Causes and effects of economic growth in China and India

The US together with her European counterparts including Germany, France and the UK has dominated the global economy in the past. In the recent past however, emerging economics including BRIC countries (Brazil, Russia, India and China) and others such as Malaysia and Thailand have taken the global economy by storm owing to their economic prowess. The most notable countries in the rise to global dominance are India and China. These countries have contributed immensely to global trade and command a huge amount of foreign direct investment. China on one hand has increased its global influence through development partnerships with developing countries especially in Africa (Besliu, 2013). Such growth and prosperity in these countries is largely due to their rampant economic growth in the last few decades. A few decades ago, China and India, due to their high population growth rates were facing difficulties in feeding the massive populations. Today the two countries are net exporters of food items. Although the two countries still have a large portion of their population living under the poverty line, there are a lot of positives that can be drawn from their impressive economic growth in such a short period. This paper discusses the factors that have contributed to such impressive economic growth and also its effect on the countries on its people, its neighbors and the global community.
Current status
The current economic status of India and China is very optimistic despite the recent global financial crisis. In the last decade prior to 2012, China`s GDP growth has averaged 10.3% per year compared to India`s also impressive 7.4%. The two countries have been compared and contrasted on various dimensions. The most common traits shared by the two are rampant economic growth, huge size and their massive populations. While most of China`s growth has taken place after economic reforms, some observers are noting that the growth of the country will slow down after the initial response to economic reforms. Other observers have noted that China`s growth is not sustainable as it is export based as the domestic market does not consume much at a paltry 30% of the GDP (Shilling 2012). Some have hinted that India, which is more driven by the domestic market, will overtake China in the near future while some note that China will overthrow the US as the global super power. Going by the GDP outlook, the case is different. India`s GDP was 1.842 trillion in 2012 while China`s GDP as of 2012 was $8.23 trillion which is way below that of the US at $15.68 trillion in the same year (Atlas, 2013). There are various factors at play that determine the direction each economy takes. However, for the purposes of this paper and its scope, the interest is the similarities of China and India as a single market in the global economy.
Factors that favor India and China`s economic growth
India and China are home to over a third of the global population. The CIA fact book (2013) puts China`s population at 1,349,585,838 (July 2013 est.) and that of India at 1,220,800,359 (July 2013 est.). In the 20[th] century, both countries registered some of the highest population growth rates in the world. As of 1950, the global population stood at 2,519,495 and that of was at 357,561 while China was at 554,760. Half a century on, both countries had doubled their population with India at 1,008,937 people and India 1,275,133. It is notable that while China more than doubled its population, India tripled hers. In fact, at the turn of the 20[th] century, India`s population stood at 295215 only. Such a huge population has made the countries very influential globally in terms of culture, language and policies among others. For instance, Mandarin is the most widely used language in the world. The result has been migration to other countries around the world including Europe and the US. Currently, the US has a substantial population of Chinese and Indian ancestry. The effect on the American culture has been huge with Indian and china cuisine being some of the favorite meals in the US. The two countries huge populations are the basic factor to their economic progress story.
The demographics of the population in China-India market favors make it more highly productive. The median age in India`s labor force is one of the lowest in the world. In one of the country`s` largest employers, Tata Consulting Services, the average age is 28 years. This is relatively impressive compared to one of America`s top ICT employer, Oracle, whose average age of employees is 38 years (Harjani, 2012). A younger workforce means more productivity and innovativeness which attracts firms and also increases productivity and profitability of firms. Similarly, India`s national media age is 28 years compared to China`s 37.6 and Japan 44.4 years. This implies that the country has a workforce that can power the economy and also that the national health budget and social benefit schemes are not overburdened which makes more resources available to be channeled to over development programs. Economists have observed that an aging population like in the case of Japan and the UK is detrimental to the country`s economy. In recognition of India`s young population, the International Monetary Fund in 2011 estimated that the country`s vibrant workforce could be responsible for adding 2 percentage points to the country`s annual growth rate (Harjani, 2012). On the other hand, China`s also relatively young population has been responsible for adding 1.8 percentage points to the country`s GDP since the 1970`s (Shilling, 2012). This increase in wages in geared towards developing the population`s purchasing power and boost aggregate demand.
China is the single largest market in the world followed by India. Together they form an irresistible market (China-India) which is the new frontier for western firms. This market has attracted the attention of global brands. Every western marketer is attracted by the allure of the large China-India market. This market is increasingly more economically enabled and has better purchasing power as a result of sustained economic growth. The need to serve this huge market has over the years forced western firms such as Citibank, General Electric, Bell helicopter, Avon, Coca Cola, IBM and Apple Inc among others to sell their products and services in this market. For majority of American companies, China-India is the largest market in their international operations forming a considering source of their revenue. To capitalize on the potentials of this particular market, a number of the firms have opted to move their operations to China-India to take advantage of the low operating costs in the country and also be closer to the huge market. This has been done in form of FDI.
Economic policies
China is the single largest recipient of the world`s FDI inflow. Majority (77%) of this FDI is sourced from OECD countries led by the US. However, due to the recent global financial crisis of 2008, the FDI market has slowed down for the first time in decades. The OECD report noted that FDI outflows declined by 15% in 2012. China was the largest recipient of the FDI global inflow accounting for 18% with India`s FDI inflow declining by 15%. The market in general has been receiving heavy FDI inflow for some decades. American firms such as the athletic footwear, apparel and accessories manufacturer, Nike, had opened operations in China as early as 1982. India has attracted considerable attention in the FDI market from the OECD countries and others in the recent past. However, the country has been at cross roads in terms of FDI flow as noted by divestment by some major American companies from India. Among them is Wal-Mart which ended its partnership with Bharti Enterprises (Sharma & Mukherji, 2013). Daimler Chrysler also ended its interest in the motor industry after disposing its shares in Tata Motors (ibid). These moves took at a time when the world is focused on the China-India market. Government policies on FDI alongside the availability and size of the market have proved vital in determining FDI flow. China and India have not been historically economic hot points of importance to other developed nations until recently following change in policies.
The most significant economic reforms in China took place between 1978 and 1982 during the reign of Deng Xiangpong while in India the reforms took place at the same time between 1980 and 1984 (Maluste, 2011). China, a communist country has undergone economic and political reforms to usher in policies synonymous with capitalism. The Communist government has over the years privatized much of the serves and opened its market to foreign players. Previously, the country was followed a closed door policy that kept foreign players away in order to nurture the local industry. Consequently, the Chinese local industries especially the agro-based industries developed at an impressive rate. The first major reform in the country was decollectivization of land which allowed individuals to own land (Maluste, 2011). This increased agricultural productivity allowing the country to be self-sufficient in terms of food. Peasant farmers in the rural areas became more financially empowered as they could see their excess products in the markets and elsewhere. In the recent past, the government has initiated other policies aimed at helping the country adjust to prevailing circumstances. One of the most commonly cited is the one-child policy that aims at slowing down the country`s population. On the other hand, India has failed to address the burgeoning birth rate is responsible for the high population of the youth in the country. Experts estimate that by 2020, India`s population is expected to surpass that of China. However, the one-child policy has been heavily criticized by some people arguing that it will lead to an aging population in China which will harm the economy. Other experts argue that the same policy is leading to shrinking labor market that has led to an upsurge in wages. For instance, in 2011, minimum wages in China increased by 20-30% (Shilling 2012).
The Open door foreign policy adopted by Xiaoping has had the most profound effect on China`s economy. This policy was geared towards encouraging foreign firms to invest in the country by setting up local operations. American firms, especially the labor intensive industries such as garment manufacturing soon relocated their factories to China to take advantage of the low cost of labor. The government in the other hand provided other incentives such as tax exemption, provision of free land to investors and even creating export manufacturing zones that enjoyed unique benefits (Maluste, 2011). The infrastructure in the country was also geared towards accommodating export trade through high speed railway lines and excellent seaports strategically located to serve the global market. The Communist government also took it upon itself to privatize major companies and industries by allowing private investors to take over industries such as banking and telecommunications which were previously preserves of the government through state owned corporations.
The effect of rapid economic growth
China-India`s rampart economic growth has transformed global trade and regional and global power balance. As of 2013, China is estimated to have overtaken the US in terms of volume of trade in the global market place. This is a healthy indicator of China`s role in the export market that serves both developed and developing countries. In the 21[st] century, it is estimated that China`s interests in Africa have surpassed those of the US in terms of grants and aid to Africa (Besliu, 2013). This is largely in form of mining and mineral explorations. In countries such as South Sudan, China dominates the oil drilling industry. Large infrastructural projects in east Africa also highlight the impact and importance of an economically vibrant China. Economic partnerships with majority of African countries have been recorded at very high rates (Ibid). India on the other hand has not been left behind. The country has been actively involved in global trade. In fact, India is one of the world`s leading services outsourcing centers with American firms importing labor intensive services such as call centers to India. The result of more employment opportunities courtesy of foreign firm has been higher purchasing power of the populations in China-India. The result is a growing middle class.
China and India are home to the largest middle class globally. In India, about 300 million people are in the middle and approximately the same in China (Freidman 2013). Experts indicate that the growth in the middle class in the region is not only driven by increased job opportunities and high wages but also by improved education standards and technology use. For instance, China has over 400 million bloggers while India has over 900 mobile phone users (ibid). India has also created a virtual middle class through unique projects. For instance, India government with the assistance of United States Agency for International Development is enabling over 600 million Indians who have no access to regular power supply access power through a low cost reliable method at only 20 cents a day (ibid). Such power is enough to power all home appliances. Therefore, such plans enable such residents to have access to a middle class lifestyle without necessarily having the income levels of a middle class hence the term “virtual middle class” as Friedman (2013) uses it.
China has managed to sustain an annual growth rate of about 10% for a period of over 30 years. This growth, as aforementioned, is exports driven which has enhanced China`s place in the global political power play. Consequently, Americas place as the global super power is under threat. In fact, a poll conducted in 39 countries shows that majority of countries believe that China has replaced the US as the world`s leading economic power house (Atlas 2013). Another survey by Pew Research Center showed that majority of Americas allies are more skeptical about the country`s superpower place after the 2008 financial crisis in which the US experienced a recession while China was barely affected economically (Cosgrave, 2013). However, an OECD report released in March 2013 still indicated the US as the leading economic powerhouse globally with China expected to take the number one position by 2016 (Atlas, 2013). India has also been cited a potential super power in future. However, the country`s socioeconomic challenges such as unchecked population growth and high poverty levels are viewed as hindrances to such growth. Misplaced policies in pursuit of super power authority have also hinder India growth. For instance, India has tripled its defense expenditure in the last ten years instead of investing in more economically beneficial activities. The country has also adopted retrogressive policies on profit repatriation by foreign firm operating in the country. A report released by the London School of Economics in 2010 warned India against getting carried away by global super power ambitions at the cost of addressing social economic problems facing the country (Bagchee, 2012).
It is clear that India and China are poised for a better future. These two neighbors have managed to wither the recent global economic downturn and demonstrated to the world that they can carry the super role just as well if not better than the US. However, these countries are powered by exports oriented growth which to some experts is not economically viable. Fluctuations in the global market can expose the economies with negative outcomes. While the US can be seen to be stuttering, especially after the recent recession, it is clear that China and India have a long way to go before they attain the successes of the US. Social economic challenges and poor infrastructure are some of the factors that plague China-India. However, it is clear that in the near future, the global political power play will change as China and India establish their presence.
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