Rural Industrialization in China and India: Role of Policies and Institutions

doi:10.1016/j.worlddev.2006.11.008

World Development

Volume 35, Issue 10, October 2007, Pages 1621-1634

https://doi.org/10.1016/j.worlddev.2006.11.008 Get rights and content

Summary

The dynamic rural nonfarm sector in China has been a major contributor to the country’s remarkable growth, while in India the growth in output and employment in this sector has been rather stagnant. This paper argues that the observed patterns in the rural nonfarm development are the results of institutional differences between the two countries, especially in their political systems, ownership structure, and credit institutions. A review of the strengths and weaknesses of the rural nonfarm economy in China and India highlights the potentials and challenges of growth in the sector.

Introduction

Over the last five decades, China and India have made dramatic improvements in their standard of living and structural transformation of the economy. Agricultural growth has made both countries self-sufficient in food, providing a residual surplus for export and capital for other sectors. Industries and services now form an integral part of the output and employment of the rural sector. The share of agriculture in total GDP has declined to less than one-third in India and about one-seventh in China. This transition is remarkable considering the initial situation in the two countries half a century ago.

However, a look behind the macro-economic aggregates reveals more rapid growth of rural nonfarm employment in China than in India, especially over the decade of the 1990s (Figure 1, Figure 2).¹ This paper aims to address the following questions: why has the development of the rural nonfarm sector followed different paths in China and India over the past two decades? How much of the current growth or stagnation are the results of institutional differences between the two countries, especially in their political systems, ownership structure, and credit institutions? What lessons can be learned from the relative strengths and weaknesses of the rural nonfarm sector in the two countries? In a similar vein, Lal (1995) compares the economic liberalization in China and India up to 1990. However, because most of India’s liberalization policies did not fully start until the early 1990s, it is necessary to extend his comparison to a later period with a particular focus on the rural nonfarm sector.

After China and India’s entry into the World Trade Organization (WTO), they are having increasingly important impact on the world economy given their rapid growth and size.² With globalization, there is greater capital flow to the two countries to take advantage of their cheap and abundant labor force, thereby stimulating the growth of their nonfarm sector. Rapidly industrialized China and India will affect production patterns, trade flows, financial flows, environmental spillovers, and global and regional governance (IDS Asian Drivers Team, 2006). An examination of the causes, potentials, strengths, and weaknesses in China and India should, therefore, provide useful indications for other developing countries in the process of nurturing a viable rural nonfarm sector in the current global context.

Section snippets

Policy framework for nonfarm development

In this section, we first present the patterns of rural nonfarm sector development and then look at the path of policy-making since the beginning of the 1950s in India and China. In the 1950s, both countries were largely agricultural societies. For China, the nonfarm sector took off only after the rapid growth in the agricultural sector from 1978 to 1984 and the shift to the Household Responsibility System. When China started the rural reform in 1978, the share of rural nonfarm employment in

The role of institutions and policies

Institutional developments and relationships translate government intentions, explicit or implicit, into action. Institutional relationships and governance have evolved significantly in both China and India over the past few decades and have influenced the current levels of dynamism in the rural nonfarm sector.

The impact of institutions and governance needs to be analyzed from several vantage points. Firstly, the differences in political economy have to be explained in order to appreciate the

Conclusions

Our comparative analysis shows that the difference in the trajectory of rural nonfarm sector development in China and India can be largely attributed to the difference in the institutional structure analyzed above. Regulations aimed to protect small industries in India may have hindered their growth compared to the spontaneous experience of China. Comparison of the relative strengths and weaknesses of the two countries indicates that there is likely to be a significant degree of convergence,

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Rural Industrialization in China and India: Role of Policies and Institutions

Summary

Introduction

Section snippets

Policy framework for nonfarm development

The role of institutions and policies

Conclusions

World Development

World Development

World Development

China Economic Review

Small industry and globalisation: Implications, performance and prospects

Economic and Political Weekly

How efficiency is capital allocated? Evidence from the knitted garment industry in Tirupur

Review of Economic Studies

Crouching tiger, lumbering elephant: A China–India comparison

Can labor regulation hinder economic performance? Evidence from India

Quarterly Journal of Economics

Deep and shallow integration in Asia: Toward a holistic account

IDS Bulletin

Structural change and economic growth in China

Review of Development Economics

Reform, investment and poverty in rural China

Economic Development and Cultural Change

Agricultural productivity growth, rural economic diversity, and economic reforms: India, 1970–2000

Economic Development and Cultural Change

The value of value chains: Spreading the gains from globalization

IDS Bulletin

Rural–urban Growth Linkages in India

Indian Journal of Agricultural Economics