Saturday, July 11, 2009

Rising with the tide !!

By JOHN LEE From today's Wall Street Journal Asia.
 China and India will likely defy the economic malaise in Western
 economies and grow at more than 7% this year. But that is where the
 comparison should end. Contrary to popular hype, India is actually
 outpacing China where it counts most -- the economic growth of the
 rural poor.
 Half of China's population and two-thirds of India's still live in
 rural areas -- roughly 700 million people in each country, most of
 whom remain poor. In China, the urban-rural income ratio has become
 increasingly disparate; it was 1.8 times more in the mid-1980s, 2.4 in
 the mid-1990s, 2.9 in 2001 and now around 3.5.
 This trend starkly contrasts with the early years of Chinese economic
 reform. Over 80% of the poverty reduction in China occurred during
 Deng Xiaoping's reforms, between 1978 and 1988. Although per-capita
 incomes have risen since then, the net incomes of about 400 million
 people have declined over the past decade.
 India started from a lower economic base but has made greater gains:
 Its urban-rural income gap has slowly but steadily declined since the
 early 1990s. Over the past decade, economic growth in rural India has
 outpaced growth in urban areas by almost 40%. Rural India now accounts
 for half of the country's GDP, up from 46% in 1993. Unlike the
 Chinese, rural Indians do not have to migrate to already crowded urban
 areas to earn a better living.
 These trends mirror the path of economic reform in both nations. China
 had a huge head start in alleviating poverty. It began free-market
 reforms in 1978, while India only started on its current journey away
 from socialism toward a market-based system in the early 1990s. Since
 the turn of the century, India has been rapidly improving, but China
 has been getting worse. And since 2000, poverty and illiteracy in
 India have halved, while the same figures doubled in China.
 The role of domestic consumption in the economy also demonstrates the
 divergent paths of these two developing giants. In China, domestic
 consumption as a proportion of GDP has fallen to 35% from around 60%
 in the 1980s. The Chinese "economic miracle" depends mostly on exports
 and state-led fixed investment. Even Beijing consistently admits this
 is an unbalanced, unsustainable strategy. Moreover, depressed
 consumption levels and correspondingly high levels of savings by the
 citizens of a still-poor country mean growth is uneven and benefits
 relatively few. In contrast, domestic consumption composes more than
 two-thirds of the Indian economy. India has a lot of catching up to
 do, but its poor are rising with the tide, unlike in China.
 China's emphasis on state-led fixed-investment growth in urban areas
 may have fostered this trend, exacerbating inequality and heavily
 favoring a relatively small number of well-placed insiders. After the
 1989 Tiananmen Square massacre, Beijing decided the state should
 reassert its control of economic growth, which had rested on
 private-sector entrepreneurship. Before Tiananmen, private-sector
 investment growth in rural China was growing at 20% annually. After
 Tiananmen, it dropped to 7%. Hundreds of millions of Chinese have
 since missed out on the fruits of the country's spectacular growth.
 The Chinese and Indian development models are not actually in
 competition, despite what newspaper headlines and books may suggest.
 But as magnificent as Shanghai now is, its shiny buildings have been
 built on the backs of peasants forced to deposit their savings into
 state-owned banks and receiving little in return. In contrast, India
 started its reforms 15 years later than China but is quietly and
 gradually building its base. Now that Prime Minister Manmohan Singh is
 starting his second term, he will do well to reject the dangerous
 appeal of the Chinese approach.
 Mr. Lee is a foreign-policy fellow at the Centre for Independent
 Studies in Sydney, a visiting scholar at the Hudson Institute in
 Washington. (CIS, 2008).

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