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Why the Dragon and the Elephant Diverged: State Capability, Structural Transformation & Inclusive Development in China and India

Author

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  • Mehrotra, Santosh

    (Higher School of Economics)

Abstract

China and India embarked on planned development at roughly the same time and had comparable per capita incomes about four decades ago. Yet they have since diverged sharply in economic growth, human development and inequality. This paper examines the sources of that divergence. It first analyses the contrasting trajectories of agricultural growth. Following agrarian reforms after 1980, China sustained much faster agricultural growth, strengthening rural incomes and domestic demand. India's agrarian transformation remained incomplete, with lasting consequences for growth and structural change. The paper then argues that deeper institutional differences explain the widening gap. It examines divergences in governance, state capability and administrative capacity, investment in education, and growth strategies, particularly the extent to which growth generated productive employment. These factors shaped both the pace and inclusiveness of development. The paper concludes by showing how differences in agricultural transformation, state capability, human capital formation and employment-intensive growth contributed to the contrasting trajectories of inequality in the two countries.

Suggested Citation

  • Mehrotra, Santosh, 2026. "Why the Dragon and the Elephant Diverged: State Capability, Structural Transformation & Inclusive Development in China and India," IZA Discussion Papers 18779, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18779
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    References listed on IDEAS

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    1. Jin, Jing & Zou, Heng-fu, 2005. "Fiscal decentralization, revenue and expenditure assignments, and growth in China," Journal of Asian Economics, Elsevier, vol. 16(6), pages 1047-1064, December.
    2. Gradín, Carlos & Wu, Binbin, 2020. "Income and consumption inequality in China: A comparative approach with India," China Economic Review, Elsevier, vol. 62(C).
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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