Comparative Economic Systems: China, India, and Iran

Econ 372

Dr. Khorassani

Qi Li, Yihe Li

Agenda

Backgrounds of China, India, and Iran Compare and classify the three economic

systems based on six criterions Evaluate their economies based upon nine

criterions Future prediction Policies recommendation

Backgrounds China

• Area: 9,640,821 km²• Population: 1,336,718,015• Political system: People’s republic

India• Area: 3,287,263 km²• Population: 1,210,193,422• Political system: Republic

Iran• Area: 1,648,195 km²• Population: 76,923,300• Political system: Islamic republic

Classification based upon the six institutional frameworks

Allocation Mechanism Forms of ownership of land and capital Role of planning Types of incentives Income redistribution Role of politics

1st Criterion: Allocation Mechanism China

• Mostly command - China is an old socialist country• Some market - In the past 30 years they developed the market socialism

India• Some market

- 20th century, India set free market principles as the foundation of economic

system• Some traditional - Hindu Religion and caste system

Iran• Some traditional → Islam• Some command• Some market

2nd Criterion: Forms of Ownership of Land and Capital China

• Socialism - Socialist market economy with Chinese characteristics

India• Capitalism - State capitalism which has both private and government

operations within the market mechanism

Iran• Socialism and Capitalism - A system where the productive forces are owned and run by state

in a capitalist way

3rd Criterion: Role of Planning China

• Planned market economy, central planning - socialist market economy with Chinese characteristics

- a long gradual process to shift to pure market economy

India• Planned market economy, indicative planning - is both centralized and localized by influences of British and

Soviet-Union

Iran• Planned market economy, indicative planning - Iran used to be centrally planned, relying heavily on five-year plans

- indicative planning → goal of economic liberalization and inflation-

fighting

4th Criterion: Types of Incentives Moral or Material China: Both India: Both Iran: Both

• Material (investment) The goal of investment is to gain profit, the higher the investment as the percentage of GDP, the more material incentives involved in the economy China: 41%

India: 31% Iran: 34%

• Moral (religious participation) China: 4% to 6%

India: 99.9% Iran: 100%

Great Proletarian Cultural Revolution(1966-1976), Mao asserted the slogan “Serve the people” to encourage people to work in the village to solve the food shortage on China

40% of Chinese labors are working in agriculture now.

5th Criterion: Income Redistribution

Taxes rate• China• highest marginal tax rate of individuals: 45%(highest)• highest marginal tax rate of corporations: 31.4%(lowest)

• India• highest marginal tax rate of individuals: 30%(lowest)• highest marginal tax rate of corporations: 35%(highest)

• Iran• highest marginal tax rate of individuals: 35%• highest marginal tax rate of corporations: 33.7%

• China has the highest individual tax rate but the lowest corporative tax rate.• India has the highest corporative tax rate but the lowest individual tax rate.

6th Criterion: Role of Politics Government expenditures(% of GDP) China: 11%

India: 16%

Iran: 21%

The country with higher government spending means the

government plays a more important role in the economy.

Rankings:

-Iran

-India

-China

EVALUATING THE ECONOMIES BASED UPON

THE 9 CRITERIONS

The Level of Output

Iran had the highest GDP per capital during 2000 to 2008. Iran maintained positive growth before 2009.

China still kept an increasing GDP per capital in 2009.

India has seen limited growth in GDP per capita in the long run.

GDP Growth in Output

China kept the highest growth from 2000 to 2009. Iran had a unsable GDP per capital growth among these countries. In 2007, all 3 countries saw significant declines. But India recovered in

2008.

Why India could rebuilt economic situation in 2008?• well-suited economic revolutions and good policies• more liberty of business regulations

Composition of Output(Percentage of GDP Expenditures)

Country Agriculture

(1997-2007)

Military

(1997-2007)

Health

(1995-2006)

Imports

(1998-2007)

Exports

(1997-2007)

China 14.22 1.943 4.408 25.09 28.56

Iran 12.7 3.123 6.117 21.17 25.11

India 21.82 2.832 4.500 17.83 15.47

Source: Gapminder.org

Composition of Output(Percentage of GDP Expenditures) Agriculture

• India contributes a significant amount to Indian GDP expenditures. (second worldwide in farm output)

Military• Iran and India had similar percentage on military, which were higher

than China.• The Chinese government’s published military budget is USD 77.95

billion in 2010 . (second largest in the world)

Health• Compared to China and India, Iran had the higher % of GDP

expenditure on health care programs.

Inport/Export• China is the highest % of GDP expenditure in import and export

Degree of Static Efficiency Efficiency in production

• We can’t produce more of one thing without having to produce less of another thing.

• Production efficiency → operating on PPF

• China has a relatively flat unemployment rate, fot the labor-intensive sector.

Degree of Static Efficiency• In Iran, unemployment is especially common among the youth and

women. - female unemployment rate is twice that of men

- high unemployment rate cause drug addiction and deep rifts

in family• In India, the unemployment can be identified by a chronic

characteristic. - poverty

- huge population

Efficiency in consumption• No one can be better off without making someone else worse off.• Economic Freedom Index

(later in the 9th criterion)

Degree of Dynamic Efficiency

China: 4% India: 5.5% Iran: 15.3%

Macroeconomic Stability GDP per capita growth

Rankings: China

India

Iran Exchange rate

Related to net export? Why?

Macroeconomic Stability

Example

- After Chinese RMB appreciated, the price of Chinese goods in other countries would be more expansive than before, the demand of Chinese goods decrease.

- China exports less, X ↓

- Foreign goods in China become cheaper than before, the demand of foreign goods increase

- China imports more, M ↑

- Net export = X – M

Economic Security of the Individual

Infant mortality per 1,000 new births China: 24 India: 47 Iran: 41 Physicians per 100,000 people China:142

India:60 Iran:89

We can see the negative relationship between the Infant mortality rate and Physicians number.

Infant mortality rate(per every 1000 new births)

15

20

25

30

35

40

45

50

55

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Years China

India

Iran

Degree of Income or Wealth Equality Gini index (100=perfect inequality, 0=perfect equality) China: 41.5

India: 38.3

Iran: 36.8 Poverty rate China: 15.9%

India: 41.6%

Iran: 2%

Iran has the lowest in both Gini index and poverty rate

Degree of Economic Freedom Economic freedom index

Rankings: India

China

Iran

India and China are both members of WTO. That may cause the higher economic freedom in these two countries.

Future Prediction China

• The increase of GDP growth rate will be slowed down since the

appreciation of RMB.

• Inflation rate will increase

- High growth rate in GDP

- The reduction of government involvement in economy to help the

transition of market economy.

• Income distribution will be more unequal

- productivity matters

- cost minimum

• Increase in degree of economic freedom

Future Prediction

India• The population growth rate will decrease• GDP per capita growth rate would be higher than

the current level• Software production and automobile manufactory

will lead the economy to grow at a higher rate• Inflation rate goes up since the high GDP growth

rate

Future Prediction Iran

• Increase in net export

- World’s economy is recovering from the economic crisis, the demand of oil will increase

• GDP growth rate goes up in short run• GDP growth will go back to a very stable rate in

long run

Recommended Policies

China• Improve the economic freedom

- Reduce the international trade barriers

• Stabilize the exchange rate

• Work on the income equality- Lower the poverty rate

Recommended Policies

India• Control the birth rate

- Could learn from China’s “One Child Policy”

Encouragement instead of command

• Increase economic security of individual

- Increase the total number of physicians to reduce the infant mortality rate

• Lower the poverty rate

Recommended Policies

Iran• Improve the economic freedom

- reduce the government involvement in the economy

• Reduce the unemployment rate- Plan of re-employment in China

this plan includes financial rewards--such as tax reduction and loan guarantees to companies who hired unemployed workers