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Inequalities in Asia's Giants

Author: Jayshree Bajoria
November 6, 2007
This publication is now archived.

Introduction

The growth of the world’s two most populous nations, India and China, is often cited as the largest contributor to the reduction in global poverty levels in the last fifteen years. With an average annual growth rate of 9.5 percent, China has lifted over 400 million of its 1.3 billion citizens out of poverty in the last twenty years. India’s 7.5 percent average growth has brought an estimated 100 million out of its 1.1 billion people out of poverty since 1991. But the incredible growth of these rising powers has been marred by uneven gains. An estimated 150 million Chinese and more than 300 million Indians remain under the poverty line, earning less than one dollar a day. In China, this has meant a rapid, uncontrolled migration of people from rural areas into already crowded cities as this backgrounder explains. In India, one serious consequence is less food available to the poor. As indicated by increasing geographic, sector-based, and income inequalities within each country, benefits from growth have failed to trickle down to significant segments of populations. Experts say governments need to expand social spending, especially in health and education, as well as work toward more transparent policy implementation.

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Growth Models

China, termed the “dragon” by economists, has followed a model where growth has primarily been led by investment and a growing global trade surplus. India, known as the “elephant,” has run contrary to the traditional Asian growth strategy of exporting low-priced manufactured goods to the West. Instead, India has “relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing,” writes economist Gurcharan Das in Foreign Affairs. Since December 2004, China has been working to alter its growth strategy toward one that’s driven more by domestic consumption, usually perceived as more sustainable in the long run. But so far, progress has been limited. CFR Senior Fellow Adam Segal says he is not sure how China will go about shifting export-led growth toward a more consumption-driven model because the Chinese tend to save instead of spend. Unless poor Chinese feel that they have future security by way of pensions or other social services, they will not consume more, he says. Also, while China has followed a state-centric growth model, India’s growth has been mostly driven by private entrepreneurship, experts say.

 

While the Chinese and Indian growth models are different, some of the consequences have been similar. In particular, growth has been uneven in both countries, according to the World Bank and other sources.

The World Bank’s 2007 book Dancing with the Giants: China, India, and the Global Economy points out that uneven growth has implications for inequality, poverty reduction, and human development in both countries. Growth in China and India has been unequal in the following ways:

  • Geographic inequality. Whether a state or province is along the coast or landlocked has affected how people have gained from economic growth. Unequal growth across Indian states and among the different provinces in China has meant unequal progress against poverty. The World Bank book notes that between 1978 and 2004, Chinese provincial gross domestic product (GDP ) growth rates ranged from a low of 5.9 percent in landlocked Qinghai in west China to a high of 13.3 percent in Zhejiang, on the eastern coast. In India, state growth rates between 1980 and 2004 ranged from a low of 1.7 percent in landlocked Jammu and Kashmir to a high of 8.7 percent in coastal Goa. Similarly, poverty declined by much more in coastal areas in both countries than in the inland areas.
  • Sector-based inequality. China has focused on its manufacturing sector while India’s service sector has driven growth. In both countries, that has created inequalities in which agriculture and rural industries involving hundreds of millions of workers have been left behind.
  • Income inequality. In both countries, households at higher income levels benefited much more than those at lower levels. According to Chinese media, the richest 10 percent of Chinese families now own more than 40 percent of all private assets, while the poorest 10 percent share less than 2 percent of the total wealth. In India , thirty-six people reportedly are collectively worth $191 billion, while according the Asian Development Bank more than 800 million people earn less than two dollars per day.
Building an Equitable Society

Government spending on education, healthcare, and infrastructure development are generally good indicators of how the gains from growth are trickling down to all segments of society. In the case of both India and China, they are lacking, experts say.

In 2005, India enacted a law earmarking $2.2 billion to provide guaranteed wage employment for at least one hundred days every year to an adult member of every rural household. But initial reports suggests uneven progress. Economist Jean Dreze, a member of the council that devised the plan, conceded in September 2007 that the scheme had not done very well (BBC) in terms of generating more employment, raising wage rates, or decreasing corruption.

“There is no clarity in India ’s national development policies either on the growth side or on the development side.” — World Bank researcher Shahid Yusuf

Similarly, the Indian government has levied a 2 percent education tax to fund its flagship educational program launched in 2001, theSarva Shiksha Abhiyan (SSA). It seeks to provide education to all children between six and fourteen by 2010. By 2005, however, 12.5 million children in rural India were still out of school and the quality of education remained a serious concern. A 2005 report on rural education by the non-governmental group Pratham found 22 percent of children in grades six to eight in government-run schools could not read simple passages. Of the same group, 40 percent could not do simple math. Experts say the poor quality of elementary education in most schools is not necessarily because of limited funds but rather poor governance and corruption. Manjeet Kripalani, India bureau chief for Business Week, says India’s biggest problem is “the implementation of policies,” and the lack of accountability “by government to the people about the impementation.”

Problems of implementation are exacerbated by shortcomings in allocation. For example, in healthcare, India ’s Planning Commission reported in December 2006 that government expenditure is less than 1 percent (PDF), “ which is unacceptably low." World Bank researcher Shahid Yusuf says, “There is no clarity in India’s national development policies either on the growth side or on the development side.” He says state-by-state policies in India are more important than a central policy. Yet the performance of states varies greatly in terms of human development. For instance, according to the planning commission, in 2003, the infant mortality rate (PDF) in Kerala was only eleven per thousand live births, while in Orissa it was as great as eighty-three per thousand live births.

A 2006 Organization for Economic Cooperation and Development (OECD)report found that public spending on health and education by the Chinese government may be too low and inefficient to meet the country’s development needs. In 2002, official spending in these areas, along with culture and science, amounted to the equivalent of 5.5 percent of GDPcompared with an average of 28.2 percent for OECD countries. The report says education funding is unevenly distributed among regions while a comparatively large share of spending is channeled into higher education—such as vocational training institutes—at the expense of primary and secondary schools. The report says healthcare services in rural areas remain severely underfunded.

Growing Misery of Peasants

Though agricultural reform did more to reduce poverty and inequality than growth in other sectors, China’s peasants have fallen behind. A 2004 report by the United Nations Development Program says: “China’s basic economic strategy has not been pro-poor. The allocation of public resources has maintained an urban bias.” About three-quarters of China’s rural population has suffered income reductions since China entered the World Trade Organization in 2001, writes Joshua Kurlantzick of the Carnegie Foundation for International Peace.

“China’s basic economic strategy has not been pro-poor. The allocation of public resources has maintained an urban bias.” – United Nations Development Program report, 2004

Unable to survive on farming, China’s peasants have been migrating to cities. According to Kurlantzick, China’s cities are already home to some 140 million migrant workers, who are either unemployed or employed in construction, mining, and other largely unregulated industries. In turn, he says, these migrants are forming a massive urban underclass, with no social welfare net, job security, legal rights, or unions.

For its part, India in 2007 was facing its worst agrarian crisis since its independence. One measure of the crisis is a surge in suicides. Roughly 100,000 farmers have committed suicide in the last eight years, according to officially confirmed estimates. Farmers’ woes are blamed on a lack of institutional credit and land reform combined with plummeting incomes due to a fall in domestic and global prices of farm products.

Policy Reform Needed

Experts say more equitable growth in India and China will require governments to boost investment in public infrastructure, health, and education. It is important that skills-based biases resulting in income disparities are removed through education. Rural areas require special attention. Experts say investment in rural infrastructure combined with land and irrigation reform are essential to the welfare of the peasants in both countries. For China, scholars like Kurlantzick propose land ownership by farmers. He says it will make it easier for farmers to modernize and consolidate their land.

In India, experts emphasize land reform and labor laws. The government will also have to be more accountable and transparent in the disclosure of its expenditure on public goods. Effective rule of law and control of corruption are seen as vital in spurring reforms. According to a 2005 Transparency International report (PDF), corruption in Indian public services affects the day-to-day needs of citizens far more than is realized. The same organization’s 2006 country report (PDF) on China notes that corruption remains a huge challenge.

India, a multiparty democracy, and China, ruled by a singly-party authoritarian government, confront a similar development dilemma with markedly difference forms of governance. But as growing social unrest in India and China have shown, social inequality will need to be addressed. The Asian Development Bank’s 2007 Key Indicators Report (PDF) says increasing inequalities suggest a slower pace of poverty reduction and threaten the sustainability of the process of growth itself.

Policymakers must focus on policies that can counter the negative distributional impacts of market-oriented reforms and globalization – Asian Development Bank report, 2007

India ’s eleventh five-year plan and China’s “harmonious development” both strive for inclusive growth. Policymakers must focus on “policies that can counter the negative distributional impacts of market-oriented reforms and globalization,” writes the Asian development report. A partnership between the public and private sectors is needed to develop economic activities and industries that generate employment opportunities that do not bypass the poor. Business Week’s Kripalani thinks both countries will reach their goal at the same time, with “India going slower on economic growth and China going slower on social and political equity.”

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