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Chapter 17 China and India in the World Economy Copyright © 2011 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 © 2011 Pearson Addison-Wesley. All rights reserved. 17-2 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-3 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-4 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-5 Table 17.1 Population and Income in China and India, 2005 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-6 FIGURE 17.1 Population and Projections, 1950–2050 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-7 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-8 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-9 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-10 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-11 FIGURE 17.2 Openness Index, 1975–2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-12 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-13 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-14 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-15 FIGURE 17.3 Average Annual Growth of Imports and Exports, 1980–2005 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-16 TABLE 17.2 Chinese and Indian Export and Import Totals, 2005 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-17 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-18 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-19 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-20 FIGURE 17.4 Current Account Balances, 1990-2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-21 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-22 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. 17-23 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 17-24