Master Thesis the Economic Development of India and China In
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Master Thesis The economic development of India and China in a globalizing world Author: M.M.A. Restiau, BSc. Supervisor: Dr. A.J.W. van de Gevel Date September 2007 Number of words: 22.447 (introduction, table of contents, appendix and literature list excluded, footnoted and references included) Table of contents Word of thanks...................................................................................................... 2 Introduction.......................................................................................................... 3 Chapter 1 ............................................................................................................. 5 1.1. The anti-globalists ....................................................................................... 5 1.1.1. Rising inequality .................................................................................... 6 1.1.2. The ‘pauper labour’ and ‘de-industrialization’ arguments ............................ 8 1.1.3. The race to the bottom and increased vulnerability .................................... 9 1.2. The Pro-globalists .......................................................................................11 1.2.1. Rising inequality? .................................................................................11 1.2.2. Can we speak of pauper labour and/or de-industrialization ........................12 1.2.3. Wages in labour-intensive manufacturing and labour standards.................13 1.3. Conclusion .................................................................................................15 Chapter 2 ............................................................................................................17 2.1. India .........................................................................................................17 2.1.1. The globalization and liberalization process in India ..................................17 2.1.2. India’s role in the world economy ...........................................................20 2.1.3. Consequences of globalization on India’s economy....................................24 2.1.4. To conclude the section on India ............................................................31 2.2. China ........................................................................................................32 2.1.1. Policy reforms and institutional changes ..................................................32 2.1.2. China’s role in the world economy ..........................................................33 2.1.3. Consequences of globalization on China’s economy...................................38 2.1.4. To conclude the section on China............................................................41 Chapter 3 ............................................................................................................43 3.1. India’s future .............................................................................................43 3.1.1. Why is it that India remains behind China? ..............................................43 3.1.2. What needs to be done to stimulate industrialization? ...............................45 3.1.3. Keeping the IT-sector up-to-date............................................................46 3.1.4. Conclusion...........................................................................................47 3.2. China’s future.............................................................................................48 3.2.1. The future of capital formation in China...................................................48 3.2.2. Human Capital .....................................................................................51 3.2.3. Exports ...............................................................................................52 3.2.4. Conclusion...........................................................................................54 Conclusion...........................................................................................................55 Appendix .............................................................................................................58 Literature ............................................................................................................61 1 Word of thanks I would like to thank Dr. van de Gevel for supervising my Master Thesis, reading it, and providing me with useful advice. 2 Introduction For the largest part of my study, I have been particularly interested in the economic development of developing countries. The globalization of the world economy brings about opportunities as well as threats for these kinds of countries. Especially the development of India and China has attracted my attention, because China has profited from the opportunities and advantages a globalizing world brought to them. India, however, seems not to have profited as much as China. In my Master Thesis, I would like to discuss which choices the governments of these two giant countries have made, and which reforms they have carried out in their countries. Second, I want to show that these past choices have had a major influence on the economic development of both India and China, and that these choices have had enormous consequences that are still in effect today. The main question I want to find an answer to in my thesis is the following: “India and China have responded in different ways to the globalization process. How are these different choices responsible for the fact that India lags behind China, and will India ever be able to bridge the gap?” To be able to answer this question, however, I have to answer several sub-questions, which will be formulated at the beginning of the sub-sections that are supposed to answer those questions. Before I start to discuss the situations of India and China, I am going to present the views of the groups in favor and against globalization in the first chapter . The reason why I am going to do this, is because one of the reasons that China is such a large country today, is because it has chosen to open up to the world market already in the early 1980’s. India has only shifted its orientation from the internal market to the international market in the early 1990’s. This is a major cause of India lagging behind China. This means that globalization plays a large role in the development of countries all over the world. This does, however, not mean that globalization only has advantages. Anti- globalists show that there are many disadvantages connected to globalization, which could also apply to India and/or China. In the second chapter , I am going to apply the arguments against globalization to China and India, and enquire whether there are arguments against globalization that apply to China and/or India. Moreover, I will also talk about the recent developments in the economies of the two countries. 3 In the third chapter , the final step toward answering the main question will be taken by talking about why India is lagging behind China, and whether it is possible and likely that India will ever bridge this gap with China. The main question will then be answered in the main conclusion . 4 Chapter 1 Globalization In this first chapter I will show that there are two main parties regarding the subject ‘globalization’, namely those in favor of globalization (hereafter: pro-globalists), and those against globalization (hereafter: anti-globalists). I will discuss their views by answering the sub-question of this chapter, namely: “What are the main arguments used by the different parties to support their views?” 1.1. The anti-globalists Before I start to discuss the different views concerning globalization , I will give a definition of what I mean when I use the term ‘globalization’. When I talk about globalization, I refer to ‘economic globalization’. Bhagwati describes economic globalization as follows: ….[economic globalization is the] integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows, international flows of workers and humanity generally, and flows of technology. Bhagwati (2004, p.440) Economic globalization is subject to a lot of criticism. According to Wolf (2004) there are two main groups of critics regarding economic globalization. One group broadly consists of old-fashioned economic interests , while the other group consists of single-issue non- governmental organizations. The group of the economic interests consists of several sub- groups, such as trade unions, which are concerned with the jobs in the home countries of their members, as well as with labour standards abroad. Other sub-groups can be farm lobbies and other producer groups that want to protect their position in the world economy. These groups provide an economic rationale for their views and they can be very influential. Apart from the fact that they try to protect their position in the world economy, they also state that globalization leads to increased poverty in developing countries and to deterioration of the environment worldwide. But even though these groups can still be very influential, they are no longer the most dominant group that fights against liberalization. The other group of anti-globalists consists of the more idealistic sub-groups. They include conservative groups, environmentalists, lobbies for development, consumer groups, human right groups and church groups. A large proportion of these groups consist