The Future Economic Situation of China and India. A Comparison

Bachelor Thesis, 2020

56 Pages, Grade: 1,8


Table of Content

Table of Content

List of abbreviations

1. Introduction
1.1 Problem Discussion
1.2 The aim of this work
1.3 Research question
1.4 Hypotheses

2. Methodology

3. Theoretical background

4. India economics
4.1 India's economic development in the colonial era
4.2 The independence of India after the colonial period
4.3 India's reforms
4.4 India Economic growth

5. Chinas economics
5.1 Country information
5.2 Political system
5.3Histroical reforms
5.4 China's economic growth

6. Comparison of Chinas and India economic (Analyse)

7. Future expectation

8. Conclusion


List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1 Problem Discussion

In the news, China is always in the headlines. The trade conflict with the USA and Donald Trump is often discussed. In our everyday life we meet products made in China every day. Thus, China's trade has made it in our lives from smartphones to almost all electrical appliances. Until recently, India and China stood for poverty and backwardness. Among the leading economically strong countries in Asia were Japan, then Hong Kong, Singapore, Taiwan and South Korea. Within a very short time, this has changed radically: For just 20 years China and 10 years India have both been among the world's high growth regions and investment magnets. If we look at the current situation in the world, China is one of the most advanced countries. China is one of the leading countries when it comes to exports and is also technologically ahead of many countries. On the other hand, India is a country that is just starting to grow economically.

India is seen as one of the BRIC countries along with Brazil, Russia, and China as a new economic power to help the world economy out of the crisis.1 2 Due to the current outbreak of the coronavirus, China is experiencing many negative effects. Not only because of the number of ill and dead people in China, but also on an economic level. This leads to the collapse of the economy in China.

To what extent will Chinese trade with the world be affected and can Chinas economy recover before that or will India overtake China economically and become wealthier?

1.2 The aim of this work

The aim of this thesis is to compare the India future economic situation with chinas future economic situation. In order to get an outlook for China and India, the past and the changes now must be considered. In order to obtain a result, the theories of international trade, comparative advantage, foreign direct investment and Rise and Decline of Nations by Mancur Olson are considered.

1.3 Research question

This work deals with the following research questions. To what extent has the gross domestic product of China and India developed in recent years? What progress is happening in the labour market of both countries? What is the investment rate in these countries? What economic opportunities and deficits do India and China have?

1.4 Hypotheses

The current economic situation in China is leading to a negative effect on world trade, from which India and China can profit. India has many untapped resources that will enable the country to profit economically in the future. If India makes use of the potential labour force in the market, India's economy can grow more strongly. China could take advantage of the currently weak global economy to grow more strongly.

1.5 State of research

The publication International Economics by Krugman, Paul R. and Maurice Obstfeld is one of the basic literatures on this topic. In this Krugman deals with unemployment and inflation and exchange rates. How can countries best work together and what economic goals can be achieved. Primarily the theory of Mancur Olson is treated from the publication of Rise and Decline of Nations. It analyses the extent to which a nation can rise or fall economically.

2. Methodology

In the qualitative and quantitative methodology, the aim is to reduce data. Quantitative methodology explains phenomena by applying mathematical and statistical models, it includes closed surveys and uses response scales. Qualitative methodology involves finding suitable measurement methods, such as observations and/or interviews. The combination of qualitative and quantitative methods represents a complementary set of instruments, especially in empirical social research, depending on the research question.3 Qualitative research enables the researcher to go into depth and illuminate complex issues from different perspectives.4 The qualitative method helps us to interpret economic results in order to make a forecast for the future. A disadvantage of qualitative research is that the researcher has to analyse a large database in the form of interview protocols or documents.5 Bryman and Bell state that there are two basic approaches to the production of scientific statements: Deduction and induction.6 A deductive approach begins with testing whether the established theory applies to certain cases. In contrast, an inductive approach contains statements on experiments or observations that are referred to general hypotheses and theories.

The research methods are divided into two main types: quantitative and qualitative research. Also, both research methods deal with research questions that must be answered at the end. On the contrary to quantitative research, "qualitative research is more concerned with words than with numbers [...]"7. Bryman and Bell call the researcher the "main instrument of data collection", who decides what he/she will concentrate on in research. In this work, a qualitative research approach is chosen to answer the research questions.

3. Theoretical background

Introduction economy

Theoretical knowledge forms the basis of economic decisions. Macroeconomics, the science of macroeconomic processes, attempts to answer these and many related questions. All economists agree that political interventions and many other events influence the economy over different time spans. This leads us to our first research question.

Research Question 1: To what extent has the gross domestic product of China and India developed in recent years?

Gross Domestic Product

The most important economic variable is the gross domestic product (GDP), which covers both the production output and the income of an economy. To appreciate the importance of GDP, one need only take a brief look at international statistics: Compared to poorer countries, countries with a high per capita income have better scores for practically all welfare indicators, this applies to child mortality as well as to the number of telephones or televisions per household. High GDP does not guarantee that all citizens of a country are happy, but it is probably the best recipe for well-being that macroeconomists can offer.8 To get a result for this question, section 4.4 and 5.4 analyses the economic growth of both countries. The following research question will be addressed next.

Research Question 2: What progress is happening in the labour market of both countries?


Economists deal with unemployment in order to analyse its causes and to find better economic policy measures to combat it. Some measures, such as the promotion of retraining and further training, aim to improve opportunities on the labour market through qualification. Others, such as unemployment insurance, are aimed at mitigating the consequences of job losses. Still other economic policy measures unintentionally influence the employment situation of an economy. The majority of economist, for example, assume that high minimum wage regulations lead to an increase in unemployment, especially among low-skilled workers and those with little work experience. By pointing out the consequences of different policy measures, economists can contribute to a rational assessment of policy options. In order to get a result for this research question of the progress in the labour market, section 4.4 and 5.5 must be considered.


Inflation is defined as the growth in the prices of goods and services over time. While a certain level of inflation is normal, a significant increase in the rate of inflation can lead to serious economic problems. The problem with inflation is that it decreases purchasing power; if an individual or business earns the same amount of money as before and goods now cost more, that individual or business gets much less for the money.9 The third research question of this thesis can be formulated.

Research Question 3: What is the investment rate in China and India?


While spending on consumer goods today provides households with greater benefits, spending on capital goods is aimed at enabling a higher standard of living at a later point in time. Investment is the component of GDP that connects present and future. Investment expenditure plays a key role not only in long-term growth, but also in the short-term view of the business cycle because it is the most volatile component of GDP.10 The investment rate and the resulting results are also analysed in sections 4.4 and 5.4.

Economic growth

Economic growth is usually expressed as a percentage change over time in terms of monthly, quarterly or annual growth rates. Since growth is generally regarded as the normal case, if economic variables remain constant, one also speaks of zero growth (stagnation), the economic variable shrinks, of "minus growth".

The growth concept is related to macroeconomic variables in the narrower sense and is interpreted as a permanent (long-term) increase in real gross domestic product (GDP). This real growth means an increase in domestic product in prices of a base year. Changes in the general price level (inflation rate) during the period under review are, in contrast to non-price-adjusted nominal growth, deducted (deflation).

In order to emphasise the long-term aspect of economic growth and to distinguish growth from the more short-term, cyclically induced changes in social product, the potential output of an economy is used instead of the actual national product of an economy, i.e. the domestic product that could be generated if the existing stock of physical capital and labour were fully utilised in the production process. If we calculate the GDP per inhabitant, an increase leads to a better supply of material goods to the population. If, on the other hand, GDP is related to the number of people in employment, this results in a statement about their productivity (labour productivity). Economic growth can be viewed from a quantitative, material point of view (quantitative growth) or from a qualitative point of view (qualitative growth). Quantitative growth aims at the purely quantitative increase of total economic production in the sense of the increase of a national product (e.g. GDP).

Qualitative growth includes not only the pure increase of the total economic production quantity but also the improvement of the quality of life of the people, the protection of the environment or the fair distribution of income. However, measuring qualitative growth and increasing prosperity in a society is associated with considerable difficulties. In Germany, appropriate and steady economic growth is an economic policy objective.11

Foreign direct investment

Definition: Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.12

International Trade due to Comparative Advantage

Definition: Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries.13 Opportunity cost measures a trade-off. The country may not best at producing something. But the good or service has a low opportunity cost for other countries to import.

World trade development

World trade is all global and economic interdependencies and relations between different states of the world, which arise through foreign trade as well as through transactions and movements of capital and labour between different economies. The development of the world economy is increasingly linked to the development of world trade, whereby world trade is understood as the entirety of the trade in goods between all countries of the world. The intensifying process of international division of labour and international trade relates to goods and services, financial and real capital as well as technical knowledge. Its main cause is the worldwide reduction of customs duties and other trade barriers. The increasing internationalisation and globalisation of the economy, with multinational companies being the most important players, is creating enormous global economic imbalances between the individual groups of states. More than half of the world trade between the western industrial countries takes place among themselves.14

Understanding the history of the economy

Collective term for the economic views and theories that were mainly developed by important English economists such as Adam Smith (* 1723, † 1790), Thomas Robert Mal- thus (* 1766, † 1834), David Ricardo (* 1772, † 1823) and John Stuart Mill (* 1806, † 1873).

Above all, the theories of the classical school have in common that they start from the economic self-interest of the individual and examine the effects of this action on the common good. In his most important work, "The Wealth of Nations", Adam Smith tried to show that the selfish individual who is intent on his own personal economic advantage simultaneously serves the welfare of all others with his economic actions. He thus regarded the egoism of man as the driving force behind economic activity. Smith paid great attention to the so-called invisible hand, i.e. the market as an ordering and regulating force.

In Smith's view, the productive power of labour is most likely to be increased by the division of labour: When each worker is given a certain amount of work, the worker becomes more skilful, time is saved, and machines are invented that further accelerate the pace of production. Smith believes that a well-governed community would enjoy a "universal opulence that extends to the lowest ranks of the people" as a result of the increase in production that followed the division of labour.

Thomas Robert Malthus was primarily concerned with the study of the causes of economic misery and poverty and in this context developed the famous Population Law. In the Population Act, Malthus states that the population grows faster than the food supply, which in his view leads to disasters such as famine and wars. In the gloomy forecasts of the Club of Rome about the limits of growth and the situation and future development of humanity, the theses and predictions of Thomas Robert Malthus have a parallel in the present.

With his main work "On the Principles of Political Economy and Taxation", David Ricardo mainly based on the theories of Adam Smith, but developed these views further. Of outstanding importance are David Ricardo's remarks on the law of revenue and his theory of foreign trade with the presentation of comparative costs.

John Stuart Mill was the son of the English national economist James Mill (* 1773, f 1836) and was strongly influenced by his economic ideas. The main achievement of John Stuart Mill was to systematically present the theories of Smith , Malthus and Ricardo in one of his major works "Principles of Political Economy".

The idea of a "classical" period has its origins in Karl Marx, who is as important as the classics and considered John Stuart Mill to be their last representative. The end of the classical epoch, if one follows Marx's classification, is in 1870 and is at the same time the beginning of the neoclassical period.15

Neoclassical Economics

Neoclassical theory is a further development of classical theory and deals primarily with the problem of the allocation of scarce (fully employed) resources. In contrast to classical theory, it works with the concept of marginal productivity and marginal utility and emphasizes the role of price in establishing market equilibria. The best-known model, which is described entirely by equations, is the general competitive equilibrium model, which goes back to Walras and which can be used to prove the existence, stability and unambiguity of a macroeconomic equilibrium at full employment.16

New Institutional Economics

In contrast to neoclassical theory, (New) Institutional Economics deals with the imperfection of real markets and with the facilities (institutions) that are suitable for coping with this imperfection. The (New) Institutional Economics attempts to use economic assumptions and behavioural patterns to explain how institutions come about and function.

Institutions in the broadest sense include all kinds of systems of rules that people invent in order to bring a certain order to their interactions. Institutions are grown or consciously created institutions that form the infrastructure of an economy based on the division of labour.17

Keynesianism and Monetarism

Keynesianism already differs in its basic assumptions from the neo-classical approach. The characteristics of Keynesianism are: Production and employment result from the goods and not the labour market. The emergence of involuntary unemployment is possible. No linear relationship between savings and investment rates. Quantity theory of money only applies in the case of full employment. Effective demand. Especially the last point of effective demand is to be emphasized here. Whereas in Neoclassicism demand already arises from a desire for demand, Keynesianism demands that demand can only arise if, in addition to the pure desire for demand, there are also the financial possibilities to realize the desire for demand. In this case one speaks of effective demand. This shows that the focus in Keynesianism is on demand, i.e. demand-oriented (employee-oriented), as opposed to supply-oriented (employer-oriented) neoclassicism. While neoclassical theory is designed for a situation in which the economy is in equilibrium (no unemployment), Keynesian theory is designed for a crisis (unemployment is possible). Furthermore, the neoclassical theory is supply-oriented (firms are in the foreground), while the Keynesian theory is demand-oriented (households are in the foreground).18

Monetarism is an economic doctrine dating back to the American economist Milton Friedman (* 1912, † 2006), according to which the quantity of money is the most important factor in controlling economic processes. The theoretical basis of monetarism is the quantity theory. According to this theory, the money supply is to be controlled by the central banks in such a way that it is expanded with the growth of economic production (real national product) without fluctuations as far as possible. This is intended to prevent fluctuations in the economy and to ensure a steady economic development.

The monetarists fundamentally reject state intervention in the economy, e.g. anti-cyclical economic policy measures to control the economy, as demanded by Keynesianism. Anticyclical economic policy measures, such as investment subsidies during a downturn or tax increases during an upswing, further intensify economic fluctuations and therefore do not have a stabilizing effect on the economy. The less the state intervenes in the economy to control the economy, the better. The monetarists thus see the basis for a steady upward development of the economy in the self-regulating power of the market over supply and demand and in the control of the money supply by the central bank, which is geared to economic production.19 The final research question addressed in this paper is the following.

Research Question 4: What economic opportunities and deficits do India and China have?

Theory according to Mancur Olson rise and decline of nations

In his book "The Logic of Collective Action", Mancur Olson deals with the actions of individuals within an organization and how these organizations function in the production of collective goods. Olson defines organizations (synonym: groups) as associations for the purpose of pursuing the common interests of their members20

Olson differentiates between three types of groups, the small ("privileged") groups, medium-sized and large ("latent"/"comprehensive") groups. According to Olson, small groups are best able to assert their interests. In small groups, the effect of an individual's commitment to the group interest is felt by the individual and his share of the group's profit is large. In addition, there is a social incentive in these groups, since if an individual does not participate in the provision of the collective good, he is worse off within the group in his own image. In large groups, on the other hand, it is not noticeable when individuals do not participate, which means that it makes the most sense for the individual not to participate in the production of the collective good. He benefits from the collective good if the others provide it without having to participate in its provision himself (freerider syndrome). For the same reason that it is not noticeable whether an individual participates or not, there is no positive incentive for the individual to participate, because he or she cannot achieve anything directly through his or her involvement. The individual's share of the group's profit is relatively small, due to the size of the group and there are no social incentives because the group is so large that the members cannot monitor each other. Therefore, large groups must create selective incentives to encourage their members to get involved; they must use rewards and sanctions or coercion. Large groups also have the disadvantage that, due to the size of the group, higher organisational costs are incurred before anything can be gained from the collective good. Medium-sized groups lie in between. In these groups, no individual receives a sufficiently large share of the group's profit to make him or her participate in the provision of the good. On the other hand, these groups are small enough that a member stands out if he or she does not contribute to the provision of the common good. The conclusion: Small groups will promote their common interests better than large groups.21

From this, Olson develops the theory of the age of democracy in "Rise and Decline of Nations". Stable societies with unchanged borders tend to accumulate more collusion and organizations for collective action over time. Among these organizations, small groups are more likely and faster to organize for collective action than large groups. It follows that small groups have more lobbying and cartel power in a society than large groups.22 It is in the interest of all groups to increase their own profits, by whatever means. This includes measures which, although inefficient for society, are beneficial to organised groups.23 For the small organisations there is a parallel to the individual within a large organisation. The small group can strive to increase the production of the society. But then everyone benefits, and the small organization that would have to finance the implementation of the productivity increase would only have a small share of the profit. Therefore, small organisations - equivalent to the free-rider syndrome will not try to increase the overall cake, but only their share of it, which the organisation will then have completely for itself. One obvious way in which a group serves the interests of its members while reducing the efficiency and performance of society is to lobby for legislation that increases certain prices or wages. The cost of this "rent-seeking" is imposed on society.24 At the same time, resources are diverted into areas that are economically unproductive.25

Large organisations cannot engage in rent-seeking because they have an incentive to make the society in which they operate prosper.26

Both large and small interest groups have a common disadvantage, however, and the larger and more inhomogeneous the group, the greater the disadvantage, because then even more different interests must be coordinated within the group. The groups make decisions more slowly than the individuals and companies they represent and tend to cement the status quo rather than constantly adapting to changing market conditions. Instead, innovations and new technologies are blocked, and with them an increase in efficiency and growth.27

To achieve their goals, distribution coalitions must use their lobbying power to influence government policy. This increases the complexity and scope of government, which ties up resources in politics. The government must deal with the active lobbying. Compliance with benefits granted must be monitored, and the benefits themselves must be constantly reviewed to identify loopholes, which must then be closed, leading to further regulation. In order to be able to do this, bureaucracy is inflated.28 As a result, government spending is increasing while economic output is declining more and more. The consequences are recession, depression and high public debt.29

Olson explains the difference that different societies have different degrees of special interest organizations and that these therefore developed differently when macroeconomic problems are the same. Keynes' practical advice, on the other hand, is not enough in Olson's view and only describes the symptoms. The expansion of aggregate demand, for example, is entirely in the interest of the special interest groups and would only temporarily absorb their social costs. A stable society will have to accept higher unemployment and a greater loss of output for any given reduction in aggregate demand because of the increasing inflexibility of prices over time.30 Nor can Keynes' theory explain the inflexibility of many wages and prices, although it is precisely this explanation that is the core of every macroeconomic theory. Nevertheless, Olson sees himself not as an antiKeynesian, but as a solver of a general theory in which others may also participate.31

Monetary policy and possibly fiscal policy can sometimes be changed faster than distribution coalitions can change their prices, and this opens up the possibility that demand management can achieve an increase in real output by changing its policies after most distribution coalitions have decided on their price. As these measures are unpredictable and variable, they have their own costs and are temporary.32 To be able to get a result this research will be analysed in section 6 according to Mancur Olson theory.

4. India economics

Country information

With an area of 3,287,263 km2, India is the seventh largest country on earth and by far the largest and most populous country in South Asia. India shares common borders with six countries: Pakistan, China, Nepal, Bhutan, Myanmar and Bangladesh.33

For thousands of years, India was one of the world's economic leaders.

India is in the process of developing into a major economic power. The growth rates are remarkable. But there is a downside to the boom, as more than three quarters of the population are not benefiting from it.34

4.1 India's economic development in the colonial era

In 1497 Vasco da Gama1497 left Lisbon to undertake an expedition to the Far East. On 19 May 1498 he reached the port of Calicut (today's Kozhikode). This marked the beginning of a new epoch in Indian history. The English and Spanish followed the Portuguese, the French and Dutch came to India at the end of the 16th century.35

The British were striving for a monopoly position, because at that time the best cotton wool yarn and the finest textiles in the world were produced in India. There began the rule of the British in India.36 Two centuries of British colonial rule left their mark on all levels, especially in the economy. The rootedness with England is still visible today. The decisive course was set for India with the connection to the world market under the British flag, which determined the further economic development.37 Private trade was prohibited, commercial and financial functions were strictly separated, the collection of agricultural tax was unified and a system of independent courts was established. However, the regulation of land ownership, in conjunction with the appointment of tax collectors as landlords, placed a heavy burden on agriculture and caused rapid consecutive famines.38

4.2 The independence of India after the colonial period

The First World War interrupted the trade routes to the colonial ruler and thus provided protection for Indian industry.39 No real entrepreneurship could develop in India, so national elites under the leadership of Mahatma Gandhi turned primarily to the struggle for independence and liberation from British colonialism. After India's independence in 1947, economic policy was for a long time dominated by the state philosophy of national autarky and socialist planning. It is only in the last two decades that the state paternalism ( permit raj) has been abolished and the Indian economy has been opened to foreign companies and technologies, with positive effects on economic growth and prosperity.40


1 Compare (Accessed:

2 March 2020)

3 Compare Atteslander, 2008

4 Compare Witt, 2001 page 9

5 Compare Bryman and Bell, (2011), p. 57

6 Compare Bryman and Bell, (2011), p. 11

7 Compare Bryman and Bell, (2011), p. 386

8 Compare rect=true&db=nlebk&AN=1789400&lang=de&site=eds-live&scope=site (Accessed: 23 August 2020)

9 Compare (Accessed: 15 August 2020)

10 Compare rect=true&db=nlebk&AN=1789400&lang=de&site=eds-live&scope=site (Accessed: 15 August 2020)

11 Compare (Accessed: 02 August 2020)

12 Compare rect=true&db=nlebk&AN=1419045&lang=de&site=eds-live&scope=site (Accessed: 02 August 2020).

13 Compare Krugman and Obstfeld, 2015, page 58

14 Compare (Accessed: 24 May 2020)

15 Compare nationaloekonomie (Accessed: 24 May 2020)

16 Compare (Accessed: 24 May 2020)

17 Compare Lippold, 2015, page 25

18 Compare Perret and Welfens, 2019 page 209

19 Compare (Accessed: 24 May 2020)

20 Compare Olson 2004 page 4

21 Compare Olson, Mancur 2004 page 46-50

22 Compare Olson, Mancur 1991 page 52

23 Compare Olson, Mancur 1991, page 47

24 Compare Olson, Mancur 1991, page 53-57

25 Compare Braun 1999, page 123

26 Compare Olson 1991, Mancur page 68

27 Compare Olson, Mancur 1991, page 73-75 and 82-85 Compare Braun, Dietmar 1999, page 124

28 Compare Olson, Mancur 1991, page 92-94

29 Compare Braun, Dietmar 1999, page 124 and 127

30 Compare Olson, Mancur 1991, page 292 303030

31 Compare Olson, Mancur 1982 page 293

32 Olson, Mancur 1991, page 300

33 Compare (Accessed: 20 August 2020)

34 Compare (Accessed: 20 August 2020)

35 Compare Gosalia, Sushila 2003, page 291.

36 Compare (Accessed: 20 August 2020)

37 Compare Rothermund, Dietmar 1995, page 485.

38 Compare (Accessed: 28 June 2020)

39 Compare Rothermund, Dietmar 1995, page 486

40 Compare Fischer, Paul 2015, page 28

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The Future Economic Situation of China and India. A Comparison
University of applied sciences, Munich
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future, economic, situation, china, india, comparison
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Ramla Bashir (Author), 2020, The Future Economic Situation of China and India. A Comparison, Munich, GRIN Verlag,


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