Comparing the Economy Development of China and India – Implication of the Internal and External Stability

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i Abstract

 

This assignment includes is written in three part beginning with a historical review of the development of China and India to see how to come to the current status. This review is followed by a further analysis by focusing on the topic of the implication of the stability in term of both internal and external stabilities to the economy development of China and India. The last part will be to give some recommendations on what a country should learn from the experiences of these two countries.

 

 

 

ii List of tables, figures and charts

 

Figure 1 Percentage of light and heavy industries……………………………………….. 14

Figure 2 The real gross domestic income per capita……………………………………… 15


 

iii Content page

i Abstract………………………………………………………………………………………………………… 1

ii List of tables, figures and charts……………………………………………………………………… 2

iii Content page……………………………………………………………………………………………….. 3

1.     Introduction……………………………………………………………………………………………… 5

1.1           Research objectives……………………………………………………………………….. 5

1.1.1     How Indian and China come to their current status in a historical perspective?  5

1.1.2     What are the implications of internal stability to the economy development in China and India?  5

1.1.3     What are the implications of external stability to the economy development in China and India? 5

1.1.4     What recommendations could be given to a country learning from China and India?      5

2.     Findings…………………………………………………………………………………………………… 5

2.1           Chronological development and rise of India……………………………………. 5

2.1.1     The beginning of European Settlements (1600~1757)…………………. 5

2.1.2     The British Conquest of India (1757~1858)……………………………….. 6

2.1.3     Direct ruling under the British Crown (1858~1947)……………………. 6

2.1.4     Economy development after independence (1947~today)……………. 7

2.2           Chronological development and rise of China…………………………………… 8

2.2.1     Imperial era (221 BC~1912AD)……………………………………………….. 8

2.2.2     Modern era…………………………………………………………………………….. 9

2.2.2.1 Republic of China (1912~1948)…………………………………………. 9

2.2.2.2 Communist era (1949~today)…………………………………………….. 9

3.     Analysis………………………………………………………………………………………………….. 11

3.1           Implication of internal stability……………………………………………………… 11

3.1.1     Impact of political stability on effectiveness of economy policy….. 11

3.1.2     A strong government and economy stability……………………………… 11

3.1.3     Strong government, unbalance economy development and economy inefficiency     12

3.2           Implication of external stability…………………………………………………….. 15

3.2.1     Impact of colonial ruling as an external instability on the Indian economy development 15

3.2.2     Impact of the potential wars in the peaceful time on the economy development of China      17

4.     Concluding remarks…………………………………………………………………………………. 18

5.     Recommendations……………………………………………………………………………………. 18

iv References…………………………………………………………………………………………………. 20


 

1.        Introduction

 

1.1    Research objectives

 

1.1.1            How Indian and China come to their current status in a historical perspective?

 

1.1.2            What are the implications of internal stability to the economy development in China and India?

 

1.1.3            What are the implications of external stability to the economy development in China and India?

 

1.1.4            What recommendations could be given to a country learning from China and India?

 

2.        Findings

 

2.1    Chronological development and rise of India

 

2.1.1            The beginning of European Settlements (1600~1757)

 

As early as in 1498, Portuguese explorer Vasco da Gama discovered the new trade route from Europe to India which allow the long land route to be replaced by the more efficient and convenient sea shipping (Page 2003, p201). Since then, under the leadership of the European explorers the European business men from different European countries started to settle their companies in regions such as India and China. The East India Company was incorporated by Elizabeth I in December of 1600 following the steps of Spanish and Portuguese as proposed by the London merchants who had long been interested in the eastern trade. And the company was given a monopoly in the business in the great region extended from Cape of Good Hope to Straits of Magellan (p510). During the period of European settlements, the company got in wars with Dutch, Portuguese and French forces. Since the restructure of the company as a joint-stock trading company, it had gradually consolidated its control over the Indian affairs.

 

2.1.2            The British Conquest of India (1757~1858)

 

The East India Company conquered Bengal in 1757, when the company find out that it was impossible to rule through the local puppets due to the greed of the European servants and other private British traders who were profit oriented. This led to that consequence that the British gradually assumed all the formal power as a ruler. During this one century (1757~1858), the British had control over the whole of the subcontinent and liberally enslaved the whole of the population (Singh 1998, p9).

 

2.1.3            Direct ruling under the British Crown (1858~1947)

 

When the Charter Act of 1853 which allowed the East India Company to rule India until further order (Tarique 2008) was passed, there were objections to the ruling of East India Company in England and India. The great Indian Mutiny and Civil Rebellion in 1957 happened as a shock to the over confident East India Company and to London as they failed to recognize the widespread social unrest before the uprising. And the uprising taught a good lesson to the British that the Indian interest had to be taken into consideration before any big development under the colonial rule (Stein & Arnold 2010, p223). In the next year, the passing of the Government of India Act 1858 or Act for the Better Government of India ushered in a new phrase of the Indian history with the ending of the rule under the East India Company and the beginning of direct rule under the British Crown (Ganihar & Belagali 2009). From 1858 to 1905, there was a period called the Emergence of Indian Nationalism. Within this period the Indian National Movement was led by the moderates who used the constitutional framework to express their demand. But when the results from the continual moderate efforts such as petitions and appeals could not lead to the desired results, there were a growth of extremism since 1905. After 1905, Indian history entered into another period known as National Movement which lasted until the independence of India, during this period various form of national movement were included such as the most famous non-cooperation movement under the leadership of Mohandas Gandhi (Kochhar 2005, p73). Through half a century’s struggling, the British Parliament finally passed the Indian Independence Act declaring the formal independence of India (Campo 2009, p357).

 

2.1.4            Economy development after independence (1947~today)

 

When the British finally left India, they left India as a poor and underdeveloped colonial economy with a more than 70 percent of the population living on the agriculture. India economy, mainly inspired by the Fabian Socialism pursued the fast economy development through state control and planning in the economy activities in term of the launching of the Five Year Plan since 1951 (Kapila 2009, p35). But such great governmental involvement in the economy activities plus the government’s preference in the independence of the economy which led to the isolation from the world economy system had resulted in slow growth rate for three decades after the independence in 1947. In the 1980s there had been gradual market and economy liberalization followed by more fundamental reforms since 1991. There were two major sets of policy measures in the reforms carried out in the 1990s. The first policy measure was to achieve the macroeconomic stabilization through fiscal and balance of payment deficits. The other kind of economy polices was through the changes in the economy structure by enhancing the role of the market in the economy activities and the major technique was by privatization. These reform and new policies had helped the economy of India move forward to a free market economy with a fast economy growth at the same time in the new century.

 

2.2    Chronological development and rise of China

2.2.1            Imperial era (221 BC~1912AD)

 

From the first empire (Qin Dynasty) built up on in 221 B.C marking the first time unification of the states through the military conquest, to the end of the last imperial Qing dynasty in 1912, a number of dynasties had been gone through in during this span of 2,132 years. Golden Years of Zhenguan or Zhengguan era which lasted from 626 to 649 AD was one of the most powerful dynasties in the history of China in the imperial era under the rule of emperor Taizong of the Tang dynasty (Tian 2006, p94). There were disputable reasons to explain the appearance of the Zhengguan era. Firstly, the Zhengguan era happened at the beginning of the Tang dynasty after the previous wars in Sui Dynasty which reduced the population of more than 20 million and while there were relatively abundant of land compared to the population (agriculture was the most important in the economy society during the imperial ear). Secondly, the Grand Canal which connects Luoyang with Hangzhou Bay covering almost every was constructed in the Sui Dynasty, was one of the reasons that caused the fall down of the Sui Dynasty because of the project’s large consumption of labor (Lewis 2009, p22). Other achievements made in the Sui Dynasty also helped to create the Golden Years of Zhenguan. Thirdly, political stabilities and focus on the agriculture with low land tax.

 

After the long history of imperial era, in the late of the last empire, beginning with the 1840 First Opium War with the British the Qing Dynasty was forced to end by the external military intervention and the gradual acceptance of the western style democracy internally.

 

2.2.2            Modern era

 

2.2.2.1      Republic of China (1912~1948)

 

Inspired the revolutionary idea from Sun Yat-sen who was the later honored father of the country, the Qing Dynasty was overthrown under the armed forces. And the establishment of the Republic of China with capital set up in Nanjing was announced in 1912. Since 1912, China had still been involved in the wars with the foreign armies and civil war between the republican government and the communist party and the later win the final victory and the republican government established by Sun Yat-sen was forced to retreat and keep only Taiwan under its control (Kirby 2001). During this period, war was still the main theme in the society making the economy growth in a very slow speed or even negative speed.

 

2.2.2.2      Communist era (1949~today)

 

After the formal formation of the People’s Republic of China in 1949, the Communist Party of China followed the Soviet model through taking over the control the economy by the government by nationalization of the private business. And since the 1950s, the economy and social development of China was under the plan and control by the Communist Party of China. For example after 1949, the import of goods and food in Shanghai, the largest city in China, was curtailed significantly according to the economy policy of the communist and the industrial concentration had been shifted from textile industry and fixed industrial capital to the development of heavy industry such as iron and steel. In the industrial output percentage, the textile industry declined from 62% in 1949 to 33% in 1958 and at the same period the heavy industry roles from 17% to 46% resulting in a major change in the industrial structure (Shabad 1972, p137).

 

From 1949 to 1976, this period was marked with the description of socialist transformation under Mao Zedong. With the mistakes of raising the political events such as Anti-Rightist Campaign of (1957-1958), Great Leap Forward (1958-1960) and the Cultural Revolution (1966-1976), these political events led to severe consequence to the economy and social life to the people. For example, the Great Leap Forward (1958-1960) which happened at the same period of a three year natural disaster (1959-1961) resulted in the death of about 30 million people (Jeffries 2006, p378). And the economy development policy during the rule of Mao Zedong was not stable. Similar to India in the same period, Chinese government directed the economy activities through the Five Year Plan by central planning of all the social resources to achieve the targets defined in the plan by the government. The policies were subject to frequent changes and adjustment resulted by the internal and external factors. The external factors include the wars such as the war with the US in Korea and the retreat of the Soviet assistance in the 1950s, the internal factors which were the main reasons of the frequent changes of the economy polices included Mao’s revolutionary politics and class struggles (Liou 1998, p9).

 

Because of the nature of the plan economy and the instability in the economy policy, there was under-performance in the key performance areas such as the productivity, GDP growth, and industrialization rate until the post-Mao economy reforms which happened in the 1980s under the second generation of the Chinese leadership of Deng Xiaoping. And China’s current status as the world’s fastest growing economy with high stability derived directly from the economy reforms since the 1980s. Two major directions in the policy making during the economy reforms which last to present are similar to that of India which include market liberalization which was achieved largely through privatization and utilization in the foreign investment which is used more efficiently by the Chinese economy under the guidance of the economy reform policies. But the Chinese way of using special economy zones (SEZs) such as the Shenzhen Special Economy Zone to attract large amount of foreign direct investment (FDIs) to development the pointed regions in a fast speed but it also buried the booms for the later social unrest and economy development inequality across the country leading to a number of social and economy issues which are yet to be resolved by the government (Waters 1997, p52). But still the economy and social achievements made through the economy reform are progresses that should be recognized.

 

3.        Analysis

 

3.1    Implication of internal stability

 

3.1.1            Impact of political stability on effectiveness of economy policy

 

As mentioned in the second part of the review of the India history, there were two types of policy measures in the 1990s economy reforms and one of them was designed to improve the balance of payment deficits. The detail techniques used included a cutting in the public expenditure as well as attempts to increase the public revenue to achieve a balanced budget and in term of the balance of payment policy of devaluation of the currency and measures to reduce the imports were utilize to resolve the balance of payment deficits. But historical data proved that the results of these policies were not satisfactory. From 1990 to 1997 the balance of trade deficit did not get improved as expected but still went on the increase from Rs 16,934 to Rs 60,751 and in the same period the total budgetary deficits also grew from Rs 18,562 crores to Rs 30,265 (Shand & Sankar 2003, p3). When it could be concluded that the policy aiming at achieve the balance of payments and reduce budgetary deficits had not been effective, the reasons for such ineffectiveness were many. And two of the major reasons were the political instability in New Delhi and the lack of determination of the government to implement the policy timely and decisively.

 

3.1.2            A strong government and economy stability

 

While there is always a debate about the internal stability is dominated by a deeply seated belief in the need for a strong government rather than the need for a stable constitution or a firmly grounded ideology, in the part of the assignment the relationship among a strong government, the desired economy stability and the economy performance of a country using the experience of Chinese economy development under the Chairman Mao’s rule as an example. As mentioned above economy development policy during the rule of Mao Zedong was not stable and the most fundamental reasons were internal such as Mao’s revolutionary politics and the focus of the class struggles. When the Chinese government has always been a strong government in term of the control and influence over the economy activities, it had never been stronger and powerful than it was during the Mao’s ruling from the 1950s to the middle of the 1970s when not only the economy behaviors were under strict control and plan but also people’s belief and thinking were closely monitored. But even under such a strong government, history has told us the fact that the economy development policies at that time were still not stable though the economy direction to build a socialist economy that focus on dividend equality and meeting the needs of the most people had not been changed. Though in the perspective of the economy policy direction, the Chinese economy policies were rather stable by setting the targets in the Five Year National Plans, but such policy stability on one hand helped to concentrate the social resources to achieve the fast growth and development of the special industries and business and on the other hand also caused serious problems in the economy society such as the unbalance economy development and inefficiency in resource usage and this will be elaborated in the next part below.

 

3.1.3            Strong government, unbalance economy development and economy inefficiency

 

On the other hand, at the same time social stability and policy stability could be too some extent enhanced by the policies issued by a strong government to manage and direct the economy and social life closely, two common problems in the economy society could usually been found when there is a strong government being involved in every part of people’s life: unbalance economy development and economy inefficiency. The unbalance economy development in China could most easily be found in different provinces and cities, the best example was the Shanghai Phenomenon which could be referred to the divergence of Shanghai economy compared to the rest of the country. During the 30 years’ development under strong government led by Chairman Mao Zedong from 1949 to 1978, Shanghai economy created 10 percent of the national industrial turnover and 17 percent of the fiscal revenue with only 1 percent of the country’s population (Fulton, Li & Xu 1998, p402). This Shanghai Phenomenon in term of economy development unbalance was caused by three major reasons. Firstly, the cost of production was low through preferential policies. The allocation of resources such as capital by the central government had put Shanghai as in a preferential position and lending came at an extreme interest. Also the approximately eighty percent of the required energy and materials involved in the industrial production in Shanghai were acquired through the obligatory supply system in a very low cost and it was initiated and supported by the government. Secondly, the city infrastructure was already well built in the republic of China period before the Communist Party of China took over in 1949. The well established infrastructure had helped the Shanghai economy to develop with leading advantages from the beginning in 1949. And thirdly, as the market system was closed at that time the products manufactured will enjoy a domestic market of five hundred to eight hundred with industrial superiority without being exposing to the global competitors. What’s more unbalance economy development could also been found in the industrial structure which had been mentioned earlier such as the unbalance distribution of the industrial output between the heavy industry and the light industry.

 

Figure 1 Percentage of light and heavy industries

Source: Statistical Yearbook of China, 1981. P210

 

As seen from the data above, the proportion between the light industry and heavy industry started in a balanced status at the beginning of the new China in 1949, but this balance was lost soon with the dramatic growth of the heavy industry under the direction of the central government through a number of Five Year Plans. In 1978, two years after the two Cultural Revolution, the industrial unbalance reached the most serious status with the heavy industry accounting for 57.6% of the total industrial output. And the figure also suggested there was a shift in the output from heavy industry to light industry since 1979 right at the beginning of the economy reform (Chow 1987, p132).

 

Figure 2 The real gross domestic income per capita

Source: Heston, Summers & Aten 2009

 

In another topic regarding the economy efficiency, the government directed model was believed not to be functioning as efficient as the market in term of the provision of the factors of production such as labor force, capital and material at the lowest cost to contribute to the economy growth. And according to North and Thomas (1973), a true economy growth with efficiency should be based on the fact that the total income of society must increase more rapidly than the population. But as seen in the figure above, for the 30 years after the establishment of the People’s Republic of China in 1949, there had been little growth in the real gross domestic income per capita meaning to say that the economy was inefficient under the plan economy system with a strong government involved in every part of the economy society.

 

3.2    Implication of external stability

 

3.2.1            Impact of colonial ruling as an external instability on the Indian economy development

 

Marked by the success the suppressing national uprising which happened in 1857 to 1859, the British completed the conquest over the whole subcontinent and its ruling lasted for a century. For a whole century, did the British ruling brought any substantial help to the development of capitalism and social and economy progress in India? As mentioned above, the answer to this question is an obvious “No”. The reasons why one of the most developed countries at that time did not help with the Indian economy could be concluded as followings. Firstly, in this one hundred years time colonial India had been treated as an appendage of Great Britain not only politically but also economically, in the connection between the two economies, the British always used India as a source of agricultural products and raw materials (Chande 2000, p251). Secondly, as a result of the Industrial Revolution from which the British managed to obtain greater production efficiency and in particular in its cotton textiles, the British cotton textiles not only started to win the global market share from the Indian textiles but also they make India as one of their important market for the British cotton textiles (Marks 2007, p129). The British had used their privilege to remove the tariff barriers to the British manufactured textiles resulting in the dramatic growth in the important of the British manufactured textiles. Thirdly, the “deindustrialization” process hindered the growth of the Indian capitalism. Here we still use the textile industry in India as example which showed how the British earned the money by ruling a colonial country. As in our general understanding, when a market opens to the outside competitors there will be a period of time of transition to protect the domestic industry if it is weaker than the international competitor though imposing tariff to the imported foreign good. But India as under the control by the British did not have such an offer. On one hand, with the market full of the British cotton textile products, the traditional Indian handicraft quit the market leading to the lost of a great art and also unemployment of the artisans. And on the other hand, through lost of the market to the British goods, the cotton produced will be exported to the developed countries including Britain and the Indian people had to rely on the agricultural to grow agricultural products to support their life financially. This process is known as the deindustrialization as people who had left the land for making industrial output were having no choices but to return to their land. So the “deindustrialization” process had actually hindered the growth of the Indian capitalism and this could be confirmed from that fact which we had mentioned earlier that in 1947 when the British left India, they left India as a poor and underdeveloped colonial economy with a more than 70 percent of the population living on the agriculture.

 

3.2.2            Impact of the potential wars in the peaceful time on the economy development of China

 

Just like what happen to the Soviet Union, a super power that had been long Cold War with the United States had been too focusing on the development of the heavy industry that finally led to the failure of the model because of the unbalance development of the union, similar situation could also be found in the early years after the formation of the People’s Republic of China. There were three major reasons of the concerns over the potential wars. Firstly, even after the formation of the new China, the Kuomintang was driven to Taiwan but still had the ambition to restart the war again especially with the support from the United States. Secondly, though wars had been curtailed in the mainland of China, but wars still went on with the United States when China decided to assist Korea and Vietnam to further stop the US from surrounding China in a military perspective. Thirdly, internal conflicts may happen as the formation of the new China in 1949 had been announced officially but according to the vision and plan of the communist party, the nature of the economy had not been changed fundamentally and need to be changed in the coming years. So, that there were possibility of internal war and regional conflicts when nationalism was expected to start. And because of the fear of the possible wars largely contributed by the external instability, it was too some degree reasonable that Chairman Mao will on one hand focusing on the growth of the heavy industry in fear of an immediate war which requires a lot of output from the heavy industry which led to the unbalance development of the industries and on the other hand he also focused on the internal class conflicts in fear that the internal instability may also lead to a internal war that provided a chance for the foreign military forces such as the United States who had long not been satisfied with the existence of a large communist country like China.

 

4.        Concluding remarks

 

On one hand, internal and external stability is necessary for a country of any scale even as large as China and India to develop the economy in order to provide better well off to the society. And internal and external instabilities such as war, natural disasters, class conflicts, and ideological conflicts, industrial unbalance development and regional unbalance development such as the Shanghai Phenomenon, could all contribute to the slow or even negative growth of the economy. But on the other hand, absolute stability is also not a good thing. China had been leading the world for several thousands of years but stable and closed environment finally led to the stagnation of the economy and technology growth and the shameful recent history in the 19 and 20 century.

 

5.        Recommendations

 

By reviewing the economy and political development history of the two of the world’s largest countries, at least two recommendations could be given. Firstly, it is important to keep the military balance to avoid the possible further wars between the countries as the direct and indirect consequence of the wars will be serious and costs is also large as concluded from the analysis of the recent history of China and India, two countries that had suffered too much from the war in the last two centuries. To achieve this goal, internal and external instabilities such as religious difference and conflicts need to be resolved timely. Secondly, economy development of a country needs to be join the globalization and should not be closed to a country, though the globalization process will to some degree expose the domestic industries to the global competition and bring in external instabilities. But learning from the history of China and India, the two countries that had experienced a slow economy development process by keeping their door closed. So, it would be recommendable that a country need to open its door to the world economy and keep itself updated to the world leading idea and technology.

iv References

 

Allan, J., Haig, S. W. & Dodwell, H. 1969, The Cambridge shorter history of India, Cambridge: Cambridge University Press, p510

 

Campo, J. E. 2009, Encyclopedia of Islam, New York: Infobase Publishing, p357

 

Chande, M. B., 2000, Indian Philosophy in Modern Times, New Delhi: Atlantic Publishers and Distributors, p251

 

Chinese State Statistics Bureau. Statistical yearbook of China. 1981. Hong Kong: Hong Kong Economic Review Publishing House.

 

Chow, G. C. 1987, The Chinese economy, Singapore: World scientific publishing. Pet. Ltd, 2nd edition, p132

 

Fulton, T., Li, J. Y. & Xu, D. Q. 1998, China’s tax reform options, Singapore: World Scientific Publishing Co. Pte. Ltd. p402

 

Ganihar, N. G. & Belagali, H. V. 2009, Educational Philosophy of Dr. Zakir Husain, New Delhi: Global vision publishing house

 

Heston, A., Summers, R., & Aten, B. 2009, Penn world table version 6.2 Philadelphia, PA: Center for international

 

Jeffries, I. 2006, China: a guide to economic and political developments, Oxon: Routledge, p378

 

Kapila, U. 2009, Indian Economy Since Independence, 19th edition, New Delhi: Academic Foundation. p35

 

Kirby, W. C. 2001. State and economy in Republican China: a handbook for scholars, the first volume, United States: The Harvard University Asia Center

 

Kochhar, S. K. 2005, Teaching Of History, New Delhi: Sterling Publishing Private Limited, p73

 

Lewis, M. E. 2009, China’s cosmopolitan empire: the Tang dynasty. Massachusetts: Harvard University Press address, p22

 

Liou, K. T. 1998, Managing economic reforms in post-Mao China, Westport: Praeger Publishers, p9

 

Marks, R. 2007, The origins of the modern world: a global and ecological narrative from the fifteenth to the twenty-first century, Lanham: Rowman & Littlefield Publishers, Inc, p129

 

North, D. C., & Thomas, R. P. 1973. The rise of the western world: A new economic history, Cambridge: Cambridge University Press

 

Page, M. E. 2003, Colonialism: an international social, cultural, and political encyclopedia, California: ABC-CLIO, Inc, p201

 

Shabad, T. 1972, China’s changing map: national and regional development, 1949-71, London: Praeger Publishers, Inc, p137

 

Shand, R. T. & Sankar, K. K. U., 2003, Economic reform and the liberalisation of the Indian economy: essays in honour of Richard T. Shand. Northampton: Edward Elgar Publishing, Inc, p3

 

Singh, J. 1998, Hindus of India, New Delhi: Gyan Publishing House, p9

 

Stein, B. & Arnold, D. 2010, A History of India, 2nd edition, West Sussex: John Wiley & Sons, p223

 

Tarique, M. 2008. Modern Indian History. New Delhi: Tata McGraw-hill

 

Tian, H. Y. 2006, Great Chinese emperors: tales of wise and benevolent rule. Singapore: Asipac Books Pte ltd, p94

 

Waters, H. J. 1997, China’s economic development strategies for the 21st century, Westport: Greenwood Publishing Group, Inc, p52

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