Cambridge Journal of Regions, Economy and Society 2011, 4, 2948

doi:10.1093/cjres/rsq013
Advance Access publication 10 May 2010

India, China and the East Asian Miracle: a human capital

development path to high growth rates and declining
inequalities

Downloaded from http://cjres.oxfordjournals.org/ at University of Iowa Libraries/Serials Acquisitions on June 6, 2015

Aurelie Charlesa, Giuseppe Fontanaa,b and Abhinav Srivastavac
a
Department of Economics, Leeds University Business School, University of Leeds, Leeds LS2
9JT, UK, A.Charles@lubs.leeds.ac.uk, gf@lubs.leeds.ac.uk
b
University of Sannio, Italy
c
ItalyEuropa Statistics India, Taylor and Francis Books India Pvt Ltd, 812-816 Tolstoy House,
1517 Tolstoy Marg, New Delhi 110001, India, abhinav_223@hotmail.com

Received on January 6, 2010; accepted on March 25, 2010

The High-Performing Asian Economies (HPAEs) have been unusually successful compared to
large parts of Asia (including India), Africa and Latin America at matching high growth rates
with significantly declining income inequalities. This paper looks at India and the HPAEs from
a human capital development perspective, and it seeks to explain the reasons for the possible
causes of these different patterns of growth rates and income inequalities. The paper proposes
a new Human Capital Index, and argues that the notion of fair wage is the key factor linking
human capital development to high growth rates and declining inequalities.

Keywords: Human capital, inequality, fair wage, East Asian Miracle, India, China
JEL Classifications: O10, O15, O53

Introduction Interestingly, between the middle 1960s and

The four tigers, namely Hong Kong, the
Republic of Korea, Singapore and Taiwan, to-
gether with Japan, China, Indonesia, Malaysia
and Thailand are well-known for the successful
economic performances between middle 1960s
and middle 1990s. Less known is that in the
same period, these High-Performing Asian
Economies (HPAEs) have been also successful
at matching high growth rates with significantly
declining income inequalities. Indeed, the com-
bination of high growth rates and declining
income inequalities has persuaded some com-
mentators to speak of an East Asian Miracle
(World Bank, 1993).
middle 1990s, there was very little growth for large
parts of Asia, Africa and Latin America. This stark
contrast between the high growth rate plus declin-
ing income inequalities of the HPAEs on one side,
and the low growth rate plus stable (or rising) in-
come inequalities for large parts of Asia, Africa and
Latin America on the other side, has created an in-
teresting debate about the possible causes of these
different economic performances. Some scholars
have argued that the East Asian Miracle of
HPAEs is explained by the existence of regional
strengths involving government intervention act-
ing together (Stiglitz, 1996, 151). Yet, this view
fails to explain why countries like India and

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Charles, Fontana and Srivastava
Philippines did not record impressive growth rates
and declining inequalities, in spite of sharing the
same geographical proximity to some HPAEs.
Other scholars have maintained that the successful
performance of HPAEs is explained by the adop-
tion of laissez-faire and free market policies pro-
moted through the Washington Consensus. Yet
again, the evidence is controversial. India has a large
and dominant public sector. But this is also the case
for Korea and China, two successful HPAEs. More
generally, most HPAEs are characterized by some
form of State intervention.1
This paper looks at the East Asian Miracle from
a totally different perspective, that of human capital
development (Fontana and Srivastava, 2009). It
argues that the latter is a major factor in explaining
both the high growth rates and declining income
inequalities experienced by HPAEs as well as the
comparatively poor economic and human develop-
ment performance of India since middle 1960s.
Building on this, it then suggests that fair wages
are a significant cause of these different human
capital development performances, via the
workers-channel and the employers-channel. Finally, access to resources is represented by the
The paper is structured as follows. The next sec-
tion proposes a new Human Capital Index (HCI) in
order to measure human capital in India and HPAEs.
The paper moves on to argue that the notion of fair
wage is a key factor linking human capital develop-
ment to high growth rates and declining inequalities.
This idea is then used to explain the different eco-
nomic performances of a component of the industry
sector, namely manufacturing, in China and India.
Finally, the final section concludes.
The construction of the Human
Capital Index
In the 1980s, the dominant view was that Gross
Domestic Product (GDP) per capita was the most
important indicator of the welfare of a nation. How-
ever, the last two decades have witnessed a growing
theoretical and empirical literature that has chal-
lenged this view, and has suggested the multi-
dimensional aspects of well-being (Streeten, 1994;
UNDP, 2003). On one side, the focus on aggregate
30
income and the total supply of goods and services at
the expense of the entitlements of people, and the
capabilities that these entitlements generate, has
been increasingly seen as one of the most important
deficiencies of traditional measures of human wel-
fare (Sen, 1984, 1990). On the other side, the past
decades have seen a significant increase in the
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availability of statistics measuring the different eco-
nomic and social aspects of the welfare of a nation
(Booysen, 2002).
The Human Development Index (HDI) by the
United Nations Development Programme (UNDP)
is since 1990 one of the most successful attempts of
moving beyond traditional measure of well-being.
The HDI is a composite index that expressly aims to
measure the multi-dimensional aspects of the wel-
fare of a nation. It is made of three components:
longevity, knowledge and access to resources. The
first component is directly measured by Life Expec-
tancy at birth (LE). Education achievement is con-
sidered a proxy measure for knowledge, and it is
calculated as weighted sum of Adult Literacy Rate
(ALR) (2/3) and level gross enrolment ratios (1/3).
real per capita GDP.
The HDI has been criticized on several grounds,
including the formal measure of access to resources
used, the sensitivity of the index to the selected
fixed ranges for its longevity and knowledge com-
ponents, as well as the subjective weight assigned
to its components, which implies a universally ac-
ceptable human welfare function (Noorbakhsh,
1998). These are general criticisms, which apply
to several other composite indices of well-being
(Salzman, 2003). More specific criticisms refer to
the fact that the knowledge and education compo-
nents of the HDI are unnecessarily restrictive. For
instance, the knowledge achievement variable con-
siders neither the quality nor the accessibility of the
health system. The HCI proposed in this section is
an attempt to overcome these specific criticisms.
The HCI is comprised of three components:
health achievement, education achievement and
per capita GDP. It is calculated for India and three
HPAEs, China, the Republic of Korea and Malay-
sia; however, where data are available, indices for

components of HCI are presented for additional
HPAEs. All data used for constructing the HCI
are obtained from the World Bank (2009), World
Development Indicators, though some data on
Korea have been obtained from the statistics pub-
lished by the Ministry of Education, Seoul. Finally,
Linear Scaling Technique (LST) has been used in
order to standardize the range of raw data available
into a unit-free index between 0 and 1. The implicit
assumption in the LST used is that an increase in the
variable corresponds to an increase in the overall
welfare. Therefore, the following formula has been
used:
x
minx
; effects on the health of the woman and her off-
maxx
minx
where min (x) and max (x) are the lowest and high-
est values the variable x can attain. As a reference,
for the highest and lowest values, corresponding
statistics of Norway and Sweden (countries that
have consistently dominated the HDI charts) and
Yemen and Sierra-Leone and Lesotho (countries
that have performed poorly) have been considered,
respectively. In some cases where the figures for
these countries are not indicative, that is, in cases
where Norway and Sweden have not done well in
a particular area, or Lesotho has performed rather
well on some statistics, the values for other coun-
tries have been used. This is done in order to form
realistic limits (i.e. from actual country evidence),
within which a variable can fluctuate.
The Health Index
The health achievement component of the HCI is an
extensive index. It takes into account a wide range
of factors influencing not only the general health of
individuals but also, among other things, the afford-
ability and accessibility of the health system. Six
variables are considered in the Health Index (HI) of
the HCI, namely, (i) the Fertility Rate (FR), (ii) the
LE, (iii) the Infant Mortality Rate (IMR), (iv) the
number of Physicians (P) per thousand of popula-
tion, (v) the number of hospital beds (Ho) per thou-
sand of population and (vi) public health
expenditure as a percent of GDP (PHE). Ideally,
India, China and the East Asian Miracle
also the ratio of the total population having
access to improved sanitation facilities, and being
immunized against diphtheriapertussistetanus,
measles, malaria and other illnesses, should be in-
cluded in the HI. However, due to inadequate data,
this information is not considered in the construc-
tion of the HI.
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1) The Fertility Rate Index (FI) is a measure of the
total FR, namely the expected number of chil-
dren born per woman in her child-bearing years.
Most countries strive to maintain FR at the re-
placement level, the implicit assumption being
that FRs above replacement levels have negative
spring. The FR is also indicative of the status of
women in the society: high rates are associated
with poor fertility controls, and low status of
women in the society. For this reason, the oppo-
site of the FI, namely (1 FI), is used when
calculating the overall HI.
According to the Central Intelligence Agency
(CIA), Hong Kong and Mali have the lowest and
the highest FR in the world, namely 0.98 and 7.38,
respectively (CIA, 2007). Therefore, the FI is given
by the following formula:
FR
0:98
FI = :
7:38
0:98
2) LE is a conventional statistics measuring the
potential return on investment in human capital.
The UNDP assumes the maximum and mini-
mum values of LE to be 85 and 25 years, re-
spectively. The same limits are used in
constructing the overall HI. Thus, the Life Ex-
pectancy at birth Index (LEI) is given by the
following formula:
LE
25
LEI = :
85
25
3) The IMR is another conventional statistics mea-
suring the level of health in a country. It denotes
31
Charles, Fontana and Srivastava
the number of deaths of infants (under the age of
one) per thousand live births: this is a significant
loss of human capital, since these infants die
before they can grow to make any meaningful
contribution to the economy and society. For this
reason, like in the case of the FR the opposite of
the IMR, namely (1 IMR), is used when
calculating the HI.
According to the CIA (2007), the values of the
IMR vary from 184.44 (for Angola) to 2.30 (for
Singapore). Thus, the Infant Mortality rate Index
(IMI) is calculated by the following formula:
IMR
2:30
IMI = : following formula:
184:44
2:30
4) A non-conventional statistics measuring the
level of health in a country is the number of
P per thousand of population. Although there
is no consensus about the optimal number of
P (and health workers, more generally) for
a population, there is ample evidence that
P, which includes generalists and specialists,
is positively associated with immunization
coverage and outreach of health care. Accord-
ing to the World Bank (2009), in 2005 P varies
from 3.1 (for Norway) to 0.2 (for the
United Arab Emirates and Afghanistan).
Therefore, the number of Physicians per thou-
sand of population Index (PI) is given by the
following formula:
P
0:2
PI= : the index. Therefore, as a working formula, the
3:1
0:2
5) Another non-conventional statistics measuring
the level of health in a country is the number
of Ho per thousand of population. Like the pre-
vious statistics, Ho is a proxy for the quality and
accessibility of the health care system. Accord-
ing to the World Bank (2009), in 2005 the
values of Ho typically vary between 10.8 (for
Norway) and 0.4 (for Afghanistan). Therefore,
32
the Hospital beds per thousand of population
Index (HoI) is given by the following formula:
Ho
0:4
HoI = :
10:8
0:4
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6) Finally, PHE is an important statistics measuring
the level of health in a country. PHE is proxy
measure of the accessibility and affordability of
health care. According to the Human Develop-
ment Reports from 2000 to 2006, PHE was 8.62
for Sweden and a mere 0.5 for Nigeria (UNDP,
2006). Therefore, the Public Health Expenditure
as a percent of GDP Index (PHEI) is given by the
PHE
0:5
PHEI = :
8:62
0:5
On the basis of the above discussion, the overall
HI can be calculated by taking a weighted average
of all standardised variables, namely the FI, LEI,
IMI, PI, HoI and PHEI:
1
FI+23LEI+231
IMI+PI+HoI+PHEI
HI= :
8
Two points need to be discussed before present-
ing the results of the overall HI. First, the PHEI is
difficult to calculate: most countries do not disclose
information about the various aspects of govern-
ment spending. Data are particularly hard to obtain,
more so for the 1960s and 1970s. One way around
this difficulty is to simply drop this variable from
adjusted overall Health Index HI* is defined as
follows:
1
FI+23LEI+231
IMI+PI+HoI
HI = :
7
Secondly, there is the thorny subject of the sub-
jective weights assigned to the single components

of the HI*. The PI and the HoI represent a proxy
for the accessibility of the health system. There-
fore, the two indices taken together have a weight
of two, which are the same weights assigned to the
LEI and the IMI. Finally, the FI gets half of the
weight assigned to the other indices, because it is
perceived to be the least important variables of the
overall HI*. Sensitivity analysis performed by al-
tering the weights assigned to each component of
the HI* indicates that the results of the overall
adjusted health index are not drastically affected.
Moreover, the ordering or rank of the countries in
HI* is indicative of how a country has performed
on all components of the adjusted health index,
that is, a country receiving an overall high rank
is one that has performed well on all components
of its HI*.
Figure 1 shows that the adjusted health index for
India is the lowest of all countries under study: in
1960, India recorded a HI* of 0.17, which compares
poorly with the corresponding HI* of Singapore
and Korea, namely 0.52 and 0.33, respectively. In
the same year, Japan recorded a HI* of 0.72. In-
terestingly, Figure 1 shows that the six HPAEs and
India follow the same trend with a steep rise of the
adjusted health index from 1960 to 1985 followed
by a flat period, which remains up to today. China
experiences the steepest rise of HI* in the 1970s, in
Figure 1. Adjusted Health Index.
Source: Authors calculations.
India, China and the East Asian Miracle
this way overtaking Malaysia by early 1980s. Over-
all, Figure 1 shows that between 1960 and 2005
India, China, Singapore, Korea, Malaysia, Thailand
and Japan all recorded a rise in their adjusted health
index, though India consistently underperformed
compared to the HPAEs analysed: in 2004, the
HI* for India is 0.50, against 0.63 for Thailand,
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0.77 for Singapore and 0.82 for Korea. Finally,
Appendix A, which displays the individual compo-
nents of the HI, confirms this conclusion. Between
1960 and 2005, with the exception of the HoI
(Table A5), India underperformed China, Singa-
pore, Korea, Malaysia, Thailand and Japan on all
components of the adjusted health index, namely
the FI (Table A1), the LEI (Table A2), the IMI
(Table A3) and the PI (Table A4).
The Education Index
The education achievement component of the HCI
is also an extensive index. It tries to capture more
empirical evidence than conventional indices of
well-being do. It includes the ALR and the School
Enrolment Rate (SER) as well as the pupilteacher
ratio (PTR) in primary education. Furthermore, in
most developing countries, the number of students
leaving schools and colleges before finishing their
studies is large. Therefore, the education achieve-
ment component of the HCI includes a proxy for
33
Charles, Fontana and Srivastava
the completion of primary education, namely, the
persistence of students to grade 5. Overall, six
variables are considered in the Education Index
(EI) of the HCI, namely, (i) the ALR, (ii) the
SER, (iii) the persistence to grade 5, (iv) the
agedependency ratio, (v) the PTR in primary
education and (vi) public education expenditure
as a percentage of GDP.
1) The ALR is a conventional statistics measuring
the stock of literate individuals within the adult
population. The ALR is produced by the UNDP
in order to calculate the HDI. UNDP sets the
maximum and minimum values at 100 and 0, re-
spectively. Therefore, the Adult Literacy Index
(ALI) is calculated by the following formula:
ALR
ALI = :
100
2) The SER is another conventional statistics for
measuring the education achievement of
a country. It is calculated by expressing the
number of students enrolled in primary education
as a percentage of the population of official school
age for that level of education. Like for the ALR,
the SER is produced by the UNDP in order to
calculate the HDI. The UNDP sets the maximum
and minimum values of the SER at 100 and 0,
respectively. Importantly, the SER is capped at
one in order to avoid the risk of double counting:
many children may enrol in primary schools, only
to drop out, and enrol back again. The School
Enrolment Index (SEI) is calculated by the fol-
lowing formula:
SER
SEI = :
100
3) A non-conventional statistics measuring the level
of health in a country is the Persistence to Grade 5
Rate (PG5R). The SER described above measures
the number of students enrolled in primary educa-
34
tion. However, no all students complete their pri-
mary education. The PG5R measures the share of
children enrolled in the first grade of primary school
who eventually reach grade 5. Therefore, the PG5R
is an important complementary statistics to the
SER. According to the World Bank (2009), in
2004 Sweden recorded a PG5R of 99.99. In the
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same year, many developing countries failed to pro-
vide data, hence the suggested minimum value for
PG5R is zero. The Persistence to Grade 5 Index
(PG5I) is therefore calculated by the following
formula:
PG5R
PG5I = :
100
4) Another non-conventional statistics measuring
the level of health in a country is the Age-
Dependency Ratio (ADR). It measures the pro-
portion of the population in the age below 15
and over 65 years to the population between age
15 and 65. ADR is thus a measure of the burden
of those who are not working or able to work on
those who are economically active. For this
reason, the opposite of the ADR, namely
(1 ADR), is used when calculating the EI.
According to the World Bank (2009), in 2002
ADR was 0.98 and 0.29 for Yemen and United
Arab Emirates, respectively. Therefore, the Age-
Dependency Index (ADI) is calculated by the
following formula:
ADR
0:29
ADI = :
0:98
0:29
5) The primary school PTR is an important proxy
for the quality of education dispensed in class-
rooms. PTR indicates the number of pupils en-
rolled in primary school divided by the number
of primary school teachers: the lower is the PTR,
the higher is ceteris paribus the quality of the
education system. For this reason, the opposite
of the PTR, namely (1 PTR), is used when
calculating the EI. According to the World Bank
(2009), in 2004 the PTR was 10.11 and 45.24 for

Sweden and Guinea, respectively. Therefore, the
primary school PupilTeacher Index (PTI) is cal-
culated by the following formula:
PTR
10:11
PTI= : analysis performed by altering the weights assigned
45:24
10:11
6) Finally, Public Education Expenditure as a per-
cent of GDP (PEE) is an important statistics
measuring the level of education in a country.
PHE is proxy measure of the accessibility and
affordability of education system. Again, accord-
ing to the World Bank (2009), in 2004 the PEE
was 7.35 and 1.56% for Sweden and United Arab
Emirates, respectively. Therefore, the Public Ed-
ucation Expenditure as a percent of GDP Index
(PEEI) is given by the following formula:
PEE
1:56
PEEI = : Korea, 0.90 for Malaysia and 0.93 for China. Appen-
7:35
1:56
On the basis of the above discussion, the overall
education index EI can be calculated by taking
a weighted average of all standardised variables,
namely the ALI, the SEI, the PG5I, the ADI, the
primary school PTI and the PEEI:
23ALI+23SEI+23PG5I+1
ADI+1
PTI+PEEI
EI =
9
Like for the overall health index, two points need
to be discussed before presenting the results of the
education index. First, since most countries do not
disclose information about the various aspects of
government spending, the PEEI is difficult to cal-
culate. PEEI is thus dropped from the overall edu-
cation index. Then, the adjusted overall Education
Index HI* is defined as follows:
23ALI+23SEI+23PG5I+1
ADI+1
PTI
EI  =
8
Secondly, different weights have been assigned
to components of the adjusted overall Education
Index EI*: the ALI, the SEI and the PG5I are con-
sidered to be the most significant proxies of the
quality of the education system of a country. For
India, China and the East Asian Miracle
this reason, ALI, SEI and PG5I have a weight of
two. The ADI and the primary school PTI are per-
ceived to be the least important variables of the
overall EI*, and hence they get half of the weight
assigned to the previous indices. Again, sensitivity
to each component of the EI* indicates that the
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results of the overall adjusted education index are
not drastically affected.
Figure 2 shows the adjusted education index for
India, China, Korea and Malaysia. In 1991, India
recorded an EI* of 0.58, which compares poorly
with the corresponding EI* of Malaysia, Korea
and China, namely 0.85, 0.87 and 0.94, respec-
tively. By early 2000s, all HPAEs had significant
improvements in their education systems. How-
ever, India did not eliminate its education gap: in
2003, the EI* for India is 0.71, against 0.89 for
dix B confirms this conclusion: India underper-
formed Korea, Malaysia and China on the ALI
(Table B1), the SEI (Table B2; this is not the case
for Malaysia) and especially PG5I (Table B3). In-
terestingly, the latter index, which measures the share
of children enrolled in the first grade of primary
school who eventually reach grade 5, indicates a par-
ticular weakness of the Indian education system.
:
The Gross Domestic Product Index
The final component of the HCI is the per capita
Gross Domestic Product Index (GDPI). It is a proxy
for the standard of living in a country. Consistently
with Anand and Sen (2000) and the computation of
the income component of the UNDP HDI, the
GDPI is calculated by taking the logarithm of real
GDP per capita, adjusted for (i) different purchasing
power parity of each national currency and (ii) for
the assumption of diminishing marginal utility of
: income (see also Salzman, 2003). Therefore, the
GDPI is calculated by the following formula:
logGDPper capita
log100
GDPI = :
log40; 000
log100
Figure 3 shows the GDPI for India and
six HPAEs, namely China, Singapore, Korea,
35
Charles, Fontana and Srivastava
Malaysia, Thailand and Japan, together with India,
from 1975 to 2005. All countries are on a positive
trend, though some countries start from very low
level. In 1975, the GDPI for China and India is 0.29
and 0.40, respectively. This compares poorly with
the GDPI for Singapore and Japan, namely 0.69 and
0.82, respectively. By the early 2000s, the gap in
GDPIs is reduced though still significant. In 2005,
the GDPI for India is 0.57 against 0.67 for China,
0.93 for Singapore and 0.93 for Japan.
The Human Capital Index
The HCI is made of three equally weighted compo-
nents, namely the HI, the EI and the GDPI de-
scribed above. Furthermore, given the limited data
availability on both the PHE and the PEE, the ad-
justed health index HI* and the adjusted education
index EI* are used in the construction of the HCI.
Therefore, the adjusted Human Capital Index HCI*
is given by the following formula:
HI +EI +GDPI
HCI = : seem to have started from a similar position in the
3
Figure 4 below shows the adjusted human capital
index HCI* for India, China, Korea and Malaysia
Figure 2. Adjusted Education Index.
Source: Authors calculations.
36
for the period 20002005. Despite the severe data
limitations, Figure 4 shows the poor performance
on human capital development of India compared
to HPAEs. In 2000, India recorded an HCI* of 0.55,
which then slightly increased to 0.59 in 2004. How-
ever, China recorded an HCI* of 0.69 already in
1991. Similarly, Malaysia and Korea recorded an
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HCI* of 0.75 and 0.83, respectively, in 2000.
Malaysia, Korea and especially China kept increas-
ing their HCI* in the early 2000s, such that the
human development gap between these countries
and India increased rather than decreased by the
middle 2000s.
Figure 4, together with Figures 13, shows that
with the possible exception of China all HPAEs
scored highly on all components of the HCI*,
namely, the adjusted health index, the adjusted ed-
ucation index and the GDPI, which translated in an
overall high HCI*. In short, Figures 14 shows that
since 1960 HPAEs could count on an increasingly
healthy, educated and skilled workforce. This was
not the case for India. Interestingly, China and India
1960s, but their human development and economic
performances drew apart in the following decades.
The next section looks at China and India in order
to understand the role of fair wages as a potential

key factor linking human capital development to
high growth rates and declining inequalities.
Linking human capital development to
high growth rates and declining
inequalities: a fair wage hypothesis
China and India are often compared in terms of
emerging economic powers. They are two compa-
Figure 3. Gross Domestic Product Index.
Source: Authors calculations.
Figure 4. Adjusted Human Capital Index.
Source: Authors calculations.
India, China and the East Asian Miracle
rable countries in terms of population and geo-
graphic size, and up to the 1980s, they also had
a very similar level of per capita GDP (Bosworth
and Collins, 2008). However, in the last two deca-
des, the Chinese growth rate has been much higher
than the Indian growth rate, which has led to a rising
gap in the economic performance of the two coun-
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tries. In this regard, it should suffice to remember
that in 2008 China recorded more than double per
37
Charles, Fontana and Srivastava
capita GDP than India. Some authors have argued
that these different economic performances are
explained by the late 1970s market-oriented reforms
in China (Sen, 2008). The previous section has sug-
gested a different argument: human capital develop-
ment had a significant role in explaining the different
economic performances of India and China (again
see, also, Sen, 2008). Since the 1960s, India per-
formed poorly on all components of the HI and the
EI, which translated in an overall low HCI. By con-
trast, in the same period, China could count on an
increasingly healthier, more skilled and educated
workforce (Bosworth and Collins, 2008).
Charles (2009) has argued that the notion of fair
wage is useful for explaining the different perform-
ances of India and China. She maintains that fair
wages are a key factor linking human capital de-
velopment to high growth rates and potentially de-
clining inequalities. The fair wage-effort hypothesis
(Akerlof and Yellen, 1986) and fairness-related the-
ories (Kahneman et al., 1986) suggest that wages
are set above their market clearing level essentially
because employers have a perception as to how
much they should pay for a given work or level of
effort. In the same way, workers have a perception as
to how much effort they should provide for a given
level of wage, relative to the wage of other workers.
In other words, norms attached to the value of fair-
ness affect the remuneration for a certain type of
work as well as the effort for a given level of wage
(Charles, 2010). Importantly, norms not only affects
remunerations and efforts but they are also affected
by them: for instance, the pace of economic growth
can influence the perception of what is a fair wage,
the level at which it should be set from the point of
view of employers and the level of effort workers
should offer for a given wage level.
There are two main channels through which fair
wages link human development to economic devel-
opment. First, there is the workers-channel: the
effort made by workers responds to signals sent
by employers, including marginal increases in
wages. An increase in wages means an increase in
purchasing power that could be spent on goods and
services. This is the idea behind Henry Fords high
wage doctrine of five dollars a day for his workers:
38
todays workers will be tomorrows consumers. In
other words, increases in wages eventually lead to
an increase in consumption, hence in aggregate de-
mand, and possibly in output (Taylor, 2003). Im-
portantly, increases in wages also give access to
better health and education, which in turn raise
the quality of the workforce. In this sense, a fair
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wage for workers means an income that enables
them to sustain and/or improve their human capital,
which has a positive effect on their level of effort in
the labour market. This is indeed the original idea
behind the efficiency wages hypothesis (Yellen,
1984). The hypothesis emerged in the context of
less-developed countries and established a link be-
tween wages, nutrition and illnesses: poor nutrition
leads to low productivity and low wages, which
sustain deficient nutrition and lead to a vicious cir-
cle of poverty and poor health (Leibenstein, 1963).
Second, there is the employers-channel: the
wage offered by employers responds to signals sent
by workers, namely marginal increases in labour
productivity, and therefore output. In other words,
labour productivity depends on the fair real wage
paid by the employer. Different authors put forward
different arguments as to why employers may deem
fair to set wages in excess of their market-clearing
level: they may do it in order to reduce the costs of
labour turnover and attract a better pool of appli-
cants (Salop, 1979), to reduce shirking by workers
(Shapiro and Stiglitz, 1984), to increase labour pro-
ductivity while saving on total labour costs (Carlin
and Soskice, 2005) or simply for moral motivations
(Solow, 1979). In the context of HPAEs based on
labour-intensive industries such as manufacturing,
labour productivity becomes an essential instru-
ment for economic growth.
Mosley (2004, 762) has argued, along similar
lines, in favour of the government paying a social
efficiency wage premium in order to sustain the mo-
mentum of accumulation against the threat of polit-
ical disturbances. In his argument, the provision of
social goods like health and education operates not
only between workers and employers but also at
a social level. It signals the commitment of a govern-
ment to a human capital-based development strategy,
which engender social norms conducive to efficiency

wage responses from the entire population. This so-
cial interpretation of the notion of fair wage reinfor-
ces the effects of the workers-channel and the
employers-channel described above. It also plays
a crucial role in the passage from import substitution
industrialization policies to export-oriented industri-
alization policies, which require the development of
skills and aptitudes for the development of new prod-
ucts and processes in manufacturing.
In summary, fair wages link human development
to economic development via the workers-channel
and the employers-channel. Figures 5 and 6 below
support the view that fair wages are a key factor
linking human development to economic develop-
ment, and hence are useful for explaining the dif-
ferent performances of India and China.
Figure 5 presents the real wage index in the
manufacturing sector of China and India for the pe-
riod 19802008.2 It shows that since 1980, Indian
workers in the manufacturing sector have experienced
a constant fall in the real wage index, i.e. a fall in their
purchasing power. By contrast, over the same period
manufacturing workers in China have experienced
a constant increase in real wages (Figure C1 in Ap-
pendix C shows a similar pattern for other HPAEs).
Figure 6 presents labour productivity in the
manufacturing sector of China and India for the
period 19802005. From 1980 to 1986, China and
India had a similar level of productivity. However,
from mid-1980s onwards, their performances grew
apart: by early 2000s, a manufacturing worker in
China was five times more productive than a similar
worker in India. This is consistent with Bosworth
and Collins (2008, 55) who also found that China
has experienced a much faster rate of total labour
productivity compared with India, thanks to a dou-
bling of growth in the contribution of increased
capital per worker in China compared with India.
In the context of the fair wage hypothesis, the
relationship between real wage and labour produc-
tivity needs to be understood by looking at
Figures 6 and C1 simultaneously.3 Figure 5 shows
that the real wage index in the Chinese
manufacturing sector rose steadily up to 1997
1998, the date of the Asian financial crisis. There-
after, the Chinese real wage index rose at an even
India, China and the East Asian Miracle
faster rate, and by early 2000s overtakes the Indian
real wage index. Similarly, Figure 6 shows that
starting in the late 1980s, Chinese productivity
rose constantly for two decades. In short, between
late 1980s and mid-2000s, China experienced an
increasing real wage and an increasing labour pro-
ductivity in the manufacturing sector. The situa-
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tion in India could not be more different. Figure 5
shows a decreasing trend of the real wage index in
the Indian manufacturing sector between 1986 and
2003; while Figure 6 shows that productivity
remains constant over the same period. In short,
between mid-1980s and mid-2000s, India had to
cope with a decreasing real wage and a constant
productivity in the manufacturing sector.
Figures 5 and 6 together support the idea that the
notion of fair wage is useful for explaining the
different performances of both China and India.
Lets start with China. First, the workers-channel:
the increase in the real wages index raised the
purchasing power of workers in the manufacturing
sector, which in turn improved access to health and
education for them and their families. The high
value for China of the adjusted health index
(Figure 1), adjusted education index (Figure 2)
and the overall HCI (Figure 4), is consistent with
this. Importantly, the improved access to health
and education had then a positive effect on the
labour productivity, and hence on the per capita
GDP (Figure 1). Second, the employers-channel:
the increase in the real wages index raised labour
productivity in the manufacturing sector, which
has positive effects on the per capita GDP. The
employers-channel thus reinforced the positive
link between real wages and per capita GDP estab-
lished by the workers-channel. Finally, there are
important positive feedback effects from GDP to
real wages. As explained before, the remuneration
for a certain type of work as well as the effort for
a given level of wage are affected by the pace of
economic growth: as per capita GDP grows, the
perception of what is a fair wage, the level at
which it should be set and the level of effort work-
ers should offer change. In other words, the initial
increase in the real wage index in the Chinese
manufacturing sector, which was affordable as
39
Charles, Fontana and Srivastava
Figure 5. Real-wage Index in the manufacturing sectors of China and India.
Source: KILM (2006).
Note: The real-wage index is the nominal wages index corrected for changes in purchasing power measured by the consumer price index
in each country with the year 2000 as base 100 (KILM, 2006).
a result of an undervalued Chinese currency, trig-
gered a virtuous circle: growing levels of health
and education capital and of labour productivity
had beneficial effects on the level of per capita
GDP, which led to further increases in real wages,
and hence health and education capital and labour
productivity.
Unfortunately, India seems to have been trapped
in a vicious circle, where both the workers-channel
and employers-channel work against further prog-
ress in human capital and economic developments.
First, the workers-channel: decreases in the real
wages index lowered the purchasing power of
workers in the manufacturing sector, which in turn
restrained access to better health and education for
them and their families. The low value for India of
the adjusted health index (Figure 1), adjusted ed-
ucation index (Figure 2) and the overall HCI
(Figure 4) is consistent with this. Importantly,
the restricted access to health and education had
then a negative effect on the labour productivity,
which remained almost constant for over two dec-
ades between mid-1980s and mid-2000s. All this
helps to explain the relatively poor performance
40
Downloaded from http://cjres.oxfordjournals.org/ at University of Iowa Libraries/Serials Acquisitions on June 6, 2015
for per capita GDP of India compared to China
in the last couple of decades (Figure 1). Second,
the employers-channel: again decreases in the real
wages index were not beneficial to labour produc-
tivity, and this is useful for understanding why by
early 2000s a manufacturing worker in India was
five times less productive than a similar worker in
China. The employers-channel thus reinforced the
negative link between real wages and per capita
GDP established by the workers-channel. Taking
together the workers-channel and the employers-
channel and their feedback effects, the initial
reduction in the real wage index in the manufactur-
ing sector seems to have had a severe negative
impact on human capital development and
economic development in India.
Summary and conclusions
This paper has examined the role of human capital
in explaining the high growth rates and declining
inequalities experienced by HPAEs between mid-
dle 1960s and middle 1990s in comparison to the
poor performance of India during the same period.
For this purpose, a HCI has been built. HCI is made

Figure 6. Labour Productivity in the manufacturing sector of China and India (19802006).
Source: KILM (2006).
Note: Labour productivity is calculated GDP per person employed in the manufacturing sector in 1997 US$ (KILM, 2006).
of three components measuring the health achieve-
ment, the education achievement and per capita GDP
of a country. Despite data limitations, the main out-
come of the HCI analysis is unambiguous: between
middle 1960s and middle 1990s India lagged behind
HPAEs on human capital development. Interest-
ingly, India and China started from a similar po-
sition in the 1960s, but they grew apart in terms of
human capital and economic performances in the
following decades. The paper has suggested that
fair wages are a significant cause of these differ-
ent performances. Fair wages are a key factor
linking human capital development to economic
development. Fair wages through the workers-
channel, the employers-channel and their feed-
back effects help to explain why since 1960s In-
dia performed poorly compared to China on all
components of the HI and the EI. Fair wages also
help to explain why in 2008 China recorded more
than double per capita GDP than India.
Endnotes
1
Another controversial explanation for the East Asian
Miracle is the success of land reforms for early HPAEs.
Amsden (1989) and Wade (1990) maintain that land
reforms have been a key factor in enabling industrialisa-
tion and, importantly, with relatively low levels of in-
India, China and the East Asian Miracle
Downloaded from http://cjres.oxfordjournals.org/ at University of Iowa Libraries/Serials Acquisitions on June 6, 2015
equality in the case of South Korea and Taiwan,
respectively. Similarly, Kay (2002) has recently argued
that land reforms explain the different development tra-
jectory and performances of HPAEs and Latin-America
countries. In the case of India, the effects of land reform
are more problematic to interpret (Banerjee et al., 2002;
Besley and Burgess, 2000). Land reform received top
priority when India regained its independence in 1947,
though its adoption and implementation was left to state
governments. This has led to a lot of variation in the
implementation of land reforms across Indian states and
over time: the states of West Bengal and Kerala are the
most notable successful examples of land reform, while
the state of Bihar is arguably the most disappointing case
(violent tensions often arise between land owners and
peasants).
2
The manufacturing sector made 40.23% of Chinese
GDP in 1980 and 34.38% in 2008, while it made
16.72% of Indian GDP in 1980 and 16.02% in 2008
(World Bank, 2009).
3
The analysis here is purely descriptive since the scarcity
of data points does not allow a reliable econometric anal-
ysis to be performed.
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 India, China and the East Asian Miracle

Appendix A: Health Index components

Table A1. Fertility Date Index (FDI)

India China Singapore Korea Malaysia Thailand Japan

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1960 0.87 0.38 0.69 0.73 0.91 0.85 0.16
1970 0.75 0.75 0.33 0.55 0.7 0.69 0.18
1971 0.64 0.32 0.56 0.18
1972 0.72 0.61 0.32 0.49 0.65 0.62 0.18
1977 0.66 0.27 0.13 0.32 0.49 0.46 0.13
1980 0.62 0.24 0.12 0.29 0.51 0.38 0.12
1981 0.31 0.12 0.26 0.12
1982 0.59 0.21 0.11 0.22 0.51 0.32 0.12
1985 0.54 0.21 0.1 0.11 0.49 0.26 0.12
1986 0.07 0.10 0.11
1987 0.50 0.25 0.10 0.09 0.47 0.22 0.11
1990 0.44 0.17 0.14 0.09 0.44 0.19 0.09
1991 0.12 0.12 0.08
1992 0.4 0.15 0.12 0.12 0.41 0.17 0.08
1995 0.38 0.15 0.11 0.10 0.38 0.16 0.07
1997 0.14 0.10 0.09 0.35 0.15 0.06
2000 0.33 0.14 0.07 0.07 0.32 0.15 0.06
2001 0.14 0.07 0.05 0.32 0.05
2002 0.31 0.14 0.06 0.03 0.30 0.15 0.05
2003 0.30 0.14 0.04 0.03 0.29 0.15 0.05
2004 0.29 0.13 0.04 0.03 0.28 0.14 0.05

43
Charles, Fontana and Srivastava

Table A2. Life Expectancy Index (LEI)

India China Singapore Korea Malaysia Thailand Japan

1960 0.32 0.19 0.64 0.48 0.49 0.52 0.71

1967 0.38 0.58 0.69 0.54 0.57 0.57 0.77
1970 0.41 0.61 0.71 0.60 0.61 0.59 0.78
1971 0.62 0.79

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1972 0.42 0.64 0.72 0.63 0.60 0.81
1974 0.65 0.82
1980 0.49 0.69 0.77 0.68 0.69 0.65 0.85
1981 0.69 0.86
1982 0.50 0.71 0.78 0.71 0.67 0.86
1983 0.70 0.87
1985 0.53 0.72 0.79 0.72 0.73 0.69 0.88
1986 0.88
1987 0.54 0.73 0.81 0.75 0.74 0.70 0.89
1990 0.57 0.73 0.82 0.77 0.75 0.72 0.89
1991 0.78 0.90
1992 0.58 0.73 0.83 0.76 0.73 0.90
1994 0.85 0.91
1995 0.61 0.74 0.86 0.81 0.77 0.73 0.91
1996 0.86 0.92
1997 0.62 0.74 0.87 0.82 0.78 0.73 0.92
1999 0.87 0.84 0.93
2000 0.63 0.75 0.88 0.85 0.79 0.74 0.93
2001 0.76 0.89 0.85 0.80 0.74 0.94
2002 0.64 0.76 0.89 0.86 0.80 0.74 0.94
2003 0.64 0.77 0.90 0.86 0.80 0.75 0.94
2004 0.64 0.77 0.90 0.87 0.81 0.76 0.95

44
 India, China and the East Asian Miracle

Table A3. Infant Mortality Index (IML)

India China Singapore Korea Malaysia Thailand Japan

1960 0.79 0.81 0.18 0.48 0.38 0.55 0.15

1965 0.73 0.59 0.13 0.29 0.46 0.09
1970 0.68 0.45 0.09 0.22 0.24 0.39 0.06
1975 0.67 0.34 0.06 0.19 0.33 0.04

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1980 0.61 0.26 0.05 0.07 0.16 0.23 0.03
1985 0.52 0.21 0.04 0.11 0.19 0.02
1990 0.43 0.19 0.02 0.03 0.07 0.16 0.01
1991 0.43 0.02 0.01
1992 0.42 0.01 0.01
1993 0.39 0.01 0.01
1994 0.39 0.01 0.01
1995 0.39 0.19 0.01 0.01 0.06 0.11 0.01
1996 0.38 0.01 0.01
1997 0.37 0.01 0.00
1998 0.38 0.01 0.00
1999 0.37 0.01 0.02 0.00
2000 0.36 0.17 0.01 0.01 0.05 0.09 0.00
2001 0.35 0.15 0.01 0.01 0.05 0.09 0.00
2002 0.34 0.15 0.00 0.01 0.09 0.00
2003 0.33 0.00 0.01 0.09 0.00
2004 0.32 0.13 0.00 0.01 0.04 0.08 0.00

45
Charles, Fontana and Srivastava

Table A4. Physicans per thousand Index (PI)

India China Singapore Korea Malaysia Thailand Japan

1965 0.001 0.3 0.11 0.27

1970 0.001 0.23 0.16 0.01 0.31
1975 0.001 0.26 0.16 0.01 0.31
1980 0.06 0.34 0.22 0.10 0.02 0.38

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1981 0.02 0.36 0.23 0.10 0.02 0.38
1985 0.39 0.27 0.14 0.04 0.45
1986 0.39 0.18 0.14 0.05 0.45
1987 0.40 0.17 0.05
1988 0.07 0.44 0.31 0.17 0.06 0.003 0.48
1989 0.46 0.21 0.06 0.01
1990 0.46 0.37 0.21 0.07 0.008 0.52
1991 0.46 0.39 0.24 0.07 0.009
1992 0.01 0.46 0.39 0.27 0.07 0.01 0.52
1993 0.07 0.46 0.41 0.27 0.08 0.01
1994 0.47 0.42 0.31 0.08 0.55
1998 0.11 0.48 0.49 0.38 0.59
1999 0.51 0.39 0.38 0.17 0.03 0.59
2000 0.11 0.49 0.39 0.37 0.17 0.06 0.59
2001 0.29 0.42 0.41 0.17 0.06 0.59
2002 0.12 0.50 0.42 0.45 0.06 0.62
2003 0.13 0.42 0.48 0.06 0.62
2004 0.14 0.41

Table A5. Hospital beds per thousand Index (HoI)

India China Singapore Korea Malaysia Thailand

1960 0.005 0.38 0.09 0.32 0.03

1969 0.10
1970 0.02 0.10 0.32 0.29 0.07
1975 0.02 0.15 0.28 0.28 0.07
1980 0.03 0.17 0.34 0.12 0.11
1981 0.03 0.18 0.34 0.18
1985 0.03 0.19 0.19 0.21
1986 0.19
1987 0.03 0.2 0.19
1990 0.21 0.31 0.26 0.17 0.12
1991 0.04 0.21 0.31 0.28 0.16 0.12
1992 0.04 0.21 0.29 0.29 0.16 0.12
1993 0.21 0.31 0.32 0.16
1994 0.21 0.30 0.36 0.16
1998 0.20 0.45
1999 0.20 0.5 0.17
2000 0.04 0.20 0.26 0.55 0.14 0.17
2001 0.20 0.24 0.55 0.14
2002 0.04 0.19 0.23 0.59 0.17
2003 0.05 0.23 0.64 0.17
2004 0.05 0.17

46
 India, China and the East Asian Miracle

Appendix B: Education Index components

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Table B1. Adult Literary Index (ALI)
India China Singapore Korea Malaysia Thailand

1990 0.49 0.78 0.89 0.96 0.81

1991 0.51 0.79 0.97 0.81
1992 0.97
1997 0.98
1998 0.52 0.98
2000 0.54 0.99 0.85
2001 0.88 0.1 0.85
2002 0.56 0.88 0.1 0.86
2003 0.59 0.90 0.1 0.88
2004 0.61 0.91 0.92 0.1 0.89
2005 0.93

Table B2. School Enrolment Index (SEI)

India China Korea Malaysia

1991 0.98 1 1.05 0.95

1998 0.99 0.97 0.98
1999 0.97 0.95 1
2000 0.99 0.98 0.97
2001 0.98 1 1 0.95
2002 0.99 1 1 0.93
2003 1 1 1 0.93
2004 1 1 1
2005 1

Note: SEI capped at 1 to adjust for multiple enrolments.

Table B3. Progression to Grade 5 Index (PG5I)

India China Korea Malaysia

1991 0.56 0.86 0.99 0.97

1998 0.59 0.96
1999 0.62 0.99
2000 0.59 0.99 0.87
2001 0.61 0.86 0.99 0.87
2002 0.84 0.86 0.99 0.98
2003 0.79 0.86 0.99 0.99
2004 0.79 0.86 0.98

47
Charles, Fontana and Srivastava

Appendix C

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Figure C1. Real-wage Index in the manufacturing sector of different Asian countries (19802008).
Source: KILM (2006).
Note: The real-wage index is the nominal wages index corrected for changes in purchasing power measured by the consumer price index
in each country with the year 2000 as base 100 (KILM, 2006).

48