Growth: Can India catch up with China?

Growth: Can India catch up with China?



Can China and India sustain their current growth rates?

A traditional answer to this question is conditional: yes, provided they continue to implement policy reforms. But historical experience allows a less guarded answer.

There are few examples of countries that have grown as strongly and for such long periods as India and China have - 6 per cent and 10 per cent, respectively, for nearly three decades - and then suffered a sharp slowdown or collapse.

If history is a reliable guide, then barring major upheavals, economic growth looks likely to continue in both countries until some threshold level of prosperity is attained.
But why does growth beget more growth? One mechanism is simply that growth signals the fact of profitable economic opportunities, which encourages investors to rush in, first in response to these opportunities but then in response to each other - this is growth as a confidence trick - creating a virtuous circle.


If countries are relatively poor, if their markets are large, and if their policy framework is basically sensible - all of which are true of China and India - the chances of the growth-begetting-growth dynamic taking hold are high.

But in addition to the signalling effect, growth may itself cause changes which have in turn a growth-reinforcing effect - a kind of positive feedback loop. A good example is education.
For long, development economists bemoaned the poor levels of educational attainment in India, directing their critique at the government's failure to supply better education. But economic growth changed the education picture dramatically.


It increased the returns to, and hence the demand for, education. And if government supply remained weak, consumers simply turned to the private sector to meet their demand for education.


Improvements in educational attainment over the last 15 years are attributable in part to more rapid growth..



For more: http://specials.rediff.com/money/2008/aug/21slide2.htm



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