Industrialisation and development in china

The recent economic changes in China and India have drawn widespread attention for two major reasons. First, these to large economies have demonstrated that market-oriented reforms can trigger both durable industrial growth as well as foster economic development (Saha, 2006). At the same time, they have also demonstrated how to market regulations affecting labor and labor relations can play an important role in determining the economic performance of the economy. As will be noted in this discussion, major labor reforms and market incentives adopted by China in the past have led to the creation of a free labor market. As Saha (2006) explains this has been one of the key drivers of rapid industrialization and economic growth and development in this country. Similarly, India has numerous labor laws that affect labor conditions in the country. However, unlike in China, India has been stuck to various labor laws and regulations that are rigid and overtaken by time and which pose barriers to effective restructuring (Sen et al, 2010). The inflexible laws and regulations act as a stumbling block to industrialization and economic development. This essay makes a comparison assessment of labor structure and labor relations in China and India. It also explains the effects of laws and regulations affecting labor structure and labor relations on industrialization and economic development in the two countries. To understand this better, it will be prudent to understand the background of labor reforms in both China and India.

Background of labor reforms in China and India                  

Before 1970, both China and India engaged in gigantic planning and large-scale public investment which gave a head start to industrialization and economic development in the two countries (Saha, 2006). In China, there were large-scale and small-scale state-owned enterprises that were managed and controlled by the central authority as well as small enterprises that were privately-owned. Together, they helped to create a strong base for industrial growth and economic development. In India, there were numerous large-scale state-owned enterprises which were fully controlled by the government. There were no small-scale state-owned enterprises but there were widespread small-scale privately-owned enterprises. The early phase of planning in the 1960s led India to become more industrialized than many nations in East Asia.

According to Saha (2006), both China and India recorded an average annual growth of 5.4% and 11.2% respectively during 1960-70. However, these countries financed their poor closed economies by taxing agriculture, both directly and indirectly. The Indian government, for instance, controlled the movement of agricultural products, ensured that they were sold at low prices in urban areas and restricted exports, in order to support industrialization. Though the industrial sector received much protection from external protection, the agricultural sector continued to deteriorate due to coercion and lack of attention. China too followed the same path by controlling the movement of agricultural products. Yueh (2004) explained that “food grains in China were surrendered to authority in the form of targets and quotas. Farmers were transformed into commune employees, and placed under the control of party officials.” However, the ill effects of this command-and-control economy began to be evident in China during the same period (Saha, 2006). This transformed into high levels of inefficiency, distorted incentives, lack of employment security in both the agricultural and industrial sector, deficient in food production and lack of market system.

Driven by this backdrop, (Saha, 2006) explains that China launched “agricultural reform in 1978 by leasing out commune lands to individual farmers on a private basis.”  This step was successful and agricultural output increased by 64 percent between 1978 and 1984. Similar reforms were adopted in State-owned –enterprises. These were followed by deep wage and managerial reforms as well as privatization of all small-scale enterprises. Improved agricultural production led to higher agricultural income, increased savings and improvement in the performance of overall ec0onomy. It also provided a breeding ground for small and medium-scale private entrepreneurship and increased employment security (Saha, 2006).  Generally, Chinese reforms were concentrated on adding market incentives and reforming labor laws and regulations.

India took a different path from China. Rather than adding incentives or reforming labor laws and regulations, the state-owned enterprises in India increased employment in the 1970s. Consequently, the ailing agricultural sector in India worsened due to increased inefficiencies in production. This situation worsened further after the Indian government passed labor laws in 1976 and 1982 which saw large firms lose the right to fire or lay off employees or even close down.  Industrial De-regulation in India started during the late 1980s after the government realized the adverse impact of the past policies (Saha, 2006). Foreign investment was also welcomed, though selectively. As a result of these reforms, India recorded a rise in real GDP per capita by 5.67 percent. In 1991, some of the physical regulations on industries that existed were removed and the Indian economy continued to perform much better. However, as Sen et al (2010) noted there have been limited reforms carried out on labor laws and regulations in India and the Indian economy is still thriving under the rigid labor laws introduced during the planning stage. The reforms carried out in India were meant to improve efficiency in the allocation of production recourses and foster competition. Though this move led to an improvement in the performance of the economy, the benefits are basically unsustainable without reforming the rigid labor laws. Therefore, though the Indian economy has been improving, the rigid labor laws and regulations have been an obstacle to rapid industrialization and economic development (Sen et al, 2010).

Labour Reforms in China

Unlike in most countries in East Asia, China has been cautious and adaptive while introducing reforms that affect local industries. As Sen et al (2010) explain, Chinese reforms concentrated more on labor market than on other areas. During the period of planning, the Chinese government ensured that workers enjoyed complete employment security in all sectors. For instance, large industries and small enterprises were required to create room for new employees regardless of their needs. Further, employees could not move from one town or city to another before they could secure a resident there. Several reforms followed later between 1984 and 1994. The first was the wage reform was carried out in 1985 which required all industries as well as small enterprises to link their wage budget with performance (Davis, 1999). This motivated workers and eventually led to an improvement in the performance of most industries. Another reform that was carried out in 1992 gave enterprises permission to set their own wage structure but stick to the wage budget limit set by the government (Davis 1999). Later in 1994, the state-owned enterprises that were publicly-listed were allowed to set their internal wage structure, subject to some restrictions. Other reforms made between 1996 and 2000 led to simplification of wage structure to link every worker’s performance with their wages (Sundar, 2004)

Chinese government also introduced reforms that led to free mobility of workers. Davis (1999) noted that, prior to 1988, local and regional bureaucrats used to assign employees to organizations without their choice, just like physical inputs of production. However, important declarations made between 1988 and 1992 led to dismantling of the bureaucratic system of allocation and workers started to find their jobs freely. Various labour laws which govern labour and labour relations in China today were introduced. The Regulations on Private Enterprises, 1988 permits private ownership of businesses (Sundar, 2004). Trade Unions Act, 1992 (Amended in 2001) gives workers the right to form trade unions.  Labour Act, 1994 introduced the concept of labour as a contract between employer and workers. It therefore gave employers the right to freely hire and fire employees but on reasonable grounds. Various grounds were also defined under which employer can breach an employment contract, such as financial distress. Regulations on Collective Contracts, 2004 further defines the nature of employment contracts (Saha, 2006). It states that the nature and terms of employment contracts should be determined through bargaining. Generally, though there have been mass lay-off s and unemployment in China, cases of industrial disputes have been minimal (Saha, 2006). Though this has often been attributed to the Chinese Communist Party that has highly been able to manage and control public reactions, the labour reforms have played a great part.

Labour laws in India

As mentioned earlier, most of the reforms carried out in India have focussed on trade and industrial policies, with very minimal change focussing on labour laws and regulations. The Factories Act, 1948 is the major Act that is used to define industrial workers and factories in India (Planning Commission of India, 2007). Thus, the reforms that have been made to this Act in the past have concentrated on the factory part. There are other laws that regulate labour relations apart from the Factories Act, 1948. One of these is the Industrial Employment (Standing Orders) Act, 1946 which requires an employer to explain to an employee his or her status in relation to conditions of employment in most precise terms (Planning Commission of India (2007). These include conditions related to recruitment, confirmation, discharge, misconduct, leave, disciplinary action and holiday. This Act applies to all business enterprises in India employing more than 50 workers (Planning Commission of India, 2007). On top of that, this legislation defines severance pay that should be granted to employees.

Trade Union Act, 1926 on the other hand recognizes the freedom of employees of association, to express their interests among themselves and to their employers, to express grievances when dissatisfied and to engage in collective bargaining (Planning Commission of India, 2007).. This legislation allows a minimum of seven individuals to form a union, which can be formed both at factory or industry level. Notably, this legislation protects office bearers and members of unions from criminal and civil suits that are related to trade union activities. As Sen et al (2010) noted, this is one of the legislations that have been in existence since colonial period and only minimal changes have been made on in light of the changed circumstances. The Industrial Disputes Act, 1947 is concerned with disputes related to terms and conditions of work or matters related to wage (Planning Commission of India, 2007). The aim of this legislation is to create a legal framework to help in solving industrial disputes peacefully. It permits layoffs when terms of employment are contractual or on medical or disciplinary grounds. However, under the act, all business enterprises employing 100 or more workers are required to seek permission from the government before retrenching or laying off any worker or closing down the business. Any employer who violates this requirement may be seriously penalized and the workers laid off reinstated. The major problem with this Act is that on top of being too restrictive, the government has been too conservative in granting permissions to lay-off or retrench. A good example is the case of 1997 when the Indian government received 60 applications for retrenchment, layoff and closure, but only six cases were granted permissions (Sen et al, 2010). This has been a major hindrance for effective restructuring of loss-making business enterprises. Most remarkably, such legislations have negatively affected economic performance in India. Sen et al (2010) noted that as a result of divergence and complexity nature of labour legislations, disputes have plagued Indian industry since the planning period. The laws have established an elaborate procedure for dispute resolution but the system itself has been quite inefficient.

Impact of Laws on Industrialization and Economic development in China and India

As mentioned earlier, the rigid labour laws and excessive regulations put a stumbling block to the process of industrialization and economic development in India. First, as Boeri et al (2008) noted, they create a perception of lack of flexibility among investors. This leads to greater cost of employment, which induces investors to employ few workers or to shy away completely. Ironically, the few of the recent changes carried out in labour laws and regulations in India tend to substitute these laws for social security programs (Boeri et al, 2008). This tends to push welfare burden on to employers. Investors tend to shy away due to the increased cost of employment and hence, the burden comes back in form of the lower employment rate and the foregone tax. This translates to lower aggregate income as well as lower rate of industrialization and economic development.

To understand the impact of flexibility and rigidity further, it is vital to examine two of the various ways in which flexibility brings about benefits in an economy; ‘low road’ and ‘high road’ to restructuring (Bamber and Lansbury, 2001) Firms apply the ‘low road’ by organizing labour in the least cost way. This is achieved through employment of cheap labour with little or no emphasis on skills accumulation. On the other hand, the ‘high road’ to restructuring implies that employers rely on the skills of workers to compete effectively in the market. Usually, this kind of investment on human capital induces employees to be loyal to their employers and prevents opportunistic behaviour. This translates into worker’s satisfaction, motivation and high productivity among workers, which benefits them and leads firms to realize higher profits (Bamber and Lansbury, 2001). Generally, flexibility leads to increased productivity among individual firms and in the overall economy, which is a key incentive to industrialization and economic development (Besley & Burgess, 2004). This also explains the cause of lower rate of industrialization and economic development in India as compared to China.

Despite the fact that both of these nations embraced reforms for similar reasons, they chose different patterns. As mentioned earlier, China responded by creating free labour markets and various market-oriented incentives. These moves, among others, helped to attract foreign investors. Foreign investors brought with them new technology, which was necessary for industrialization entrepreneurship. According to Srivastava (2005), flexibility also allowed the foreign investors to cut input costs by attracting cheap labour with freedom to hire and fire. This enabled the investors to employ workers on a large-scale, to increase productivity and to realize a lot of profits. Therefore, industrialization and economic growth and development in china have largely been driven by availability of semi-skilled workers as well as favourable climate for investment that has attracted a steady flow of foreign investors. One of the disadvantages of incentives and flexibility is that they tend to widen income differentials (Srivastava, 2005). As noted earlier, reforms removed distributive mechanisms that guided employment contracts. As a result, employees, especially in private firms suffered from discrimination and exploitation. In spite of this, overall production increased manifold.



In conclusion, the labour structure and labour relations has a huge impact on industrialization and development of any economy. As noted in this discussion, labour laws regulations adopted in any country affects labour structure as well as labour relations. In turn, labour structure and labour relations determines the willingness of both local and foreign investors to invest in any country. An economy that is driven by flexible labour laws and regulations, such as that of China encourages local investors to invest more and as well, attracts foreign investors. This brings about various benefits to an economy, including increased productivity and introduction of new technology. Therefore, flexibility is essential for industrialization and economic development, as demonstrated by Chinese case. In contrast, rigid labour laws and regulations make investors to shy away and thus, leads to lower productivity in the long-run. Facing away foreign investors makes it more difficult to acquire or to import the latest technology in an economy. This explains the fact that the rate of industrialization and economic development has been higher in China than in India.








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