Transition from a command economy to a market economy would mean a complete remodeling of a country’s economic aims and procedures.
The command economy, being centrally planned, involves a lot of government involvement in its plans and all major economic decisions are made by the government, maximizing social welfare being the sole purpose. In such a case, the government aims to provide the population with its basic needs and essentially determines the market forces of demand and supply according to its own perception of what is best for its people. With all best intentions in mind, the command economy derived its major popularity from the success of the Soviet Union and when the Soviet Union disintegrated, all the apparent advantages of such an economic system disappeared and the flaws became visible.However, the prevalence of a centrally planned economy left some wounds to fill up, as was obvious in the case of India and china, both of which adopted the soviet model in hope of some economic success which was never material. Low growth rates were the highlight of the period.
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India was probably more affected by the command economy system because it was stricter in its observance as compared to China which had some form of civil involvements in agriculture in the early 1960s.Under the command economy, all industries were to be centrally planned, and their run was marked with inefficiency, non profitability and often supply surpluses and bottlenecks which were not desirable. It was a matter of time after realizing these affects that both countries adopted economic reforms to put things right.The purpose of these reforms would be to reverse the earlier problems that had occurred, like making major enterprises more profitable, efficient and allowing the ‘invisible hand’ to control market forces.
Not only would this solve the earlier problems, but it would also relieve the government of the intensive job and allow some thing its more capable of- regulating and developing a better environment for businesses to operate in.Privatization would make most of these things possible by allowing ordinary people to take over government run enterprises, as that would result in a more efficient use of resources which essentially results from profit maximization and it also eliminates any errors in the market force determination due the presence of the ‘invisible hand’. Innovation increases as many minds are now involved with respective industries.All these changes due to privatization are the exact requirements which would reform an economy ailing from being centrally designed and this similarity of interests makes privatization a good probable to be included as economic reforms. And a study of the economic development of India and china shows that the extent of privatization adopted by both countries has been detrimental to their growth.
Thus privatization forms a crucial part of the path towards economic growth and both India and China realized this at some point. From that point onwards it was a matter of bringing about the necessary reforms, and even here the course of action varied between India and China.The Indian ExperienceIndia was the slower of the two to realize the negative affects of the soviet model. British rule had made them averse to foreign relations and this was a huge disadvantage in regards to foreign direct investments that it was missing out on.
But probably it can be justified because it was a trading unit that took over India before and they didn’t want it to happen again. And reversing from the soviet model wasn’t that easy either. Indian students in Britain were ‘brainwashed’ by soviet agents and being the upcoming politicians, it was a hard task to bring about reforms of the opposite polarity. Levies, quotas and taxes lowered consumption and hampered private investments. Anti export policies were a blow to local industries because the low consumption meant that they could not sell their products even if there was international demand.Even the agricultural sector was paralyzed by the framework that included compulsory procurements, administered prices and forced savings. The private sector was a hollow one in which key sectors like banks, investment and airlines were nationalized and the rest were subject to government policies which limited their operations.
These policies included labor laws which made it impractical to fire employees and an industrial development act and some other legislation which meant that the state controlled financial and investment decisions to assist “qualified” establishments. Prices of other key inputs were also centrally administered, essentially making all resources out of private control. A private sector like this, effectively in the hands of the government defeats its purpose of existence.In January 1956, the government agreed to establish a ministry for village and small scale industries. By July of the same year, insurance companies were under state control and cement trade was taken over by the government. The government kept on introducing laws and acts that put the state on “commanding heights” in the economy.
In 1957 a wage board was introduced for the cotton textile industry, this being a part of the earlier mentioned labor reforms.By December 1957, such a wage board was introduced for the sugar industry too. Independent industries certainly weren’t popular with the government.All private ventures had to face walls erected by the government when acquiring resources. The wage control boards and labor laws gave over protection to the human resources, finance companies where state controlled and that was a red tape procedure to go through. High tariffs(to promote the import substituting industries) and import quotas made it harder for them to import inputs, forcing them to use domestic, lower quality products which then made their products unable to compete in the international market.During this period of 1950-1980 the government continued its policy to control most of the economic activity in the country. However this did not produce any fruitful results, as the GDP growth rate was stagnant between 3.
5 and 3.8 percent per year. Imports of capital goods kept straining the balance of payment. Even the currency was revalued a couple of times.The relaxation towards the private sector came at the end of this period, when the government adopted a more “open” approach and gave its attention to exports and foreign investments. Short term international loans were taken as enterprises with export promotion as an aim were introduced.
This marked the beginning of India’s liberalization. But it was not until early 1990s when the process became more rapid due a number of reasons. The Indian economy was in crisis as the gulf war was going on and the rise in oil prices had put the balance of payment in a critical position because of the sudden rise in fuel imports. Together with that the demise of the Soviet Union shattered the remaining confidence of the Indian government in central planning and the shift to a more open economy was imminent.
Consequently the changes were rather quick and direct, resulting in favorable outcomes.As the rules became friendlier, private enterprises began to emerge and the results were evident in the increased growth rates in the past ten years. Foreign investments rules were relaxed and they have increased since 2001. Right now the private sector is controlling all major industries and is pretty much on top, but it is still barred by problems like corruption which have been a legacy for them.China and its private sectorCompared to India, China proved to be more open minded and versatile in its adaptation of the Soviet model.
With the government being under the communist party, China was a centrally controlled state and so a command economy was prevalent. Seeing the powerful position of the Soviet Union, China too, adopted the soviet model. Being a communist country it was no surprise but China was quick to realize the positive effects of private involvement.
To include private involvement in its system, it tested the effects which proved to be very fruitful. In 1961, farmers were allowed to farm in their back yards and manage their crops on their own. This was a huge success as the output increased and continuing to experiment, the government allowed farmers to sell their produce in local fairs, held by themselves. This was how the agricultural sector was slowly decentralized but this was only the starting because there was room for a lot more to happen.
State owned enterprises were the major part of the economy, and they had all the usual problems associated with centrally controlled industries. The government realized this problem and the need for increased participation from the private sector and in 1978, decentralizing of state owned enterprises began, which was a breathing space for the private sector. The government continued during the 1980s to promote nonagricultural activities like village enterprises. It kept increasing self management in state-owned enterprises and even took steps to increase competition in the market space.However this was a slow process and happened steadily.
Growth rates increased but the development of the private sector was still in progress. Foreign Investments were permitted, starting from 1979, but China’s reputation as a communist country was still a major factor. As control was imparted to the private sector, this transition wasn’t that fast so the private sector was still in the process of building up. Although the output growth rates were going up, the slow pace of the privatization related reforms was frustrating to the people, especially with the presence of a communist government. This was just a hypothesis because China was able to avoid the problems faced by other East Asian countries by its steady policies to decentralize state controlled enterprises.
With a communist government over them, business environment was insecure and the central authority was thought to be unable to provide the necessary infrastructure. During the late 1980s and early 1990s, China relaxed its regulations for foreign Investments in order to attract capital and even made assurances against nationalization. It eliminated the previously effective time restrictions for foreign firms, to attract more foreign investment. This provided the private industry with competition and allowed the flow of contemporary business through the economy, which can have positive externalities.The government even gave preferential tax treatment to contractual ventures and foreign companies investing in energy, communications and transport sectors. This was even for investments in economic zones setup by the government.
This meant that the infrastructure was going to be developed.All such reforms resulted in huge inflows of capital throughout the 1990s and later. This capital not only helped to develop a healthy infrastructure for enterprises, it also paved the way for more foreign investments to setup industries. The private sector now had a lot of resources to build upon and it certainly did. It could be theoretically said that a more downsized government could further enhance the situation, but it seems that Chinese private sector has achieved its peak with a communist government, essentially due to its “Chinese characteristics”.China and India: a comparison of their courses of actionBetween India and China, India was the country that had its political system changed as a part of economic reforms, and China on the other hand just adopted the necessary independence of the private sector, keeping its communist image intact. The Indian government was the slower of the two in realizing that self management in state enterprises was actually healthy for the economy as a whole. India, earlier being rocked by the British rule was rightfully wary of foreign intrusions and this was reflected in its policies which restricted any foreign involvement.
Where China was being helped by foreign investments in developing the system for enterprises, India had itself to count on. The Chinese government was early to realize the need for decentralization, where as India was filled up with pro Soviet politicians who kept firm in their belief in central planning. So where the Chinese government planned and enacted the transition of the state owned enterprises, Indian government was never forced to do that and it took a lot more time for it to be convinced. In fact, it was not until the demise of the Soviet Union that Indian government started making any serious reforms.
After the realization took place, it was a matter for redirecting resources to aid the development of the private sector. With out the foreign investments that china enjoyed, India certainly faced a steeper challenge.Is downsizing of the government really necessary?Analyzing the reforms in both countries and their effects, India reduced the size of state control to increase the private sector. China on the other hand kept its communist image but made the necessary changes in its regulations and therefore the economic system to facilitate the development of a private sector. China, with its course of actions, proved that downsizing of the government was not a necessary part of economic reforms.The government is responsible for the required economic reforms required to alter the economy to the right path. In case of India, the government was full of communist minded people, so a change was required.
China on the other hand proved that its communist government was economically sound and in the best interests of the country. Downsizing in such a position is necessary in terms of the extent of state control over industries, which can work out more efficiently under the private sector.As far as economic reforms are concerned, they require the attention and the correct decisions of the government, and where it is unable to do that it needs to change or lose its decision making power so that a more reliable source can do the job. Downsizing the government should be a part of economic reform as far as the transfer of state controlled enterprises to the private sector is concerned, because it has lead to greater efficiency and growth rates. Because it is not possible for the majority to work with social interests, individual interests exist and are the reason for motivation of the highest degree among the majority, the greater rate of growth in the private sector can perhaps be explained. Downsizing the government maybe essential, but eventually it depends whether the government is trying itself to minimize its involvement.
If it is not, then reduction in its power should be an essential part of economics reforms.