china versus india -- 7/17/18

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Today's selection -- from Slums: How Informal Real Estate Markets Work edited by Eugenie L. Birch, Shahana Chattaraj and Susan M. Wachter. As recently as the 1990s, the economies of India and China were roughly the same size. China's economy now dwarfs India's -- though China has accumulated unprecedented levels of debt in the process. In addition, in India there are massive shantytowns -- the ramshackle communities adjacent to large cities that have no water or electricity and no formal titling of land ownership that have come to define megacities in the developing world. These are referred to as being part of an "informal" economy and in China they largely don't exist, primarily because of China's massive investment in infrastructure:

"India and China have both experienced sustained urbanization and eco­nomic growth over the last decades, but India has lagged behind. In 1980, 20 percent of China's population was urban compared with 25 percent for India; by 2010 China was 50 percent urban, while India was 30 percent. ... These official rates of urbanization over the period trans­late into China adding over 450 million residents to its urban population while India added over 200 million urban residents (an impressive figure as well, even if lagging behind China's rate of urbanization). ... Between 1980 and 2010, while India's GDP increased fivefold, China's GDP increased more than thirty times. Per capita GDP increased from less than $300 per capita in constant 2010 dollars in both India and China in 1980 to almost $1,500 in India and $4,500 in China in 2010, reflecting tremendous economic improvement for the overall popula­tion. This [book] explores the role of infrastructure investment and of the land development process in explaining these differential aggregate outcomes in both countries, while recognizing that of course the situation of different regions and cities varies greatly within each country.

Urban construction work in a Chinese city, 2013

"The relationship between infrastructure investment and economic devel­opment has been long recognized, going back to Adam Smith. Transporta­tion infrastructure, in particular, is necessary to enable specialization and trade that lead to the development of economies of scale and important pro­ductivity gains. The effect of infrastructure on devel­opment has been extensively studied, showing its direct effect on GDP as an input in the production function (energy, water) and its indirect effects on development by increasing a system's overall productivity through increased agglomeration economies. Infrastructure investments en­able firms to maximize agglomeration gains from urbanization economies across industries and localization economies within an industry. Without these investments, the congestion, barriers to industrializa­tion, and cost of communication resulting from insufficient infrastructure limit the economic gains associated with the transition from a rural to an urban society, and the lack of sufficient serviced land contributes to informal urbanization.

"Since 1988, China has framed urbanization as one of its top priorities to
absorb surplus rural labor and ensure economic growth. Massive urbanization is occurring along with infrastructure development, but without the emergence of a large informal [shantytown] sector. At the same time, it has experienced a rapid increase in GDP and a drop in extreme poverty. High-ranking officials have emphasized the importance of ur­banization for China's sustained development. For example, in 2005, Chen Yuan, governor of the China Development Bank wrote that 'urbanization is the most important and enduring force in stimulating consumption and investment in China's domestic economy. It is also the engine to simultane­ously propel China's economic and social development'.

"Urbanization in China resembles the open-city model characterized by the emergence of new cities in opposition to a primate model in which most of the urban growth occurs in one or a few main existing cities. The value created through development is captured by local governments and is their main source of revenue. This puts them in competition with each other to attract growth, encouraging a race to devel­opment that has resulted in the expansion of a large number of cities. For ex­ample, the growth in the number of cities with more than a million residents occurred at a much faster pace in China than in India. In 1990, China had thirty-four cities with a population above one million and India had twenty­-three. By 2010, China had ninety-three cities with a population above one million compared with forty-three in India.

"In addition, urbanization in China is occurring in the context of a fis­cally decentralized system despite China being a very centralized country. The situation shares some of the characteristics of the model developed by Tiebout, in which the authority given to local commu­nities to control land use and employ taxing powers to finance the provision of local services results in local governments acting as efficient service providers that compete for growth and invest in infrastructure and public services to attract residents by offering more attractive tax and services levels.

"In contrast, India has a federal system, which implies a certain level of decentralization, but local governments have no real fiscal autonomy and gen­erally depend on central government funding to finance public investments, resulting in a severe infrastructure shortage. There is a clear contrast in the share of public revenue and expenditure that takes place at the local level in India and China. While in China, 50 percent of public expenditure and 25 percent of revenue are controlled by the lower tier of government, in In­dia, 33 percent of expenditure and only 3 percent of revenue are thus con­trolled.

Dharavi shantytown in Mumbai, India.

"The decentralization of local taxation, development rights control, and services provision in China has had a strong impact on local outcomes, even if municipal governments do not have real autonomy from the central gov­ernment (Weingast 2009). While determined by the central government, the incentives for local officials to promote growth have created a system in which local governments compete for development in order to receive benefits from urban expansion through increased revenue, in particular by monetizing land assets and career advancement for local officials. The result are pro­growth policies with a heavy focus on the provision of infrastructures as can be seen in such cities as Shanghai and Beijing, which have devoted over 6 percent of their regional GDP to urban infrastructure over the last decade, as compared with an average of between 3 and 4 percent of GDP in developing countries."

author:	Edited by Eugenie L. Birch, Shahana Chattaraj, and Susan M. Wachter
title:	Slums: How Informal Real Estate Markets Work
publisher:	University of Pennsylvania Press
date:	Copyright 2016 University of Pennsylvania Press
pages:	6-11