Economic Reforms in China and India: Features, Achievements, and Prospects

free essayIndia and China are rapidly developing countries in the world with over a one third of the world’s population. Average income in China has grown tenfold and quadrupled in India since 1995. Both countries with opposite economic and political models significantly reduced their poverty levels as well as environmental destruction and income inequality (Syed and Walsh 36).

Features of Economic Reforms

In China, the most significant economic reforms happened from the end of the 1970s till the 1990s. According to the agricultural reform, in 1978 peasants got a right to independently choose which crops to grow and freely sell them on the market. In 1980, Chinese government established special economic zones on the east coast that helped to attract foreign investments to the country. The next reform was in the middle of the 1990s when state-owned companies got a chance to look for new markets and invest in technologies (Syed and Walsh 37). With the entry into the World Trade Organization, Chinese economy faced economic and investment growth (Xiaoshuo 62). Thus, China started opening its economy and applying market economies experience.

India began modernizing its economy in 1991. The main objective of these reforms was to improve economic flexibility because of the existing payment crisis. At first, India began developing regulations and simplifying requirements of running a business in the country. India’s government wanted to attract foreign investments and open market to the global enterprises. Moreover, the core focus was on service industry. Country started with programming and customer support that later transformed into the creation of new software, profound medical services, and pharmacy (Syed and Walsh 37). Next steps were taken in trade, monetary, and industrial spheres. For example, customs duties were simplified and reduced. Rupee exchange rate was regulated to make the country’s currency more easily convertible. Furthermore, downfall of the state involvement to the economy caused the rise of cooperation, initiative, and responsibility (Kennedy). Thus, India wanted to advance its economy to modern demands.

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In the 1990s, India’s GDP grew for 7-8% per year. From 2000 till the beginning of economic crisis, the economy growth was 8%, and after 2009 – around 6%. The “second generation reforms” anticipated private enterprises and state bodies’ cooperation. Many institutions got more autonomy at regional levels, and new institutions were created to implement reforms (Harris 226). On the contrary, financial crisis in 2008-2009 underlined weaknesses of China’s development model. As a result, in 12th Five Year Plan, China aimed to change extensive growth into intensive. Such shift meant improved protection of workers and environment, skills advancement, wages rise, and growing investments in manufacturing process and new technologies (Luthje and MacNally 2). Thus, economic crisis made adjustments to reforms.

The biggest changes happened in Chinese model, which has changed into a new formation. “Refurbished state capitalism” has become a new development way when state policy and control is combined with domestic network, global capital, and some other market forces. This model has different variations in different industries. For example, state-owned companies that produce foreign brand cars are very conservative, while private enterprises are innovative. However, Chinese brand has lower demand on the inner market as compared with international brands (Luthje and McNally 4). Thus, China began to promote closer cooperating between state and market.

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High pollution level led to a need to modify the economic policy in both countries. Actions were taken to promote the control over the number of cars and the usage of new energy vehicles. These actions created some tensions within the local government that are shareholders of many big car producing companies. Moreover, the rise of labor protests and unrest both in auto and IT industry posed a new challenge. For instance, in China, government launched anti-corruption and labor rights protection campaigns with the “rule of law” being one of them (Luthje and McNally 6). Thus, India and China face the same problem with environmental pollution.

The other common problem for China and India is the high level of population beyond the poverty line. For example, after the reforms, over 400 million people are still poor; in India, this number is 250 millions. As a result, countries lack money for education, and the gap in living standards and income between people who form a new middle class in cities and rural population is rising (Syed and Walsh 38). Nevertheless, India and China implemented economic reforms; still, a huge amount of their citizens cannot support themselves and satisfy just basic needs satisfaction.

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Both countries can adopt each economic model reforming experience to sustain development. For example, India can hold agriculture reform and promote cooperation between industrial and agricultural spheres. Moreover, the country can create new working places by liberalizing investment regimes and creating special economic zones. At last, India can adopt renewable energy initiatives and modernize infrastructure in order to enhance connectivity and trade. On the contrary, China can improve its financial sector and establish more market-oriented stock market. The country can also adopt India’s approach in the service sector management and regulations and develop “invisible human infrastructure”. Also, attention should be paid to intellectual property right protection (Syed and Walsh 39). Thus, India and China can adopt the best practice of each other.

Reforms’ Major Outcomes

One of the reforms’ main outcomes were economic openness for the global market and growing gap between poor and rich. A lot of foreign companies operate in China. For example, out of 500 top world’s transnational corporations, 483 have their offices and produce something in China. In 2008, China was the third country in the world according to the amount of foreign direct investments with $118 billion input (Harris 226). Nevertheless, both poor and rich Indian states were growing, but the degree of dispersion in growth rates is now larger than it was before reforms. Moreover, according to the surveys, inequality gap was the biggest in Tamil Nadu and Mahrashstra, which are the richest states. At the same time, the situation in the poorest states showed the decline of inequality. However, although the countries became more open to the global market, it did not help them to reduce inequality.

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At the same time, key development indicators have not changed dramatically, and China still faces many other challenges. Moreover, the period of “new normal of slower economic growth” signals that China needs to rebalance its economy again. The main problems of the modern model are the lack of innovation systems, market competition, labor standards and wages regulations, as well as existing relations among Chinese state, private and state-owned enterprises, and multinational corporations (Luthje and McNally 2). Thus, the need for economic reforms still exists.

Chinese auto industry has been growing since 2000. Today, the country is one of the biggest cars producers and consumers in the world, and most of the produced automobiles do not go on export but are sold in the domestic market. Moreover, production model follows the pattern when first-tier component is produced in the small but modern state-owned factories with multinational corporations’ capital and high labor standards and salaries in big developed cities such as Wuhan, Changchun, and Shanghai. On the other hand, most difficult and labor costly details are produced in the provincial level and periphery where private employers pay less, and it is easier to ignore different regulations (Luthje and McNally 3). Thus, the situation in auto industry demonstrates the existing drawback of the economic model.

IT industry is another sphere that depicts China’s model. First, many foreign companies that have their headquarters in the Silicon Valley locate their production in China. The core reason for that is cheap labor force, predominantly migrants from rural areas with minimum wages. On the other hand, China started developing its own IT industry and founded such companies as Huawei, Lenovo, and Xiaomi, which employ Taiwanese-owned factories. These brands are challenging other IT giant in the market. National-level politics, regulations and standards play are significant for Chinese and foreign companies. While most companies are private enterprises, China Mobile and China Telecom play an important role in this sphere as state-owned. However, the main drawbacks in this industry are the existing problem with low salaries and flexible working conditions. Moreover, many producers locate their manufacturing capacities in less economically developed regions where different regulations can be omitted (Luthje and McNally 3-5). Thus, China started paying attention to the IT sector development.

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India faces almost the same problems. Even though India now competes with the biggest IT companies in the world, the country’s main problems are the low salary rates as compared with other countries and small amount of population who are actually working in this sphere. Moreover, the rapid growth of working-age population requires more jobs, education and health care facilities. At the same time, infrastructure and labor right regulations need to be improved. The other challenges of modern India’s economic model are complex business regulations and rules, existing barriers for foreign investors, and high red tape rates (Syed and Walsh 38). Thus, India has many problems that still remain after the reforms.

China’s and India’s Influence in the Global Economy in the Future

Many scholars argue about the future role of China and India in the world because of their strong and rapidly developing economies and large population. For instance, Dimaranan conducted a research on the possible influence of India and China’s development and trade on other countries till 2020. According to his findings, such growth will have both positive and negative impact on other countries. However, positive aspects such as the desire of other countries to maintain high quality and the variety of goods on the market will minimize adverse effects (Prime 626). Thus, these countries will positively influence the world economy.

One of the problems for both countries is the possible competition between them for consumer markets and raw materials. According to some predictions, China and India will supply the whole global market with various products “from low-wage, low-skilled sectors all the way to capital goods and higher technologies”. As a result, the rest of the world will predominantly specialize in raw materials and resources supply as well as food. Moreover, many developed countries will face the decline of the demand for their high-technology products (Prime 625). Thus, countries can become competitors as well.

Modern China has several aims to pursue in the future: Chinese common citizens desire the continued growth, and officials want stability. At the same time, the Chinese plan to create a new defense strategy and regain influence, position, and power the country had many centuries ago. According to Kerry Brown, “China is neither a missionary culture nor a values superpower”. The country’s growing presence in Latin America and Africa is more a search for new suppliers of raw materials and consumers markets than domination. For example, the abuse of the workers’ rights or illegal businesses signal about bad business operation models, but not about the vision to conquer new nations as it was during the colonialism (Johnston). Thus, China places its economic interests on the first place.

Old Chinese saying states, “Sweep the snow from in front of your own house; do not worry about the frost on your neighbor’s roof”. The high rate of population that lives beyond the poverty line is a more challenging issue for the government than famine in Africa. “The country wants to have a little involvement abroad as it can get away with, except of engagement that enhances its image as a great power. It will act abroad when its own interests are at stake, but not for the greater or general good”. At the same time, China seeks to get a broader representation on the global arena. For example, China created New Development Bank in Shanghai, where all BRICS countries are represented. Moreover, PRC also founded Asian Infrastructure Investment Bank. As a result, such policy is hold in order to create a counterbalance to the International Monetary Fund and the Asian Development Bank, where China’s role is less essential (Johnston). Thus, China wants to get global recognition, but avoid unnecessary involvement in other countries’ affairs.

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India also has some objectives and plans for the future. For India, Latin America region is the preferential one, and the country has grown its influence there over decades. After creating strong ties with Brazil, India signed Preferential Tariff Agreement with Mercosur and Chile and plans to add Peru, Colombia, and Mexico to this cooperation. The main objective of this interest in the region is the growing need of markets and raw materials for its industry (Bhojwani 38). Some experts state that in the future India will face some problems because of commercial services that are export-oriented. As the same time, this industry pays less attention on domestic market, which causes companies and products non-competitiveness in India itself. Faster development of sectors, especially services, in India led to the creation of products with higher value-added rates. Thus, India has more opportunities in this sphere as compared with China in the future (Prime 624-25). Thus, India will strengthen its influence in some regions, but will face some problems in the future as well.

Conclusion

China and India are examples of different economic models that underwent reforms to be competitive in the global market. Both countries introduced free market elements to their economies, simplified some regulations, and lowered the level of state interference into the economy. As a result, they managed to reach high GDP growth rate and attract foreign investments. Nowadays, China and India still face many problems such as labor law violations, low wages, and a huge amount of citizens, who live in poverty. In the future, India and China will play an important role in the world; however, both countries still have many weaknesses that need to be solved.