China is developing a demand-constrained economy due to its sheer economic size is steering global production and global demand while India is actually using its huge resource base for tackling deficit arising out of its uncompetitive economy. Indian model of development is not enough to turn it into demand constrained economy from supply constrained economy.
This article intends to analyze different models of economic development that has emerged historically until today especially comparing Chinese and Indian growth models. The core of our analysis is that the growth rate of gross domestic product (GDP) is not enough to gauge the economic strength. The GDP growth rate does not measure the level of technology a country has attained or if a country’s GDP is progressing because of its people becoming more productive or simply because more people are joining labour forces. It also fails to measure if GDP is rising because of the increasing prices of some raw material that the country is rich in or how the rising income is being used to sustain growth. So which development model a country is pursuing is important to understand how much it can develop.
Definition of Development
We used to define economic development from 1945 to 1990 as a process of transforming agriculture-based rural society into an industry based urban society. It is believed that both income and employment source will gradually shift from agriculture to industry. By 1990s, when most of developing economies had a greater share of income coming from industry but a larger portion of employment still coming from agriculture then defining economic development became even more difficult. Here, we will define economic development as a process of turning a supply constrained economy into a demand constrained industrial economy. This development is about transforming a society which has to give extra effort to raise production into one which has to give extra effort to increase consumption. Let us now classify the different models of economic development that came into being in different periods of history.
Holland, Belgium, Britain and France followed the colonial model. They forcefully de-industrialized the then most industrially advanced need-based mode of production of South-East Asia, India and China using war, tariff policies, etc. Then the colonials forcefully turned these Asian countries into the market for their industrial markets and supplier of raw materials. At the same time, the colonials carried on the process of primitive accumulation inside their own country. It means evicting peasants from agro-land and turning them into labourers of city factories and then using land and labourers for profit-making purposes. Primitive accumulation also means ending property rights of non-producer rent earning feudal classes and giving land rights to tillers. Thus tillers have greater incentive to work hard and hence agriculture productivity rose. Thus more people could be removed from agriculture to industries. These processes in the late 18th century AD finally gave rise to the industrial revolution.
By 1870s, when West Europe had completely exceeded Asia as the most industrially developed region then the USA, Japan and Germany came up with a new model of export-led development. After completing primitive accumulation inside their own countries, they began to rely on comparative advantage (mainly cheap labour) and absolute advantage (commodities) for exporting to the then industrially advanced countries (which followed colonial model). Then use export earnings to upgrade economy to have a comparative advantage in higher value goods.
Since large scale production came into being by 1870s, larger companies were out competing for smaller ones by that time. The USA, Japan and Germany used their nation-states to help different companies form cartels or merge into one so that they can exploit economies of scale and become globally competitive. These states also invest in health and education significantly to improve the productivity of labourers. Recently Malaysia, Singapore and Hong Kong showed a similar trend of development.
After the first world war, when the global economy was plagued with overproduction crisis and tariff wars among industrially developed countries, this model proved to be most ideal. Soviet Union, East Europe, Cuba and North Korea followed this path. Here, after completing primitive accumulation, they invest their resources in education, health, physical infrastructures and heavy industries. The state has to invest directly since profit is small or nil and so private profiteers will not invest there. Thus labourers became productive and they get enough machines and infrastructures to work with. This model uses economies of scale to the full extent but fails to use comparative advantage to have export earnings and cheap imports. It can use the absolute advantage of available raw materials, the ideal climate for plantation industries, etc. for exports.
Internal Consumption led to Development
Primitive accumulation was never carried out properly. Thus poor people though available are not productive. They rely on static comparative advantage or absolute advantage for earning exports. The rent dependent unproductive feudal classes are either still existing or transformed into a profit earning or salary earning classes. They use export earnings mainly for consumption and hence fails to upgrade comparative advantage in higher value goods. These elements also distort the labour market and capital market making economy further inefficient. We call it internal consumption led development. Most of the Latin American countries, Arab countries Pakistan, Thailand, Philippines and African countries follow this model. These countries often fall into the middle-income trap as their static comparative advantage of cheap labour is not upgraded to new higher value goods.
Hybrid Model of Planned and Export-led Development
Taiwan, South Korea and China have followed this model of development. Now Vietnam, Laos, Cambodia and even Cuba are trying to follow this model. North Korea is believed to be waiting for the end of sanctions and join the club. This model till now has proved itself to be the most ideal and rapid development model. In South Korea, ex-communist leaders Singman Ri and Park Chu He executed this model brilliantly for the first time. They went for land reformation and heavy state investment in education, health and heavy industries in the 1950s. By mid-1960s, South Korea and Taiwan had enough productive labour and basic infrastructure to take advantage of export-led growth.
They keep upgrading comparative advantages by investment often by state-owned companies. In China, Mao Zedong eradicated feudalism and invested heavily in education, health and basic infrastructure. Under Deng Xiaoping, China started to take advantage of the global market and global supply chain and keep upgrading their comparative advantage by state-led investments and companies. The success of China motivated other countries which thoroughly executed primitive accumulation like Vietnam, Laos and Cambodia to follow this model. They are showing excellent results too. Cuba with world best health care system and education can be the next growth story too.
North Korea’s skilled manufacturing labourer is already attracting many corporate bosses across the globe. Russia and East European countries failed to execute this model due to political reasons. One striking similarity between these successful countries is that they developed not under liberal democracy. Russia and East Europe thus could have shown similar results if they do not accept liberal democracy (Glasnost) before joining the global market.
Hybrid Model of Planned and Internal Consumption led Development
Many countries of Third Word instead of doing primitive accumulation started to use economies of scale due to the abundance of resources through planned development. Thus they often result in a lot of social and economic inequalities. India is one such example which consists of one of the highest numbers of best educated and illiterate people, billionaires and poor people on earth. India’s economy remains uncompetitive with higher imports than exports since labour is cheap but not productive and conspicuous consumption is rampant. But its infrastructural base being strong (when compared to other Third World countries) through planned development (up to 1991), it can attract a lot of foreign investment and debt to finance its current account deficit. India’s huge resource base and the significantly higher percentage of the young population is also helping India to carry on.
Iran after the Islamic Revolution (1979) also tried this model. Iran started investing in huge oil export profits in education, health, technology. Iran definitely thus formed one of the fastest technologically developing countries in the Third World. Iran also used Islamic Jakat to take care of the problem of inequality. Saudi Arabia in its Vision 2030 follows such a model too. Libya, Syria and Iraq have executed such a model as well under Baathists. But their technology was never strong enough to counter the assault of US imperialism.
Twenty-first century Latin American socialist governments in Venezuela, Bolivia, Equador, Uruguay, Brazil, Nicaragua started to use this model as well. They distributed export earnings among mass and people poor in the form of investment in housing, education and health. As China started becoming a major economy, its demand for commodities started to break monopsony (monopoly as the buyer) power of the West in the global commodity market. This increased export earnings from commodity export considerably. Since the Chinese economy started showing signs of moderation since 2013, this model is showing signs of crisis. These Latin American countries are also likely to face the assault of US imperialism in the near future.
From our discussion, we point out that while China is developing into a demand-constrained economy and due to its sheer economic size is becoming global production and global demand centre, India is actually using its huge resource base for tackling deficit arising out of its uncompetitive economy. Indian model of development is not enough to turn it into demand constrained economy from supply constrained economy. Indian development story can stop in the face of Fourth Industrial revolution or as young population supply starts to fall. Moreover, the entire Third World growth following internal consumption led development is actually a derivative of Chinese development. Indian growth is not enough to even out Chinese growth moderation.
If a country’s primitive accumulation is incomplete, its development path will never reach its destination. Arid countries can have less advantage from primitive accumulation as its land is not ideal enough to sustain a huge population unproductively. But in a country like India with vast fertile land and long agro tradition, land continues to sustain the unproductive population and psyche. Thus benefit stalled due to inadequate primitive accumulation is absolutely huge. Thus to make India next growth story question of nationalities, land reformation, investment in health-education-infrastructure must be addressed first.