Plus One Economics Chapter 10

Introduction

Economic policies followed by countries change over time. Policies are changed by learning from the mistakes of the past. It is also possible to learn from the experiences of other countries. Learning from the successes and failures of others can be a rewarding experience. A comparison of the development experiences of India, Chinaand Pakistan would be therefore, meaningful.

Even though India, China and Pakistan are neighbours in the same Asian continent, there are big differences between these countries. India is a liberal, secular, multi-party democracy. China has a single party political system. Pakistan has a high degree of political instability with frequent bouts of military dictatorship in a multi-party democracy. A common economic feature of all three countries is that all three are developing economies.

Developmental path —Snapshot view

India, China and Pakistan became independent and started initiating their development strategies at almost the same time.

• India and Pakistan became independent in 1947 and China became independent in 1949.
• These three economies adopted the planning strategy for economic growth and started implementing five year plans.
• India started Five Year Plan in 1951, China in 1953 and Pakistan in 1956. Five Year Plan of Pakistan is now called the Medium Term Development Plan.
• Since 2018, Pakistan is working on the basis of 12^th Five, Year Development Plan (2018-23) while China is working on 14^th Five Year Plan (2021 – 25). Until March 2017 India was following Five Year Plan based development strategy.
• Economic reforms initiated in all the three countries — India in 1991, China in 1978 and Pakistan in 1988.
• The government played a major role in all these economies.
• The role of government and the role of markets underwent major changes when economic reforms (liberalisation) were introduced in these economies.
• Till the 1980s all these economies had almost similar growth rates and other economic indicators.

By the turn of the century, the differences became sharp. We shall briefly examine the economic policies and development strategies of China and Pakistan.

Chinese Economic Strategy

In 1949, the People’s Republic of China was established. They adopted – one party (Communist) political system. Mao Zedong became the supreme leader. All means of production were brought under government control. The commune system was adopted for agriculture. In the communes people cultivated land collectively. By the end of 1958 no less than 26,000 communes had been set up.

The Great Leap Forward (GLF) Programme was started in 1958 for industrialising the country. Mao Zedong’s campaign aimed at rapid industrialization of the countryside. He encouraged starting of cottage industries attached to the houses of artisans.

During the Great Proletarian Cultural Revolution in 1966-76, doctors, engineers, teachers, students, etc., were forcibly sent to work in rural areas. China’s economic progress was slow in the first three decades after independence, During 1958-61 about 30 million people died in China due to famine.

Reforms in 1978

The trigger for economic reforms in China was the death of Mao Zedong in 1978. Under the new leader Deng Xiao Peng economic reforms were introduced. The old command economy was slowly abandoned. Private initiative and private enterprise were encouraged. The old rigid ideology was replaced with economic pragmatism. Abandoning the old system which was not effective, Deng made the famous remark:

Major reforms introduced in China may be summarised as follows:

In agriculture, communes were dismantled and Responsibility System was introduced. Under the Responsibility System, farmers were given freedom to produce any crop of their choice and sell it at market rates and keep the income. This reform substantially increased agricultural production.

Private initiative and private enterprise were encouraged. Private entrepreneurs were allowed to invest in business. This policy created millions of entrepreneurs.

State Owned Enterprises (SOEs) (In India we call public sector enterprises) were made to face competition. Many SOEs were closed down.

The reform process also involved dual pricing. Farmers and industrial enterprises were required to buy and sell fixed quantities of inputs and outputs at a fixed price put forward by the government. The rest can be purchased and sold at market prices.

Foreign investment, which was formerly prohibited, was allowed and encouraged. This policy attracted thousands of Multi National Corporations (MNCs) into China.

China became the largest recipient of FDI (Foreign Direct Investment) in the developing world. Special Economic Zones (SEZs) were set up to attract FDI.

These reforms completely transformed the Chinese economy. Now 65 per cent of the Chinese GDP comes from the private sector. During the last 25 years, China has been the fastest growing economy in the world.

Pakistan’s Economic Strategy

Pakistan adopted comprehensive planning and mixed economy as strategies for development. Pakistan followed the policies of import sub- stitution and protection to domestic industry. In the decade of 1970s, Pakistan nationalised many capital goods industries. In brief, there were many similarities between the economic policies followed by India and Pakistan.

The introduction of Green Revolution led to the mechanisation and increase in public investment in infrastructure in selected areas. This led to a rise in the production of foodgrains. This changed the agrarian structure of Pakistan significantly.

In the 1980s, Pakistan slowly introduced privatization. Industrial policies were liberalised to encourage private initiative and enterprise. In the late eighties and early nineties, more reforms were introduced. FDI was encouraged, direct taxes were reduced and many areas of the economy were Nene to private and foreign investment.

India, China, Pakistan

India, China and Pakistan introduced reforms in the economy. All three economies were liberalised, private initiative and enterprise were encouraged and foreign investment promoted. An important difference is that China had a head-start in reforms, having initiated reforms in 1978. India and Pakistan initiated reforms in the eighties gathering momentum only in the nineties. Because of this, Chinese economic performance is better than that of India and Pakistan in many areas. Many believe that had India introduced reforms earlier, she would have made substantial economic progress by now.

Demographic Indicators

We shall compare some demographic indicators of India, China and Pakistan.

• Population in Pakistan is roughly about one-tenth of China or India.
• Though China is the largest nation (in terms of population (1393 million) and geographical area), it has the lowest density of population (148 per sq. km.). Population growth is highest in Pakistan (455 per sq. km.) followed by India (275 per sq. km.).
• The growth rate of population is lowest in China and highest in Pakistan. The low growth rate in China is due to the adoption of one child family norm in China in 1978. For instance, after a few decades, there will be more elderly people in China as compared to young people. This led China to rethink and allowed couples to have two children.
• The growth rate of population is lowest in China and highest in Pakistan. The low growth rate in China is due to the adoption of one child family norm in China in 1978. For instance, after a few decades, there will be more elderly people in China as compared to young people. This led China to rethink and allowed couples to have two children.
• One child norm led to a decline in sex ratio, the proportion of females per 1000 males. From the table we can see that the sex ratio is more or less similar in all the three countries. This is due to the son preference prevailing in all these countries.
• The fertility rate is also low in China and very high in Pakistan. Urbanisation is high in China (59 per cent) and low in India.

The table reveals the following important aspects.

• China has the second largest GDP (PPP) of $22.5 trillion. India’s GDP (PPP) is $9.03 trillion and Pakistan’s $ 0.94 trillion. We can say that Pakistan’s GDP is roughly about 11 per cent of India and India’s GDP is about 41 per cent of China.
• When many developed countries, were trailing behind with 5 percent growth rate, China was able to maintain a double-digit growth rate during 1980s.
• During 1980 -90 China stood first with 10.3 per cent growth rate. It should be noted that Pakistan was ahead of India.
• In 2015 – 17 there has been a decline in Pakistan’s and China’s growth rates; India’s growth rate increased moderately.
• Introduction of reform process and political instability were the reasons behind the declining growth rate in Pakistan.

Agriculture

• Only about 10 per cent area in China is suitable for cultivation due to topographic and climatic conditions.
• The total cultivable area in China accounts for 40 per cent of the cultivable land in India.
• Until the 1980s, more than 80 per cent of the people in China were engaged on farming. In 2018-19, it has become 26 per cent and contribution to GVA is 7 per cent.
• In India, the contribution of agriculture to GVA is 16 per cent. The proportion of workforce engaged in agriculture is 43 per cent.
• In Pakistan, the contribution of agriculture to GVA is 24 per cent. The proportion of workforce engaged in agriculture is 41 per cent.

In the contribution of agriculture to GVA, Pakistan comes first followed by India and China. In the distribution of workforce, in agriculture, it is more in India and Pakistan.

Industry

• 24 per cent of Pakistan workforce is engaged in industry. But the contribution of industry to GVA is 19 per cent.
• In India, industry workforce is 25 per cent but it produces 30 per cent of GVA.
• In China, industry workforce is 28 per cent. Industries’ contribution to GVA is 41 per cent.

In the contribution of industry to GVA, China ranks first, followed by India and Pakistan. The same pattern can be seen in the proportion of workforce also.

Services

• In the process of development, countries first shift from agriculture to industry and then to services.
• Pakistan employed 35 per cent of its workforce in the service sector. The contribution of service sector to GVA is 57 per cent.
• India employed 32 per cent of its workforce in the service sector, The contribution of service sector to GVA is 54 per cent.
• China employed 46 per cent of its workforce in the service sector. The contribution of service sector to GVA is 52 per cent.

Trends in output Growth in Different Sectors

Indicators of Human Development

The quality of life of the people of a country is reflected in its Human Development Index (HDI).

The HDI was developed by the United Nations Development Programme (UNDP) which publishes annually a Human Development Report (HDR) since 1990. This report ranks countries on the basis of their Human Development Index. Let us see how India, China and Pakistan fare in the HDI.

Table given given above brings the following facts:

• China is moving ahead of India and Pakistan in terms of many indicators —GDP per capita, or proportion of population below poverty line or health indicators such as mortality rates, access to sanitation, literacy or life expectancy.
• China and Pakistan are ahead of India in reducing proportion of people below poverty line and a very good performance in sanitation.
• Maternal mortality per one lakh is high in India and Pakistan (133 and 140) as compared to China (29).
• All the three countries provide improved drinking water sources for their population.
• China has the smallest share of poor among the three countries.

It would be wrong to jump to conclusions about quality of life based on HD indicators alone. There are many other indicators which determine quality of life like human rights, political freedom, freedom of the press, rule of law, constitutional protection to citizens, etc. Democratic, secular India with-a liberal constitution scores very high in these indicators.

Development Strategies – An Appraisal

Reform process has taken place in different parts of the world. In order to learn from the performance of our neighbouring countries we should understand the roots of their successes and failures. We should distinguish and compare the different phases of their strategies. Though economies go through their development stages differently — let us refer to initiation of reforms in these three countries. We know that reforms were initiated in China in 1978, Pakistan in 1988 and India in 1991. Let us briefly assess their achievements and failures in pre and post-reform periods.

Successes and Failures of Structural Reforms in China

China was under no compulsion to introduce reforms dictated by the World Bank and International Monetary Fund as in the case of India and Pakistan.

• In the pre-reform period the growth of Chinese economy was very slow and lacked modernisation.
• The new leadership felt that Maoist vision (pre-reform period) of economic development based on decentralisation, self sufficiency and ignoring foreign technology, goods and capital had miserably failed.
• Even though extensive land reforms, collectivisation, the Great ‘ Leap Forward and other measures the per capita grain output in 1978 was the same as in the 1950s.
• Establishment of infrastructure in areas like education and health, land reforms, long existence of decentralised planning and the existence of small enterprises helped in improving the social and income indicators in the post-reform period. In the pre-reform period there had been adequate basic health services in rural areas. With the introduction of commune system there was more equitable distribution of foodgrains.
• Each reform was introduced at a small level and later extended on a massive scale. It enabled the government to assess the economic, social and political costs of success or failure.
• Agricultural reforms were initiated by handing over plots of land to individuals for cultivation. This brought in prosperity to a large number of poor people. It prepared ground for the subsequent phenomenal growth in rural industries. It also built up a strong support base for further reforms.

Experts cite many examples on how reform measures led to rapid growth of chinese economy. It is expected that China will become the largest economic power in the near future.

Successes and Failures of Structural Reforms in Pakistan

• In Pakistan reforms were introduced out of compulsion on the part of IMF and World Bank.
• Scholars say that reform process led to worsening of all economic indicators. Growth rate of GDP has not yet improved.
• The proportion of poor in 1960s was 40 per cent which declined to 25 per cent in 1980s. But it started rising again in the recent decades.

The reasons for low growth rate and re-emergence of poverty are:

• 1. agricultural growth purely dependent on good harvest.
• 2. inability to build up foreign exchange earnings by sustainable export of manufactured goods.
• 3. For foreign exchange earnings Pakistan was dependent on remittances from Pakistani workers in the Middle East and exports of highly volatile agricultural products.
• 4. Growing dependence on foreign loans on the one hand repayment difficulty on the other.

However, during the last few years Pakistan’s economic growth has little improved and has been sustaining. In , 2017 -18 GDP registered a growth rate of 5.5 per cent. This is the highest when compared to the previous decade. Growth in agricultural sector was far from satisfactory. But industrial and service sectors grew at 4.9 and 6.2 per cent respectively.

Conclusion

China and Pakistan have travelled more than five decades of developmental path. China is ahead of India in economic growth, poverty reduction, infrastructure development, foreign trade, etc. Sustained high growth for over twenty years led to remarkable economic progress. India is also experiencing high growth rates, but Pakistan is lagging behind. Many scholars are of the view that China’s growth was at a high political cost. Moderate growth with democracy, freedom and human rights is better than high growth without political freedom. China suffers from lack of multi-party democracy, freedom of expression and human rights. India’s political system scores over both Pakistan’s and China’s. But in economic development India has to achieve sustained high growth over a long period in order to catch up with China.

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Sri Lanka is facing its worst economic crisis since independence. Its foreign exchange reserves fell to $ 1,6 billion in March 22 while the total foreign debt rose to $ 51 billion with a repayment commitment of $ 7 billion in 2022. This forced the island nation to default on its foreign debt in April 2022. Sri Lanka depends on imports for most of its requirements including food, fuel, milk, vegetables and medicines. Lack of foreign exchange to import these led to massive shortage of these essentials and people rose in rebellion against the ruling party led by the Rajapaksa family. After months of suffering, finally people stormed the presidential palace, and the president Gotabaya Rajapaksa fled the country.

Sri Lankas’s problems began with the terror attack on some churches in the capital city Colombo on the Easter day in 2019. This terror attack impacted tourism, which was a major source of foreign exchange for the economy. When foreign exchange became scarce, Sri Lanka stopped imports of chemical fertilizers and pesticides. This sudden shift to organic farming impacted agriculture production, particularly tea, which was a major item of Sri Lanka’s exports. Along with this foreign exchange problem Sri Lanka’s fiscal deficit too rose alarmingly. The major reason for the rising fiscal deficit was the tax cuts given by the United People’s Party just before the presidential elections in 2019. The combination of rising fiscal deficit, ballooning Balance of Payments deficit and spiraling inflation wrecked the Sri Lankan economy. India has helped Sri Lanka with an initial assistance of around 3.8 billion dollars and has promised more. Sti Lanka is approaching the IMF for assistance. The island nation has a rough road ahead. The major lesson for emerging economies is the importance of macroeconomic stability. Deficits – both internal and external — must be under control and borrowing must be moderate. Otherwise, financial instability will wreak havoc on the economy. In this context, it is important to appreciate the fact that India’s macroeconomic management has been sound.

A war in Europe was unthinkable in modern times. But the unexpected happened with the Russian invasion of neighbouring Ukraine on 24″ February 2022. The world’s second most powerful army invading an independent sovereign nation was treated as an act of aggression by the western world led by the US, and they imposed severe sanctions on Russia. The economic consequences of the Russian invasion and western sanctions on Russia impacted the entire world. Inflation, which had started rising even before the Russian invasion, became a severe problem impacting most countries of the world.

The Russian invasion led to sharp surge in the prices of crude, natural gas, metals, wheat and edible oil. The price of crude sharply rose to a high of $139 a barrel. Prices of edible oil and wheat, of which Ukraine is a major exporter, rose sharply Even before the Russian invasion of Ukraine, inflation had started rising globally The massive money printing (monetary stimulus to address the Global Recession caused by the pandemic) by the leading central banks of the world, particularly the US central bank Fed, and supply chain disruptions caused by the widespread lockdowns in China had triggered inflation globally, Inflation in US and Europe reached 40-year highs. In India too inflation is higher than RBI’s comfort zone of maximum 6 percent. But inflation in India is relatively lower compared to inflation in the developed world and many other emerging economies.

Even though the war continues even after four months of the invasion, commodity ‘Prices have cooled off. Prices of crude, metals, wheat and edible oil have’ declined between 25 to 40 percent from their peaks. This is a big relief. The decline in crude is a major relief for India.