This chapter provides a broad analysis of how and why China and India opened themselves to the global economy. It provides a comprehensive review of the various policies and programs that were put in place to facilitate each country's integration into the international economic system. The following pages explore not only the politics behind the policy making and how this has influenced and determined the nature, substance, and depth of the various pro-market policies, but also why and how the various policies and programs have evolved or been revised to meet the changing political and economic circumstances. The chapter shows that whereas China – following Deng's famous maxim, “crossing the river by groping for stones” – gradually and sequentially adapted its reform policies to the fast-changing domestic and global political economy and seized opportunities as they arose, India's liberalization program, literally forced on the country's political elites by a fast hemorrhaging economy, was hastily introduced. After the initial burst, pro-market policies have followed a seemingly meandering path – more a reflection of the contingencies of the country's democratic politics than economic prudence.

Moreover, the chapter sheds insight on the perennial political economy question: why was a certain approach to global economic integration – namely, “gradualism” – privileged over “shock therapy”? Why, unlike the former Soviet Union and its Eastern bloc, did market reforms and global economic integration in China not result in economic and political implosion, but rather political stability and unprecedented economic growth?

The April 2005 visit by Chinese Prime Minister Wen Jiabao and the November 2006 visit by President Hu Jintao to India, as well as the return visit by Indian Prime Minister Manmohan Singh to China in January 2008, mark an unprecedented level of interaction and dialogue between the leadership of China and India and signal a qualitative transformation in Sino-Indian relations. Following the 1962 border war, relations between the two Asian giants became estranged and increasingly acrimonious, with both sides feeling no compunction about conjuring up rather incongruous images of the other. In the shrill postwar atmosphere, each saw the other as a strategic adversary and used various strategies (e.g., China's unconditional support of Pakistan and India's close alliance with the USSR) to undermine the other's perceived designs (Sidhu and Yuan 2003). However, Prime Minister Rajiv Gandhi's (1984–88) historic visit to Beijing in December 1988 (the first such trip by an Indian leader since Jawaharlal Nehru's in 1954), followed by more high-level visits by both countries over the next several years, set in motion the process of rapprochement, the “thawing of relations,” and de-escalation of tensions. In fact, during the signing of the landmark Strategic and Cooperative Partnership for Peace and Prosperity in 2005 both sides effusively described their relations as “warm and friendly.”

The improvement in Sino-Indo relations has also resulted in growing economic linkages between the two countries.

When India gained independence in 1947 following more than two centuries of British colonial rule and the Chinese Communist Party took control of the Chinese mainland in 1949 after a protracted civil war, both were among the poorest nations on earth. In 1951, some 85 percent of China's population out of an estimated 540 million was classified as rural, and in India, more than 90 percent of the total population of approximately 360 million lived in the countryside. Moreover, both countries had roughly the same level of GNP per capita income ($50 for China and $60 for India in 1952 U.S. dollars) and had experienced similar slow and stagnant economic growth rates in the previous half century. Basic standard-of-living indicators such as life expectancy (only thirty-two years in India and forty years for China), infant mortality rates, nutritional and consumption patterns, and access to education, health care, and social services were also extremely poor to nonexistent. In such impoverished environments, infectious diseases such as malaria, cholera, smallpox, leprosy, and dysentery were rampant, and frequent epidemics and famine took their deadly toll on weak and vulnerable populations (Maddison 2003; Sachs 2005, chaps. 8–9; Sen 1982; World Bank 1983). In sum, both nations faced formidable challenges to economic development and nation-building. The following sections discuss the paths each country followed to achieve its developmental goals and assesses the outcomes, legacies, and political and socioeconomic implications.

Over the past three decades, the Chinese economy has gradually but irrevocably moved away from central planning to a greater reliance on markets. Over this period, it has been the fastest growing economy in the world with real gross GDP growth rates averaging 9.5 percent per year during 1980–2004 and over 9 percent since 2005. Endowed with a GDP of $1.65 trillion, China is now the fourth largest economy in the world. If, as expected, China maintains its current growth trajectory it will become the world's largest economy by 2025, if not earlier (Organisation for Economic Co-operation and Development [OECD] 2005). Moreover, as Table 3.1 illustrates, the Chinese economy has undergone significant structural changes. The primary sector (agriculture, forestry, and fishing) has declined as a share of GDP, and the share in GDP of the secondary sector (comprising manufacturing and construction) contracted in the early 1990s as a result of the restructuring of the state-owned enterprises (SOEs) but has since recovered to about the same share in 2005 (47.5 percent) as in 1980 (48.2 percent). The tertiary sector covering service industries has dramatically expanded from 21.9 percent in 1980 to almost 40 percent in 2005.

The aim of this chapter is twofold: first, to elaborate some of the issues discussed in the preceding chapters – namely, how the reforms of the past three decades have affected China's political economy by delineating the outcomes (both the successes as well as the contradictions) and the socioeconomic and political implications of the reforms.

Throughout much of her long history, China was the dominant power in Asia to which surrounding states paid homage and tribute. The Middle Kingdom saw itself as the center of progress, propriety, and righteousness – a bulwark against the uncivilized barbarity on its periphery. The collapse of the Soviet Union eliminated the major land-based threat to China, and its economic rise has enabled it once again to regain its earlier power and glory. Today, China's global influence and leverage rivals only the lone superpower – the United States. For the international community, and especially China's neighbors, the rise of a potentially Sinocentric world has prompted them to rethink and readjust their relations with Beijing by taking into account its interests and concerns in their foreign policies and diplomacy. Although some hope that China will play a greater role in world affairs (at least to balance the American “hyperpower”), most remain ambivalent – uncertain as to what China's emergence means to them and its implications for global stability and security.

Arguably, nowhere is this ambivalence more pronounced than in the United States. Although the United States remains the world's most powerful state, it also knows that its power and influence are neither limitless nor uncontested. To the United States, if there is a “peer competitor” on the horizon, it is China. Indeed, China's ambitious military modernization is fast transforming the country into a formidable power and a genuine strategic competitor to the United States.

To a generation of India's leaders, their country's economic backwardness and grinding poverty was not only a source of enormous embarrassment, it also stood as an obstacle to the international prestige and respect that they craved and believed was India's natural geopolitical destiny. India's unprecedented economic rise has finally made this dream a possibility. Its leaders realize that after decades of tireless effort to overcome the long history of thwarted ambitions, power and prestige are now tantalizingly within the country's reach. Slowly but surely, India is finally acquiring the capability to influence developments – not only in the South Asian region but throughout the world.

This chapter provides an assessment of the economic and geostrategic implications for the United States of India's rise. It examines the evolving relations between the two countries over the past six decades, highlighting the twists and turns in a complex relationship. In the post–Cold War period, the relations between the world's most powerful democracy and the world's largest democracy have improved dramatically, leading some to conclude that Indo-U.S. relations have finally moved from “estrangement to engagement,” and others to suggest blissfully the flowering of a “beautiful friendship” (Ganguly, Shoup, and Scobell 2006; Kux 1992).Yet this chapter argues that although there is currently strong convergence of American and Indian interests on a number of economic and security areas, including the promotion of democracy and countering terrorism and extremism, Indo-U.S. relations will not be without friction.

In April 2008, the World Bank issued a public statement warning that skyrocketing food and fuel prices were threatening recent hard-won gains in overcoming poverty and malnutrition throughout the world. More ominously, it warned that the sharp increases in global prices (overall global food prices increased by 83 percent over the 36 months leading up to February 2008) are expected to remain high throughout 2008–9, and likely remain well above the 2004 levels through 2015, for most food crops. While China and India have not experienced the large-scale and often violent protest and riots over rising food prices that have hit several countries, including Bangladesh, Mexico, Zimbabwe, Egypt, Haiti, Indonesia, Cameroon, Peru, Somalia, Guinea, Mauritania, Morocco, Senegal, Uzbekistan, Yemen, and Argentina, there is palpable worry that the current rise in consumer inflation (which is close to 8 percent in India and slightly higher in China) has the potential to reverse dramatically the gains in poverty reduction in both countries. This is a particularly worrisome concern for India because one in every four Indians lives on less than $1 a day, and three in four earn $2 or less. This is because food price inflation is the most regressive of all taxes – it hurts the poor the most because food accounts for a relatively high proportion of their expenses.

It is hard to miss the mood of optimism in contemporary India. Celebrating its sixtieth year of independence, the country's political and business leaders can hardly contain themselves, trumpeting India's economic achievements and its rise to global prominence. If in an earlier time India was patronizingly dismissed as “the country of the future,” forever poised for a dramatic takeoff but never quite accomplishing it, today its representatives, like effervescent Commerce and Industry Minister Kamal Nath, confidently proclaim that “we no longer discuss the future of India. The future is India.” No doubt, India has shed its image as a land of grinding poverty, starving children, sacred cows, and wandering holy men. Now media stories are about its legions of “techies,” savvy entrepreneurs, brand-name multinationals moving or outsourcing their operations to Bangalore, the ever-growing ranks of Indian business tycoons adding to their global portfolios, and the extravagant Bollywood movies. When the Indian industrial conglomerate Tata (with ninety-eight companies spanning a variety of industries) recently took over Corus, a major Belgian steel firm for US$11 billion, and Mittal Steel merged with Arcelor, making Arcelor Mittal the largest steel maker in the world; when the Indian conglomerate Aditya Birla Group purchased the American firm Novelis, the world's leading manufacturer of aluminum products; and, last but not least, when on 26 March 2008, Tata Motors of the Tata Group paid US$2.3 billion for Ford Motor Companies Jaguar and Land Rover brands, they were widely celebrated as conquering heroes – symbols of the “new India” finally taking their rightful place in the world.