India and China have both been recognized for rapid
economic growth. But India’s growth pattern is dramatically different. China
has a global reputation for exporting manufactured goods. It has experienced a
manufacturing-led growth. India has side-stepped the manufacturing sector, and
made the big leap straight from agriculture into services. Their differences in
growth patterns are striking. They raise big questions in development
economics. Can developing countries jump straight from agriculture into
services? Can services be as dynamic as manufacturing? Can late-comers to
development take advantage of the globalization of service? Can services be a
driver of sustained growth, job creation, and poverty reduction?
India’s growth pattern in the 21st century is
remarkable because it contradicts a seemingly iron law of development that has
held true for almost two hundred years since the start of the Industrial
Revolution. This law – which is now conventional wisdom – says that
industrialization is the only route to rapid economic development for
developing countries.
China and India: The race to growth
First it
was China. The rest of the world looked on in disbelief, then awe, as Chinese
economy began to take off in 1980s at what seemed like lightning speed and the
country positioned itself as a global economic power. GDP growth, driven
largely by manufacturing, rose to 9.9 percent in 2010 after reaching 8.7
percent in 2009. China used its vast reservoirs of domestic savings to build an
impressive infrastructure and sucked in huge amounts of foreign money to build
factories and to acquire the expertise it needed. It continues to receive large
amount of foreign direct investment – more than any other country in quite a
few years.
India began
its economic transformation almost a decade after China did but has grabbed
just as much attention by early 2000s, prompted largely by the number of jobs
transferred to it from the West. At the same time, the country rapidly created
world-class businesses in knowledge-based industries such as software, IT
services, and pharmaceuticals. These companies, which emerged with little
government assistance, helped propel the economy: GDP growth stood at 10.1
percent in 2010, up from 7.4 percent in 2009. But India's level of foreign
direct investment is a fraction of China's.
Both
countries still have serious problems: India has poor roads and insufficient
water and electricity supplies, policy paralysis all of which could thwart its
development; China has massive bad bank loans that will have to be accounted
for. The contrasting ways in which China and India are developing, manufacturing
vs services, prompt debate about whether one country has a better approach to
economic development and will eventually emerge as the stronger.
But can service-led growth be sustained?
Service-led growth is sustainable because the
globalization of services is just the tip of the iceberg. Services are the
largest sector in the world, accounting for more than 70% of global output. The
service revolution has altered the characteristics of services. Services can
now be produced and exported at low cost. The old idea of services
being non-transportable, non-tradable, and non-scalable no longer holds for a
range of modern impersonal services. Developing countries can sustain
service-led growth as there is a huge room for catch up and convergence.
The Services Revolution could upset three long-held
tenets of economic development. First, services have long been thought to be
driven by domestic demand. They could not by themselves drive growth, but
instead followed growth. In the classical treatment of services, any attempt to
expand the volume of services production beyond the limits of domestic demand
would quickly lead to deterioration in the price of services, hence a reduction
in profitability, and hence the impulse towards expanded production would be
choked off.
Second, services in developing countries were
considered to have lower productivity and lower productivity growth than
industry. As economies became more service oriented, their growth would slow.
For rich countries, with high demand for various services, the slowdown in
growth was an acceptable consequence of the higher welfare that could be
achieved by a switch towards services. But for developing countries such a
trade-off was thought to be inappropriate.
Third, services jobs in developing countries were
thought of as menial, and for the most part poorly paid, especially for low
skilled workers. As such, service jobs could not be an effective pathway out of
poverty.
Future
Prospects
India’s development experience offers hope to
late-comers to development in Africa as of now. The marginalization of Africa
during a period when China and other East Asian countries grew rapidly has led some
to wonder if late-comers to development like Africa are doomed to failure. The
process of globalization in the late 20th century led to a strong divergence of
incomes between those who industrialized and broke into global markets. It
seemed as if the bottom billion would have to wait their turn for development,
until the giant industrialisers like China became rich and uncompetitive in
labour-intensive manufacturing.
While both countries have grown in different ways,
future prospects wise, China stands better as manufacturing is a capital
intensive and is not easily replaceable & is time consuming.
In comparison, services sector on which India’s
growth has been primarily dependent and is comparatively easily replaceable.
Also, the primary reason for growth of services sector in India is due to
availability of:
- Cheap labour
- Skilled labour & knowledge
- Large scale operations
