The emergence of China and India on the world stage has aroused much interest. As in many other areas of (policy) economics, just how these countries “did it” and the lessons for other countries is something economists either do not know, do not agree on, or both.

In the case of China, the literature seems to agree that capital accumulation, industrialisation, and export-led growth were key factors after 1979. Economists like Gregory Chow (1993) or World Bank chief economist Justin Lin, argue that, before 1979, Chinese central planning was a failure, economic performance was poor, and “haste made waste” (Lin 2010).ⁱ

In the case of India, its poor performance during the 1960s and 1970s, referred to as “Hindu growth”, has often been attributed to, among other things, poor planning, and the license-permit Raj (Bhagwati and Desai 1970). Yet economists such as Bardhan (2006) and Nagaraj (2010) argue that infrastructure bottlenecks and demand–side constraints have been neglected in the discussion of India’s industrial performance.

Built-up capability

In two recent papers and using a data set covering almost 800 products (Felipe et al 2010a and 2010b), we examine the evolution of the export basket of the two countries. We argue that the capabilities that both China and India accumulated before reforms started are vital to understanding their growth later on. While we agree that planning led to mistakes, inefficiencies, and to the misallocation of resources in both countries, we argue that, given their income per capita, China’s and India’s export baskets are more sophisticated – as measured by the income content of the export basket – and diversified – as measured by the number of products exported with revealed comparative advantage – than might otherwise be expected. Both are far ahead of countries at similar levels of development. This could have been achieved only through planning, industrial policy, and sector targeting.

The objective of the development strategies of both countries during the 1950s and 1960s was to achieve industrialisation. Both favoured the capital-intensive route, to a large extent as part of an import-substitution strategy that aimed at avoiding foreign dependence, although with significant differences between the two. The important point is that both countries developed a broad industrial base during the planning period that helped them accumulate capabilities that are now allowing them to grow (see Hidalgo 2009 and the footnote for further discussion).ⁱⁱ

Export sophistication

Figure 1 provides a cross-country comparison of the actual and the expected sophistication level of the export basket, given their income per capita. The sophistication level of the export basket (EXPY) of a country captures its ability to export products produced and exported by the rich countries, to the extent that, in general, rich countries’ exports embody higher productivity and wages (Hausmann et al. 2007). The level of sophistication of a country’s export basket is calculated as the weighted average of the sophistication of the products (PRODY) exported.ⁱⁱⁱ Figure 1 shows that the export baskets of China and India are more sophisticated than their income levels might suggest.

Figure 1. Export sophistication and GDP per capita

Diversification

Diversification is measured by the absolute number of products that a country exports with revealed comparative advantage (RCA). We consider that a country has revealed comparative advantage in a product when this measure is greater than one.^ivHidalgo et al. (2007) argue that more diversified countries have greater capabilities. These allow a country to acquire comparative advantage in other products. Figure 2 shows that both China and India are positive outliers in the sense that their export baskets are more diversified than one would expect given their income levels.

Figure 2. Diversification and GDP per capita, average 2001-2007

To gain further insights into the structures of China’s and India’s export baskets, we show in Tables 1 and 2 the number of products that both countries export with comparative advantage (i.e., RCA>1), according to Leamer’s (1984) classification, for the period 1960-2007.^v We complement this information with Figures 3 and 4, which show the product spaces (Hidalgo et al. 2007) of the two countries in 1962 and in 2007. We mark in black the products that each country exported with RCA>1 in each year.

A few things stand out:

(i) In 1962 China exported with RCA>1 105 products, of which only 14 were “core” products.^vi The bulk of the products China exported with RCA>1 were divided equally between tropical agriculture, animal products, cereals, labour intensive, and capital intensive products (excluding metals).^vii By 1980, China was exporting 200 products with RCA>1, 39 of them in the core. By 2007, China exported 265 products with RCA, of which 106 were core commodities.

India, on the other hand, exported a total of 71 products with RCA>1 in 1962, only 4 were in the core. In 1962, animal products, cereals, and capital intensive products (excluding metals) accounted for more than half of the products exported with RCA>1 (44 out of 71 products). By 1980, the number of products that India exported with RCA>1 had increased to 157, 25% of which were in core products. In 2007, out of 254 products exported with RCA>1, 84 were in the core.

(ii) Over the period 1980-2007, China acquired RCA>1 in 67 core products (on a net basis). Table 1 shows that China lost RCA (where previously RCA was >1) in categories such as tropical agriculture, animal products, and cereals. The speed at which China acquired RCA>1 in the machinery category is outstanding, from 3 in 1980, to 22 in 1990, and to 60 in 2007.

India acquired RCA>1 in an additional 97 products between 1980 and 2007. Of these 97 products, 46 were in the core (6 in metal products, 16 in machinery, and 24 in chemicals).

(iii) The highest number of commodities that China exports with RCA>1 is in the labour-intensive category, followed by the machinery sector. In the case of India, on the other hand, the capital-intensive category tops the ranking of exports with RCA>1, followed by chemicals and labour-intensive. China acquired RCA>1 in 19 labour-intensive products between 1980 and 2007, while India acquired RCA>1 in only 6 products over the same period.

(iv) In China, the majority of the machinery products (39 out of 60 in 2007) exported with RCA>1 are office and data processing, telecommunications, electrical, and photographic equipment. On the other hand, in India, the largest share of the machinery products (16 out of 28 in 2007) exported with RCA>1 is taken up by the power generating, machinery specialised for particular industries, metalworking, and general industrial categories.

Table 1. China’s export diversification according to Leamer classification

Figure 3. Product Space, China: 1962 and 2007

a) 1962

b) 2007

Source: Hidalgo et al. (2007) and authors’ calculations

Table 2. India’s export diversification according to Leamer classification

Figure 4. Product Space, India: 1962 and 2007

a) 1962

b) 2007

Source: Hidalgo et al. (2007) and authors’ calculations

Giants without industrial policy?

China and India are undergoing deep structural transformations. China has been able to do it by using manufacturing as its engine of growth and absorbing surplus labour from the rural areas. It has done it by both exploiting its comparative advantage in labour-intensive activities and by defying it. Without the latter, it would not have been able to establish a foothold in a wide number of core products. This was made possible under the planning system.

While industrialisation on the scale seen in China has not yet taken place in India, the focus on heavy-machinery based industrialisation and emphasis on tertiary education has allowed it to build capabilities that, post-reforms, have led to its expansion into core activities. India’s failure lies in not being able to exploit its comparative advantage in the labour-intensive sectors, even after reforms.

We do not claim that the policy framework in the two countries before reforms did not lead to misallocation of resources, shortages, and price distortions. Instead, we argue that industrial policies and targeting helped both countries accumulate critical capabilities in core sectors. Without these policies, and given their low per capita, the two would have shied away from those industries. Going forward, both China...

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