9.2 POLICIES FOR THE FUTURE
9.2.2 Recent Success Stories and First Principles
Recent growth successes in China and India have allowed these countries to signifi cantly reduce absolute poverty and improve the quality of life for millions. How much of their success relies upon the fi rst principles described above? This could be useful for countries that have not been able to enjoy such success so far. In this section, I make an attempt to fi nd out. First I discuss the case of China. This is followed by the case of India.
China
The Chinese economy has grown rapidly over the last three decades. In particular, China has been the fastest growing economy since the 1990s.
What is the reason behind China’s phenomenal growth? Many econo- mists argue that trade orientation and FDI are central to China’s success.
However China’s economic reforms cover something more than that.
China embarked on economic reforms in 1978, led by Deng Xiaoping, the then leader of the Communist Party. The main idea was to gener- ate enough economic surplus to eradicate imbalances across regions in the mainland Chinese economy. To this eff ect, the Chinese government embarked on a large- scale modernization project for the economy. The fi rst step was to institute household responsibility systems in the farms.
The idea was to transfer responsibility for cultivation and, in eff ect, property rights from the Soviet- style collective farms to the households.
Under this system, the farmers were also allowed to sell their surplus crop on the open market. This immediately delivered signifi cant productivity dividends to Chinese agriculture. This reform was followed by the estab- lishment of Township Village Enterprises (TVEs). TVEs were mainly small- to medium- sized industries owned by townships and villages. TVEs were also a success story. Throughout this period, the Chinese government invested in modernizing the infrastructure. New roads, highways, airports, sea ports and telecommunication systems were being built. During the late 1980s, the Chinese government introduced an open door policy towards international trade and FDIs. Export processing zones were set up along the coast and foreign manufacturing fi rms were allowed to set up factories using inexpensive Chinese labour. This turned out to be huge success and helped lift millions out of poverty. As a result, the Chinese economy, at present, is dominated by the private sector. However, state controlled enterprises dominate utilities and the resources sector.
Without doubt, China did not follow the fi rst principles of growth to the letter. There were no private property rights in China. Property rights in TVEs and household run farms were shared. Nevertheless, it managed to create enough incentives for long-term investments. The emphasis on FDI in manufacturing to exploit low labour costs was also successful and generated employment opportunities for millions. This was made possible because of an unwritten guarantee of non- predatory behaviour by the state. Even though there is little rule of law in the Western sense of the word, the Chinese state has developed a symbiotic relationship with the multinationals investing in China through mutual trust. Economic progress is crucial for the legitimacy of the one- party Chinese state and the state is well aware that the multinational fi rms are important contribu- tors to that process. Furthermore, Chinese political institutions remained far from democratic throughout this process. However, they are likely to remain reasonably representative as long as the Communist Party is in touch with what is happening on the ground. In spite of rising inequality,
it is perhaps fair to say that the Chinese state has managed it eff ectively through redistribution programmes and minimized social unrest.
Therefore, what we notice in retrospect is that the Chinese Communist Party perhaps has used the fi rst principles as a guideline and not as gospel.
In the process, they have developed institutions which are rooted in local customs and culture and best represent local conditions to deliver eco- nomic growth.
India
India’s economic reforms started in the 1980s with privatization of some state- owned enterprises and unilateral reductions in tariff s and quantitative restrictions. However, the reform process gained momentum in 1991 fol- lowing a debt crisis. Growth in per capita income experienced a signifi cant boost following the 1991 reforms. However, the institutional change, on paper, was not signifi cant. Post- independence India always had property rights and laws to enforce private contracts. She also had the rule of law and constitutional rights for individuals to buy and sell goods and services on the open market. However the sociopolitical environment was not pro business till the late 1980s. A commonly held view amongst the public and politicians pre- reform was that a socialist system is best suited for India to deliver shared prosperity. As a result, the economy was held hostage to numerous regulations and licensing procedures commonly known as the
‘licence raj’. With reforms, the entire discourse shifted and the government and its institutions became more pro business. This delivered improve- ments in institutional quality and rapid growth. The economy experienced expansion in both manufacturing and services at the expense of agriculture.
However, problems remained at the front of public goods delivery and infrastructure. With a rapidly expanding economy, the demand for infra- structure and other public goods quadrupled. Laying out infrastructure effi ciently within the current institutional framework is always a challenge in India. The rapidly growing demand for land to lay out infrastructure and other projects in a growing economy, such as India, is often faced with chal- lenges of land disputes. The sheer number of these disputes poses challenges for the court system and other institutions. Nevertheless, in spite of all these hurdles, India’s progress over the last two decades has been impressive.
In summary, the paths of development chosen by India and China are distinctly diff erent. Both countries have successfully utilized local condi- tions and developed institutions that are well aligned with their initial conditions. However, there is little debate on the fact that they are built on the appropriate foundation of incentives. In other words, even though the fi rst principles are not applied to the letter in both of these countries, they are applied to create the right incentives for growth.