China and India are making immense strides in development. Growth in both countries has been impressive. But there is now much concern about whether impressive growth rates are yielding enough poverty reduction. The present debate about their poverty lines is a reflection of this. In this second part of a two-part article (first part featured in January's Angle), we focus on more inclusive growth in these two Asian giants.
India and, especially, China have enjoyed rapid economic growth, with a median growth rate of 6% and 10% in the 1980-2010 period, respectively. This has catapulted the impressive growth in per capita gross national income (GNI) in the two countries: in 1980, the GNI per capita based on purchasing power parity (PPP) was in the order of US$430 in India and US$250 in China. By 2010, the two countries had increased their per capita income up to US$3,560 and US$7,570, respectively. The high growth rates in China are largely explained by the high gross capital formation over the past 30 years, which as a percentage of GDP fluctuated around the median of 38%, vis-o-vis 24% in India, although the investment gap between the two countries has narrowed in recent years.
A significant part of the domestic investment in China, about 20% of GDP, has gone to infrastructure projects, which is nearly 10 times more than the share of GDP invested in infrastructure in India. That has facilitated the accelerated rate at which the Chinese economy has transited form agricultural to manufacturing production. In India, the transition has been towards the IT off-shore service industry with as much as 60% of the labour force remaining engaged in traditional farming activities.
Economic growth is a necessary condition to rising per capital income, but it is nonetheless insufficient to guarantee a steady trend towards poverty reduction. In China, for instance, the relationship between economic growth and poverty reduction is far from being linear, with episodes of high economic performance in the 1990s accompanied with increases in the poverty rates (see Figure 2). In India, since the late 1990s the country has experienced the fastest economic growth, and yet the speed at which poverty is being reduced has decelerated. This tells us about the importance of public interventions in making growth more inclusive. Indeed, it is now well understood that policies that are designed to maximise growth can only trickle down to the poor if they...