The emergence of China and India as major forces in the global economy is one of the most significant economic developments of the past quarter century. Their continued growth is likely to dominate the course of the world economy for the next several decades. Up to now, only a small fraction of the world’s population has enjoyed the fruits of economic well-being, with high-income industrial countries accounting for less than a fifth of the world’s population. However, China and India together comprise over a third of the world’s population; and since 1980, they have achieved remarkable rates of economic growth and poverty reduction.
The purpose of this paper is to examine sources of economic growth in the two countries and to compare and contrast their experiences over the past 25 years. In many respects, China and India seem similar. Both are geographically large countries with enormous populations that remain very poor. In 1980, roughly the beginning of our analysis, both had extremely low per capita incomes, although we note that there is some controversy in the literature about their relative income levels. Since then, GDP per capita has more than doubled in India and has increased a remarkable 7-fold in China. However, the details of their economic growth are in fact quite different. While initially both were largely autarkic countries, isolated from the global economy, China acted more quickly and aggressively to lower trade barriers, and attract foreign direct investment inflows. In addition, as discussed more fully in later sections, China has experienced explosive growth in its industrial sector, whereas India’s growth has been fueled by the expansion of service-producing industries.
In this paper, we investigate the patterns of economic growth for China and India by constructing a set of growth accounts for each that uncover the supply side sources of output change. In addition to aggregate output, the accounts are constructed for the three major economic sectors: primary (agriculture, forestry and fisheries), industry (manufacturing, mining, construction, and utilities), and services. This level of detail enables us to assess the magnitude of efficiency gains associated with the movement of workers out of agriculture, where they are frequently under-employed, into higher productivity jobs in industry and services.
Mao Zedong did not see the value of reform and opening up. The China part of Nixon’s 1967 Foreign Affairs article suggested an implicit bargain that provided the conceptual basis for China’s new direction after 1978. That bargain was if China focused on domestic development and didn’t threaten the security of its neighbours, the United States would help.