Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 17 China and India in the World Economy.

Copyright © 2008 Pearson Addison-Wesley. All rights reserved.

Chapter 17

China and India in the World Economy

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 17-2

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 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


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


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.


TABLE 17.1 Population and Income in China and India, 2005


FIGURE 17.1 Population and Projections, 1950–2050


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


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


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


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


FIGURE 17.2 Openness Index, 1975–2004


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.


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


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 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


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.


FIGURE 17.4 Current Account Balance in Three Countries and the EMU

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 17 China and India in the World Economy.

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