The neoclassical growth model also known as the Solow-Swan model was put forward to explain long-term economic growth and development by examining economic variables such as accumulation of capital, growth of labor and advancement of technological processes. This model can be used to provide theoretical framework which will aid in explaining and comparing the economic growth of China and India. The model stresses out on the manner in which examine and interpret data. For example, China’s high level of investment should not be directly interpreted as steady economic growth (Huisken 238). This is because economic growth in the model is dependent on the variance of the investment interest rates and not the level of investment.
For example, India, compared to China has had larger increases in investment, yet it has only experienced a small proportion of China’s development (Huisken 238). We can also establish that the changes (increase) in the level of the investment rate resulted to a change in the capital stock of both China and India (Huisken 238). This would imply that the neoclassical model cannot be used to explain the economic growth of the two countries. In spite of this it is imprudent to discard off the model since other economic theories used to explain economic growth are more complicated.
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The growth accounting technique can be used to explain the growth pattern of the two countries. From the above figure, a significant part of the China's exceptional increment in labor profitability since the 1980s has been because of proficiency increases with generous commitment from rising capital per laborer (Aziz 10). Then again, the capital-yield proportion, in the wake of falling through the 1980s, climbed strongly in the late-1980s and mid 1990s preceding shrinking by the mid-1990s. From that point forward it has risen consistently. While contrasting in total levels, the story is fundamentally the same as on account of India. Increments in labor profitability, particularly as of late have been because of huge change in skills proficiency and capital use per worker (Aziz 10). In both nations, however particularly in China the commitment of work to development has been surprisingly little. Some of his could be because of low quality of statistics, such that the proficiency additions might be exaggerated.
The neoclassical model depicts that an increase in the productivity of labor i.e. from the increase of human capital per laborer can have a significant impact on the economic growth of a country. An increase in the labor productivity increases the nation’s output and also triggers capital accumulation (Aziz 10). Thus, we can deduct that the high proportion of growth in India and China that is usually attributed to accumulation of capital can be as a result of increased human capital. As a matter of fact, the large proportion of growth in India and the even larger proportion of growth in China since the 1950 is a result of human capital accumulation. This phenomena can be observed in the graph below.
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The strain that has been put on the two country’s level of labor productivity may pose impediments to the growth and development ambitions for the two countries. India can easily overcome this impediment due its democratic institutions and its ease of conflict resolution (Huisken 239). However, such democratic institutions may be useless unless supported by high investment in education. China’s lack of democracy is the primary challenge to its growth (Huisken 239). Therefore for the two countries to realize the full economic potential, it is paramount for its citizens must be educated and participate in the equitable sharing the economic growth i.e. national income must be equally distributed. The governments of both China and India must therefore provide education and access to labor markets that will provide sustainable returns to the human capital investments (Huisken 240).
Rostow’s Development Model.
Walt Whitman Rostow, and American economist observed that the growth and development of any economy takes place in five different stages. His model puts an emphasis on a country’s economic resources and how it can use these resources to maximize economic growth (Todaro and Smith 12). Therefore, the country needs to capitalize on the limited resources, use these resources to tap into the global markets and use the proceeds of international trade to further the country’s economic development. He identified the five stages of economic growth as; traditional society, transitional, takeoff, drive to maturity and high mass consumption stages (Todaro and Smith 12).
A country in the traditional stage was characterized by a high number of people employed in the agricultural sector (Todaro and Smith 13). Rostow also observed a high number of these nations resources are tied up in the military and religious sectors which described them as ‘nonproductive’. They lack knowledge in any technological advancement and still use primitive methods of production. In the transitional stage, the country’s economic development process begins (Todaro and Smith 14). A large proportion of the labor market ventures out of the agriculture and seek employment in the upcoming infrastructure sector. Construction projects such as transport and communication which will further stimulate the economic development sprout. There is still limited technological advancements thus limiting the amount of output produced. However, there is a noticeable increase in the division of labor and specialization which increases the amount of output compared to the preceding stage-traditional society.
In the takeoff stage, the country experiences a rapid economic growth arising from the increased output of the textile and food-manufacturing industries. These are the industries which have achieved major technological advancements while the other remain dominated by archaic processes. Most western countries nations such as Britain and The United States went through this stage during the Industrial Revolution (Todaro and Smith 17). More people continue to shift from the agricultural to the manufacturing sector. The country also experiences an increase in the level of investment. The rapid economic growth can sustain investment leading to increased income and consequentially increased savings which will further finance the investment activities of the country.
In the drive to maturity stage, the technical advancements which were experienced in the textile and food manufacturing sector, diffuse to other sectors of the economy. The labor market becomes more skilled and highly specialized. Other sectors of the economy such as insurance, banking and finance emerge to support the existent sectors. Also, the economy becomes closer to self-sufficient as it produces a wide variety of goods and services, reducing the amount of goods and services it imports. The final stage of the model, which is enjoyed exclusively by developed nations such the US, Britain, Germany and France, is depicted by the shift of from manufacturing capital goods such as steel and heavy machinery to the manufacture of consumers. There is decline in the manufacturing activities of such nations as more people migrate to the emerging services industry.
The growth patterns of China and India can be traced back using Rostow’s model. These nations are well past the traditional society and transitional stage. China, for example can be said to be at the drive to maturity stage (Yokokawa, Ghosh and Rowthorn 23). This is evidenced by its diversification of the industrial base and the shift from manufacturing of capital goods to the manufacture of consumer durables. The country is also experiencing a large scale of investment in social infrastructure. India, on the other hand, is at the take off stage (Yokokawa, Ghosh and Rowthorn 38). There is the rapid growth of numerous sectors especially the information technology sector. The country is experiencing a change in its social structure. There is also a widespread development and improvement of more productive methods especially in the commercial agriculture.
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.
Todaro, Michael P and Stephen C Smith. Economic Development. Boston, Mass.: Addison- Wesley, 2012. Print.
Yokokawa, Nobuharu, Jayati Ghosh, and Bob Rowthorn. Industralization Of China And India. Print.
