Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India

It is often claimed, both in the media and academia, that it was global integration that brought down the extreme poverty that had afflicted the two countries over many decades. While expansion of exports of labor­intensive manufactures probably lifted many people out of poverty in China in the past decade (not in India, where exports are still mainly skill­and capital­intensive), the more impor­tant reason for the dramatic decline of poverty over the past three decades may actually lie elsewhere. Table 6 suggests that more than half of the total decline in the numbers of poor people (below the poverty line of $1 a day per capita) in China between 1981 and 2005 had already happened by the mid­ 1980s, before the big strides in foreign trade and investment in China in the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following decollectivization and one of history’s most egalitarian land redistributions, with every rural fam­ily getting an equal piece of land (subject to differences in family size and regional average), in addition to an upward readjustment of farm procurement prices—these are mostly internal factors that had very little to do with global integration.

To settle the issue of how much of the poverty decline is due to globalization and how much due to largely domestic factors, one needs causal models, which have not been econometrically tested much in the literature. In an at­tempt to econometrically measure, on the basis of a time series of province­ level data, the effects of different factors on rural poverty reduction in China, Fan, Zhang, and Zhang (2004) show that since the mid­ 1980s domestic public investment (particularly in educa­tion, agricultural research and development, roads, and other rural infrastructure) has been the dominant factor both in growth and in rural poverty reduction, much more than economic reform. With a new provincial panel dataset Montalvo and Ravallion (forthcoming) confirm econometrically that the poverty reduction in China has been mainly due to agricultural growth.

In India, NSS data suggestthat the rate of decline in poverty did not accelerate in 1993–2005, the period of intensive opening of the economy, compared to the 1970s and 1980s. This may be connected with the fact that agricultural output (and TFP) grew at a slower rate in the past decade compared to the earlier decade (see table 2 in chapter 2). This may be largely on account of the decline in public investment in rural infrastructure (such as irrigation, roads, and prevention of soil erosion), which has little to do with global­ization. NSS data also suggest that there has been a decline in the rate of growth of real wages in the period 1993–2005 compared to the previous decade, 1983–1993. We should also recognize that pri­vate consumer expenditure data of the NSS that are used in poverty estimates (as with the Chinese household survey data) do not cap­ture the declining access to environmental resources (such as forests, fisheries, grazing lands, and water both for drinking and irrigation) on which the daily lives and livelihoods of the poor depend.

Global integration does not seem to have helped some of the other nonincome indicators such as those of health. The National Family health Survey (NFHS) data show that some of India’s health indicators are worse than those of Bangladesh (in maternal mortal­ity, infant mortality, child immunization rates, etc.), and even those of sub­-Saharan Africa (in the percentage of underweight children), in spite of much higher growth rates in India than in those other countries. The percentage of underweight children (younger than age three) is 46 in India, and about 30 percent on average in sub­-Saharan Africa (8 percent in China). Take the case of Gujarat, one of the richest, highest­-growth, and highest­-reform states in India: the percentage of underweight children, which was already high (higher than sub-Saharan Africa ), went up between NFHS 2 (1998–1999) and NFHS 3 (2005–2006).(6)

Some disaggregated studies (7) across districts in India have also found trade liberalization actually slowing down the decline in rural poverty. Such results may indicate the difficulty of displaced farmers and workers in adjusting to new activities and sectors on account of various constraints (for example, in getting credit or information or infrastructural facilities such as power and roads, high incidence of school dropouts, and labor market rigidities), even when new opportunities are opened up by globalization. This is in line with textbooks in international economics that emphasize that product-­market liberalization need not be an improvement when there are severe distortions in input markets (such as those of credit, labor, electricity, land, etc. in the case of India).

India’s pace of poverty reduction has been less than China’s, not just because growth has been faster in China but also because the same 1 percent growth rate reduces (or is associated with reduc­tion in) poverty in India by much less. This so­ called growth elas­ticity of poverty reduction is much higher in China than in India; this may have something to do (8) with the differential inequalities of opportunity in the two countries. We do not have good measures of inequality of opportunity, (9) but in a poor agrarian economy such inequality is largely reflected in that of land and education. Contrary to common perception, these inequalities are much higher in India than in China.

As noted in chapter 3, the Gini coefficient of inequality of land distribution (in terms of operational holdings) in rural India was 0.62 in 2002; the corresponding figure in China was 0.49 in 2002. India’s educational inequality is among the worst in the world: ac­cording to a table in the World Development Report 2006, published by the World Bank, the Gini coefficient of the distribution of adult schooling years in the population, a crude measure of educational inequality, was 0.56 in India in 1998–2000, which is not just higher than 0.37 in China in 2000, but even higher than almost all Latin American countries (for example, Brazil: 0.39), and some African countries. Because of the educational disparity among households, a study of the determinants of rural poverty in China and India by Borooah, Gustafsson, and Shi (2006) finds that education has a much bigger impact on poverty in India than in China. Apart from land and education, the other important ingredient of inequality of opportunity is due to ethnicity. In China, ethnic minorities make up only about 9 percent of the population. In India, with a much more heterogeneous society, about one-third of the population is in so­cially disadvantaged minority categories (such as Muslims, “dalits,” and tribal people), and thus minority status is a more important de­terminant of poverty in India than in China.

Comparing across states in India, as Datt and Ravallion (2002) point out, the growth elasticity of poverty reduction depends on the initial distribution of land and human capital. Purfield (2006) indi­cates that in the period 1977–2001 this elasticity was quite low in high­-growth states such as Maharashtra and Karnataka, and high in states such as Kerala and West Bengal. Comparing across states and over time, Topalova (2008) estimates that “inclusiveness” of growth (measured by her as the difference between the growth in consumption of the bottom 30 percent of the population and the top 30 percent) depends significantly and positively on the share of the population that has completed primary and particularly sec­ondary education, apart from financial development, flexible labor markets, and infrastructure in the state. Similarly, comparing across provinces in China, Ravallion and Chen (2007) find that growth had more poverty­-reducing impact in provinces that initially had less inequality.

What about the link between market reform and inequality? at least two major problems beset the analyst in this matter. one is that so many other changes have taken place in the past quarter century of reform, it is difficult to disentangle the effects of reform from those of other ongoing changes (such as technological progress—often information-­based or skill­-biased—which usually changes the in­come distribution in favor of the better-­off skilled labor groups, demographic changes, or macroeconomic policies). The second is that in both countries there are reasons to suspect that economic inequality (or its rise) could be underestimated (though not neces­sarily) in view of a widely noted fact facing household surveys (in many countries) of large (and increasing) non-response by the rich households. In addition there is reason to believe that the income data may not have adequately covered the rising importance of family-­run businesses in China, which results in understating the rise in inequality. It is also difficult to compare inequality in China (10) and India, as most of the inequality data that are cited in this con­text usually are for income inequality in China and consumption expenditure inequality in India (as the Indian NSS does not collect income data).(11) Consumption expenditure data do show a rise in ex­penditure inequality in both countries in the past decade or so. But, as we have suggested, this rise may be an underestimate, and there is very little analysis as yet to show that this rise is primarily due to economic reform.

(11) The National Council of applied economic Research data, which occasionally provide income data, suggest that (after correction for rural­urban price variation) the Gini coefficient for inequality of Indian income as 0.535 in 2004–2005, much higher than that in China.