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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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-2 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-3 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-4 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. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-5 TABLE 17.1 Population and Income in China and India, 2005 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-6 FIGURE 17.1 Population and Projections, 1950–2050 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-7 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-8 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-9 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-10 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-11 FIGURE 17.2 Openness Index, 1975–2004 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-12 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. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-13 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-14 FIGURE 17.3 Average Annual Growth of Imports and Exports, 1980–2005 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-15 TABLE 17.2 Chinese and Indian Export and Import Totals, 2005 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-16 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 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-17 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. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-18 FIGURE 17.4 Current Account Balance in Three Countries and the EMU Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-19