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Chapter 17
China and
India in the
World
Economy
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
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
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Introduction
• 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 remain sit the grip of
the Communist Party
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Demographic and Economic
Characteristics
• In 2005 their combined populations accounted for 37.5% of the
world’s population
– 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
– 9.8% per year on average in China
– 5.9% per year on average in India
– China is currently has the third largest GDP, behind the U.S. and Japan
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Demographic and Economic
Characteristics (cont.)
• Economic growth has lead to the decline of poverty
• Both countries still have large numbers without access
to adequate nutrition and other necessities
• There is a growing middle class with increasing
purchasing power
• The growing middle class represents a huge potential
market for the West.
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TABLE 17.1 Population and
Income in China and India, 2005
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FIGURE 17.1 Population and
Projections, 1950–2050
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Economic Reforms
• 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
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Economic Reforms in China
• Leader of reforms was Deng Xaioping
• Gradual 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 WTO in 1986 and gained
membership in 2001
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Economic Reforms in India
• Three forces played roles in move towards 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
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Economic Reforms in India (cont.)
• De-nationalization
• 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 trade and foreign
investment
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FIGURE 17.2 Openness Index,
1975–2004
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Remaining Reform Issues
• Legacy of communism and state ownership of
productive enterprises remains in China
• World Bank’s Doing Business Index ranks
China 93rd and India 134th out of 175 nations.
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China and India in the World
Economy
• Both are member of the WTO
• Both have experience tremendous export and
import growth
• A fundamental difference what they trade
– China’s emphasis is manufacturing
– India’s emphasis is the service sector
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FIGURE 17.3 Average Annual Growth
of Imports and Exports, 1980–2005
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TABLE 17.2 Chinese and Indian
Export and Import Totals, 2005
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The Challenges of China and India
in the World Economy
• Services
– Relatively new to international trade
– Represents a new arena of comparative advantage
– Western nations fear high tech job losses
• Manufacturing
– China’s scale and labor advantages represent a huge challenge to other emerging
market
– China’s enforcement of intellectual property has been criticized
• Resources
– Population growth in China and India increase natural resource consumption,
potentially at the expense of other developing nations
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Unresolved Issues
• Unbalance trade
– In 2005 the U.S. had a $200 billion trade deficit with China
– Chinese savings finance U.S. government deficits
• 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.
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FIGURE 17.4 Current Account Balance in
Three Countries and the EMU
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