Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 17 China and India in the...

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Chapter 17

China and India in the World Economy

Chapter Objectives

• Analyze the demographic and economic similarities and differences between China and India

• Explain the economic reforms that have taken place in China and India

• Discuss the trade relations and challenges China and India face the world economy

Introduction: The Challenges of Openness

• The emergence of China and India from their relative isolation is one of the most important contemporary trends in the international economy

• Increased openness has increased growth and impacted the global flow of goods and services

• China and India have many similarities and many differences– Both have huge populations and nuclear powers– India is the world’s largest democracy, while China is

ruled by the Communist Party

Demographic and Economic Characteristics

• In 2007, China and India’s combined populations accounted for 38.5% of the world’s population

– This combined total has doubled since 1950

– China is currently the world’s most populous nation, but it should be surpassed by India between 2020 and 2030

• Since 1980, real GDP growth has been astonishing

– 10.0% per year on average in China

– 6.0% per year on average in India

– China is currently has the third largest GDP, behind the U.S. and Japan

Demographic and Economic Characteristics (cont.)

• In 1980, 84% of China and 65% of India’s populations lived in extreme poverty

• In first decade of first century, figures have fallen 15% for China and 42% for India

• This represents nearly 1 billion individuals pulled out of extreme poverty

• Growing middle class represents a huge potential market for the West

Table 17.1 Population and Income in

China and India, 2005

FIGURE 17.1 Population and Projections, 1950–2050

Economic Reforms in China and India

• Reform of the Communist system in China began in 1978

– Prior to reform, private enterprise did not exist

– All decisions were made from the top-down

• India’s reforms began in the 1980’s and gained momentum in the 1990’s in response to a balance of payments crisis

– Prior to reform, India was best characterized socialist

– Heavy industry was state owned

– Private industry was heavily regulated

The Reform Process in China

• Foreign trade under the old system controlled by 12 foreign trading corporations (FTC), with no consideration given to comparative advantage

• Leader of reforms was Deng Xaioping, gradually dismantling of controls exercised by Communist Party

• Created Special Economic Zones (SEZ) that gave local provinces authority to establish economic and trade policy

• China applies to joint the GATT in 1986 and gained WTO membership in 2001

Indian Economic Reforms

• Three forces played roles in the move toward reform:

• (1) The USSR, India’s primary trading partner, dissolved in 1991

• (2) Other South East Asian countries were having success with reforms

• (3) A financial crisis had developed as a result of heavy borrowing by the government

Indian Economic Reforms (cont.)

• Details of the reforms:

- De-nationalization, led by finance minister Mammohan Singh

- Elimination of a regulatory permitting process that interfered with competition

- Transition from import substitution Industrialization policies toward export lead growth policies

- Dismantling of restrictions on international trade and foreign investment

FIGURE 17.2 Openness Index, 1975–2007

Remaining Issues

• The breadth and depth of the reforms represent a break in each country’s historical path

• Both are shifting from low growth, isolationist policies toward high growth and integration with the world economy

• World Bank’s 2009 Doing Business Index ranks China 83rd and India 122nd out of 181 nations

Remaining Issues (cont.)

• China’s growth in spite of obstacles has two explanations:

1) Local enterprises are owned by local governments (township and village enterprises- TVE)—

Not everyone accepts this view

2) Dual track strategy: localized reforms to certain areas or sectors (e.g., agriculture) while maintaining traditional, central planning structures in the remainder of the economy

China and India in the World Economy

• Both are members of the WTO

• Both have experienced tremendous export and import growth

• A fundamental difference is what they trade– China’s emphasis is manufacturing– India’s emphasis is the service sector

FIGURE 17.3 Average Annual Growth of

Imports and Exports, 1980–2005

TABLE 17.2 Chinese and Indian

Export and Import Totals, 2005

The Challenges of India and China in the World Economy

• Services:

–Relatively new to international trade

–Represents a new arena of comparative advantage

–Western nations fear high tech job losses

The Challenges of India and China in the World Economy (cont.)

• Manufacturing:

–China’s scale and labor advantages represent a huge challenge to other emerging market

–China’s enforcement of intellectual property has been criticized

The Challenges of India and China in the World Economy (cont.)

• Resources:

–Population growth in China and India increase natural resource consumption, potentially at the expense of other developing nations

FIGURE 17.4 Current Account Balances, 1990-2007

Unresolved Issues

• Unbalance trade

– In 2007 the U.S. had a $268 billion merchandise trade deficit with China

– Chinese savings finance U.S. government deficits

– China then takes a large portion of the newly created off the market by selling bonds, known as sterilization

Unresolved Issues (cont.)

• Environmental pressures

– China will likely become a major produce of carbon dioxide

• Political reform and protest

– Freer markets and access to information make it more challenging for the Communist Party to maintain social control

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 17 China and India in the...

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