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February 12, 2016

Excerpts from book by Mohan Lakhera 'Economic Growth in Developing Countries'

In the book "Economic Growth in Developing Countries," Mohan Lakhera writes that "Growth paths differ radically across countries, depending on the pace and the pattern of their individual structural transformations."

 

The excerpts below, from the chapter "Growth and Structural Transformation – Major Asian Countries’ Experiences," provide an overview of the author's views on the development of India and China.

 

Courtesy: Mohan Lakhera, Economic Growth in Developing Countries, published 2015, reproduced with permission of Palgrave Macmillan'

 

"Growth paths differ radically across countries, depending on the pace and the pattern of their individual structural transformations. In most developing economies, structural transformation has been heterogeneous without any significant deepening and has not always been growth-enhancing. It presents an ‘idiosyncratic’ aspect of structural change, bucking sequential stages, and slow intersectoral reallocation of labor…

 

The development race, in particular during the past three decades, has witnessed miraculous achievement in the economic transformation of China with an over eightfold increase in its per capita income and more than double in the case of India. In the case of China this is the consequence of the continuous interventionist role of the state in the drastic restructuring of industrial sector and, of course, to some extent also due to the endogenous factors. Its gross domestic product (GDP) has grown by an average annual rate of nearly 10 percent in real terms since 1978, compared with a figure of 4 percent for all developing economies. Since 1978, the government has consistently undertaken economic reforms and opened up the economy to the outside world, fueling impressive levels of economic growth. Although China’s per capita GDP is still modest (at about US$4,940 in 2011), it had become the world’s third-largest economy by 2007 (measured in current exchange rates). Its transformation in a catch-up process and emergence from international isolation has been exceptional. Also its gradualism with intermittent shocks has worked well. China maintained a sustained growth path over the 30-year period of reform and globalization. Much of China’s GDP growth has come from an impressive growth in industrial production. Its industry-led growth pattern is amplified by its policies. The government has favored industry and investment over the services sector in several ways: high and rising investment; favoring high investment rates in industry through the financial system; promoting industrialization by keeping the prices of key inputs low; gearing government investment in infrastructure which helped the industry; and impressive FDI inflows into industry. In the industry-led growth model its undervalued currency has also been instrumental. China’s strong economic performance has been influenced by both external and internal factors. China has been following an increasingly aggressive policy undercutting India not only in foreign markets but also in capturing India’s own domestic market, mostly in low-value products through the exploitation of an undervalued exchange rate…

 

Curiously, even though the manufacturing sector has been the focus of the policy reforms in India it has failed to bring about the growth transition in this sector and trigger new growth dynamism. With a near-stagnant share of manufacturing in the GDP figures, the sector appears to be trapped in a self-fulfilling low level and unable to extricate itself. Seen as a ‘rising star’ among developing countries in the 1950s, within three decades India had come to be regarded as a ‘basket case’ with a meager per capita income growing at less than 1.5 percent per annum…

 

The low-growth equilibrium of the high-cost economy of India did end in the mid-1980s following some limited liberalization measures, but the macroeconomic equilibrium ended in a severe fiscal and external payment crisis in the early 1990s, which paved the way for a paradigm shift in the policy in 1991 but with little success in terms of performance. The growth rate did increase, but it was service-driven – mostly by an exceptional phase in the world economy. This dream run of India’s growth story, which witnessed the achievement of growth rates of about 9 percent per year in the five-year period from 2003–04 to 2007–08, were triggered by factors such as the sharp upturn in world trade and a technological ‘revolution’ in communications. But now, as the global economy faces a semi-slump and with other unfavorable conditions the service growth dream run is also evaporating…

 

China’s gradualist approach to economic transition, despite institutional frailties, started first with agriculture and subsequently shifted to a more economically decentralized and liberalized system – but retaining a large and dominant industrial public sector – has resulted in sustained economic growth. The gradual and partial reform shifted the economy towards a market system under a regime of growth, improved productivity in the early years of reforms, accelerated technical change and exports. Government focused increasingly on innovation, cost reduction and further deregulation, deepening the cumulative impact of reform, rather than on rent-seeking approach and subsidies. It was different from the top-down, centrally planned approach, but is said to have evolved from sequences of decisions made by tens of thousands of enterprises, managers, administrators and workers. It is an endogenous outcome which explains the achievements in both growth and institutional change... Its growth-promoting specific reform measures included a lifting of the restrictions on small private enterprises and industrial ownership and also the removal of tight planning controls from large-scale enterprises…The measures propelled the economy to become one of the fastest-growing countries in the world, averaging over 9 percent growth rate subsequent to reforms in 1978…

 

India’s major policy switch in 1991, was by ‘stealth’ and not by design or an endogenous outcome, following the macroeconomic crisis in that year, were aimed at removing irksome controls and the rigidities covering: industrial licensing; foreign investment; foreign technology investments; public sector policy and MRTP Act… Notwithstanding the inadequate and delayed response, the reforms got ‘interlocked’ between the rent-seeking policies and the confused bureaucracy, on the one hand, and severe institutional weak- nesses. The reform path was also not viewed in the larger context of giving global orientation to the economy… but removing some policy burdens, improving macroeconomic distortions and providing some market competition. It was also not viewed in the context of an optimal mix and trade-off between alternatives and unbundling the constraints that became evident during policy dispensation, viz. growth and equity; the public sector versus private sector mix; export-led versus import substitution; factory-type industries versus small-scale industries; and so forth…"

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