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China Wins the Race;
A Comparison of Chinese and Indian Economic Development
and the Geopolitical Consequences of China’s “Win”
John W. Garver
Georgia Institute of Technology
Penelope B. Prime
Kennesaw State University
15 October 2002
Abstract: The China-India economic race was a significant element of international politics in the first
several decades of the Cold War. The U.S. put substantial effort into ensuring that India surpassed China in
its economic progress in order to thwart the communist threat. In the early 1970s, the U.S. began a new
relation with China to build support against the U.S.S.R., and hence lost interest in the India-China race.
Then, in the late 1970s, China began substantial reforms to marketize and join the global economy under
Deng Xiaoping. This paper draws on World Bank figures to demonstrate that China has by a substantial
margin “won” this new round of the economic race. Having established China’s lead in many economic
sectors, this paper then explores the reasons for this outcome, discusses some of the geopolitical
implications of China’s “win,” and considers the possibility that India may do significantly better in a
future round of competition with China. In the meantime, China’s already substantial developmental lead
over India will probably intensify geopolitical rivalry between the two countries in the South Asia region.
The China – India Economic Race
During the 1950s and 1960s analysts widely believed that the relative success of
Indian and Chinese economic development would have a great impact on world history.
China then stood as a model of comprehensive economic planning plus Leninist
dictatorship, while India represented a mixed economy of socialism and capitalism
combined with parliamentary democracy. U.S. foreign policy planners believed that
peoples across the developing world --- in countries just emerging from generations
under colonial rule --- would watch and be influenced by the outcome of the India-China
economic race. Exposed to new sources of electronic information (radio, movies,
television), which led them to crave improved standards of living, peoples in the
“emerging nations” would move politically one way or the other in response to the
relative developmental success of India and China --- or at least that is what U.S.
strategists believed. The United States consequently devoted considerable energy and
resources to ensuring that India won that race.1 U.S. policy makers did what they could
to throttle Chinese economic growth (via economic sanctions and market denial), while
encouraging Indian growth in many ways (by granting market access, development aid,
etc). This effort to ensure that India won its economic race with China was part of the
massive U.S. effort to direct the development of the post-colonial emerging countries
toward democratic capitalism and away from Leninist socialism as the Cold War spread
from Europe to the world. In short, the China-India economic race was a significant
element of international politics in the first several decades of the Cold War.
The significance of the outcome of that first round of the India-China race was
made complex by India’s accelerated movement toward “a socialist pattern of society”
(an ideal goal established in the 1950s) under Indira Gandhi in the 1970s. India became
less and less a model of a mixed economy as it increasingly relied on policies of autarky
and state control then beloved by progressive thought. Indira Gandhi also moved India
into much closer alignment with the USSR than her father ever continenced. Meanwhile,
totalitarian China broke with the USSR (with which it had formed a close politicalmilitary alliance in 1950) and moved into strategic alignment with the United States. The
new U.S. strategy of exploiting contradictions among the communist powers superceded
support for India as a counter to China’s pernicious influence. American strategists lost
interest in the outcome of the Sino-Indian economic race.
We are now witnessing a second round of the China-India economic race. This
round does not have the ideological overtones of the first round. China has long
abandoned its advocacy of non-market economics. Indeed, China’s success in the second
round of its economic race with India seems to be largely due to its enthusiastic embrace
of the “East Asian development model” of integration into the world capitalist economy.
India, for its part, seems to have retained far more anti-market ideological baggage than
China. India still represents a free, democratic political system based on rule of law,
while China remains an authoritarian, one-party dictatorship. Yet U.S. thinking --- both
in the form of “modernization theory” of the 1950s and 1960s, and in the form of
“engagement” theories of the 1990s --- has typically seen political liberalization and
democratization deriving from economic marketization and development. By this logic,
now that China has embraced marketization, it is only a matter of time, albeit perhaps
several generations, before China moves in the desired political direction. In short, the
outcome of the China-India economic race is no longer tied to the evolution of the world
toward or away from political values and institutions embraced by the United States.
This article will first draw primarily on indicators developed by the World Bank
to demonstrate that China has by a substantial margin won a new round of the economic
race that began in 1978 when China started marketizing and joining the global economy
under Deng Xiaoping. This article then explores some of the reasons for this outcome,
emphasizing the role of geopolitical and economic integration in the region and beyond.
Despite China’s recent gains, India has some distinct advantages over China. The next
section analyzes the possible reasons that India might turn the tables in a future round of
economic competition with China. The concluding section discusses some of the
geopolitical implications of China’s “win,” and the changing balance of power in south
and southeast Asia.
The focus of this article is not to compare the reform processes in India and China
per se.2 Rather it will focus on the economic results of the two nations’ post-1978
developmental efforts, some of which are due to reform measures while some are due to
other factors.
In order to compare economic results, the analysis relies heavily on the
World Bank’s data, which minimizes comparability problems. However, we are well
aware of the controversies concerning cross country comparisons, and the allegations of
inflated figures for China in particular. Due to the difficulties of knowing the correct
ways to alter these figures, and since they have been scrutinized and adjusted by World
Bank economists already, we use the World Bank figures as originally published. While
we suspect that some of China’s figures continue to overstate China’s accomplishments,
it should be noted that any corrections to the data would have to very large to alter the
general conclusions of this analysis.
Use of the term “race” to compare the India-China economic relationship requires
a bit of explanation. First, a “race” does not go on forever, but is for a specified, arbitrary
distance. The “distance” of the race analyzed here is the period 1978-2000. Designating
one party the “victor” in a race does not preclude a subsequent race, perhaps with a
different victor. Moreover, declaring one party the “victor” in a race is not synonymous
with declaring the other party a failure. Races are often between the swiftest few. Both
India and China have done very well in terms of economic development when compared
to other large, populous, and poor countries (Egypt, Indonesia, Brazil, Nigeria, Pakistan),
and concluding that China has done better than India in the 1978-2000 “race” is very
different than declaring India’s development effort unsuccessful, much less declaring
India some sort of failure.
The term “race” also implies a degree of consciousness by the two parties
involved in that competition which we believe was indeed the case. To a significant
degree, India served for China as the negative other --- what China was not. Thus in the
immediate aftermath of the events of June 1989 when the Chinese Communist Party was
struggling to relegitimize its rule, it stressed the point that China had done much better
than democratic India in developmental terms.3 For India, increasing awareness of
China’s booming market-driven economy was one significant factor inspiring Indian
reform efforts in the 1990s. Indian planners were also apprehensive of China’s deep and
growing presence in regions adjacent to India.
While the post-1978 economic race between India-China lacks the ideological
overtones of the first race (i.e., in the 1950s and 1960s), the geopolitical implications of
the post-1978 round of the Sino-Indian economic race are significant. Indeed, it seems
probable that these geopolitical consequences may turn out to be more substantial and
important than the ideological consequences associated with the first round of SinoIndian economic competition. China and India are both emerging powers. The
aggregate national capabilities of both dwarf the capabilities of surrounding nations.
India and China have strong self-conceptions of national greatness and both believe that
their well-deserved national greatness was long denied by foreign oppression, but is now
in the process of being restored on the international stage. The two states are also fated
to lie side-by-side with large common flanks of land and sea. In a number of ways, both
India and China are expanding activities in these common, adjacent lands and waters: by
expanding trade and investment; by constructing roads, railways, waterways, and airlines;
by undertaking military activities of various sorts, including visits by naval squadrons
and arms sales; by developing long-range military capabilities; by extending
developmental assistance; and in many other ways.
Differing success in economic development will affect the abilities of China and
of India to expand national activities and influence in the lands and waters of South Asia,
Central Asia, Southeast Asia, and the Indian Ocean. Extrapolating from the substantially
greater economic developmental success of China, the presence of Chinese warships,
merchant ships, trucks, trains, investments, aid projects, trade, tourists, spies,
businessmen, criminals, scholars, soldiers, and so on, in the lands and waters around
India will increase. India’s relative ability to offset the growing Chinese presence will
decline. India will feel, and indeed is already feeling, this deepening Chinese presence.
Dealing with these Chinese activities in India’s traditional South Asian “security zone”
will constitute a probably ever-more-pressing problem for India.
We will return to the geopolitical implications of China’s greater successes in
economic development. Before that, it is necessary to demonstrate that China has, in
fact, won this round of the Sino-Indian economic race.
Outcomes of the China-Indian Economic Race
National Wealth
Comparisons between Indian and Chinese development outcomes over the
decades since the 1950s have been hampered by data problems. The World Bank
development indicators generally begin in the mid-1960s. For China, however, since it
joined the Bank in 1980, and since its economic system before this was measured with
somewhat different indicators, many series do not begin until the late 1970s or even the
early 1980s. Studies that tackled the India-China comparison before the 1980s generally
concluded that either the two countries’ economic progress was about comparable, or that
China did somewhat better, especially in industrial growth.4
This section will compare changes in key indicators for India and China between
the 1970s and the late 1990s or 2000, data permitting.5 Overall these numbers indicate
that between 1978 when China initiated opening and reform, and 2000, China clearly and
dramatically pulled ahead of India.
Comparisons of Indian and Chinese gross domestic product (GDP) in constant
1995 US dollars are given in figure 1. In 1965 when China was stuck in Maoist autarky
and xenophobia, India’s GDP stood at 125 percent of China’s. By 1978 India’s lead had
slipped to only 106 percent of China’s. This shift in the mid 1970s was probably due in
part to the rising international price of petroleum, of which China was just becoming a
major exporter.
Within two more years, by 1980, India’s aggregate was only 94 percent
of China’s. By 2000, the value of India’s total production had fallen to just 45 percent of
China’s. Per capita comparisons yield the same result. In 1965 India’s per capita GDP
was 183 percent of China’s and by 2000 it had fallen to 45 percent.
Figure 1: India & China GDP (1995 constant $US)
GDP (billions)
India as a % of China 125
GDP per capita India
India as a % of China 183
Source: World Bank, World Development Indicators Online Database, 2002 (
Another apt comparison is with Japan --- long recognized as the standard of Asian
wealth and economic development. In 1965 India’s GDP represented 8 percent of
Japan’s. China’s then stood at 6 percent of Japan’s. Thirty-five years later in 2000,
China’s GDP was 18 percent of Japan’s, while India’s was still only 8 percent.
While both economies emphasized development of key industries, China’s higher
investment rates resulted in a more extreme rate of industrialization primarily at the
expense of services. In 1965 the value of industry in GDP in China was 35 percent
compared to 20 percent in India. By 1980, China’s share of industry had increased to 48
percent and then to 50 percent by 2000, compared to 24 percent in 1980 and 27 percent in
2000 for India. In contrast, by 2000 India’s share of services was 48 percent compared to
only 33 percent in China.
In 2000 agriculture represented 25 percent of GDP in India and only 16 percent in
China. Indian agricultural labor productivity was higher than China’s, with a value added
per agricultural worker roughly 20 percent higher than China’s and nearly a third more
tractors employed per hectare than in China. This is indicated by Figure 2. On the other
hand, per hectare cereal yield in China was more than double that of India, as was the
utilization of chemical fertilizer. Food production also increased significantly more
rapidly in China than in India. From a base of 100 for 1989-1991, China’s output grew
70 percent by the end of the decade, compared to an Indian increase of 26 percent. Gains
in livestock production were similar. In terms of growth of value added, China’s lead is
far less impressive, but still about 16 percent. While it seems that Indian agriculture is
more mechanized and has higher labor productivity than China’s, it has apparently not
done as well with increasing food production.
Figure 2: Agricultural Growth and Productivity
(2000 unless otherwise indicated)
India China
Tractors (per hectare of arable land)
Fertilizer consumption (100 g. per hectare arable land) 1,136 2,654
Food production growth index (1989-91 = 100)
125.72 169.62
Cereal yield (kg per hectare)
2,339 4,947
Livestock production index (1989-91 = 100)
133.5 2102
Agricultural value added per worker (constant $US) 3971
Agricultural value added (annual % growth)
Notes: 1) Figure for 1999. 2) Figure is a three year average for 1998-2000.
Source: World Bank, World Development Indicators Online Database, 2002
While China has seen more rapid growth in industry and output generally, have
these increases translated into betterment of people’s livelihoods? Based on the United
Nations Development Programme’s well-respected Human Development Reports, it
appears that the answer generally is yes. Figure 3 summarizes several key human capital
figures for the two countries. The overall country human development index ranking for
China in the 2002 Report (based on data for 2000) was 96 compared with 124 for India
where a lower ranking represents relatively more progress on a series of conditions.6 In
terms of the index itself, China’s was .726 while India’s was .577. The highest-ranking
country, Norway, earned an index of .942 and the lowest ranking country, Sierra Leone,
earned an index of .275. China fell in the middle of the “medium human development”
group, which consisted of 83 countries, while India was in the bottom third of this group.
China scored better than India in life expectancy, adult literacy, and the poverty index,
while school enrollment was comparable and India surpassed China in the percent of
population with improved water sources.
Figure 3: Human Development Indicators: India and China, 2000
Overall Overall
Rank Expectancy
Enrollment using
Source: United Nations Development Programme, Human Development Report 2002 (New York: Oxford
University Press, 2002), pp.149-52, 158-59, 167-68.
Underlying China’s investment in specific sectors has been substantial investment
in infrastructure, especially during the reform period. India’s total electrical production
in 2000 was less than half China’s, for example. An Indian lead in the number of
telephone mainlines per thousand people quickly evaporated after 1978. By 2000, 3.5
times as many Chinese as Indians had telephones. The mobile phone revolution has yet
to take fire in India --- at least when compared to China. By 2000, 188 times as many
Chinese as Indians utilized mobile phones. A 36 percent Chinese advantage in television
dissemination in 1975 had grown to a 380 percent lead by 2000. China is also ahead in
cable access. In terms of overall per capita expenditures on information and
communications technologies, a Chinese expenditure equivalent to US$46 compares to
India’s $18.
In the area of transportation, the picture is more mixed. India has a substantially
better road system than China. According to World Development Indicators, India’s total
road system was 41 percent larger than China’s, and served a land area only one third that
of China. Moreover, nearly twice the percentage of India’s roads is hard surfaced, 46
percent compared to 22 percent for China. Apparently, however, China’s inferior road
network bears far heavier commercial traffic. This may suggest that India’s greater
investment in highways could have a future multiplier effect if and when India becomes
able to attract large quantities of foreign and domestic investment.
Diffusion of computer and Internet technology will probably be a critical
developmental advantage over the next several decades. In this area, too, it seems that
China holds key leads.
In terms of the number of Internet users, China has a substantial lead over India -- 16.9 million Internet users in China in 2000 compared to 4.8 million users in India
(Figure 4). The number of Internet users is important because it is an indication of the
size of the domestic market for internet-related products, and of the availability of
Internet skills for employment in various sectors of the economy.
Figure 4: Number of Internet Users in India and China
Millions of Users
Source: Peter Wolcott, Seymour E. Goodman, Is the Elephant Learning to Dance? The Diffusion of the
Internet in the Republic of India, Georgia Tech Information Security Center, Georgia Institute of
Technology, College of Computing, 2002, pp. 79-81; William Foster, Seymour E. Goodman, The
Diffusion of the Internet in China, Center for International Security and Cooperation, Stanford University,
2000, p.49.
Behind this Internet use are personal computers, which are 3.5 times as common
in China as in India. (See Figure 5.) An even larger difference in personal computers
installed in education --- where the next generation of computer users is trained --suggests that China’s lead may grow. Nearly 10 times as many personal computers are
installed in Chinese educational institutions as in India. In terms of expenditures on
information and communications technologies, China spends 1.6 percent more of GDP in
this area --- a very substantial difference --- while its per capita expenditure is 2.6 times
India’s. Interestingly, the receipts of the two countries from royalties and fees are about
the same, with India having a slight lead. But in terms of payment of licensing fees and
royalties, China spends over 4 times as much as India. This suggests that China avails
itself much more of the technologies and knowledge developed in other countries. In
terms of patents, China also enjoys a hefty lead. In sum, China has a very substantial
lead over India in assimilating the cutting edge technologies of the coming decades and in
building the infrastructure to support this assimilation.
Figure 5: Information Technology Development
(2000 unless otherwise indicated)
Number of secure internet servers
Personal computers per 1000 people
Personal computers installed in education (thousands)
Information and communication technology expenditures (% of GDP)
Information and communication technology expenditures (per capita
Royalty and license fees, payments (millions, current $US)
Royalty and license fees, receipts (millions, current $US)
Patent applications, residents
Patent applications, non-residents (thousands)
Scientific and technical journal articles
8,439 9,0812
Notes: 1) Figure for 1999. 2) Figure is for 1992.
Source: World Bank, World Development Indicators Online Database, 2002 (
The External Sector
Since opening to foreign investment in the early 1980s, China has been
remarkably more successful than India in attracting foreign capital. (See figure 6.) The
first year in which the World Bank lists foreign direct investment (FDI) for China is
1982. In that year $430 million in FDI reportedly flowed into China. By the end of the
five year period ending in 1985, India’s FDI was only 7 percent of China’s, and it
continued to fall until the mid-1990s. Although FDI in India increased in the late 1990s
as a result of reform policies, by 2000 China’s annual net FDI inflow was still 15 times
that of India, based on official figures. For the eighteen years between 1981 and 2000,
China’s total net inflow of FDI was $336 billion compared with $18.3 billion in India.
Figure 6: India and China: Cumulative Net Inflows of Foreign Direct Investment
(Current $US, millions)
India as a % of China --
Source: World Bank, World Development Indicators Online Database, 2002 (
Official figures for FDI for both China and India have been criticized—China for
overestimating inflows and India for underestimating them.7 One major problem is that
perhaps as much as half of China’s FDI is actually domestic money that flows outside the
country in order to return as “foreign investment” to gain the flexibility and other benefits
that foreign investors enjoy. In addition, suspected incomplete coverage in Indian
accounts and the treatment of reinvested earnings may mean FDI in that country is 50
percent higher than official figures reveal. Even taking these high estimates of miss
reporting, however, would still leave China ahead in FDI by billions of dollars.
In terms of exports of goods and services, according to World Development
Indicators presented in Figure 7, already in 1980 India’s exports were about 41 percent of
China’s, and this proportion continued to fall until the second half of the 1990s. In 2000,
India exports were only 32 percent of China’s.
Figure 7: India and China: Exports
Exports of Goods & Services India
1980 1985 1990 1995
11.46 13.22 20.39 39.66
(constant 1995 $US, billion)
China 27.75 41.00 84.88 167.96 158.95
India as a % of China
Exports of Goods & Services India
(% of GDP)
India as a % of China
China 7.6
Source: World Bank, World Development Indicators Online Database, 2002 (
Taking exports of goods and services as a percent of GDP yields a result only
slightly more favorable to India. In 1980 India’s exports were 81 percent of China’s. By
2000, 26 percent of China’s GDP was constituted by exports of goods and services,
compared to 14 percent for India. Indian exports as a percent of GDP were 54 percent of
China’s entry into the World Trade Organization (WTO) in late 2001 may well
lead to another increase in the gap between Chinese and Indian exports. According to a
Deutsche Bank study of the impact of China’s WTO entry, China’s textile and wearing
apparel exports will benefit from WTO entry by gaining greater access to North
American and European markets.8 Those increased Chinese exports will come largely at
the expense of Indian textile and apparel exports to the same markets, the Deutsche Bank
study concluded. The net benefit to China of WTO entry in increased real purchasing
power earned by greater exports between 2002 and 2006 would be on the order of US$23
billion. India’s exports were projected to drop by US$ 4.8 billion over the same period
because of greater Chinese exports, making India the biggest national loser from China’s
WTO entry.
Chinese competition may also hurt India’s software exports. Software has long
been one of India’s most successful exports. In early 2002, however, the Chinese
government designated expansion of China’s software industry as a key target. During
the 10th Five Year Plan (2000-2005), the Ministry of Science and Technology was to
spend about US$ 100 million for research and development of critical software
technologies, including operating systems and management systems for large databases.
The objective was “catching up with India in two years.”9 Given China’s very distinct
leads in both telecommunications infrastructure and Internet technologies as shown
above, it is quite possible that China will accomplish this goal. At the very least, Chinese
software exports will increasingly compete with those of India.
In sum, while India’s progress has been commendable, by many measures China
has the lead, and has sped ahead especially since reforms began in the late 1970s. The
effects of India’s liberalization in the 1990s can be seen, especially in the external sector,
but there is a long distance to go to catch up. Where India is ahead in software, China
has explicit policies to try to catch up quickly. After addressing some of the reasons for
China’s lead, India’s prospects of catching up are evaluated.
Explaining China’s Winning the Race
Geography goes some distance toward explaining China’s relative success vis-àvis India. The east coast of China --- the locomotive of China’s post-1978 globalization -- was situated in a highly dynamic and increasingly rich neighborhood. Neighbors like
Japan, South Korea, Taiwan, Hong Kong, Thailand, and Singapore provided capital for
investment, markets for Chinese exports, more advanced technology, and expertise in the
ways of the global economy. The neighborhood of India’s comparable coastal industrial
belts were, in comparison, far poorer and less dynamic: Pakistan, Myanmar, Sri Lanka,
Bangladesh, and Nepal. China’s dynamic neighbors provided major sources of critical
inputs to Chinese development. Very few such transfers took place between India and its
neighbors to India’s advantage.
Why did the capital and expertise of the East Asian countries flow to China rather
than India? Lower transportation costs associated with geographic proximity were one
factor. To a significant degree, the flood of Hong Kong and Taiwanese investment into
China during the 1980s and 1990s was associated with the transfer of labor intensive and
heavy-polluting manufacturing industry from those regions to China. Given this, the
movement of inputs and finished products between Hong Kong and Taiwan, and those
relocated manufacturing plants, would have much more difficulty had the relocated plants
been situated in Gujarat or Maharastra rather than Guangdong or Fujian.
Civilizational identities also almost certainly played an important role. Nearly all
of the East Asian societies had drawn heavily from the font of Chinese civilization over
the centuries. The relative familiarity that derived from that long association probably
caused businessmen in Japan, Korea, and Taiwan to look first to China, and to feel more
comfortable in China once they went to take a look around. India, in contrast, probably
seemed rather more alien and strange to these East Asian businessmen.
Idiosyncrasies of Chinese development also played an important role. Large
ethnic Chinese enclaves of Hong Kong and Taiwan remained beyond Communist rule
after 1949. These ethnic Chinese economies were able to develop into important centers
of the global market economy in the thirty years after the Communist victory brought
socialism to the mainland of China. After 1978, both Hong Kong and Taiwan played
extremely important roles in China’s successful marketization. By 2001, Hong Kong,
with a population of 7.2 million, had provided 30 percent of all China’s FDI between
1980 and 1990. Taiwan, with a population of 22.4 million in 2001, had provided 10
percent of all China’s FDI during the 1990-2000 decade, an amount only slightly less
than the 11 percent of FDI contributed by the United States.10 As important as sheer
dollar amount of investment was the marketing savvy, financial acumen, and managerial
skill of Hong Kong and Taiwanese businessmen. That advice, coming from ethnic
Chinese and in the Chinese language, played a major role in the formation of a dynamic
market economy in China after 1978.
There is nothing comparable to Hong Kong and Taiwan in India’s case. An
intriguing thought experiment might run like this. Suppose that in 1947 the island of
Ceylon had remained under British colonial rule rather like Hong Kong had after 1949.
Suppose that free market policies similar to those implemented in Hong Kong had been
implemented in Sri Lanka (as Ceylon was renamed in 1971). Suppose too that continued
rule by an ethnically alien and impartial elite (at least as between Sri Lanka’s Singhalese
and Tamils) had averted civil war in Ceylon between that island’s Tamil and Singhalese
inhabitants. Suppose next that foreign investment had flowed steadily into this
conveniently located base of operations, so that by 1990 Sri Lanka, with its then 19
million people, had had a GDP roughly comparable to Taiwan with its 20 million people.
Suppose, finally, that in 1991 when India finally began turning away from decades of
socialist economics, Sri Lanka had been able to provide capital and expertise to plug the
economies of coastal Tamil Nadu and Andhra Pradesh into the global economy.
Nothing like this transpired, of course. The People’s Republic of China, however,
had ready-made capitalist dynamos of Hong Kong and Taiwan to jump start its entry into
the global economy. Viewed from this perspective, China’s success was an accident of
There is another set of questions that follow from the discussion about rich and
poor neighborhoods. If we conclude that East Asia was a richer, more economically
dynamic neighborhood than South Asia, we must inquire about the relation between that
regional economic difference and U.S. hegemony. It is plausible that, to a significant
degree, East Asia was rich and economically dynamic because it was an integral part of
the post-1945 realm, while South Asia was poorer because it was substantially outside
that realm. U.S. influence was great in non-Communist East Asia throughout the post1945 period. That region was a locus of extra-national U.S. military power second only
to Western Europe. A series of major U.S. allies were located in East Asia---- Japan,
South Korea, Nationalist China/Taiwan, the Philippines, South Vietnam, Thailand,
Australia, and so on. The United States fought two major wars to maintain the scope of
its East Asian realm; one it won in Korea, another it lost in Vietnam. Throughout its
East Asian realm the United States constructed international regimes conducive to open
market economics. U.S. power guaranteed the security of investment and commerce.
Because of that protection and adherence to market incentives, investment from around
the world flowed into East Asia. The U.S. presence also stifled conflict between regional
countries --- across the Taiwan Strait, between the two Koreas after 1953, in the South
China Sea, and so on. To the extent that U.S. power and influence underpinned post1945 East Asian economic prosperity, and to the extent that China’s post-1978
development piggybacked on that regional prosperity, China must, once again, be
considered a free rider and fortunate recipient of a windfall. Indeed, China benefited
from a windfall that it did its best to destroy prior to the early 1970s.
Another major reason for China’s relative economic success has to do with the
policy choices of the Chinese and Indian governments. Especially in the crucial area of
participation in the global market economy, China’s leaders seem to have gone much
further and faster than India, and perhaps most importantly, earlier, and this has made a
crucial difference. This is indicated by the annual report on World Economic Freedom
issued by the Fraser Institute of Canada. The Fraser Institute is a pro-market policy
center founded in 1974 to “redirect public attention to the role markets can play in
providing for the economic and social well-being of Canadians.” It organizes a panel of
experts annually to compare countries across a number of dimensions indicating levels of
economic marketization among 123 countries.11 The Economic Freedom of the World
Annual Report groups a hundred or so variables into five key areas, and assigns each
country a statistical rating in those various areas in terms of the consistency of the nations
policies and institutions with regard to economic freedom, with higher numbers
indicating higher levels of market orientation. The Economic Freedom report also ranks
all countries, with 1 being the highest level of marketization (Hong Kong), and 123 being
the lowest (the Democratic Republic of the Congo). Figure 8 presents the statistical
ratings and global rankings for China and India.
Figure 8: Market Adaptation of India and China:
(Higher numbers indicate more marketized policies;
global rankings among 123 countries in parentheses)
Size of
Legal Structure and
Government Security of Property
India 6.9 (30)
China 3.8 (110)
Access to
6.0 (58)
4.1 (92)
6.5 (89)
6.5 (91)
Freedom to
5.1 (109)
6.7 (69)
of Credit,
Labor &
5.8 (64)
5.2 (92)
Source: Gwartney, James and Robert Lawson, with Walter Park, et al., Economic Freedom of the World:
2002 Annual Report (Vancouver: The Fraser Institute, 2002.) Data retrieved from
India ranks markedly higher (that is, is more marketized) than China in terms of
size of government, and legal structure and security of property rights. “Size of
government” includes government consumption as a share of total consumption, transfer
payments and subsidies as a share of GDP, government enterprises and investment as a
share of gross investment, and the top marginal tax rate. “Legal structure and security of
property rights” encompasses judicial independence, impartial courts, protection of
intellectual property rights, law and order, and military involvement in politics. In each
of these areas --- except for the protection of intellectual property and law and order
where the two countries rate virtually the same --- India is far freer, more marketoriented, than China. This may well constitute hidden strengths for India in a future
round of its race with China, although these strengths have apparently not been adequate
thus far to compensate for India’s weaknesses in other areas.
The one area where India ranks decisively below China on the Fraser Institute
World Economic Freedom scale is in “freedom to exchange with foreigners.” Here
China ranks 69th out of 123 countries, while India ranks 109th. Figure 9 gives tabulations
for the two countries ratings in the various constituent elements of “freedom to exchange
with foreigners.” Again, higher numbers mean more market-oriented policies and
practices. Significantly, in most of these areas, China is more market oriented than
Figure 9: Fraser Institute Ratings for Freedom to Exchange with Foreigners
(Higher ratings indicate more marketized policies)
India China
A. Taxes on International Trade
2.39 7.17
Ai) International Trade Tax Revenue (as a % of total trade)
3.61 9.32
Aii) Mean Tariff Rate
3.56 6.64
Aiii) Standard Deviation of Tariff Rates
0.00 5.56
B. Regulatory Trade Barriers
5.67 6.01
C. Actual vs. Expected Size of Trade Sector
5.41 9.76
D. Difference Between Official & Black Market Exchange Rates 10.0 7.78
E. International Capital Market Controls
2.02 2.71
Source: Gwartney, James and Robert Lawson, with Walter Park, et al., Economic Freedom of the World:
2002 Annual Report (Vancouver: The Fraser Institute, 2002.) Data retrieved from
The first variable constituting the Fraser Institute’s “freedom to exchange with
foreigners,” tariffs, is an average of three measures. The divergence between China and
India is largest in this category, with India’s rating at 2.39 and China’s at 7.17. The first
component of the tariff measure is official tax revenue actually collected by governments
divided by the total value of trade. With this measure, China’s rating is almost three
times higher than India’s. China’s rating in the second category, mean tariff rate, is twice
that of India’s. This category reflects the formal tariff rate --- the rate stated in published
laws and regulations --- as opposed to the de facto rate captured by the first category.
The third measure of tariffs is the standard deviation of tariff rates. This index captures
the extent tariff policy is favoring, or discriminating against, specific product groups. A
non-distorting, uniform tariff would have a zero standard deviation and therefore would
contribute to a higher market-oriented rating. In India’s case, the tariff rates are so
distorting that it has a zero rating, while China has a rating of 5.56.12
The second variable, “Regulatory trade barriers,” includes quotas, hidden
administrative restraints such as customs delays, and so on. In this area too China does
better than India, though less dramatically so --- 6.01 or China compared to India’s 5.67.
The category “actual versus expected size of trade sector” is calculated on the basis of
regression equations matching a nation’s trade sector with a hypothetical trajectory
derived from a country’s size, the length of its coastline plus its proximity to other
nations. A large gap between expected and actual trade is taken as an indication of a less
free trade regime and receives a lower number. Again by this indicator China has a freer
trade regime than India by a wide margin --- 9.76 for China compared with 5.41 for
India. With the difference between official and black market currency exchange rates,
however, India does 2 points better than China. Both are on the high side, but India is
clearly ahead here with a 10.0 compared with China’s 7.78. With respect to international
capital controls, both India and China score equally low indicating extensive restrictions
in this area. In all of these areas, however, with the exception of the exchange rate,
China scores higher than India --- and in some cases substantially higher --- indicating a
more open trading regime.
Conclusions of a Standard and Poor’s Special Report dovetail with those of the
Fraser Institute.13 That Special Report found in China “very strong [political
commitment] from top to bottom and across regions” for foreign investment in China. In
India political commitment to foreign investment was “hesitant” but “getting stronger.”
China began its reform process by encouraging foreign investment in consumer goods
and labor-intensive sectors that were easiest to absorb, and that were closely tied to
exports. India, by contrast, began its reforms by encouraging foreign investment in high
tech, capital intensive industry and infrastructure that were hardest to absorb, and which
were largely unconnected to exports. Whereas China sought multinationals to shift laborintensive export oriented production to China, India was “Reluctant until recently to
insert itself into [the] production chain of multinationals (many such products [are] now
reserved for small-scale industries).” While the Chinese government built infrastructure
in selected areas to attract foreign investment, India sought foreign investment to build
infrastructure. The Standard and Poors Report also pointed out that India’s poor record
in attracting industrial foreign investment was a major factor limiting investment by the
20 million non-resident Indians of the Indian diaspora. The favorable investment
treatment offered by China to the 50 million “overseas compatriots” of the Chinese
diaspora, on the other hand, helped harness the energies of that “enormous ethnic pool” to
China’s development effort.
India’s Advantages and the Outcome of the Next Round of the Race
China is reaping the benefits of earlier reforms, and its success at taking
advantage of the global integrating trends of the 1990s. In addition, China’s entry into
the World Trade Organization as of December 2001, will push it further towards a free
market orientation and most likely nudge growth rates up. Nevertheless, India has a
number of strengths relative to China that should serve it well in the coming decades.
First, India began its opening process a decade behind China’s. On the one hand
this is one reason that India is lagging in many development indicators; on the other, it
also means that India has more opening measures that it can still take advantage of. For
example, India’s mean tariff rate is 32 percent while China’s is 17 percent before all of
the WTO agreements kick in.14 In addition, India’s tariff regime is very uneven across
products meaning that it is distorting relative prices to a great degree. These problems
can be corrected relatively easily, and India is reportedly moving in that direction.
Second, comparing the first ten years of reform in each country, India opened to
the world economy faster than China (figure 10). In terms of exports and imports as a
percent of GDP, and total accumulated foreign direct investment, India surpassed China.
Still, growth rates of GDP and GDP per capita in that decade were respectable in India
but not as fast as in China. However, this may simply reflect that fact that China’s
economy was so rigid and inefficient before reforms that it was easier to obtain initial
gains. India’s economic system, albeit relatively closed to the global economy, was
primarily privately owned and market based. China was also starting at half the GDP
per capita when reforms began as compared with India, which also makes higher rates of
growth easier to attain.
Figure 10: Comparisons of India’s First Ten Years of Reforms
with China’s First Ten Years
India: 1991-00 China: 1978-87
Exports as a % of GDP (average for period)
Imports as a % of GDP (average for period)
Foreign Direct Investment
(billion $US, accumulation over period)
Foreign reserves at end of period
(India 2000; China 1987; million $US))
Average annual growth in GDP
Average annual growth in GDP per capita
Initial GDP per capita
(India 1991; China 1978; constant 1995 $US)
End GDP per capita
(India 2000; China 1987; constant 1995 $US)
Population growth (average for period)
Gross capital formation (average for period; % of GDP)
Household final consumption expenditure
(average for period; % of GDP)
Illiteracy (average for period; % of adults)
Source: World Bank, World Development Indicators Online Database, 2002 (
Third, in terms of the overall health of the two economies, both have problems
with public sector deficits and corruption. However, India has the advantage of a
stronger banking system. India has a problem of bad bank debt, to be sure, but it is
minute compared with China’s—bad loans in India are estimated at less than 10 percent
of GDP as compared with perhaps as high as 50 percent in China.1516 In addition,
because of a larger share of the economy being in private hands, investment, while lower
as a percent of GDP, is likely to be more efficient. This also means there is more output
available for consumption. Indeed, India’s private consumption as a percent of GDP
averaged 67 percent in the first ten years of reform as compared with China’s 51 percent.
Fourth, in terms of basic human capital indicators such as literacy, education and
public health, China is clearly ahead at the moment. Part of China’s success in these
areas was related to the power and ideology of the central government that focused on
providing these services in a relatively egalitarian manner and to rural areas. Since
reform, however, these former institutions and their funding sources have been eroded.
These changes will no doubt be reflected in future lower education levels nationally, as
well as poorer health indicators. India, in the meantime, is working to improve its
education and health systems.
Finally, India is far ahead of China in the establishment and development of the
institutions that support a market-oriented economy. We saw in Figure 8 that India is
ahead in terms of its world rank in legal structure. India’s score was 7.01 on judicial
independence and 8.02 with respect to impartial courts; China’s corresponding ratings
were 3.34 and 4.18. India also has a free press, a representative government, active
community and professional groups, and a plethora of other non-governmental
organizations (NGOs)—non of which China can claim. These types of institutions are
not easy to establish or to manage well, but they are important parts of a civil society that
make up the backbone of a market economy. In the longer term, therefore, it might be
easier for India to catch up to China economically than for China to change its political
and social institutions to sustain long-run prosperity.
India also has a considerable
advantage over China in terms of the English-language capabilities of its upper and
middle classes.
Geopolitical Implications of China’s Winning of the Race
Despite India’s potential strengths, for now the growth of China’s economic
capabilities relative to those of India will very probably exacerbate the security dilemma
existing between those two countries.17 In a process similar to the expansion of U.S.
economic influence in Central and South America in the late 19th century, Chinese
economic influence in the South Asian – Indian Ocean region may well grow relative to
that of India. Just as U.S. goods, capital, and business connections supplanted those of
the European powers that had traditionally been the major foreign economic partners for
Latin American countries more than a century ago, the shift in relative Indian and
Chinese capabilities now underway could well mean growing Chinese economic
influence in the areas around India.18 This would be driven by China’s voracious quest
for export markets and raw materials imports.
Thus far Southeast Asia, not South Asia, has been the focus of China’s “going
outside” strategy announced by Premier Zhu Rongji in 2001. Chinese investment in the
countries of Southeast Asia is growing rapidly, with Cambodia, Thailand, Indonesia, and
Myanmar leading the way.19 But as China’s demand for export markets and inputs of
raw materials grows, India’s South Asian neighbors could be drawn into China’s
economic orbit.
Comparison of Chinese and Indian trade with Myanmar and Bangladesh are
suggestive of possible future trends. Figure 11 shows trade with Myanmar (as Burma
was renamed in 1989). Prior to economic liberalization in 1989, Myanmar conducted
limited trade with either China or India, although China enjoyed a slight lead. After
1989, Myanmar’s trade with both countries boomed, but trade with China grew much
more rapidly than trade with India.
Figure 11: Chinese and Indian Trade with Myanmar
(million $US)
PRC-Myanmar Indian-Myanmar
Source: International Monetary Fund, Direction of Trade
Statistics Year Book, various issues.
Data for trade with Bangladesh is presented in Figure 12. Until 1990 Chinese
trade with Bangladesh exceeded India’s by a small but significant margin. Beginning in
1990 and continuing over the subsequent decade, the volume of Indian-Bangladesh trade
pulled ahead of China-Bangladesh trade. Both China’s pre-1990 lead and the margin of
India’s post-1990 lead suggests that India’s geographic proximity to Bangladesh confer
on it no insuperable barrier to Chinese economic primacy with Bangladesh. Given
China’s growing economic lead over India, it is possible that in the not too distant future
China’s economic role in Bangladesh could again supercede India’s. This pattern could
be repeated in other countries of the South Asian – Indian Ocean region --- although it is
difficult to imagine China being able to economically supplant India in the landlocked
countries of Nepal and Bhutan.
Figure 12: Chinese and Indian Trade with Bangladesh
(million $US)
PRC-Bangladesh Indian-Bangladesh
Source: International Monetary Fund, Direction of Trade
Statistics Year Book, various issues.
Development of transportation links between China and South Asia will be
another consequence of China’s growing economic capabilities and interests in that
region. Indian apprehension will mount as these transportation links proliferate, both
because of a fear of South Asia becoming part of China’s economic sphere, and because
of the inherently dual civilian / military use of new transportation lines. Two examples
elucidate this phenomena: the Irrawaddy corridor linking Yunnan province to the Bay of
Bengal, and the Gwadar harbor project linking western Xinjiang and the Arabian Sea.
The term Irrawaddy corridor refers to a combination of road, rail, harbor, and
river navigation projects designed to move goods between Yunnan and Myanmar
seaports on the Bay of Bengal and Andaman Sea. Chinese discussion of this project
began in the mid-1980s, and various projects were implemented after Myanmar discarded
its traditional autarkic policies in 1989.20 Roads running from the Yunnan border into
northern Myanmar hard-surfaced and otherwise improved. New roads were built. New
cargo loading and unloading facilities were built along the Irrawaddy. Portions of that
river were dredged. Myanmar seaports were modernized and expanded. Several new
harbors were built. One of the largest was at Thilawa, 25 kilometers southeast of
Yangong.21 A new international airport was built outside Yangong to speed travel by
businessmen to and from Myanmar. The purpose of this effort was to expedite the flow
of goods from Yunnan and several other southwestern Chinese provinces to the oceanic
highways of global commerce. According to the Yunnan navigation bureau, by mid
2001, two hundred thousand tons of cargo annually were moving via Irrawaddy barges.
This carrying capacity was equivalent of twenty one-meter gauge railways. Major
Chinese exports included construction materials, electronics, and textile goods. Yunnan
exports moving via Myanmar ports saved a full week compared to goods moving via east
China ports.22
A similar logic applies to the Gwadar project in Pakistan’s western Baluchistan.
In early 2000 China’s government launched the ”great western development” program.
This was a large scale and ambitious effort to address the huge east-west inequalities, and
thus regional jealousies, that had emerged during the course of China’s post-1978
opening and reform. Regarding Xinjiang and Tibet, Beijing also had national security
concerns arising from ethnic separatism. The solution to all these pressures was
accelerated development. This required finding routes for Chinese goods to reach the
high seas.
In May 2001 while visiting Pakistan, Premier Zhu Rongji announced China’s
support for the Gwadar project. Gwadar was then a small fishing port notable primarily
for ship breaking. As elaborated over the next several months, that project envisioned
dredging the harbor at Gwadar, constructing twenty-three deep water berths for ships
along with new wharf and containerized loading facilities. When completed the new
Gwadar harbor was to have a carrying capacity comparable to Karachi --- which then
carried 90 percent of Pakistan’s seaborne trade. In other words, the new port at Gwadar
would nearly double Pakistan’s seaport capacity.
A new rail line was to be built
connecting Gwadar northward to Dalbandin on the main east-west line connecting
Pakistan’s rail network with Iran’s Bandar Abbas on the Strait of Hormuz. Bandar Abbas
and the rail line to it carried most of the remaining ten percent of Pakistan’s seaborne
trade. A modern highway was to be built along the Makran coast connecting Gwadar
with the dense highway grid of central Pakistan. When these new projects were
connected to the Sino-Pakistan Friendship Highway (constructed by China between 1966
and 1971), they provided a great improvement in the transport links between western
Xinjiang and the Arabian Sea.23 Trucks could carry Chinese cargoes to railheads from
which goods would be carried to Gwadar with its efficient and non-crowded access to the
ocean. This would be far cheaper and faster than moving Xinjiang cargoes all the way to
eastern Chinese ports, or perhaps over Kazakhstan via Russian lies to European ports.
From the Indian perspective, the Irrawaddy and Gwadar projects mean that China
is expanding its influence, and deepening its interests, on India’s eastern and western
flanks. China is also constructing a transport infrastructure that might, one day, be used
to support POLA operations in the areas around India. India’s decisive military
advantage vis-a-vis China in the Indian Ocean region rests on India’s greater geographic
proximity to potential theaters of military operations. Chinese development of robust
transportation links to South Asia, plus accumulation of greater influence with the South
Asian countries hosting that infrastructure, will exacerbate Indian fears of Chinese
strategic encirclement.
It is also possible that India will learn to live comfortably with Chinese
preeminence in the South Asian – Indian Ocean region. A considerable section of the
Indian political elite views China as a civilizational, racial, and developmental comrade
in the struggle against Western domination.24 Skillful Chinese diplomacy might
encourage and build on these sentiments. India might be persuaded to view Chinese
power in the Indian Ocean region as protecting India against aggressive U.S.
hegemonism.25 Ultimately the South Asian – Indian Ocean region might revert to the
pattern that existed prior to the European intrusion in the 15th century. Not too long
before the Portuguese arrived on the scene, powerful Chinese warships dominated Indian
Ocean sea lanes, while South Asian potentates appealed to China’s emperor for
protection and/or feared that emperor’s chastisement. Perhaps what we are witnessing is
the reconstruction of the Asian order that existed prior to the “great divergence” between
China and the West.
W.W. Rostow, Eisenhower, Kennedy, and Foreign Aid, Austin: University of
Texas Press, 1985. Regarding U.S. aid to India see, Dennis Kux, India and the United
States: Estranged Democracies, Fort Lesley McNair, National Defense University Press,
1993, p. 144-45, 175 note 41, p. 186.
A number of studies have compared the reform processes in India and China.
See, for example, George Rosen, Contrasting Styles of Industrial Reform: China and
India in the 1980s, University of Chicago Press, 1992, Ashok Guha, “Economic Reform
in India and China; What Each can Learn From the Other,” Journal of Asian Economics,
vol. 4, no. 2, 1993, p. 333-345, and Montek S. Ahluwalia, “Economic Reforms in India
Since 1991: Has Gradualiam Worked?,” The Journal of Economic Perspectives, vo.16,
no.3, 2002, pp.67-88.
“Shehui zhuyi nenggou jiu zhongguo (Socialism can save China), Renmin ribao
(People’s daily), 15 January 1990, p. 1, 2, 3. While India was the second-listed country
used to demonstrate China’s successful development record under the CCP, it was not the
only country. The first comparison with the USSR, “the oldest socialist country,” then
entering the penultimate year of its existence. Other developing countries were also used
as examples.
Pranab K. Bardhan, “Chinese and Indian Agriculture: A Broad Comparison of
Recent Policy and Performance,” Journal of Asian Studies, Vol.29, Issue 3, 1970,
pp.515-37; T. N. Srinivasan, “External Sector in Development: China and India, 195089,” American Economic Review, Vol.80, Issue 2, 1990, pp.113-17; Wilfred
Malenbaum, “Modern Economic Growth in India and China: The Comparison Revisited,
1950-1980,” Economic Development and Cultural Change, vol.31, No.1, 1982, pp.45-84;
Jong H. Park, “The Two Giants of Asia: Trade and Development in China and India,”
Unless otherwise indicated, the data discussed in this section is from the World
Bank, World Development Indicators Online Data, 2002 (
United Nations Development Programme, Human Development Report 2002
(New York: Oxford University Press, 2002), pp.149-152.
Joanna Slater, “India: Two Plus Two,” Far Eastern Economic Review, 29 August
2002, p.20.
Deutsche Bank, Global Markets Research, Emerging Markets, “Quantifying the
Impact of China’s WTO Entry,” 14 December 2001, p. 1-9.
Tang Yuankai, “China Strives to Catch Up with Strong Software Countries,”
Beijing Review, 6 June 2002, p. 17-20.
China Data, China Business Review, May-June 2002, p. 29.
About the Fraser Institute.
It should be underscored that India’s zero rating in this category refers not to the
standard deviation of India tariff rates, but to the Fraser Institute panel’s rating deriving
from a high standard deviation of Indian tariffs.
“Special Report, View from the Silk Road: Comparing Reform in China and
India,” Standard and Poor’s Credit Week, 6 February 2002, p. 32-43.
Gwartney, James and Robert Lawson, with Walter Park, et al., Economic
Freedom of the World: 2002 Annual Report (Vancouver: The Frazer Institute, 2002.)
Data retrieved from
Rasul Bailay, “India Acts to Clean Up Bad Loans,” The Wall Street Journal (9
July 2002), p. A12.
One of the authors analyzes this security dilemma in, John W. Garver, “The
Security Dilemma in Sino-Indian Relations,” India Review, vol. 1, No. 4 (October 2002),
p. 1-38.
Regarding the growth of U.S. economic presence in Latin America in the 18801890s, see J.W. Root, Trade Relations of the British Empire, Liverpool: Commerce
Chambers, 1904, p. 164, 294. Walter Lafeber, The New Empire, An Interpretation of
American Expansion, 1860-1898, Ithica: Cornell University Press, 1963, p. 21-23, 4251. Lloyd C. Gardner, et. al., Creation of the American Empire, Chicago: Rand
McNally, 1973, p. 202-241.
Sadanand Dhume, Susan V. Lawrence, “Buying Fast into Southeast Asia,” Far
Eastern Economic Review, 28 March 2002, p. 30-33.
Pan Qi, “Opening to the Southwest: An Expert Opinion,” Beijing Review, 2
September 1985, p. 22-23.
Information about the port is available at the Hutchinson Port Holdings website at
“Zhongmian tuijin yilowadijiang luxun lianyun,” (Promoting Sino-Myanmar
Irrawaddy River sea-land transport), Renmin wang, 27 June 2001, at
Regarding the Gwadar project see, Islamabad The Nation, 5 August 2001, in
Foreign Broadcast Information Service, Near East South Asia, 2001-0805. Islamabad
The News, 8 August 2001, in Foreign Broadcast Information Service, China, (hereafter
FBIS-CHI), 2001-0808. And Islamabad The News, 16 August 2001, in FBIS-CHI, 20010816.
Regarding this line of Indian thought see, John W. Garver, Review of Tan Chung,
Across the Himalayan Divide, The Indian Quest for Understanding China, New Delhi:
Indira Gandhi Institute for the Arts, 1999, in The China Quarterly, No. 170, (June 2002),
p. 491-93.
A recent article arguing along these lines appeared in the influential Chinese
journal Strategy and Management, see Zhang Wenmu, “Shijie diyuan zhengzhi tixi yu
yindu weilai anquan” (World geopolitical system and India’s future security), Zhanlue yu
guanli, 2001, No. 3, p. 43052.