Budget 2023: What gives China immunity from extreme poverty, but not India?

China’s dizzying rise as an economic superpower has baffled most economists for years because of its authoritarian political structure. Many have tried to decipher how did it sustain high growth for 40 years and lifted close to 800 million – or three-quarters of global poverty ($1.9 USD per day) since 1980. In one of the most influential studies on economic development in recent times, “Why Nations Fail”, Daron Acemoglu and James Robinson said China was an exception to their assessment of why some countries are rich and prosperous while others are not, and like many others, dismissed it stating that its concentration of political power (“extractive” political institution) “will not bring sustained growth and is likely to run out of steam”. That was in 2012.

Essentially, Acemoglu and Robinson posited that only those nations developed and flourished that adopted “inclusive institutions” – first political and then economic, or from shared political power to shared economic prosperity – after analysing development processes across the world in the past 600-700 years. China became an outlier because it bucked the trend by bringing economic inclusion without political inclusion. India is an outlier too, but in the reverse order (political inclusion but not economic inclusion, and now the first one is changing fast); they didn’t pay much attention to India anyway.

In April 2022, the World Bank published a comprehensive study, “Four Decades of Poverty Reduction in China”, to explain how this authoritarian political order, contra-intuitive as it may seem, brought shared prosperity to its people. It is essentially China’s growth story and holds many lessons for India.

Land reforms and human development

To start from the beginning, the massive transformation of China since 1980, it says, could be possible as it “inherited” equitable distribution of land among its rural peasantry – beginning in 1949 (the year of the communist revolution) when “more than 300 million landless peasants gained access to land”; then in 1953 their land was transferred to “the commune” and “with the 1978 reform, the land was again distributed to each household equally”. Commenting on this, agricultural scientists Shenggen Fan and Ashok Gulati wrote in their 2008 paper “The Dragon and the Elephant: Learning from Agricultural and Rural Reforms in China and India”, that land reform ensured that in China “landlessness is virtually absent”.

In India, the opposite happened. It tried land reforms in the 1950s and 1960s, but it failed as most states, except Jammu and Kashmir, West Bengal and Kerala, “did not implement (it) in the true spirit”. Land is a state subject. Now land reform is absolutely a “no-go” area, neither in politics nor in economics. So, it shouldn’t come as a shock that 55% of India’s total agricultural workforce is landless (2011 Census, the next decadal Census is to begin only in 2024) and 86% of farmers are small and marginal with less than two hectare (5 acre) of landholdings (Agriculture Census of 2015-16). Nor when told that 45% of rural households (of 167.9 million, as per the 2011 Census) worked as menial labour with less than statutory minimum wages under the MGNREGS in FY21, 43.2% in FY22 and in FY23 (up to December 18, 2022), 32.2% have already done so.

China also began with another advantage: a “relatively high level of human capital”. It was better in education, health and relatively (lower) fertility rate than other transitioning and developing countries like India at the time. Even today, it is far ahead of India and many others. The UN’s HDI report of 2022 shows China improved its rank from 82 in 2020 to 79 in 2021, while India’s slipped from 130 to 132.

Managed urbanisation, incremental industrialisation

The twin advantages ensured that when market-oriented agricultural reforms came, the peasantry directly benefitted from improvements in productivity associated with market incentives. Good and secured income from agriculture meant it was easier to develop the rural non-farm (RNF) sector, strengthening the domestic production base for future industrial growth. It developed low-skilled and labour-tensive industries, which absorbed surplus labour from agriculture.

Urbanisation and industrialisation were incremental and managed and so was migration from rural to urban areas (not something that can work in democracies though). These came with public infrastructure and social security for workers, allowing easy integration of migrants. The cluster-based industrialisation, including export-oriented manufacturing, created more jobs. Its policies supported “market competition”. Increased earnings and investments in the “modern sector” in cities generated new demand for consumer goods and services, in turn encouraging additional investment and creating new jobs.

In sharp contrast, India’s economic transformation took a different trajectory. It didn’t have the twin advantages that China had. India had very poor literacy, low life expectancy and a feudalistic rural social and land structure. India’s low-productive and low-income agriculture supported a disproportionately large population without generating enough demand to support high industrial growth. In fact, as the then Chief Economic Advisor (CEA) Arvind Subramanian lamented in his Economic Survey of 2014-15, India was going through “premature de-industrialisation”, despite decades of government support by way of tax incentives, cheap land and others. Manufacturing’s share remains stagnant for a long, hovering around 17-18% of the GDP, despite ‘Make in India’, GST and PLIs in recent years. Its employment share is slipping by the day – from 12.1% of the workforce in 2017-18 to 10.9% in 2020-21 (PLFS 2020-21). A 2021 study by the Ashoka University-CMIE found manufacturing jobs halved (“declined by 46%”) in five years between FY17 to FY21.

India borrowed the idea of cluster-based industrial pockets and SEZs from China but that didn’t make a significant difference to manufacturing, trade or employment as the above facts demonstrate. Instead of market competition, crony capitalism was encouraged. Indian growth remains services-led for decades and 90% of its workforce is in the low-paying informal sector with no job or social security. India spectacularly failed its migrant workers in 2020 too. No other country in the world saw the massive reverse migration that India did when the lockdown was announced. Millions walked on foot, carrying family and luggage along, after losing their jobs, shelter and wages overnight. Such was the trauma that two years later in 2022, an industry estimate says, tier-1 cities faced a 68% labour shortage and a 32% shortage in other cities. Migrants reluctant to return say they prefer the poverty of their villages to the ignominy and low-wage jobs being offered in urban areas without civic and social security.

Decentralisation and cooperation

The World Bank report concludes that China’s success in reducing poverty relied mainly on two pillars: (i) “broad-based” economic transformation to open new economic opportunities and raise average income and (ii) targeted support to alleviate persistent poverty. It also concludes that this worked because of “effective governance”, governance that brought two critical elements together: (a) ensured coordination among “multiple government agencies” and (b) induced “cooperation from nongovernment stakeholders”. India fails in this parameter too with the political and fiscal powers rapidly getting “re-centralised” at the cost of state governments and civil society facing a systemic crackdown via the Foreign Contribution Regulation Act (FCRA).

The report further points out that China’s success also hinged on the fact that it encouraged and gave a free hand to area-based poverty alleviation and development models (decentralisation of power) and targeted poor counties and villages as a whole.

The report says China’s poverty reduction is “primarily a growth story”. It followed an agricultural development-led industrialisation growth model common to the East Asian tigers, as other studies have found earlier. Reforms were incremental and changes were well managed. Once the poverty headcount dropped below 10%, targeted poverty alleviation and social protection systems were brought in and after 2013, the policy efforts are concerted to reach the last mile, involving “substantial government transfers” and mobilisation of resources from “a variety of stakeholders”.

Today, China is an economic superpower with relatively more prosperous people.

In 2021, its per capita income (India set to overtake it next year in population), an indicator of the prosperity of its people, was $12,556 (current USD) – 5.5 times more than India’s $ $2,777 (World Bank). China started its reforms journey in 1978, and India in mid-198s. Their income inequality level was “at similar levels” in the early 1980s, and it grew at a similar pace until the mid-2000s but thereafter, China’s stabilized but India’s continued – wrote economists Lucas Chancel and Thomas Piketty in their 2019 book “From British Raj to Billionaire Raj".

In a world where inequality is rapidly growing for the past 40 years in most countries (within the country), India stands out as one “among the most unequal countries in the world” and the rise in its inequality “has no precedent in recent history”. Indeed, it is “a poor country with an affluent elite”. When the pandemic struck the world in 2020, the World Bank said, India added a whopping 79% of new “extreme poor” to the world population ($2.15 per day, 2017 PPP) – 56 million out of the total 71 million. But China didn’t add any. The report casually dismissed it saying “China does not contribute to the global increase in extreme poverty in 2020”.

Pray, why so?

Sure, India too has lifted millions out of poverty in the past few decades. But there is no denying that Indians remain very vulnerable to a crisis and the economic fundamentals are not as strong as it is often claimed. And its economic policies are highly questionable. Trying to answer why inequality stopped growing in China in the mid-2000s but continued in India, Chancel and Piketty said in the book quoted earlier: “Differences in national policies, rather than mechanical forces are likely to account…”