Topics: Special Economic Zone, Economics, Investment Pages: 5 (1454 words) Published: September 19, 2014

Over the last few decades, China and India have made substantial improvements in the structural transformation of their economies by allowing foreign firms to compete  in markets from which they were previously barred. At the outset of reforms, the conditions of both economies were similar, and both were under the influence of the Soviet model, pursuing similar development strategies involving central planning and rapid industrialization. Both leaderships considered the state to be the engine of growth and suspected foreign sector development. In China, foreign investments were prohibited and the mechanism for foreign trade was monopolized by the Ministry of Foreign Trade. In India, the Foreign Exchange Regulatory Act (1974) reduced foreign equity participation from 51 to 40 percent which led to the exit of companies like IBM, Shell and Coca-Cola. Since that time, both governments have significantly liberalized their FDI regimes, however, China has been able to attract a much higher level of foreign investment.

1] Beijing initiated the reform process much earlier than New Delhi and both countries are far more “FDI-led” than other developing countries have been in the past. Nonetheless, the experience of these two large, but strikingly different countries underlies the importance of political economy for growth and development. 2]The divergence of attitudes toward FDI can be easily explained by the two countries’ different political systems. China has an authoritarian regime where policy-making is generally regarded as a top-down process, and where the government is able to be flexible in its decision-making. Additionally, the Chinese leadership has a clear focus on economic growth. In contrast, the formation of policy in democratic India is much slower. Short-term political calculations dominate as there are frequent elections conducted at different levels- national, state, municipal or village. Interest groups are important constituencies for Indian parties since they have the ability to provide campaign finances and influence voting behavior. That is why for democratic, post-colonial India, allowing foreign investors to earn huge profits at the expense of domestic firms is unthinkable. A further part of the answer  lies in the political economy of the local state. In China, decentralization of economic responsibility and establishment of special economic zones (SEZs) was a key feature in foreign sector reform. Local authorities, responsible for the economic growth of their province, undertook many initiatives to ensure that SEZs would attract foreign investors. In India, decentralization was less ‘economic’ and more ‘political’. It began in the early 1990s only because central government lacked sufficient political power and was not able to create an efficient coalition without depending on the state governments support. Thus, local officials have no direct incentives to promote FDI and state governments heavily rely on centrally-led strategies. Hitec City- a special economic zone in Hyderabad, designed to attract investments in the IT sector, is a case in point. Every significant aspect of the project, from negotiations with investors to the design of the regulatory framework was conducted centrally with no local participation. Seen broadly, local bureaucracy in India- epitomized in this case by the license-quota-permit raj- do not perceive themselves as independent actors in terms of economic reform and oblige central government to be responsible for the implementation of development programs. Such dependence on central government also has an impact on infrastructure. In China local governments have far greater control over local revenues than in India. Under the new fiscal system that resulted from economic decentralization, Chinese provinces entered into negotiated revenue sharing contracts with the central government. This means that local governments are allowed...
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