Nirupam Bajpai, Tianlun Jian, and Jeffrey D. Sachs

Development Discussion Paper No. 580 April 1997

In this paper we compare the reform experiences of China and India focusing on three specific areas of industrial policy. We begin with a comparison of the macro economic performance of the two countries and find that except on the inflation front China is better placed than India. China has grown at almost double the rate of India largely because of very high savings and investment rates. Of course, economic reforms have provided the necessary policy environment for China to attain and sustain high growth.

First we compare the extent of deregulation in China and India in the areas of prices, labor and land laws, and exit policy for firms. We find that the non-state sector of China, which is the main driving force of China’s impressive growth has performed so well largely because it operates primarily under market conditions. China has gone far ahead of India in respect of deregulation of their non- state sector. Price reforms have been extensive, labor is mobile, labor laws are liberal, and firms are free to enter and exit from the market. The results achieved in the process speak for themselves. In India, by contrast, much needs to be done for private sector deregulation, price reform has been limited, labor and land laws are stringent, and while firms have no entry barriers, they do, however, face strong exit barriers. Second, we draw comparison between the Chinese township and village enterprises and the Indian small scale industries. While these have been promoted in both the countries through preferential policies, however, their objectives have been different, and hence the results. Chinese small enterprises are given initial support only as against the policy in India wherein incentives are available as long as a firm remains in small scale. Moreover, in India, items are reserved to be produced exclusively by the small scale industry. While both have grown overtime, the ones in China have grown much faster. Finally, we compare special economic zones of China with export processing zones of India. We find that although both the countries have offered similar incentives to prospective investors, the story is very different in the two countries. The zones in China have been highly successful in attracting foreign investment, promoting exports, and generating employment than they have been in India. We identify a number of factors for the performance differentials in the two countries.

Nirupam Bajpai is Development Associate at the Harvard Institute for International Development.

Tianlun Jian was a Research Associate at the Harvard Institute for International Development when this paper was written and is now a investment analyst at the Caspian Asset Management, New York.

Jeffrey D. Sachs is the Director of the Harvard Institute for International Development and the Galen L. Stone Professor of International Trade at the Department of Economics, Harvard University.

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