The hegemony of China with a $25 trillion economy, making it the largest economy in the world, is consequential. Its exponential growth over the past few decades has made it contribute to the global environment significantly. As part of its series, The State of the Economy- #EconDialogue, #IMPRI Center for the Study of Finance and Economics, IMPRI Impact and Policy Research Institute, New Delhi, organized the IMPRI #WebPolicyTalk with Prof. S. Ramakrishna Velamuri, on the Three Narratives on China’s Economic Miracle on January 13, 2022.
The moderator for the event, Prof. Nilanjan Banik, Professor and Program Director (BA, Economics and Finance), School of Management, Mahindra University, Hyderabad, is an academician whose works focus on the application of time series econometrics in issues relating to international trade, market structure, development economics and also contributes to national and international media.
The surprising statistics, provided by Prof. Banik, showed that the leading economy of today, China, was behind India in the year 1990 with an income of US $318 per capita per annum; while India’s per capita income was US $368 per annum. Today, the Chinese economy is leading India both in terms of per capita income, as well as, growth rate. While China has already crossed US $10,500 per capita income per annum, India is still around US $2000 per capita per annum. On one hand, China is expected to shift from a middle-income economy to a high-income economy in the coming years, and on the other, researchers predict China to overtake the USA by 2030-2049 in terms of its per capita income.
Should India learn from China? Is there anything Indian policymakers should adopt from China’s economic model? The answer to such questions is elaborated upon by our Speaker and fellow Discussants.
What are the Three Narratives?
Prof. S Ramakrishna Velamuri, Professor and Dean, School of Management, Mahindra University, Hyderabad has been associated with the China Europe International Business School (CEIBS) as Chengwei Capital Professor of Entrepreneurship from 2007 to 2021, where he interacted with many Chinese students and executives. He was also on the faculty of IESE Business School in Spain for four years (2003-2007) and has been a Visiting Professor at the Indian School of Business, the Frankfurt School of Finance and Management, Bocconi University, and the International Anti-Corruption Academy Austria. After giving a brief comparison between the Chinese and Indian economies, from the 1980s till date, Prof. Velamuri introduced the three narratives responsible for the rapid growth of the Chinese economy from 1980 to 2020 as compared to India- Economics 101; Human Capital; Science and Technology, respectively.
The first narrative explains how China maintains a conducive environment for investors by participating in regional and global trade, providing Special Economic Zones (SEZs), fostering cheap land and labour and most importantly, having high savings and consequent high investments in infrastructure, 8-10 percentage points higher than India, per year, over the last four decades, leading to the development of their economy. Besides this, China’s exports are at about US $2.7 trillion, way ahead of India’s. In 2018, the manufacturing output of China was US $4 trillion while India produced only one-tenth of it. Unlike democracy, where politics overpowers the economy, the issue of land acquisition in a one-party system is much easy resulting in better infrastructure development and consequent growth in the economy.
While talking about narrative two, Prof. Velamuri highlighted that although India and China were at the same economic level in 1980, China had an upper hand in its human capital, when compared to India, which added significantly to its growth. One of the factors is that the literacy rates in China have always been higher than in India, be it the 1980s or 2020. Even today, when China is on the verge of attaining universal literacy, India’s literate population is at 74.68% as of 2020. The eligibility for being considered literate in China is much higher than in India. Although India has been working on its healthcare infrastructure, it is still behind China, which has a higher life expectancy at birth and more hospital beds per 10,000 people than India. Quoting Mao’s statement on gender equality, Prof. Velamuri claimed China to be a more equal country than India, in terms of gender. Be it economic participation, labour force participation or education attainment, China is doing much better than India in all aspects. However, India is ahead of China in politically empowering its women, and is almost equal to China when it comes to health and survival for them. According to the 2021 Gender Gap Report, published by the World Economic Forum, China is ranked at the 107th position while India stands at 140th. All of this, along with other social factors makes India stand farther from China while measuring the social mobility of its population.
The third narrative of science and technology has been regarded as of great value by Prof. Velamury. He explained that Deng Xiaoping’s economic reforms, the Four Modernizations, included science and technology, along with agriculture, industry and defence. This span of forty years from 1980 to 2020 was characterized by the personal computers and smartphone revolutions where China contributed heavily because of its liberal science and technology policies, thus making it the global leader in consumer technology, as can be seen in the case of High-Speed Rail (HSR). Looking at the statistics of 1986, China did not occupy any place in the data of most installed bandwidth (in kbps), however, in 2014, it had 29% of the bandwidth (in kbps) installed globally. China does not only has the most number of internet users, but it was also probably the first economy to gain momentum in cashless transactions; China has undoubtedly been one of the largest investors in Artificial Intelligence (AI)- by 2018, companies working in AI in China were able to generate 20 billion yuan- transforming itself into a knowledge economy. In the Global Innovation Index of 2019, China acquires the 14th position, making it the highest-ranked middle-income country to acquire this place. One of the possible reasons for China’s remarkable development is its increased investment in Research & Development (R&D) post-2008 when other advanced economies were taking a backseat. Prof. Velamuri also highlighted that with such a huge investment, China is likely to reap the benefits, but India, having comparatively low investments in its R&D, being a lower-middle-income country, has been doing a good job in terms of innovation and development and brags the second position after Vietnam. China is exceptional in offering its consumers value for their money across the globe, as its smartphone industry is giving tough competition to others. It is also rising to be the second country in publishing science and engineering articles, after the European Union.
Summing up his talk, Prof. Velamuri extended how the successful economic policies of China, covered under narrative 1, encouraging investments and exports have been the major contributors to China’s economic development for the past four decades. In addition to this, the efficient human resource at the time of opening up of the Chinese economy, along with the strategic use of existing science and technology, at that time, helped China grow enormously. After explaining the three narratives in detail, he leaves the audience with an open ending question of which narrative was the most persuasive for them.
Loopholes Covered by the Development
Taking a critical approach to the three narratives, Dr Priyanka Pandit, Post-Doctoral Fellow, Department of International Relations and Governance Studies, Shiv Nadar University, began her discussion. She explained how Prof. Velamuri’s account of China’s economy pointed out the strong opposing winds the country has been facing. According to her, the large stimulus package of China is resulting in the growing debt which is domestically owned and owed. Along with the misallocation of funds, there are many debt-defaulters within the state-owned enterprises leading to financial stress within the country. This is leading to the growth of inequality and unemployment within China. Secondly, the transitioning demography of the country, where the retired people are outnumbering the working-age population is a cause of concern; this was expected as an outcome of China’s One-Child Policy, which has been reversed recently. Besides this, the lack of social security schemes in China, especially after the COVID-19 pandemic, is increasing the financial burden on the single child of the family, especially with the rising living costs, as the parents have little or no retirement pensions.
This is further challenged by the Chinese tendency of consuming less and save more, restricting China’s transition to a domestic consumer demand economy. Since the Global Financial Crisis, the migrant population in China has been on the decline, resulting in higher wages, subsequent economic slowdown and importing workers. Thirdly, is the lack of independent institutions and the discussions surrounding them, especially under Xi Jinping. Dr Pandit mentioned that it is true that a one-party country, like China, faces fewer constraints on the path of development as compared to democracy, however, such an authoritarian government lacks competition, incentives and other challenging elements for the country to work towards. Additionally, the emphasis on state-owned institutions does not provide a healthy environment for private enterprises to undertake innovation and carry out their activities. In conclusion, she mentioned that Jinping’s top-down approach towards policy making and personalized routes has yielded a restrictive environment averting competition and leading to misallocation of capital.
Understanding the Reasons for Growth
Prof. Amita Batra, Chairperson and Professor, Centre for South Asian Studies, School of International Studies, Jawaharlal Nehru University (JNU), New Delhi, opened her views by suggesting that the three narratives discussed by Prof. Velamuri should not appear as mutually exclusive but rather as supplementary. She emphasized how the narrative of science and technology has not only boosted China’s economy in the past years but is also leading China to focus on domestic innovation-based growth. This gap, she mentioned, should be explained in relation to the ongoing debate in the USA of whether China will be able to establish its own world of technology and innovation and how China is cutting down on its outward orientation. To criticise Prof. Velkamuri’s point of technology not being a part of earlier discussions and policies in China, Prof. Batra commented that the trade strategies of China, as explained in the narrative of Economics 101, focus on Foreign Direct Investments (FDIs) thus make ‘forced technology transfers’ very much a part of China’s economic policies of growth. She mentioned how this point connects the first and the third narrative to each other, and further to the present situation in China with Jinping’s inward orientation policies.
As her second point, Prof. Batra discussed the high investments in China as a result of high savings and backed it up by explaining how the policies of that time forced people to save because of a lack of social security net from the government. However, even after large savings, the Chinese are not very comfortable investing in stock markets. Extending this, she also referred to Dr Pandit’s point of misallocation of capital in China as a result of the lack of development of its financial markets. Wrapping up her analysis, Dr Batra discussed the point of China’s human capital being better than that of India’s and explained the potential cause behind it. She said that right from its growth years when India was establishing its best educational institutions like the IITs, it has given priority to tertiary education, disrupting the process of human capital development. China, on the other hand, like other Southeast Asian countries emphasized primary education, thereby expanding its pool of literate.
After listening to the Discussants from the session, our moderator called Prof. Velamuri, who agreed that the three narratives presented by him are indeed intertwined. While clarifying Dr Priyanka’s point, he claimed that the Chinese economy has been unstable for a very long time now and the headwinds of past times are now combined with the latest policies to turn the economic policies of Deng Xiaoping. On questioning why would the existing Chinese government try to reverse the economic policies which lead to its economic success, he found an explanation in one of the articles he read by Mr N.S Leonce. He said that if that article is true, then the move undertaken by the Chinese leaders is really bold and risky. Responding to the issue of demographic transition, he mentioned that the age-dependency ratio in China has been favourable till 2015; he explained that the current unfavourable ratio will definitely have a negative impact on its growth but also hinted that the Chinese are well aware of this shortage of labour and have started to work towards it. Addressing the point of technology, Prof. Velamuri mentioned that a few years ago China decided to promote its own technology champions, like Baidu and Alibaba and claimed how the technology policies have been somewhat inward-looking since the beginning due to which foreign companies were not able to sustain for long. The difference between the financial markets of India and China is very stark and one of the reasons for this is the proactive corporate governance in India which monitors all the concerned activities.
He also threw light on how the retail market investors have lost their confidence in investments in financial markets and banks due to extremely low returns, which leaves real estate as the only safe investment avenue. Prof. Velamuri also agreed to India’s neglect of primary education which made us all pay a high price. He also appreciated China’s autonomy from the vested interests and its capacity to implement policies that also lead to its economic development. In the end, Prof. Velamuri stated that although the top-down economies are able to make progress much faster, however, they are also the ones making more mistakes because of the absence of deliberations and debates which are a necessary feature of democracy as it gives room for corrections.
Acknowledgement: Diya Goswami is a research intern at IMPRI.
Youtube Video for Three Narratives on China’s Economic Miracle at IMPRI #WebPolicyTalk