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Demography is Destiny

China and India - why the economic difference?

China and India - why the economic difference?

by Marcus Roberts | March 28, 2019

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As we’ve mentioned before on this blog, the next few years will see a symbolically momentous demographic shift. Sometime in the 2020s the most populous nation in the world will cease to be China. That baton will pass over the Himalayas to India and by 2050 that country is expected to have a much larger population than China and a much larger working-age population. These demographic shifts might help India close the economic gap on China because at the moment the two countries may have similar sized populations, but their economies are vastly different in size.

This interesting analysis at Forbes shows that in 1985, China and India had roughly the same GDP per capita: USD 293. Since then, India’s economy has grown remarkably and has lifted millions out of poverty. Now, the Indian GDP per capita is just shy of $2,000. An impressive growth which is part of a larger story about the coming of the middle class world. However, over that same thirty year period, China’s economy has boomed. Its economy is now nearly five times larger than India’s and its GDP per capita is $8,827. In short, India’s economy has grown, but China’s has soared.

How has this happened? Well, the Forbes analysis puts forward a few reasons for the difference between the two demographic giants. First, India is a democracy and has to deal with the messiness of democratic decision making at the federal and regional levels. Its divided politics makes infrastructure spending, for example, very difficult. Some estimates have quantified the drag on the Indian economy due to lack of infrastructure investment at a reduction in the annual GDP growth of 1-2 per cent. On the other hand, China is not a democracy. At all. And so the Party governs with few impediments. If it decides it wants to build the Three Gorges Dam, the world’s largest hydropower project, it can do so. And if that involves displacing 1.2 million people, and flooding 13 cities, 140 towns and 1,350 villages, so be it. There is no way that the Indian government could attempt something like that (thankfully for India). Such infrastructure spending has underpinned the Chinese economic lift off. Since productivity growth is a by-product of infrastructure investment, the Chinese advantage in this field has helped its GDP per capita growth multiple to be over five times that of India’s since 1969.

Another factor that explains the difference between China and India is the massive urbanisation that China has undergone since 1969. In that year, India’s urbanisation rate of 19.5 per cent was higher than that of China. Today, about 58 per cent of China’s population lives in cities and only 37 per cent of India’s is similarly urbanised. Since a worker in a factory is deemed more “productive” than a famer worker, this means that the economic indicators prize an urbanised population more than a rural one. This is another factor explaining China’s growth compared to India’s.

Of course, all of this analysis is purely from an economic standpoint and does not embrace other goods in life. We are not yet all members of the species homo economicus. And I know which country I’d prefer to live in…

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