Tim Beal

Director

Centre for Asia/Pacific Law and Business

Victoria University of Wellington

PO Box 600, Wellington, New Zealand

Tel: +64 4 495 50580; Fax: +64 4 496 5413

Email: Tim.Beal@vuw.ac.nz; URL: http://www.vuw.ac.nz/~caplab

India and China are natural points of comparison, not merely because they are of comparable size but also, as Bhagwati (1993) remarks, they seemed to represent two opposed models - 'democracy' and 'totalitarianism'.

They also share a common historical heritage and much of their modern economic policy can be explained in terms of it. They were both were colonized through foreign trade; both saw planning (Hanson 1966; Bhattacharyya 1966)), an independent foreign trade position, self-reliance and import substitution as precursors of development

Both have now moved away from self-reliance into a relatively liberalized trade system based on comparative advantage, utilizing foreign capital.

The success, until recently at least, of the export-led economies of East Asia has led to a general acceptance that foreign trade is an important aspect of economic growth (OECD 1994). It is certainly becoming an increasingly important part of the world economy. In 1820 exports accounted for only 1% of world product; that rose to 8.7% in 1913. The ratio fell during the inter-war period because of depression and protectionism, but grew again in the postwar period, especially after 1950, when the pax Americana provided a security framework for expansion again, particularly in the market economies (Maddison 1995: 37-38). A stable foreign exchange system, underpinned by the strength and availability of the US dollar, led to great growth in world trade, roughly double that of the world economy itself. In 1950 merchandise exports were 7.0% of world GDP (down from 8.7% in 1913) but by 1973 this had risen to 11.2% and by 1992 to 13.5%. This average masks considerable differences amongst countries and regions. Large countries, for well-known reasons, tend to have a relatively small trade component. For instance, the export/GNP percentage for the United States in 1950 was a mere 3%, slightly above India's 2.6%, below Indonesia's 3.3% and way below Britain's 11.4% or the Netherlands' 12.5%. However, even for the United States the export ratio has grown sharply and in 1992 was 8.2%. And there were two regions in which the growth was most marked. One was western Europe where proximity and the European Common Market led to rapid growth of trade amongst member counties. Some of the European economies had been traditionally trade oriented although Britain, which started this period with the remnants of the imperial trading system (which had included India, of course, as the jewel in the crown), ended up with a lower export dependency than its fellow members (21.4% against an average of 29.7%) and far below the Netherlands' 55.3%

The other region, and the one that had the most impact on the economic strategy of India and China, was East and Southeast Asia. The export dependency rose from 2.3% for Japan in 1950 to 12.4% in 1992. The rate of growth for the newly-industrialized economies (NIES) was much more pronounced. South Korea moved from 1.0% to 17.8%, Taiwan from 2.5% to 34.4% (Maddison does not give figures for Hong Kong or Singapore).

Trade is not the only explanation for economic growth. Investment, high savings rates, education, aid, military spending and other factors all play a role in various proportions. Nor should it be forgotten that trade can only flourish in an environment with a conducive security and institutional framework. Even if the gains from trade are theoretically admitted the actual geo-political situation may force governments to take a much more self-reliant economic strategy. The working out of de-colonialisation and nationalism in Asia in the postwar period is a vital part of the story. The Nixon rapprochement with China and the ending of the Vietnam War were the necessary pre-requisites of Deng Xiaoping's policy of Opening to the Outside World.

Whatever the balance of reasons between domestic political struggles and changes in the international environment, China did embark on a radical revision of its foreign trade strategy and with it, the proportion of exports to GNP rose considerably. India, which had traditionally been a much more trade-oriented economy, both under the British and with independence, has become less trade oriented than China over the last 20 years (Figure 1).

The shift in relative trade orientation was mirrored in share of world exports (Table 1). In 1870 (when Taiwan was still part of Qing China), India's share of world exports was two and a half times that of China. By 1992 India's exports were only a quarter of those of China (here referring to the People's Republic of China) and her share of world exports had fallen ten-fold, from 5% in 1870 to 0.5% in 1992.

It is worth noting that China's exports, and share of world 1992 exports, were twice that of India in 1973, that is during the Maoist policy of self-reliance. Nevertheless, as discussed below, it is policy shifts under Deng which saw the very rapid expansion of Chinese exports.

The question arises: does the experience of the People's Republic of China in moving towards a more trade-oriented strategy have implications for India? Can India follow China through this open door into world markets?

N V Sovani, writing at the end of the Second World War and on the eve of Indian independence, made an assessment of the prospects for India's exports of raw materials. He noted that although British subjugation had led to the destruction of small-scale industry and a shift in the composition of exports to raw materials, often under the stimulus of British demand, by the end of the 19^th century the share of Indian manufactures had risen to 22%. He argued that during the two world wars Indian industry, shielded from foreign, mainly imperial, competition, thrived but this was not a position that could be sustained in peace time. (The share of manufactures rose from 22.4% in 1913-14 to 36.6% in 1918-19, but fell back to 24.8% in 1920-25, before rising slightly to 30.0% in the 1935-40 quinquennium as the Second World War began to take effect (Bhattacharyya (1979): 141). Accordingly, he focussed his attention on the prospects of exports of raw materials - cotton, jute, groundnut, linseed, castor seed, tea, coffee, tobacco, hides and skins, wool, lac, mica and manganese.

His observations on cotton make particularly interesting reading because of its linkage with textiles. The war had stimulated domestic production of cotton in countries which had previously been importers and he predicted that world trade in cotton would decline below the pre-war level. Moreover, the United States would remain the largest exporter of raw cotton, and India would lose its prewar position as the second largest exporter to assume a more modest position, specializing in varieties only produced in India. This pessimism was balanced by an optimistic appraisal of the prospects for textile exports which he saw as largely replacing raw cotton.

Japan, he thought, would not regain her prewar markets. 'The Japanese textile industry will be maintained at the level at which it will be able to satisfy home demand and be able to export to a small extent to pay for the imports of coal, food, etc.' (Sovani(1948): 265). China, also, was not seen as a serious competitor, at least in the near future.

Although exports of manufactures might increase he saw the prospects for exports of raw materials as rather bleak. They would generally decline because of increased production in former markets and the growing domestic demand of Indian industry. India might, he judged, 'cease to be an important world exporter of raw materials in the postwar period' (Sovani (1948): 315).

This 'export pessimism' was not uncommon and would have seemed to have been vindicated by the events of the late 1940s onwards. Partition, for instance, reduced India's production of key export commodities such as raw cotton, raw jute, hides and skins, much of which was produced in what was then Pakistan (Bhattacharyya (1979): 140). This led to an apparent increase in the proportion of manufactured exports (55.1% in 1948-49).

The export performance of the Indian economy has not been good. Despite policies of import substitution, the demand for imports has risen faster than exports and there has been a perennial balance of trade deficit. In fact, in only one year, 1972 on the eve of the first oil shock, was there a positive balance of trade. It is often argued that the policy of import substitution, rather than just nurturing 'infant industries' also protected 'elderly incompetents', shielding them from international competition. The resulting high cost industrial structure prevented industries in which India had competitive advantage from realizing that on world markets (Ahluwalia (1992): 114).

The balance of trade declined sharply in the 1980s though its effect of the balance of payments was held in check by foreign aid, foreign investment and, most important, remittances of overseas resident Indians (Nayyar (1988): 218).

If the balance of trade deficit had been a problem shared with India's peers then that might have been taken as an attribute of the inherent inequality of the North-South relationship. However, the East Asian NIES and then the People's Republic of China, were developing large trade surpluses. Indeed these surpluses have become one of the main points of friction between these economies and the United States.

World exports grew some 10-fold between 1950 and 1992. In terms of constant 1990 US$ the rise was from $375,765 million in 1950 to US$3,785,619 in 1992 (Table 2). In 1950 Japan, which was still in its postwar depression and before the Korean War kick-started its economy, held just 0.9% of world exports compared with India's 1.5%. In 1992, although India's exports had grown 4-fold, her share of world exports had shrunk to 0.5% whereas Japan's had risen to 7.9%.

Although Japan is the world's second largest exporter her rapid export growth was emulated and surpassed by a number of East Asian economies. Even in South Asia, Pakistan and Bangladesh did considerably better than India, both raising their exports 10-fold and returning their 1950 share of world exports.

The People's Republic of China (PRC) which had, until the late 1970s followed a broadly similar policy of self-reliance and import substitution, had turned to a trade-oriented policy and seemed to be doing well. Were there lessons here for India?

It is common to divide PRC policy history into two periods - 'Maoist' and 'Dengist'. This is, of course, too simple, but it is broadly acceptable. Within the first period there is a division between the 1950s, when trade was oriented towards the Soviet Union and the Socialist bloc, and the 1960s, after the Sino-Soviet split, when China turned towards the West (Bucknall; Kleinberg). Trade was curtailed during the Cultural Revolution but picked up again quickly in the early 1970s. Although 1978 marks an ideological divide, in the return of Deng Xiaoping to power and the articulation the policy of 'opening to the outside world', exports stagnated in the early 1980s before resuming rapid growth from the mid 1980s onwards. Western writers tend to make much of ideological explanations, and Chinese writers use the ideological phraseology of the time they are writing, but the elements of continuity between the Maoist and Dengist periods (and back in the Republican period) are greater than usually allowed. Chinese foreign trade policy was greatly influenced in practice by the international geo-political situation as well as the state of the domestic economy.

There are many differences between China and India in respect of foreign trade but three deserve special mention here. One is that the PRC has, generally speaking, been able to preserve a positive trade balance (Figure 3). The exceptions being the early 1950s, when it received relatively large amounts of Soviet aid, and again in the mid 1980s, when there was a surge in imports. This was brought under control and the PRC moved back into a surplus, and a very substantial one, on merchandise trade.

Secondly, the PRC share of world exports held up much better than India's. The relatively high share in the 1950s, based primarily on trade with the Soviet Union, fell back slightly during the next two decades, which witnessed a huge growth in world exports. Then the 1980s, after the opening policy took effect, saw a very rapid increase in the PRC share. The change in policy may have led to an increase in exports, but the preceding period indicated that the PRC economy could, for whatever reason, produce products that could win a place in world markets.

However, the key factor is that the Chinese economy was split into three parts by the interaction between traditional China and the outside world. At roughly the same time as the republic of India was born we have in existence three major, and separate parts of the Chinese economy: the People's Republic of China, Taiwan and Hong Kong. Macau is a further, but quite minor player. More important was the overseas Chinese diaspora, which like the Indian one, had profound but often intangible effect on the economies from which they had originated. Remittances from overseas Chinese have made an important contribution to the balance of payments of the Chinese economies, as have overseas resident Indians to India, but their intangible contribution, in bringing back skills, knowledge of foreign markets, etc. may also have been very important.

However, it is the existence of Hong Kong and Taiwan as a sort of surrogate, pilot versions of the bulk of the Chinese economy that mark the main difference between India and China and suggest that India will not have the rapid export growth of the PRC.

The example, experience and investment of Hong Kong and Taiwan has made a major contribution to the PRC's rapid growth of foreign trade after the opening policy. This is not something that India can expect to emulate. Both Hong Kong and Taiwan were, as colonies, drawn into the world trade system, Hong Kong much more than Taiwan. Hong Kong was an entrepôt for the China trade whereas Taiwan was more of an appendage of the Japanese economy. When Taiwan reverted to China after the war, and particularly when the Nationalists transferred their government there in 1949, there was initially a policy of import substitution and which shifted to export-led growth later. In many respects the growth of the PRC's exports represents a transfer of exporting capability from Hong Kong and Taiwan to the PRC. This is brought out in Figure 4 which plots the share of world trade of the three main Chinese economies, excluding trade to each other. (Macau is excluded from this graph because its exports are relatively small.)

It follows that it is important to compare India, not merely with the PRC, but with Greater China (Shambaught). Table 5 takes export data from the constituent parts of core 'greater China' - PRC, HK, Taiwan and Macau - and excludes exports to the other parts. It thus shows Greater China's exports to the rest of the world.

In 1968 Greater China's exports were a bit more than twice India's. By 1973 when the PRC's exports were fast increasing after the Cultural Revolution (but still within the Maoist period, with the 'Gang of Four' in control), India's share of world exports had fallen to 0.5% while Greater China's had risen to 2.3%, and the ratio between the two was some four-fold. By 1995, after some years of the liberalization of the Indian economy, and Indian foreign trade, the Indian share had risen to just 0.6% while the Greater China share had soared to 6.3%. The ratio between the two was now over ten-fold.

In addition, Greater China has the advantage of having been first and having established the business networks and gained the experience of supplying world markets. On the over hand, the Chinese have not been successful in establishing brands, except for certain Taiwan companies such as Acer (computers) and Giant (bicycles). They have tended to focus on labor-intensive production which tends to be vulnerable to investment moving to lower wage areas.

There is not space here to examine competition between India and the Chinese economies in any detail but it seems unlikely that India will repeat the export growth of the PRC under the open door policy. The advantages that the PRC had, particularly the existence of Hong Kong and Taiwan, were unique and cannot be replicated.

It may be that India has to pay special attention to the quality of exports rather than the quantity. It also has the advantage of an elite which is more familiar with the outside world than the Chinese, particulalry those from the PRC, and which sees English, that international business language, as its own. These could be considerable advantages as India strives to win global markets.

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More detailed statitics for this paper, and their sources, are available on the CAPLAB website at

http://www.vuw.ac.nz/~caplab