Economists like to compare the People's Republic of China with the Republic of India as global success stories in reducing poverty and moving toward prosperous market economies. Their sustained productivity growth, based on their respective stable macroeconomic environments and increasingly educated labor forces, has distinguished both countries from many other parts of the world in recent decades. Since China initiated economic reform in 1978, its national income has more than quadrupled. Since India began liberalizing its economy in 1991, its per capita GDP has almost doubled.
But the successful economic growth of the two Asian giants is not the only feature that invites comparison. Standard & Poor's Ratings Services believes that the successful economic modernization of both nations is crucial for the success of the global economy. Although China and India account for only 4% and 2%, respectively, of global gross domestic product (GDP), they account for more than one-third of humanity. Thus the failure of one or both of these countries to modernize would limit the successfully "globalized" part of the planet to large pockets in the West and in East Asia - excluding half the world's population and potentially threatening the stability of the global economy.
China is likely to become a developed economy before India. Thus far, China has enjoyed faster economic growth than India. China's GDP has grown at an average rate exceeding 8% in the past decade, compared with about 6% in India. China has received more foreign direct investment (FDI) in recent years than any country in the world except the U.S., about 50 billion U.S. dollars according to official figures. Even discounting for statistical problems, the level dwarfs India's FDI level of around 4 billion U.S. dollars. While GDP growth may accelerate modestly in India and decelerate in China over the next decade, China's lower population growth rate will likely ensure that it continues to enjoy slightly higher per capita growth.
In the coming years, China may follow a course of reform similar to that of South Korea, which grew rapidly under an authoritarian government that developed the institutions of a market economy, including more secure property rights. The Communist Party is changing rapidly from an ideological vanguard to a broad tent that encompasses old and emerging elites. More than two decades of material success has provided China's governing elite with political capital, especially in the perception of the growing middle class, leaving political dissidents generally weak and divided.
The greater prosperity and stronger public finances of China, in comparison with India, are reflected in the gap between the two countries' sovereign ratings. Standard & Poor's assigns a 'BBB+' long-term foreign currency rating and positive outlook to China. India, by comparison, has been assigned a 'BB' long-term foreign currency rating and positive outlook. China's rating is investment-grade, and India's rating is non-investment grade. The gap in the ratings is largely explained by China's stronger fiscal position and lower debt burden. The Indian government runs larger fiscal deficits and has accumulated more debt as a share of GDP than its Chinese counterpart.
China's advantage is rooted in use of capital and productivity gains. According to the International Monetary Fund (IMF), added use of capital has been the biggest factor behind growth in China, contributing proportionately more than twice as much to GDP growth as in India. While total factor productivity has grown well in both countries, it was about 50% higher in China than in India. Higher worker productivity has translated into lower poverty.
Differences in poverty, literacy and life span have also been important. More than 200 million Chinese have been lifted out of poverty in recent years, the most impressive improvement in history. Though still impressive, poverty reduction has been slower in India, with the poverty rate falling to 26% in 2000 from 36% from 1993 to 1994. Chinese enjoy higher literacy rates, live one decade longer than Indians on average, and suffer half the infant mortality rate of Indians. Chinese are also richer on average than Indians, although the distribution of income may be more skewed in China.
India lags China in the development of rural and agro-industry, due in part to restrictive industrial policies and poor rural infrastructure, such as roads and electricity. Unlike in China, most rural income in India comes from the farm, except in a few locations where irrigated land has facilitated pockets of Chinese-style green and grey revolutions.
Domestic politics are more stable in China than in India. A remarkable feature of China's recent history is the ability of its party elite to agree on working rules to keep internal conflicts from shattering its cohesiveness. Under paramount leader Deng Xiaoping's guidance, the party created rules to facilitate turnover in key party and government positions, regularly injecting new blood. New rules for recruitment and retirement were complemented by less harsh methods for dealing with political opponents inside the party, in contrast to the fate of those who lost intraparty struggles in the past.
No Indian leadership, even a dictatorship, could avoid grappling with the turbulence arising from the rapid social changes under way in a country with as much diversity as India. Hence, a singular focus on economic development, as in China, is not politically possible in contemporary India. The acceleration of social change in the early 1990s coincided with an economic crisis that nearly led the government to default on its debt in 1991. But the crisis did not threaten the very existence of India's political parties or its system of government, as did the failure of the Cultural Revolution in China. Hence, the political impulse for reform was weaker in India in 1991 than it was in China when Deng came to power.
Yet after 26 years of reform in China and more than a dozen years in India, the political systems and elites of both countries are largely intact. To their credit, both governments have avoided economic shock therapy -- and they would be well advised to continue to do so. Dramatic shocks can quickly tame inflation or change people's expectations, but they can also cause more harm than good in countries that seek to build new institutions or manage complex political forces whose consent is needed for reform to continue. A gradual and pragmatic approach has allowed both countries to make the necessary adjustments to sustain change, both economically and politically, in the absence of many of the institutions that normally characterize a modern market economy.
No one can predict for certain whether China will maintain its current lead over India in terms of economic development. Indeed, China's achievement in combining economic dynamism with political continuity in recent decades has been matched by India's achievement in constructing a stable democracy that has accommodated growing social mobility. Both China and India still enjoy ample external liquidity, with high foreign exchange reserves and growing exports of goods and services. The long-term trajectory of economic reform and sovereign credit ratings of both countries will depend upon many factors, including those discussed in this commentary.
A comprehensive evaluation of the experiences of the two countries would need to define the word "success," set a time frame for the measurement of success, and define the relative importance of economic goals versus political ones. Such an analysis would assist foreign investors in obtaining a better understanding of China in a global context at a time when China is entering the global economy rapidly under a determined leadership that is increasingly open-minded about economic policies.
(This is an abstract from Standard & Poor's recent commentary titled "China, India, and the Fate of Globalization", which is now available on Standard & Poor's Web-based credit research and analysis system at www.ratingsdirect.com.)
