What Can India Learn from China's Economic Successes and Failures?

The Chinese economy has always been an agricultural economy. Owing to frequent conflicts among various tribes and kingdoms, the country witnessed economic stagnation between the 16th and late 19th century. The period from the 1930s to 1949 witnessed civil wars and the seize of power by the communist party led by Mao Zedong. The new regime introduced new economic policies; however, there was no improvement in the standard of living of the common people. On the contrary, policies like the Great Leap Forward and Cultural Revolution led to the largest manmade famine between 1966 and 1976, killing about 30 to 40 million people.

After the death of Mao Zedong, the leadership of the country and communist party shifted to Deng Xioping, who introduced several economic reforms, which transformed China from an agricultural economy to one of the foremost economic superpowers in the world. The country witnessed substantial growth in all sectors and achieved an annual growth rate of 9 to 10% from 1979 till date. This is an attempt to examine the journey of China’s progress and draw lessons from its achievements and failures, which can serve as a guiding torch for India’s progress towards becoming an economic super power.

Chinese Economy Prior to Reforms

The communist party came to power in 1949 and under the leadership of Mao Zedong various socio-economic and political changes were introduced. Collectivization of agriculture was introduced, wherein farmers could not claim ownership over their land and had to produce grains, vegetables and cash crops as per the government demands. The prices for the same were also determined by the government and not by market forces. Private businesses were not allowed to operate. All industries were state owned and controlled. The major source of revenue for the government was the profit from State Owned Enterprises (SOEs) and taxes. The Shanghai stock market was shut in 1949, soon after the communists came to power. Foreign investments were negligible. The country adopted a protectionist policy, wherein various tariff and non-tariff trade barriers were introduced which discouraged foreign trade. The period from 1966 to 1976 witnessed the perils of the Great Leap Forward and the cultural revolution which led to the death of 30-40 million people due to the largest manmade famine in human history.

During the entire pre-reform era, the economic performance of China was poor in comparison with other East Asian countries, such as Japan and South Korea. The economy was riddled with huge inefficiencies and mal-investments, and with Mao’s death, the Communist Party of China (CPC) leadership turned to market-oriented reforms to salvage the failing economy.

The Economic Reforms

After the death of Mao Zedong in 1976, the leadership shifted into the hands of Deng Xioping. He understood the need for economic reforms due to the poor state of the economy. Thus, in spite of opposition from party conservatives, he introduced major economic reforms in 1978, which have played a major role in making China one of the leading economic superpowers in the world.

The reforms were introduced in two phases. In the first phase (1978-1984), decollectivization of agriculture was introduced. This gave farmers ownership over their plot of land and the freedom to cultivate crops of their choice. They had to give a certain portion of their produce to the government as tax and were free to sell the surplus produce in the market at market prices. This led to a significant rise in agricultural production and China became one of leading exporter of agricultural products.

Reforms were also introduced in the industrial sector. Private businesses were allowed to operate and they soon formed a major portion of the overall industrial output. The country was also opened to foreign investments and Special Economic Zones (SEZs) were created along the entire coastline of China to encourage foreign trade without trade barriers and government interventions. These SEZs became the engines of China’s progress.

In the next phase (1984 to 1993), government control and intervention in private businesses continued to decline. Also there was small-scale privatization of state owned enterprises. Township and village enterprises were encouraged. In 1992, the Shanghai Stock Exchange was reopened after 40 years of its closure. Privatization continued to grow after 1992 and private enterprises surpassed state enterprises in share of GDP in mid 1990s. There was considerable economic growth during this period. However, inflation reached an all-time high in 1985, 1988 and 1992. China was now a socialist market economy.

In 1997, large-scale privatization occurred. Most state enterprises, except a few, were liquidated and their assets sold to private investors. State owned enterprises reduced by 48% between 2001 and 2004. During the same period, tariff and non-tariff barriers were considerably reduced, the banking system was reformed and there was a reduction in inflation rates, and China joined the World Trade Organization. In 2005, the domestic private sector exceeded 50% of the GDP and is now 70%. China also surpassed Japan as the largest economy in Asia in 2005. Banking and Petroleum continue to remain state monopolies.

Reforms in the agricultural sector led to increase in agricultural production and improvement in standard of living of farmers. Food production increased from 2.7% in pre reform era to 8.2% a year, post reforms. Food prices fell by 50% due to rise in production. The industrial reforms led to considerable growth in the industrial sector. Productivity and quality of industrial output increased. Private and foreign players compete with state enterprises. The state sector’s share in industrial output dropped from 81% in 1980 to 15% in 2005. China is now among the leading producers and exporters of cement, steel, textiles, ships, and the world’s largest automobile market. Steel production increased from 128.5 million tonnes to 418.8 million tonnes between 2000 and 2006. Automobile production rose from 1.1 million in 1992 to 9.35 million in 2008. Textile exports increased from 4.6% in 1980 to 24.1% in 2005. The number of industrial firms increased from 3,77,300 in 1980 to 8 million in 1990.

The foreign trade sector also witnessed significant growth during the post-reform era. China achieved high levels of openness which has led to competition from foreign players in every sector. Foreign investments have led to increase in competition, quality, knowledge and standards for various industries. During the reform period, the government focused on reducing trade barriers. The overall tariff rates fell from 56% to 15%. By 2001, less than 40% imports were subject to tariffs and 9% imports were subject to licensing and quotas. Trade increased from 10% to 64% of GDP during the reform era. By 2005, the average rate of tariffs on industrial goods was 8.9% compared to 32.4% for India.

After China joined the World Trade Organization (WTO), the service sector was considerably liberalized and foreign investment was allowed. Restrictions on retail, wholesale and distribution were ended. Banking, financial services, insurance and telecommunications were also opened up to foreign investment. The Non Performing Assets in the financial system dropped from 22% of the GDP in 2000 to 6.3% by 2006 which were estimated at 160 billion USD.

The major reasons for the success of Chinese economic reforms are the adoption of a socialist market economy structure, reduction in trade barriers, encouraging domestic businesses and industries, and creating a favorable environment for foreign trade and investment. Further, government officials were given incentives and promotions to the extent of trade barriers they reduced in their respective departments and encouraged investments. Officials presiding over areas of high economic growth were more likely to be promoted during the reform period. These factors have led to the success of the reforms. China adopted a export led growth strategy which was successfully used by countries like South Korea, Japan and Taiwan. Another factor, which contributed to the success of the reforms, was the gradual privatization of the state enterprises. After the fall of the Soviet Union in 1989, many of the former soviet republics adopted mass privatization programs, which led to inflation rising up to 1000% in many countries. China adopted privatization in phases and thus, its strategy was a success. However, in spite of increased growth rate and standard of living, there has been a rise in inequality in the Chinese economy. Poverty has been practically eliminated from the urban areas however, it still remains a problem in costal and rural areas.

Lessons from their success: 

•    Encourage domestic private enterprises
•    Reduce government interventions and restrictions on businesses and abolish protectionist policies
•    Government must exercise control over petroleum sector to keep prices of fuel and essential commodities in control.
•    Create a favorable environment for foreign trade and investment.
•    Reduce tariffs and other import restrictions on industrial goods
•    Adopt an export led growth strategy as adopted by Japan, China, Singapore and South Korea.
•    Create SEZs along the entire Indian coastline.
•    Provide incentives to government officials for reducing barriers to trade and startup businesses.
•    Reform the financial sector and make it easier for businesses to raise capital.
•    India’s reducing industrial growth rate makes it important to focus on policies, which encourage industrial growth.

Lessons from their failures:

•    Ensure appropriate income distribution to reduce inequalities.
•    Take measures to reduce NPAs in the financial system.
•    Economic growth and rise in inflation go hand in hand. Thus, the government must take steps to ensure high growth rates with adequate control over inflation.