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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
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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
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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
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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
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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 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
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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
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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
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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
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FIGURE 17.2
Openness Index, 1975–2007
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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
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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
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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
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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 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
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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
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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
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FIGURE 17.4
Current Account Balances, 1990-2007
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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
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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
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