustrated in part five. An analysis of the two countries economic prospects and challenges is evaluated in part six. In the last part, a conclusion of the entire paper is outlined.

Introduction

Over the past two decades, the world economy has undergone significant transformation arising from high rates of economic growth. One of the factors that have stimulated the growth relates to globalization, which has led to increased industrialization in various economies. One of the regions experiencing this growth is Asia. For a long period, China and India had insulated themselves from the global economy (Srinivansan, n.d, p.3).

In an effort to stimulate economic growth, both China and India undertook a number of reforms in their governance. For example, China reformed its closed market economy system in 1978 (Bell, Khor & Kochhar, 1993, p.2). On the other hand, India abolished its stringent market regulations (Mattoo & Stern, 2003, p.23).

During this period, India had a relatively large private sector; however, the market was inefficient due to the stringent government control. This limited the country’s growth. Additionally, both India and China were regarded as impoverished economies until 1980(Das, 2005, p.94).The economic policies which they adopted led to a great transformation.

The two countries economic growth as emerging economies in Asia was also motivated by different factors. Some of these factors relate to political, social and cultural elements. Currently, China and India’s economic growth has made them to be regarded as the new tigers of Asia (Ahya & Xie, 2004, p.2).

The topic, ‘The Tiger Economies; China and India’ therefore falls under the generally accepted body of knowledge that deals with basic facts and fundamental principles. This paper compares China and India as emerging economies.

According to Marshall Cavendish Corporation (2005, p.4), the phrase ‘tiger economy’ is used to refer to a country’s economy on the basis of its strength and vigor.

China’s economic growth can be compared to that experienced by the United States during the 20^th century and Germany in the 19^th century (Gopalan, 2001, p.5). Despite attaining independence in 1947, India’s economic growth during the post-independence period was relative low.

One of the reasons that explain the slow economic growth rate of the two countries during the 1950s is their over-dependence on agriculture. The resultant effect is that their competitiveness in the global market was limited (Madhukar & Nagarjuna, 2011, p.3).

However, this trend in their economic growth was reversed during the 1990s due to increased globalization and trade liberalization. For example, the Chinese national enterprises were given more autonomy in their operation. In addition, the government also abolished collectivized agriculture (Fan & Xiaobo, 2002).

In terms of population size, China and India are the most populous countries in the world. In 2008, China’s population was 1.3 billion while that of India was 1.14 billion (Indiaonlinepages.com, n.d, para. 1-3). Their combined economy account for 18 per cent of the total global economy measured in terms of the Purchasing Power Parity (PPP) (Ahya & Xie, 2004, p.2).

Economic Growth and Growth Model Adopted

According to Tucker (2011, p.4), there are different indicators that can be used to determine a country’s rate of economic growth. Some of these include per capita GDP (Gross Domestic Product) and debt reduction. Per capita GDP is an index that is used to measure a country’s standards of living (Tucker, 2011, p.6).

Tucker (2011) further asserts that countries that have a slow growth in their GDP per capita experience a challenge in providing their citizens with basic needs such as health facilities, shelter, education, food, and clothing.

Over the past decade, India and China have undergone a significant GDP growth (Cox & Alm, 2008, p.6). However, China’s GDP growth is relatively high compared to that of India. Ahya and Xie (2004, p.4) have the opinion that India will take more than a decade to reach China’s per capita GDP.

They predict this period to be 10 years if India is to increase its growth in real GDP to 8%; however, if the rate of growth is maintained at its current rate of 6%, then it will take India 10 years (Ahya & Xie, 2004, p.5). It is also estimated that India and China will increase their nominal GDP to $ 1.3 trillion and $3.9 trillion by 2015 if their standard growth rate for the past decade is maintained (Ahya & Xie, 2004, p.6).

China has mainly focused on the manufacturing sector, as the core economic sector will contribute towards the attainment of its desired GDP growth (Chow, 1993). This has led to a significant growth in the country’s manufacturing sector. From 1980, China’s manufacturing sector has experienced an increment of 11.5% annually (Chow, 2002).

On the other hand, the service sector is the core economic driver for India’s economic growth. In 2004, India’s service sector had grown with a margin of 7. 6% annually for the past 13 years compared to its manufacturing sector that grew with a margin of 5.7% (Ahya & Xie, 2004, p.5). On the other hand, China’s manufacturing sector grew with a margin of 12.8% compared to a growth of 8.8% in its services sector (Ahya & Xie, 2004, p.5).

China adopted a fast-track growth model while India adopted unique gradualism model. Within a period of 25 years after implementation of the reforms, China’s economy has experienced an average growth rate of 9.4% annually compared to the 5.2% prior to the reforms (International Monetary Fund, 2006, p.3).

China has also implemented major structural reforms aimed at improving its labor market. For example, the government has adopted aggressive labor reforms. Additionally, China made it compulsory for all youths to attend school for a period of nine years (Ahya & Xie, 2004, p.6).

The country has also been successful in increasing its capital accumulation by eliminating entry barriers (International Monetary Fund, 2011, p.15). The government used the accumulated capital to improve the country’s infrastructure network.

This has played a critical role promoting Foreign Direct Investment. In 2002, China earned $52.7 billion from FDI while India earned $ 2.3 billion (Gopalan, 2001). One of the factors that enhanced FDI within in China relates to availability of human capital and a sizeable ready market.

In an effort to enhance its economic growth through implementation of different reforms, India decided to adopt a consensual approach. The approach entailed integration of different institutional frameworks such as adoption of a democratic political system and the rule of law. Over the past two decades, India has continuously implemented internal and external reforms.

Some of these reforms involve reduction of restrictions with regard to foreign capital investments and reduction of tax rates. Despite its effort, India’s average GDP growth has been relatively constant at 5.8% from 1992 to 2003 (Ahya & Xie, 2004, p.6). The economic reforms implemented by India have not been successful in accelerating GDP growth compared to those of China (Kwan, 2006).

Comparison of China and India with Regards to Global Exports

Over the past two decades, China and India have experienced an increment in the volume of their exports; however, China’s exports are relatively higher compared to those of India. One of the reasons that explain this differential arises from the fact that China has increasingly adopted the concept of economic integration.

This has improved its ranking in the global economy at a faster pace compared to India. In the global market, China accounts for 5.2% of the total global exports while India accounts for only 0.9 % (Ahya & Xie, 2004, p.5). In addition to economic integration, the increase in its global exports also arises from adoption of open market economy and implementation of structural reforms.

During the first twelve years (1991-2004) after implementation of the economic reforms, China’s exports expanded with a CAGR of 16.3% (Ahya & Xie, 2004, p.6). On the other hand, India’s exports increased with a CAGR of 9.9%. The difference in the volume of export between the two countries arose from the rate at which reforms were implemented and the divergent growth models adopted (Ahya & Xie, 2004, p.5).

Despite their overall involvement in global trade, China and India’s exports differ with economic sectors. Most of India’s exports are those that originate from low capital intensive and high labor intensive economic sectors. India’s exports mainly include agricultural products, engineering products and commercial services. On the other hand, China’s exports are mainly capital and labor intensive.

The countries core exports include machinery and equipments, garments, services, electronics, telecommunication equipments and computers (Ahya & Xie, 2004, p.7), According to Ahya and Xie (2004, p.7), China is more competitive in the global market compared to India; India only leads in exportation of software and steel.

The two countries have established trade with each other; however, India’s main trade partners include the United States, the United Kingdom, Belgium, Japan, Saudi Arabia and Germany (Unidas, 2006, p.84).

Foreign Trade Balance

The two countries also differ with regards to their foreign trade balances. India has a negative foreign trade balance while that of China is positive (Kowalski, 2008, p. 6).

In August 2011, China’s foreign trade balance was approximately $ 17.75 billion as illustrated in chart 1(Trading Economics, 2011, para. 1). On the other hand, India’s foreign trade balance during the same period was $ -14,041 million as illustrated by chart 2(Trading Economics, 2011, para. 1).

Chart 1:

China balance of trade.

Chart 2:

India balance of trade.

Its trade with the European Union, Japan and the United States has made China to have a positive trade balance. Additionally, another factor that has led to emergence of this difference relates to the divergent demographical and historical developments between the two countries. For example, India has a high population growth compared to China.

Additionally, the two countries exports differ with regard to value addition. China’s exports have a relatively higher value added compared to India’s exports which makes them to be competitive in the global export market (Srneck, Svobodova & Divisova, 2008, p. 36).

Exchange Rate Regimes

The difference in the two countries economic growth has also been stimulated by the exchange rate regimes that they have adopted. During the 1990s, China had adopted a fixed exchange rate regime whereby one US dollar was being exchanged for 8.28 Chinese Yuan (Srneck, Svobodova & Divisova, 2008, p. 36).

However; the dynamic nature of the global market during the 21^st century has forced China to relax its exchange rate regime. In 2007, there was a slight improvement in the country’s exchange rate whereby 7.49 Chinese Yuan were being exchanged for 1 US dollar (Srneck, Svobodova & Divisova, 2008, p. 36).

Over the past few years, China’s currency has strengthened relative to the dollar. During 2011, 1 Chinese Yuan is being exchanged for approximately USD 6.52 (Srneck, Svobodova & Divisova, 2008, p. 36).One of the factors that have led to China’s competitiveness with regards to exchange rate is its control of the financial market.

For example, China has continuously maintained its interest rates very low. On the other hand, India has adopted a flexible exchange rate regime. The resultant effect is that the Indian currency is highly exposed to liquidity risks.

Investment Efficiency

India and China have effectively utilized their GDP in stimulating economic growth. One of the economic sectors that the two countries have emphasized investing in relates to fixed investment. For example, during the period ranging between 2003 and 2008, China and India invested approximately 3.7% of their GDP in fixed investments (Ross, 2010, para. 3).

The objective of the investment was to stimulate their economy to a growth with a margin of 1% (Ross, 2010, para. 3). According to Dekle and Guillaume (2006, p.6), China and India have not experienced severe macro-economic discrepancies over the past five years. Therefore, one can conclude that the 3.7% of GDP allocated to fixed investment is similar to maintaining a sustainable macro-economic stability (Kuijs & Tao, 2005, p.12).

Considering the size of the two economies, China’s investment in fixed assets is relatively high compared to that of India. According to Gopalan (2001), China’s investment in fixed assets is more than that of India with a margin of 15%. This explains why the two countries differ with regards to their aggregate performance.

Since the implementation of the economic reforms, India and China have significantly reduced the proportion of GDP required to be invested in fixed assets. By the end of the 1970s, the United States, India and China were required to invest 6% of their Gross Domestic Product in order to stimulate a 1% growth in their GDP; however, over the past three decades, India and China have improved their investment efficiency (Ross, 2010, para. 5).

This is well illustrated in the chart below, which shows that the GDP allocated to fixed investment has reduced from 6% to 3.7% in 2005(Ross, 2010, para. 6).

Fixed investment and GDP growth.

Per Capita Consumption

China’s per capita consumption is higher compared to that of India. It is estimated that China’s private consumption has increased with a margin of 7.4% since 1990(Ahya & Xie, 2004, p.15). On the other hand, India’s private consumption has only increased with a margin of 3.4% (Ahya & Xie, 2004, p.15). One of the factors that have stimulated this increment is the high rate at which products penetrate the Chinese market.

It is estimated that market penetration of different products and services in the Chinese market is more than 2 times their penetration in the Indian market (Ahya & Xie, 2004, p.15). The reason why India is experiencing a low private consumption is that Indians are biased with regards to consumption of certain products such as tobacco, beverages and other food products.

Chinese consume 62% of their disposable income on food, tobacco and beverage compared to 48% by Indians (Ahya & Xie, 2004, p.15). The high rate of private consumption in China has enhanced the country’s growth in GDP. This arises from the fact that personal consumption is a core component in a country’s GDP.

Economic Prospects and Challenges

There is a high probability of China continuing with its growth trend in the future. This arises from the fact that currently, there is no other country that can challenge China in its manufacturing prowess. Similarly, India’s economic future is also very bright. This is due to the fact that the country has managed to attain a substantial market position with regards to outsourcing of services in different economic sectors.

However, in order to enhance their economic growth, it is critical for both countries to enhance their competitiveness in sectors that they have not emphasized. For example, India should consider improving the strength of its manufacturing sector.

Similarly, China should shift its focus to the services sector. Considering the two country’s population growth and their effort towards improving their education sector, there is a high probability that the two countries will have a strong human capital (Knight & Li, 1996, p.5).

China faces a challenge in its effort to improve its economic growth through implementation of critical reforms such as those aimed at changing institutional frameworks; for example, the financial sector. One of the factors that may lead to this is that China’s political stability is relatively low compared to other developed economies.

Despite its economic growth over the past two decades, the poverty level in India is relatively high. This has led to the country experiencing numerous civil unrests. The resultant effect is that the country’s industrial and services sectors are negatively affected thus slowing down the country’s economic growth.

Conclusion

The paper has illustrated the similarities and differences between India and China. This has been achieved by considering the various demographic and economic characteristics. Over the past two decades, China and India have undergone significant transformation. For example, the two countries have experienced a significant increment in their population size in addition to a rampant economic growth.

The two countries economic growth has made them to be regarded as ‘Tiger Economies’. The two countries growth has resulted from the effectiveness with which they have implemented economic and structural reforms. Some of these reforms relate to opening up their economies and relaxing their market control.

However, China’s economic growth outpaces that of India in different aspects. For example, the core economic sectors that contribute to the two country’s global exports differ. In addition, the size of China’s global exports is relatively high compared to that of India. The two countries have also adopted different exchange rate regimes.

China has adopted a fixed exchange rate regime while India has incorporated a flexible exchange rate regime. This has greatly affected the stability of their currency. Their investment effectiveness also differs. The analysis of the two countries has shown that China is more effective in its investment with regard to infrastructure compared to India.

Their private consumption also differs. Despite this, the two countries experience challenges such as political instability in China and high poverty level in India. However, despite this, their future economic prospect is very bright.

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