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

Santosh Mehrotra ()
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Santosh Mehrotra: Higher School of Economics

No 18779, IZA Discussion Papers from IZA Network @ LISER

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.

Keywords: China; India; state capability; structural transformation; human development; inequality (search for similar items in EconPapers)
JEL-codes: D63 H11 O11 O15 O53 (search for similar items in EconPapers)
Date: 2026-07
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