Implications of stability on China and India’s economic progress

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Implications of stability on China and India’s economic progress

1.        Introduction


China and India are the two most populous countries in the world with increasing important role that they are playing in the international arena as their economy and military power increase. They are the two countries among the BRIC organization. Below we will examine the two countries in a historical perspective to see how they could to the current status subjecting to the internal and external stability situation.


1.1    Objective of the report


To perform a brief introduction of the chronological rise of China and India


To analyze the implication of internal stability on China and India’s economic progress


To analyze the implication of external stability on China and India’s economic progress


To give recommendations based on the finding, analysis and conclusions made


2.        Findings


2.1    Chronological rise of China to its current position


As the youngest but most enduring among the Four Great Civilizations (Frazee 1997, p.75), the ancient China like the other three civilizations started its long history along a river: the Yellow River. While the history of China is as long as the Yellow River, below let’s begin our findings from the “modern time” of China which is considered as historically started in the year of 1840.


2.1.1            1840 to 1949, China in the “modem time”


When the ancient China had made the majority of the Chinese people feel proud, the beginning of the near one century “modem time” as classified by the historians, made the Chinese people feel the other extreme. The first Opium War provoked by the United Kingdom in 1840 made the Chinese government realize that he world was developing so fast that China had been legged behind so much in term of both economy and military. One of the direct results of the firs Opium War was the acceptance of the Treaty of Nanjing which states that besides Guangzhou, another four cities (Xia Men, Fu Zhou, Ningbo and Shanghai) would also become open port cities which allow trading ships to stay together with giving the right to the Britain to establish the consulates. What’s more China was forced to cede the island of Hong Kong to Britain (Bramsen & Lin 2000, p.28). With a number of wars with different countries that coming after the first Opium War in 1840, there were two major changes that China had been undergoing which had significant influence over formation of the current China in the history. The first change was that China ever since 1840 had been forced to open its market and at the same time give up its self-reliant and highly closed economy which was agriculture based; the second change was that the Chinese people started to learn from the western world in term of advanced technologies and inventions that create the high productivity of the western economies.


2.1.2            1949 to 1979


While the major uncertainties and instabilities caused by war relative factors were eliminated in 1949, the year marked the independence of China and the establishment of the so call “new China”. Two years after the 1949, Chinese fell into another difficulty: the three year of natural disaster or food crisis. Despite the natural disasters which seem to be part of the Chinese history that happen from time to time, another issue that keep troubling the Chinese government in term of slowing the economic and social development process is the continual dispute over the ideology problems. As we know the new China is constructed based on the belief of the communist ideology and it is believed that three important components form up the total structure of the Chinese Communist Ideology: a pure ideology basically derived from Marxism and Leninism and a practical ideology (Schurmann 1968, p.23) which is based on these ideologies and the actual application of the these ideologies in China in term of Maoism. The focus of the ideology selection and disputes initiated by the central government led to the social instability and even cause the happening of the Culture Revolution (1966 to 1976), one of the most catastrophic mass movements and political upheavals in the century (Lu 2004) which described probably the most difficult decade of China during its development when people not only suffer from a physical harshness but also mental affliction when families and friends were turned into “class enemies”.


During the same period in term of economy activities, due to the denial of capitalism, market economy and privatization had been widely replaced by a planned economy system which was under direct control by the central government as the product of the ideology disputes about how the socialist economy should be constructed. The solution provided by Deng Xiaoping to ideology disputes was the so call “socialist market economy” by proposing that market economy could also be used in socialist economies and as Deng said, to constrains on productivity should be the first of all to be emancipated (Gao & Wang 1999, p.22).




2.1.3            1979 to date


When the drama of “Cultural Revolution” finally came to an end along with the death of Chairman Mao Ze Dong, after more than 10 years’ adjustment time China finally come to a the peaceful period with the political and social focus shifted to economy construction. The beginning year of the relatively peaceful period is 1979, the year of the start of the economic reform and opening up policy which was designed to attract FDI (Foreign Direct Investment) to speed up the pace of the economy development (Meng 2005, p.76). Together with the policy to attract more FDI inflows, due to the lack of consumption power in the domestic market the government encourages the export of final products produced in China to form an investment and export oriented mode of economy growth which is still functioning and prevailing today. Since 1978, under the new leadership of Deng Xiao Ping, who urged that “stability is above everything” which had been carried out as one of the fundamental principles (Yu 2011, p.231) despite that there had been recurrence of some political instability and social unrest such as the Tian’anmen Square demonstrations in the middle of 1989 and the most recent Xinjiang violence issue in 5th July 2009 blood shedding frictions happened between the Han race and Hui race.



Figure 1 China GDP per capita (Constant Prices From 1980 to 2009) in US dollar

Resource: 2011


With the focus shifted to economic construction rather than ideology disputes and class fights and the implementation of the reform and opening up policy, driven by the large inflow of FDIs (Foreign Direct Investments), Chinese economy growth have so far made great achievement which surprises the world by keeping a more than 10% annual growth rate for the past 30 years leading to its surpassing Japan in 2009 to be the second largest economy (Feinglas 2010, p.22). Even uncertainties from internal and external never really stops, but China right now seems to find its rhythm.


2.2    Chronological rise of India to its current position


Another Four Great Civilizations that we will talk about is India which also starts its long history along with another two famous river districts: Ganges and Asia Indus. When India also has an ancient history that could not be described in details here, so we will briefly introduce India’s development and major features in term of social and economy changes in the recent history starting from the period under when India was under the control by East Indian Company:

2.2.1            1613 to 1858 – East India Company


While established in the end of the 16th century in the year of 1599 (Carter & Harlow 2003, p.1), the British East India Company start the business in India by setting up a factory at Surat in 1613 followed by similar establishments in other cities in the following about one hundred years’ time (Olson & Shadle 1991, p.301). Following United Kingdom’s business in Indian, the Duntch and French also set up their own companies in Indian and there were no way peace will exist among these business men from different countries. For example the French and British battles to strive for the control of Indian territories and resources culminated in 1757 with the battle at Plassey ( 2010). After that, the company started to increase the aggressive military exploits and political intervention. And Before 1858, the year in which the company was turned over to the British Crown, the British East India Company was a joint-stock company whose management and operation was well controlled by the shareholders. And because of the nature of the company to maximize the self interest, the public interest was not one of the major goals of the firm. This explains the motive of the company to start to smuggle opium from Indian and China which as mentioned above forced another ancient country to open its market and getting part of the global business in a way that they did not desired though. Social instabilities and the company’s self interest oriented behaviors finally lead to the Indian mutiny or Indian Rebellian in 1857. The causes of Indian mutiny or Indian Rebellian in 1857 are many and one of the causes was said to be that some Indian soldiers believed that the increasing number of the missionaries was a sign that the company was masterminding mass conversions of Hindus and Muslims to Christianity. Since then the East Indian Company relinquished the control of Indian the British Crown 1858, and the empire had made Indian as a market for the mass-produced cheap British factory good and brought unemployment to the handicraft industry in Indian at the same time (Olson & Shadle 1991, p.302). And it is claimed by Chaudhuri (1971, p.2) that the first half of the 19th century had been critical and transitional period for Indian to become a colonial type of economic and a producing country.


2.2.2            1858 to 1947 – road to independence


Another long term impacts coming together with Indian mutiny or Indian Rebellian in 1857 is the increasing nationalism in India. In year 1885, under leadership of Bal Gangadhar Tilak, the Indian Nationalists set p the Indian national Congress to request some degree of representative government together with a comprehensive social reform (Olson & Shadle 1991, p.302). When some of the nationalists’ requests summated through the advisory councils (set up according to the Lansdowne Act of 1982) of the native Indians were not taken seriously by the British government, the momentum of the demand for independence began to grow. Such demand started in term of request for more degree of independence, and during the World War I, the Indian new leader, the famous Mohandas K. Gandhi had initiated an influential Non-violent Resistance to obtain more autonomy (Merton & Kurlansky 2007). A number of major protests and non-violent and non-cooperation evens during the World War I and World War II such as the massive violation of the British monopoly in salt production by boiling water, such events plus and disputes between the Hindus and the Muslims and the war effects led to United Kingdom’s decision to give India full independence though the Indian Independence Act in 1947 which separate the sub-continents into two independent countries: Pakistan and India.


2.2.3            1947 onwards


After the independence, India followed a socialist-inspired policies which is similar to what happen at the same period of time and it started from the Industrial Policy Resolution in 1948 according to which the central government will be playing an major role in directing the economy development in the key sectors through the ownership control and material resource control and the design and formulation of the Five Year Plans (Kapila 2008, p.28). Until the 1980s Indian still maintain the extensive restrictions especially to the multinational companies in term of entry, ownership and various performance requirements (Girdner 1987) and the market liberalization in the 1980s started from small degree of deregulation in industrial policies which contributed to the productivity increase in the manufacturing industries and the economy growth (Pramanick & Ganguly 2010, p.222). And the following relief effort to the restriction towards the foreign capital in the 1990s showed a policy shift during the market liberalization process.



Figure 2 India GDP per capita (Constant Prices From 1998 to 2009) in US dollar

Resource: 2011


As the figure shows, with the strong economic reforms from the socialist economy like China such as the free market principles which begun in 1991 for foreign investments, Indian as the second most populous country behind China has made great economy and social achievements such as becoming the fifth largest economy in 2005 in term of nominal GDP (Keillor 2007, p.33) and it has maintained a high economic growth trend similar to China.


3.        Critical analysis


3.1    Implication of internal stability on China and India’s economic progress


3.1.1            Implication of political stability

(different ethnic groups, Ideology, governmental control and planning)


The history of China from its independence to the end of the 1970s provides maybe the most obvious and powerful example to show the critical importance of political stability to the economy construction for a country especially during the 10 years long Cultural Revolution. One of the major events in the Cultural revolution was the “Shang Shan Xia Xiang (Go up the mountains and down to the village), by focusing on the class conflicts in year 1968, Chairman Mao Zedong gave the most repeated saying in the following years that “It is necessary for young people to go to the countryside to be re-educated by the poor and lower-middle peasants” (Kirkby 1985, p.39) which led to the happening of the “Shang Shan Xia Xiang activity (Go up the mountains and down to the village). In the following 8 years time, in respondent to the Chairman Mao’s urge, 17 million young people including most college students who bore the future of the country had been sent to the remote and poor areas to do the labor job which they were not good at. There are three major influences that the Cultural Revolution like other major political instabilities has for the economy development of China at that time and for the later continual developments: influence and control on the current economy activities, shortage in the talent pool, static economy growth and missed opportunity.


Influence and control on the ongoing economy activities


While it was considered that there was little influence on the country side because the Cultural Revolution was majorly an urban movement, there were few urban residents that could stay unaffected by the Cultural Revolution as the movement majorly involved high school, factory, offices and various shops in China. And so that in an interview with Yugoslav journalists in 1980, Hu Yaopang suggested that about 100 million which accounted for about a half of the city residents covering most working age people received unjustly treatments. This means that the normal work of a large proportion of the urban labor had been influenced by the political movement resulting in their low working efficiency. According to the industrial date, in 1967, the second year of the Cultural Revolution, the industrial output fell approximately 13 percent compared to that of 1966 (MacFarquhar & Fairbank 1991, p.210) and it was considered that the disruption of normal work life was the major reason for the decrease of the industrial output.


Shortage in the talent pool


A different view holds that the impact on the economy development is limited while the major impact is in the field of education (Brugger 1978, p.272). As mentioned above, there were around 17 million young people including most college students who bore the future of the country had been sent to the remote and poor areas to do the labor job which they were not good at, and when the most students were kept away from the books and classroom at the golden time of learning, there is no doubt that the education of the talents during the decade of the Cultural Revolution had been severely affected. So that in the end of the Cultural Revolution as these young people returned at their 30s, it was difficult for them to catch up with their study. And there was a shortage in the talent pool to the country which will indirectly slow down the economy performance and growth of the country in the long run.


Static economy growth and missed opportunity


Some people hold the view saying that the impact of Cultural Revolution as a kind of political instability was limited based on the fact that the in term of industrial output which fell approximately 13 percent in 1967 had actually recovered fully to the levels in the early 1960s, but at the same time when the economy seemed to recover to the past level, it is also obvious that the economy in China during the Cultural Revolution had experienced a static period, the other economies did not experience such a period of stagnation, and these two condition can help reach the conclusion that though the economy development had not been impacted greatly in term of total output volume, but as other economies did not stop their pace, the difference between the Chinese economy and the world average level will definitely be more obvious.




3.2    Social stability issue


While social stability issue did not usually as server as the political stability problems, it is more common and more usual in any society and in any time even in nowadays so that is will be useful to discuss the social stability that has in-depth influence every common people’s daily life. And it is well known to us the social problems are inevitable with the growth of the economies especially in the fast growing one. For example, the first Five Year Plan in India expressed its preference for economy and social stability but not at the expense of economic and social changed needed for economic progress (Prasad 1993, p.25). This also corresponds with the Chinese situation in the 1990s when the economy was experience the fastest growth period. As the big cities developed, there is no doubt that income inequality will be common and social instability would become a major task for the government to handle and it is generally believed that only when economy development reaches a certain level then such social problems could receive better handlings and solutions. On the other hand, some believe that some social problems are needs, for example the increasing gap between the riches and the poor will motivate the poor people to contribute more to the total economy development which is good to the economy constructions.


3.3    Implication of external stability on China and India’s economic progress


3.3.1            Intervention and threat from the external military forces


From the perspective of whole history which we have mentioned about the how China and India develop to the current status, we can see that the external military forces have played an important role in influencing the forming of the current India and China through direct and indirect manner. On hand the military actions did create instabilities to the two giant countries but on the other hand they also brought posives impacts to the economy development of the Chinese. When there are advantages and disadvantages coming together with wars, but from the point of view of the economy development, we still can see that there are some obvious advantages. There are four major impacts coming together with the foreign invasion in term of both military invasion and business invasion that performed by foreign forces: Increasing international trade, technology transfer, democracy construction and nationalism building.


First of all, the major target of the military actions as we talked is due to expand the foreign market and maximize the economic interest. For example, the direct reason why United Kingdom provoked the Opium War with China was that the Chinese government at that time decided to end the opium trade in China which was not desired by the United Kingdom (Chaurasia 2004, p.65). And in case India, most of the goals behind the military actions were also economic interest relative. For example, the East India Company was rather self interest motivated and use military forces to make Indian as a market for the mass-produced cheap British factory good as mentioned above.


Secondly, by doing business with the foreign companies the ancient China and India have come to know the power of the modern weapons and the modern manufacturing technologies. So that the technology transfer happened along the invasion though the invaders did not have a plan for this. For example, aroused by the Opium War during the Qing dynasty, initiated by the Chinese official “Zeng GuoFan”, the Chinese government also tried to learn from the western countries through the “self-strengthening or westernization movement” in the late Qing period in which a number of modern enterprises were set up to learn from the advanced technologies and students were sent out abroad to learn the new knowledge (Zhang 1992, p.72). This paved the way for the further economy development and modernization of the country.


Thirdly, democracy construction is another impact that could be found with the foreign military invasion. Take India as an example, a country that made impressive progress in democracy construction, though obviously the British did very little efforts to promote the democracy in India, it did bring the chance for the Indian to learn from the United Kingdom in term of how to rule a country. From the late 19th century onwards, the Indian nationalists successfully appropriated liberal-democratic principles from the United Kingdom and infused them into the Indian political context (Ganguly, Diamond & Plattner 2007).


Fourthly, nationalism building is also important to the economy development of the two giant countries. As mentioned above one of the long term impacts coming together with Indian mutiny or Indian Rebellian which happened in 1857 was the increasing nationalism in India, similarly there were also a lot of nationalists in China when their countries were under the direct military threat and invasion by the foreign forces. These nationalist on one hand contributed to the military rebellion forces to the foreign invasions, on the other hand some of them also learn from the west in term technologies and management skills to establish the business to help their own country in term of economic support.


3.4    Impacts from the external bad economy stability


Since the open door polity and market liberalization being adopted and implemented by both China and India as a way to stimulate the economy growth and have proved to be working well speaking from the result of such economy policies, there is an increasing connection between the rest of the world and these two giant countries in the globalization process. Increasing trade dependence has characterized the economic growth in developed and developing countries alike so that the increased trade dependence has become an external source of vulnerability (United Nations 2009, p.24). For example the ongoing US led global economy which majorly take place in the advanced economies also have significant impacts over the developing countries including China and India. In 2008, accordingly to the assessment by NASSCOM, the financial crisis had a direct impact on the Indian IT industry and about 15% to 18% of the business coming the Indian outsourcers includes projects from banking, insurance, and the financial services sector become uncertain (Kapila, R. & Kapila, U. 2008, p.35).


3.5    Conclusions


By reviewing the history of economy and social development of the two largest economies in the developing countries, we can see that both the countries had experienced similar developing phrases, they were superpower in the majority of the history by contributing to the economy development and technology innovations, but in the recent history as they can’t catch up with fast capitalization in the free market, they were in wars with foreign military forces and were forced to become the colonies of the developed countries, but they were managed to obtain their independence in the end. Given the recent two hundred years’ experience of these two giant countries and the analysis about the implication of external and internal stability on China and India’s economic progress, a conclusion could be that internal political and social stability is necessary condition for the economic growth though some social instabilities caused by the development problems may be inevitable such as the income inequality and on the other hand external stability is also influential to the domestic economy development through the increasingly strengthening connection between the rest of the world and China and India.


3.6    Recommendations


Here two recommendations are provided to help solve the problems coming together with the internal and external stability issue.


Internally, faced by the increasing social problems that result in the social instability such as the widening income gap, the government should play a major role in stopping these problems from upgrading which will definitely influence the economy development and slow down the economy growth pace. For example, in China one of the most fundamental method to cope with the current most concerned social problems such as sky high real estate price and increasing living costs in the cities will be to develop the medium sized cities and underdeveloped areas rather than focusing on the large cities which have become much overcrowded.


Externally, while the connection between the rest of the world and India and China will definitely increase with the increasing international trade and other symptoms showing the strengthening globalization process. But inspired by the significant impacts brought by the current global financial crisis, it is important to remain some degree of self-reliance in both supply and demand side which means that a country should be able to supply the people’ needs and the people should be able to have the sufficient demand to the products that the country is able to produce. What’s more the concept of independence could also be applied in other fields such as the banking system.




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