China and India’s Economy as a Neoclassical Growth Model.
It should be noted that the standard one-sector neoclassical growth model cannot be used to explain the macroeconomic variables of India and China. The model, however, provides the theoretical framework that aids in examining how the two economies’ digress from the standard model and in this way point out the market structure, organizations, and other variables that may have led to this digress (Huisken 239). An important variable that may help us understand this deviation and explain the differences in the growth of the two economies is the investment interest rates. India may have high level of investments but compared to China it is not fully developed. This is as a result of changes in the investment rates in India. These changes have also brought an increase in the capital stock of both countries (Huisken 239).
China and India: Domestic Savings by Sectors.
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A closer look at the breakdown of reserve funds across different sectors show that while household investment funds has tumbled from around 21 percent of GDP in the mid-1990s to 19 percent of GDP in 2004, while corporate and government reserve funds have relentlessly expanded (Aziz 20). Actually, amid the previous five years, enterprise and government saving rose by around 4 % of GDP, and they now represent around 19 and 10 percent of GDP, separately (Aziz 20). The strength of interior reserve funds in financing venture is in a substantial part because of the structure of firm possession and China's poor monetary intermediation, i.e., because of an immature banking framework, which has been not able meet the speculation needs, especially of the inconceivable number of little and medium-scale enterprises, a hefty portion of whom are in the private division. Overviews and studies demonstrate that the private Chinese firms are constrained in their pursuit to acquire credit facilities (Aziz 20). Such limitations mirror the loaning and administrative system that only supports the state-possessed ventures over the private firms (Aziz 20).
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Unlike China, India’s saving sector is dominated by the households (Aziz 28). This is because India has a more capitalistic-centered economy with a lot of capital funds being in the hands of the public (Aziz 28). The public loans this money to the government through purchasing of Treasury bonds and to corporate enterprises through the purchases of equity shares. There are no restrictions to the acquiring of credit because of fully established and well-functioning banking system (Aziz 28).
Rostow’s Five Stages of Growth and Development
Walt Whitman Rostow, a renowned American economist put forwards a 5-step development model which he believed that most economies in the world follow. The model utilizes a historical and modernity approach i.e. the economy of a nation will move from a single entity to a diverse complex entity. Rostow identified the five stages as; traditional society, preconditions to take-off, take-off, drive to maturity and the age of high mass consumption (Nafziger 124). An economy in the traditional society is defined by its over-reliance to subsistent agricultural farming. There is the use of intensive and minimal or no trading activities are taking place. There is also low level of literacy with the labor market using primitive methods of production unaware of scientific and technological developments around the world (Nafziger 124).. In the preconditions to take-off stage, the economy begins to experience some technical developments. The agricultural practices of the country start to be more mechanized thus increasing the output. Subsistence farming is still dominant, however the surplus is traded internally, in the country or exported to other nations. The citizens of the nation begin saving and investing in other emerging economic activities (Nafziger 124).. However, these savings are still low to warrant the growth and development of the country. More funds, especially drawn from outside the country, in the form of international aid and proceeds of international trade are used to further develop the economy. Infrastructure projects, such as the construction of roads, setting up of communication equipment, which support trading and other commercial activities commence (Nafziger 124).
In the take-off stage, the manufacturing industry becomes more pronounced. Many people shift from agricultural sector in search for jobs in the highly paying manufacturing sector. Savings and investments continue to increase to reach 15% of the Gross Domestic Product (GDP) (Nafziger 125). In spite of this significant growth of savings and investments, the country still relies on external financing to finance major, capital-intensive projects. There is also the emergence of political and social institutions in the country. Another major characteristic of the take-off stag is the dual economy. The economy of the country is “split” in to two with one part being the highly productive and wealthy manufacturing sector and the other being the lesser productive rural agriculture (Nafziger 125).
The drive to maturity stage is a stage where most countries are. In this stage, the economy becomes more diverse. In addition to the manufacturing and agricultural sector, other economic sectors emerge. The banking and insurance industries develop and grow rapidly to provide services that will facilitate economic growth. The country also experiences a rise in the level of technology i.e. with more innovative methods in place production becomes reliant on factor-inputs. The final stage of development is the age of mass production. Countries in this stage are the developed nations e.g. the United Kingdom (UK), the United States (US), France, Germany and Japan (Nafziger 126).. The increased level of outputs enables high consumer expenditure. The country shifts from the manufacture of capital goods to the mass production of consumer goods. There is also significant change of labor from manufacturing activities to the services industry.
When examining the stages of development which India and China are in, you will note that they are both in post-takeoff stage i.e. the drive to maturity stage (Ninan par. 1 and Huisken 220). However, it is paramount to note that China is more developed compared to India as it further ahead in the stage. China’s growth is as a result of the country’s cheap labor market and the significant technological developments (Huisken 220). China continues to be a leading tech player in the world, producing and exporting electronics to nearly every country in the world. The proceeds of this trade are what have propelled the country further ahead. However, the lack of democratic institutions and absence of capitalistic structures have also lagged the economy behind (Huisken 221). China ought to be in the stage of mass production but this has not been made possible due to communistic approach towards development.
India’s growth is characterized by its pursuit to technological maturity that will eventually culminate in the stage of high mass production in, say, three to four decades. India’s take off stage was characterized by the growth of the textiles industry which further led to the diversification of the petrochemicals and engineering industry (Ninan par. 3). In spite of this growth, these industries continue operating in a traditional set-up and should thus move to more modern methods of operation which will guarantee the shift to age of mass production (Ninan par.7).
Works Cited
Aziz, Jahangir. "Real and Financial Sector Linkages In China And India". IMF Working Papers 08.95 (2008): 1. Web.
Huisken, Ronald. Rising China. Canberra: ANU E Press, 2009. Print.
Nafziger, E. Wayne. Economic Development. Cambridge: Cambridge University Press, 2012. Print.
Ninan, T. N. "Indian Economy Is Now In The Post Take-Off Stage: Walt Whitman Rostow". Indiatoday.intoday.in. N.p., 2016. Web. 25 June 2016.
