The Tiger and the Dragon

AuthorMurtaza Syed and James P. Walsh
Positionthe IMF's Deputy Resident Representative in China. is a Senior Economist in the IMF's Asia and Pacific Department.

China and India are the giants of the emerging world. With more than a third of the world’s population between them, these two countries would have an immense effect on global trends even if they were not growing rapidly. But over the past 10 years, China and India have also been among the fastest growing economies in the world. Since 1995, average income in China has increased almost tenfold, while in India it has nearly quadrupled. Despite very different political and economic systems, both countries have lifted millions from poverty, while income inequality and environmental degradation have worsened. Given the scale of these changes, the emergence of India and China has had profound implications for the rest of the world.

But China and India have pursued very different development paths. China’s economic model has focused on gearing its manufacturing industries toward exports for the rest of the world. India has also become increasingly integrated with the rest of the world, though under its model, domestic demand and services have played a more important role. As this process has played out, China has become the workshop of the world.

India’s growth has been less spectacular, but in many industries, from petrochemicals to software, India has achieved success on the global stage. Chinese goods—from T-shirts and air conditioners to iPod components and furniture—are for sale in almost every country on the planet. By contrast, Indian engineers automate office processes, call centers troubleshoot software glitches, and pharmaceutical companies produce generic drugs for clients around the world.

How can two countries, with seemingly similar initial conditions—very low incomes, large rural populations, decades of self-imposed economic exile, and a great deal of central control—have charted such different development paths? And given these differences, what might they learn from each other as they move forward?

How did reforms begin?

China began its reform not by building the factories and skyscrapers that impress visitors today but by changing the countryside. In 1978, peasants living hard lives on collective farms made up 80 percent of its population. At that time, communal land was leased to individual households, who were given permission to choose which crops to grow and to sell any production above the state quota on the free market. These agrarian reforms—dramatically increasing agricultural productivity and allowing large parts of economic activity and labor to move out of central planning and into the industrial sector—sparked the changes that led to China’s economic transformation. Next, China began reconnecting to the rest of the world by setting up special economic zones along its eastern coast in 1980. Armed with discretionary powers over taxation, streamlined business rules, and modern infrastructure, these zones attracted large-scale investments from abroad, and the experiment soon spread to other areas.

Meanwhile, growth was unleashed by the state-owned enterprise reforms of the mid-1990s, relieving corporations of social responsibilities and freeing them to invest in new technologies and seek out new markets. With support from wide-ranging government policies, companies in export sectors learned to become highly efficient by competing in the global marketplace. In this way, following the east Asian export-oriented model espoused by Japan and Korea, China was able to successfully connect its excess labor supply to the global production system. With a further boost from China’s World Trade Organization (WTO) accession in 2001, total trade (exports plus imports) mushroomed from less than 10 percent of GDP in the late 1970s to nearly 50 percent today, and foreign direct investment rose from virtually nothing at the beginning of...

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