Economic growth in China and India: scalability and theoretical constraints

China & India: Rapid Economic Growth -- Additional pages

Additional Introduction / Conclusion Copy

How did China and India emerge so rapidly as enormous economic powers? This paper reviews the circumstances of the economic advancement that both countries have made, and establishes that these nations became economic powerhouses due to the sheer size of their economies -- along with the strategies they employed.

The Indian economy has been among the "fastest growing economies" in the world since the late 1980s, according to Kunal Sen, writing in the peer-reviewed journal Contemporary South Asia. He insists that most experts (in "the international financial press") are incorrect when they assert that the Indian economy began to accelerate following the "radical economic reforms of 1991" (Sen, 2009, p. 364).

In fact, Sen writes, the gross domestic product (GDP) per capita began to rise "…in the late 1970s, and has kept on steadily increasing over the last two decades of the twentieth century" (364). What difference does it make exactly when the Indian economy began to flourish? Sen says knowing when it began to really take off dramatically holds "…the key to the puzzle that has engaged India-observers in recent years," and that is, why indeed did growth accelerate in the late 1970s to the early 1980s? (365).

The author asserts that the acceleration in growth is due in large part to the "surge in private investment in machines." On page 369 Sen explains his reasoning: machinery investment matters for economic growth more than other types of investment because "…the role of external economies is greater for machinery investment than for housing investment" because machinery investment requires "a great amount of research and development expenditures" (369). The increase in India's investment in machinery explains both the "faster rate of accumulation of capital" and it also explains the dramatic increase in productivity, which continues today, more than 20 years after the surge began, according to Sen (369).

Meanwhile, there is one clear component of India's economy that has helped this largest of the world's democratic nations become so powerful economically -- and that is the construction sector. According to authors Hrushikesh Mallick and Mantu Kumar Mahalik, writing in the Journal of Real Estate Finance and Economics, numerous scholars have investigated the dynamics of growth in India, and have looked at "various factors" important to economic growth (Mallick, et al., 2008, p. 368). Those factors include government "policy variables" (expenditures, tax-financing and alternative financing methods) Mallick, 369.

Moreover, governments spend billions of dollars on "provision of infrastructure, health and medical facilities and education," all in the name of providing for their citizens, Mallick continues. And indeed in a market economy like India has, the private sector also offers services similar to the government's services, and citizens expect the private sector services to be available at market prices (Mallick, 369). The private sector owns their "capital stock," and when the federal government provides "capital infrastructure," it thereby has "positive spillover effects on the private sector."

What this all means is India has built its economy on the above-mentioned components, and they are well understood by economists. However, India's construction industry (public and private) makes indirect and direct contributions to the economic output, and the construction industry is linked powerfully to other sectors of the Indian economy, Mallick continues (369). The construction industry in India (housing, corporate development, commercial complexes, bridges, dams, highways, schools, etc.) contributes to the economy in two ways: when a construction project arrives at its "final form," it adds to the "total output and wealth (in an accounting sense), or, alternatively, it may help further production process" which ends up beefing up output (Mallick, 370).

In China, truly one of the world's most dynamic economies, much of the attention of scholars and economists is focused on its future. In fact China's retention of its "large share of global investment" will call for greater improvements in its "investment environment," according to Rod Tyers and Jane Golley in the scholarly journal, Review of Development Economics. What that means is in order to continue its massive growth as an economic superpower it will need to depend more "than in the past on financial, legal, and other institutional reforms" (Tyers, 2010, p. 593).

The authors explain that one of the reasons for China's explosive economic growth over the past twenty years or so are linked to its fertility rate. Without its birth control policies -- each couple is allowed one child, with penalties assessed for families that have two or more children -- the authors project that instead of the 1.27 billion people (United Nations), China would have more like 1.6 billion people (Tyers, 593). What the slow-down in births means in the future is a reduction of the labor force. And even though India "is also aging," India's most popular age groups "…are very young, and as these groups age, they raise the labor force participation rate and the crude birth rate" (Tyers, 599). Hence, during the time China's labor force will not show a great deal of growth, India's labor force is expected to rise by half, the authors explain.

That said, a review of the rise of China's gross domestic product (GDP) is undeniably remarkable by most economic standards. An article in the Journal of Chinese Economic and Business Studies (Zhang, et al., 2009) offers the fact that over the period 1978 to 2007, China's GDP increased from $214.2 billion (U.S. Dollars) in 1978 to $3,400.4 billion in 2007. The average annual growth rate of GDP rose 9.9% during that same time frame; the world's average growth rate in that same window of time was 3.3% (Zhang, 127). In fact, recently China passed Japan as the number two biggest economic power in the world.

How did this happen? Zhang reports that part of the success story for China is its phenomenal growth in international trade; indeed, trade has increased in ways more impressive than its GDP growth -- from $10.9 billion in 1978 to $955.8 billion in 2007 (Zhang, 127). The opening up of China's economy to the global marketplace has also been a reason why China has made such huge strides in the growth of its economy, the authors continue.

This fast economic growth and its "active participation in economic globalization have immensely improved" China's economy and in doing so has provided a great boost to living standards in China (Zhang, 128). In fact more than 400 million citizens in China have been "lifted above the poverty line of one dollar a day" and Zhang (128) reports that having 400 million people achieve a living that is above the poverty line represents "75% of the total world poverty lift" over the past 30 years.