According to the International Monetary Fund (IMF) statistics and PwC projections to 2050 the share of China’s on the world GDP (PPPs) would increase from 18% to 20% by 2050 while India’s share of world GDP (PPPs) will increase from 7% to a projected 15% (Rachmat, 2019). On the other hand, the share of the world GDP for US and the EU27 will both drop; with the US dropping from 16% share of the global GDP (PPPs) to just 12% while the share of the EU27 will drop from 15% to 9%. The emerging markets will dominate the top 10 economies (in terms of GDP at PPPs) in the world by 2050. By 2050, it is projected that the two largest economies in the world will be China and India (Rachmat, 2019). The growth and decline of the Indian and Chinese economies have had massive influence on the economy of the world. The influence of the two economies can have positive connotations for instance in the last three decades, but the impact can also be negative as was witnessed in the previous centuries. China and India can take over the role of being the main engines of global economic growth.
The rise of China and India has attracted a massive amount of interest amongst researchers for instance Basu (2008) and Pritchett (2009) who have explored the role of China and India in the global economy. The two countries have a number of common elements such as large population bases with each having over 1 billion people and the geographical locations of the two countries; both India and China are located in the same continent (Holscher, Marelli & Signorelli, 2010). Further, both China and India have long and rich histories and were both considers world economy leaders up until the 19th century. Further, India and China have similarities in their developments in terms of the economies. However, there are some differences in the current economic takeoff of the two countries in terms of intensity and timing of the economic growth. The differences can be linked to the differences that exist in the political systems of the two countries. However, the paper only focuses on the economic development without considering the underlying impacts of the political systems thus the consideration of the political systems is beyond the scope of the research. The paper considers the economic growth in India and China over the last 3 decades; focusing primarily on the integration of the economies into the global economy.
The recent economic growth and the long-run decline
India and China’s economic decline as well as the growth has been investigated through the use of comparative perspectives and time periods (Maddison, 2007; Borworth & Collins, 2008). The historical view of the two economies indicate that in the long-run the economies of China and India accounted for nearly one-half of the world output from the year 1000 to 1820. The share of the world output for the two countries declined to slightly less than 30 percent by 1870 and to less than 10 percent between 1950 and 1973 (Holscher, Marelli & Signorelli, 2010). The dramatic decline of the relative growth of India and China followed a long period of relative economic growth in Western Europe. The economic growth of the output in Western Europe saw a rise form 9 percent in the year 1000, to 18% in 1500, 22 percent in 1700, 23 percent in 1820 and 33 percent in 1870. The period of growth was followed by relative declined to 26 percent by 1973 (Holscher, Marelli & Signorelli, 2010). The decline of the relative growth of China and India also coincided with increase in the relative growth of the United States from 2 percent in 1820 to 27 percent in 1973 (Holscher et al., 2010). The relative growth of the two economies had led to significantly reduction in the prices of products especially electronics due to lower costs of production.
The high economic growth of the Chinese economy in the last three decades and the slightly lower increase in the economic growth of India has led to a significant increase in the weight of the two countries in the global output. The output grew from slightly lower than 10 percent to more than 20 percent. Since the 1980’s the economic growth of China and India in terms of gross domestic product (GDP) annual rates have been approximately 10 percent and 6 percent respectively. On the other hand, the economic growth of the US, the EU, and Japan have slowed down. The GDP weight of China and India are higher than that of Western Europe, and the US for the first time in many decades. Further, with regards to the global financial crisis that led to the recent recession, India and China only experienced decelerated rates of positive growth as compared to the negative rates of economic growth experienced by some economies. According to Srinivasan (2006), India and Japan had great growth potentials which can explain the limited impacts the global recession had on the economies of the two countries (Holscher et al., 2010). The impact is thus a significant reduction in the global impacts of recessions.
Reforms, institutional changes and economic system transformation
The economic growth of India and China are primarily as a result of institutional change. Both countries experienced significant but gradual changes in the economic systems of the countries (Srinivasan, 2004). The economic systems transformation of China and India followed gradualism rather that the great transformation of Eastern Europe following the collapse of the Berlin wall in the late 1980s. China transition from the planned economy rife with inefficiencies started in 1978 and has been undertaken in 5 major phases. The first phase began with the agricultural sector reform where collective firm was introduced. The collective firm allows for the direct distribution of revenues of production to the households if the revenues exceeded the planned level. The reform led to a significant increase in the agricultural productivity. The second phase entailed reforms in the industrial sector for instance liberalization of ages and process, and permission that allowed companies to retain their profits. The growth in wages and productivity in the sector led to significant reduction in the unemployment levels thus contributing to the increase in the economic productivity of the country. The second phase also entailed the open door policy approach which allows for integration of the country into the economy of the world through foreign direct investments (FDI) and trade. China developed special economic areas that acted as a fiscal incentive for foreign firms to invest in the country. In the latter three phases, China has reformed all sectors to include private ownership of property, transitioned to a market economy and opened up the economy by joining the WTO (Holscher et al., 2010). The countries have thus contributed to the development of free trade between nations.
The increased economic growth of China can thus be attributed to openness in trade for instance liberalization of exports. The export led economic growth model supported by the undervalued yen and the huge inflows of FDI attracted lower labor costs. This has had a spill-over impacts by contributing to the transformation of China as a productive specialization model (Holscher et al., 2010). Therefore, many countries can outsource their production to China and thus contributing to the global economy in terms of lower costs of production.
The transition of India is different from that of China in many areas. India’s global economy integration came much later due to the delay in the reform policies and institutional changes. Reforms in India include partial import liberalization in 1976, privatizations in the 1980s and the gradually accelerated reforms such as special economic zones and fiscal systems reforms after 1992. The weaknesses and rigidities that persisted have led to lower intensity of India’s economy integration into the world economy (Holscher et al., 2010).
Per-Capita GDP growth
The main explanation for the growth in GDP per capita is sectorial allocation of factors of production such as capital and labor from sectors of low productivity to the sectors that have high productivity. The unstable and complex relationship thus exists between the structural change and the openness degree. The sectorial reallocation in India and China led to the economic development and the rise of the nations as leaders in the global economy. The resources were reallocated from agriculture to services and industry (Holscher et al., 2010). Efficiency was also increased through an increase in the privatization of the public sector.
- Quote paper
- David Onditi (Author), 2019, China and India Within Global Economy. A Short Analysis, Munich, GRIN Verlag, https://www.grin.com/document/471297