Why have China and India been able to grow so quickly? This column argues that while the industrial policies pursued by both countries up until the 1980s led to gross mistakes and inefficiencies, China and India would not be where they are now without them. Their export baskets are far more sophisticated and diversified than expected given their income per capita.
The emergence of China and India on the world stage has aroused much interest. As in many other areas of (policy) economics, just how these countries “did it” and the lessons for other countries is something economists either do not know, do not agree on, or both.
In the case of China, the literature seems to agree that capital accumulation, industrialisation, and export-led growth were key factors after 1979. Economists like Gregory Chow (1993) or World Bank chief economist Justin Lin, argue that, before 1979, Chinese central planning was a failure, economic performance was poor, and “haste made waste” (Lin 2010).i
In the case of India, its poor performance during the 1960s and 1970s, referred to as “Hindu growth”, has often been attributed to, among other things, poor planning, and the license-permit Raj (Bhagwati and Desai 1970). Yet economists such as Bardhan (2006) and Nagaraj (2010) argue that infrastructure bottlenecks and demand–side constraints have been neglected in the discussion of India’s industrial performance.
Built-up capability
In two recent papers and using a data set covering almost 800 products (Felipe et al 2010a and 2010b), we examine the evolution of the export basket of the two countries. We argue that the capabilities that both China and India accumulated before reforms started are vital to understanding their growth later on. While we agree that planning led to mistakes, inefficiencies, and to the misallocation of resources in both countries, we argue that, given their income per capita, China’s and India’s export baskets are more sophisticated – as measured by the income content of the export basket – and diversified – as measured by the number of products exported with revealed comparative advantage – than might otherwise be expected. Both are far ahead of countries at similar levels of development. This could have been achieved only through planning, industrial policy, and sector targeting.
The objective of the development strategies of both countries during the 1950s and 1960s was to achieve industrialisation. Both favoured the capital-intensive route, to a large extent as part of an import-substitution strategy that aimed at avoiding foreign dependence, although with significant differences between the two. The important point is that both countries developed a broad industrial base during the planning period that helped them accumulate capabilities that are now allowing them to grow (see Hidalgo 2009 and the footnote for further discussion).ii
