“Economic Freedom and the Standard of Living in India and China: A

Comparative Study of Two Rapidly Growing Economies with Large

Populations.”
Amit Kumar
Senior Research Fellow, JNU, New Delhi
The last decade has observed inevitable changes in global economic space. The
East Asian economic boom was harbinger of the economic liberation in a greater world.
Later on the large developing nations also liberalized the economy in order to generate
viable economic growth. The market were liberalized, structural adjustment programs
were designed. India and China, the two largest nations also fallow this progressive
trend.
India and China together consist 37.95% of world population. Any analysis of
world’s political economy can be better analyzed taking these nations as example. The
document of 2007 Index of Economic Freedom, developed by the Heritage Foundation
has often referred India and China for interpretations of various results while deriving the
index. The Economic Freedom Index (EFI) is important tool to understand the political
economy of any country. Since it is based on ten different indices including economic
freedoms, freedom from corruption and labor freedom; it includes the basic indicators for
economic freedom as individual’s right. Economic Freedom Index (EFI) can be used for
the study of economic freedom and standard of life in any nation. Since EFI is based on
the evaluation of macro economic policies of nation, it directly reflects welfare polices
also.
Choosing India and China would be an interesting study for the assessment of EFI
and also to study how economic freedom has achieved in terms of individual’s life style.
Here is a comparative graph for Economic Freedom Index of these countries from 1995
to 2007. (Figure 1.)
 Economic Freedom Scores of India and China, 1995-2005

60

50

40
Score

30

20

10

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Years

India China

Figure 1.
Since last twelve years the status of economic freedom between the both countries
has not been much different. In year 2007, India has a slightly high score than China,
however both economies fall in ‘mostly unfree’ category of report (Page 3.) The further
analysis suggest that in these ‘mostly unfree’ economies have less per capita income than
the economies which are referred ‘repressed’ by the report. This may be interpreted due
to large populations in India and China. But it again refers to a big income gap existing in
these economies. The result of big income gap in these two countries led world income
inequality had increased continuously.
To study the standard of living one can take GDP at Purchasing Power Parity, as
it reflects the individual’s income of related country. UNDP’ human development index
has also used it as assessment of the standard of life. For India per capita GDP (PPP) is
$3,139, while it is $5,896 per capita for China. There is a big difference in terms of per
capita GDP in both countries, while EFI shows India is ahead to China. One can conclude
that economic reforms in India have not improved the standard of living as much as It
occurred in China. Studies suggest that the Indian government’s attempt to minimise the
social costs of economic reform in the short run, by raising budgetary allocation for
social sectors, may not have been entirely successful.1 On other hand, the Chinese social
security system shifted from an enterprise-based system to a state-based one. This has
stagnation effect on China’s progress in the elimination of poverty.
If we compare the all indices which are used in EFI we can have a clear idea
about India and China in year 2007. (Figure 2.)
 Economic Freedom Index
2007

100

90

80

70

60
Value

50

40

30

20

10

Monetary Freedom

Financial Freedom
Business Freedom

Trade Freedom

Labor Freedom
Fiscal Freedom

Property Rights
Freedom from

Freedom from
Investment
Economic
Freedom

Government

Freedom

Corruption
Indices

India China

(Figure 2.)
The figure shows the economic freedoms are almost similar in both economies,
the mark able difference exist in property rights. India has better property rights than in
China. But it does not reflect the implications on standard of living, rather more freedom
in property rights may lead to marginalization of poor, which is very much possible in a
country like India. Well defined property right is an important issue in order to check the
inequality in income and living standard.
Labour is another important factor for both economies due to their large
population base. As Marx has said “In every country there is a certain average intensity of
labour below which the labour for the production of a commodity requires more than the
socially necessary time, and therefore does not reckon as labour of normal quality.”2
Labour is important factor for not only production but also it has larger social
implications. The absence of stringent labour laws in India has enable investors to access
cheaper labour; however Index shows better labour freedom in China than in India.
Contrary to the index figure China has slightly more unemployment compare to India.
Both have plentiful supplies of underutilized labor, though India faces greater challenges
of raising educational attainment.
But there are larger issues on labour. Indian governments have encouraged service sector
without proper attention of manufacture and while doing this, infrastructure and
education were ignored.
The growth prospects for both depend upon continued integration with global
economy, including trade in goods and services, and investment flows. India in particular
will need to broaden its trade beyond the current emphasis on services.3
The economic freedom has generated faster economic growth in both economies,
which in tern has provided more employment and directly contributed to income of
individual. With the large population base both economies have advanced in terms of
economic growth and GDP. EFI has captured this factor nicely; however, it may not
explain the standard of living in case of India and China, as China having lower rank but
better standard of living. EFI has not included the innovation and knowledge factors
related with Intellectual Property Right (IPR) regime. The monopolization of knowledge
with higher price will distort the balance in future years. Both economies will be having
problems of urban planning, transport systems and environmental management in coming
years which would be as important as economic growth. Thus the inclusion of other non-
economic factors who affect economy directly would make EFI more explanatory.
1
Roy K.C. and J.C.H. Chai (1999) Economic reforms, public transfers and social safety nets for the poor: A study of India
and China; International Journal of Social Economics; 26,1/2/3
2
Marx, Karl ( 1887) Capital Vol. II; Progress Publishers, Moscow, USSR

3
Bosworth, Barry and Susan M. Collins (2007) Accounting for Growth: Comparing China and India; National Bureau of
Economic Research Working Paper No. 12943