Professional Documents
Culture Documents
ISSUE PAPER
Prepared by
Professor Dukgeun Ah
International Trade Law and Policy
Seoul National University
Republic of Korea
THE CHINA AND INDIA FACTOR: IMPLICATIONS FOR DEVELOPING COUNTRIES
∗
IN THE ASIA AND THE PACIFIC REGION
Dukgeun Ahn∗
Graduate School of International Studies
Seoul National University
Table of Content
4. Policy Implications
A. For China and India
B. For Other Developing Countries in the Region
C. Future Agenda for the UNIDO
References
Appendices
∗
The views expressed herein are those of the author(s) and do not necessarily reflect the views of the
United Nations Industrial Development Organization.
This document has been produced without formal United Nations editing. The designations employed
and the presentation of the material in this document do not imply the expression of any opinion
whatsoever on the part of the Secretariat of the United Nations Industrial Development Organization
(UNIDO) concerning the legal status of any country, territory, city or area or of its authorities, or
concerning the delimitation of its frontiers or boundaries, or its economic system or degree of
development. Designations such as “developed”, “industrialized” and “developing” are intended for
statistical convenience and do not necessarily express a judgment about the stage reached by a
particular country or area in the development process. Mention of firm names or commercial products
does not constitute an endorsement by UNIDO.
∗
Professor of International Trade Law and Policy, Ph.D., J.D. dahn@snu.ac.kr
List of Tables
List of Figures
List of Appendix
ABSTRACT
The recent remarkable economic developments in China and India have prompted
numerous academic studies as well as policy debates on macroeconomic consequences of
their economic development. While increasing demands from China and India induced by
economic development may provide an important opportunity for many developing countries
in Asian and the Pacific region, unique industry structures of China and India spanning from
low skilled labor intensive manufacturing sectors to high skilled labor intensive service
sectors may work as serious challenges to undermine industrial bases of these developing
countries.
In order for these developments in China and India to become a catalyst for regional
economic developments, China and India need to accommodate more elements of sustainable
development. Also, developing countries in the region should be integrated more fully with
industry and trade structures of China and India so that industry restructuring in a regional
scale is facilitated to minimize economic costs from isolation. In this regard, UNIDO’s role
will become ever more important in assisting the establishment of economic infrastructures
and reforming regulatory environments of the developing countries in the region.
INTRODUCTION
The recent economic developments in China and India have changed the prospect of
the world economy in an unprecedented scale. Indeed, the remarkable growth of both
economies has prompted numerous academic studies as well as policy debates on
macroeconomic consequences of their economic development. The perception of threats and
opportunities by growing China and India appears vastly different depending on the economic
circumstances of pertinent countries. But, a more important question is not which factors are
threats or opportunities, but how threatening factors can be transformed into opportunities by
internal initiatives along with external cooperation. This paper overviews the economic
development of China and India in the context of the world economy and discuss policy
implications to enhance more sustainable development for developing countries in the Asia
and the Pacific Region.
China and India have performed very strongly since 1995 in terms of the growth of
output and income, especially compared with other large economies. China accounted for 13
percent of the world growth in output over 1995–2004; and India accounted for 3 percent,
compared with the United States’ 33 percent, whose slower growth rate is offset by its much
higher starting share in 1995. As shown in Table 1, average annual growth rates for gross
domestic product (GDP) and various economic sectors in China and India during 1990-2005
show remarkable increases, particularly considering the sheer size of their economies. In fact,
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Figure 2 shows the GDP growth of China and India along with Japan, Germany and Korea,
which have strong industry bases for their economies. In some sense, these countries may be
comparable in that their economic developments are primarily driven by manufacturing
competitiveness. In an absolute amount, the size of total gross products in China has
increased very rapidly in recent years. It would not be completely unconceivable that the total
1
World Bank, 2006. World Development Indicators.
<http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20899413~men
uPK:232599~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html>.
GDP of China exceeds that of Japan in a foreseeable future. The GDP growth of China since
the middle of the 1990s appears to follow the economic growth of Japan since the middle of
the 1980s. India also shows a clear sign for economic “take-off” since 2000. If this economic
momentum can be maintained, the next decade will be a crucial period for major economic
developments for India.
6 000 000
Germany
5 000 000 Japan
China
R. of Korea
4 000 000 India
3 000 000
2 000 000
1 000 000
-
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: World Bank, World Development Indicators 2007.
B. International Trade
China is now the largest exporter and importer in Asia. It trade shares for export and
import of merchandise are larger than the sum of the ASEAN countries. Although the shares
of export and import are not yet very large, India is the second fastest growing trader in Asia.
The growth of export and import of India is the second only to that of China. The trade of
commercial services is also constantly increasing. China, excluding Hong Kong, is currently
the second largest exporter of commercial services and India is the fourth exporter after Japan,
China, and Hong Kong.
China will remain primarily an exporter of manufactures over the next decade. On
the other hand, China is a major importer of primary products, sophisticated equipments, and
a wide range of parts and components. China’s ever increasing demand for new materials and
energy has increased its imports from the least developed countries. China’s imports from the
least developed countries in 2002 reached $3.5 billion, rendering China the third-ranked
market.2
Regarding export, despite the wage increases, China is likely to maintain
comparative advantages in labor-intensive products over the next decade. In 2004, real wages
were 2.11 times their level in 1989; and the rate of wage increase accelerated in 2004 and
2005, especially in the coastal regions—although productivity is rising as well. Considering a
large surplus of 350 million agricultural workers whose incomes are still a small fraction of
the urban workers’ wages, the Chinese economy will be able to contain the recent wage
increase.3 Thus, China’s dominant world position in the export of labor intensive products
such as textiles and clothing, shoes, and toys is not likely to change much in the coming years.
Source: UNCTAD, 2005. Trade and Development Report. Drawn from Winters and Yusuf, Dancing
with Giants: China, India and the Global Economy (2007), 40.
China is the second-largest market for, and the largest exporter of, electronics/
information and communication technology products4. The potential growth of these markets
2
Yang, Yongzheng. 2006. “China’s Integration into the World Economy: Implications for Developing
Countries.” Asia-Pacific Economic Literature 20 (1): 40–56.
3
To take full advantage of these underutilized workers and the lower cost of land, however, China will
have to move the labor-intensive factories closer to its interior. Southwestern provinces, for example,
have substantially increased investment in the transport infrastructure in an effort to develop inland
areas. Winters and Yusuf, Dancing with Giants: China, India and the Global Economy (2007), 42.
4
Ma, Jun, Nam Ngyuen, and Jin Xu. 2006. China’s Innovation Drive. Hong Kong (China): Deutsche
Bank, May 18.
has attracted most of the leading multinational corporations (MNCs) producing electronics,
autos, and consumer durables, as well as those in Taiwan and the Republic of Korea. China’s
three largest exporters in 2003 were subsidiaries of Taiwanese electronics firms, such as
Foxconn (Hon Hai) and Quanta. Several auto assemblers and manufacturers of auto parts
have shifted their regional headquarters to China and are planning to move some of their
research and design facilities as well—for example, Hyundai, Toyota and Volkswagen. On
the other hand, recent studies of China’s trade found that growing sophistication of China
poses a considerable challenge for other Southeast Asian countries although the exports of the
latter continue to grow in absolute terms.5
Source: UNCTAD, 2005. Trade and Development Report. Drawn from Winters and Yusuf, Dancing
with Giants: China, India and the Global Economy (2007), 41.
China imports machinery, plant equipment, and components that have fueled its
massive expansion of industrial capacity and served as conduits for technology transfer.
China’s heavy reliance on developed countries for machinery and plant equipments is likely
to continue over the foreseeable future because, given the importance of learning, tacit
knowledge, and cumulative research, the country’s comparative advantage in these items will
materialize only gradually.
5
For example, see Dani Rodrik, 2006, “What’s So Special about China’s Exports?” Kennedy School,
Harvard University, Cambridge, MA. <http://ksghome.harvard.edu/~drodrik/Chinaexports.pdf>.
China is one of the principal trading partners of the newly industrializing countries
and its openness to trade is contributing to the interdependence of the East Asian region. More
recently, however, elements of the supply chain are migrating to China as manufacturers of
intermediates move closer to markets and final assemblers. This process, especially with
regard to the auto industry, could fuel foreign direct investment in China during the next
decade.
Compared to China, the Indian business environment has been less conducive to the
growth of manufacturing and exports. Among its exports of manufactures, only textiles has
achieved a scale sufficient to impinge on the prospects of other Asian countries, producers
elsewhere, and the market for raw cotton. IT-enabled services is the only other area in which
Indian exports have established a substantial and growing presence. Because of the still
relatively small size of its economy and its modest level of industrialization, India’s imports
of raw materials, machinery, intermediate products, and consumer goods are fewer than those
of Brazil, Mexico, and Korea which were approximately comparable in size using constant
dollars in 2004. Also, as indicated in Figure 3.a, the share of below low skilled manufactures
accounts for more than 70% in its export.
India’s future impact on the rest of the world needs to be taken seriously, however,
because it has the labor resources, a growing base of human capital, the domestic market
potential, and the nascent industrial strength to become an industrial powerhouse that is
comparable to China today. Whether this actually materializes and India begins significantly
influencing the fortunes of other countries and natural resource use, global externalities will
depend on the country’s competitiveness and on the dimensions of a number of industrial sub-
sectors.
On the other hand, China and India are more actively engaged in WTO dispute
settlement process as summarized in Appendices 3 and 4. In particular, challenges based on
the WTO obligations have been increased against both India and conspicuously China
regarding a wide variety of measures. It implies that other WTO members have keen interest
in asserting their rights to market access for China and India. In other words, apart from
economic needs, importation of China and India will be constantly increased as WTO
inconsistent trade barriers are eliminated in the future.6
Asian NIEs, namely Hong Kong, China, Taiwan, Singapore and Korea, in that order,
6
For example, India’s excuse to limit importation based on balance-of-payment problems was rejected
in a WTO dispute case. It led India to repeal quantitative restrictions on many products in 2001. WTO,
India — Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products,
WT/DS90/R, WT/DS90/AB/R.
remained the main sources of FDI from developing countries in general and developing Asia
in particular, despite a significant decline in their total outflows. Meanwhile, the rise in its
foreign currency reserves accelerated the growth of outward FDI from China, helping reshape
the pattern of outward FDI from Asia.
The width of arrows reflects the annual average of FDI flows during 2002-2004 (based on FDI inflow data from host
economies). FDI flows below $400 million are not shown, except for those between India and South-East Asia. The
size of circles reflects the inward FDI stock in 2004
Source: UNCTAD, World Investment Report 2006, 56.
80000.000
70000.000 China
India
Korea
60000.000
South As ia (- India)
South- Eas t As ia
50000.000
FDI in flow
40000.000
30000.000
20000.000
10000.000
0.000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
- 10000.000
y ear
Intraregional FDI flows in South, East and South-East Asia have grown over the
years. Today, as illustrated in Figure 4, it accounts for almost half of all FDI inflows to the
region, and is particularly pronounced between and within East Asia and South-East Asia.
Intraregional FDI is particularly marked between East Asia and South-East Asia. Most FDI
from East Asia went to the relatively high-income South-East Asian countries. The largest
FDI flows have been within East Asia and they had been rising until recently, largely
dominated by China as a key destination. Intra- ASEAN investment accounted for 13% of
cumulative FDI flows in this sub-region between 1995 and 2004,35 with Singapore as the
leading investor. Within South Asia, intraregional FDI flows have been less significant
compared with other sub-regions, and those between South-East Asia (as well as East Asia)
and South Asia have not been as significant as those between East Asia and South-East Asia.
FDI flows into the manufacturing sector have been rapidly rising, fuelled by large
greenfield projects in industries such as automotives, electronics, steel and petrochemicals.
Low-cost countries in South-East Asia are becoming attractive locations for the
manufacturing activities of TNCs. In India, increased inflows are taking place in the steel and
petrochemical industries in particular. Meanwhile, FDI in China’s manufacturing sector has
been shifting towards more advanced technologies. For example, foreign TNCs invested $1
billion in China’s integrated circuit industry in 2005, and Airbus plans to build an A320
assembly line in China. By contrast, investments by both foreign and domestic companies in
some traditional industries are likely to be hindered by overcapacity.
Both China and India have intensified their efforts to acquire oil assets. Following
the failure of CNOOC (China) in its bid for Unocal in the United States, Chinese oil
companies have been successful elsewhere: China National Petroleum Corp. (CNPC) won the
bid for PetroKazakhstan, headquartered in Canada, in August 2005; CNPC and Sinopec
jointly purchased EnCana’s (Canada) oil assets in Ecuador in September 2005; CNOOC
invested in the Akpo offshore oilfield, owned by South Atlantic Petroleum Ltd. (Nigeria), in
January 2006. Chinese and Indian oil companies have also begun to cooperate in bidding for
foreign oil assets. Both China and India are also actively investing in mining. Companies
from both countries participate in biddings for mining projects. In 2006, Chalco (China) won
a bid for a project in Australia, and Minmetals (China) established a joint venture in
cooperation with Codelco (Chile).
A. Factor Accumulation
In China the share in population of persons in the prime working age (15-59), already
at 67.7% in 2005, is projected to fall to 53.3% by 2050. This in large part reflects the effects
of the one-child policy instituted in 1979 and also the decline in fertility in the decade before.
Its savings and investment rates at 42% and 39% of GDP respectively in 2004 are also
unlikely to be sustained indefinitely into the future.8 These two facts suggest that from the
input – labour and capital – side there will be a downward pressure on China’s growth from a
slow down in growth of labor and capital inputs. On the other hand, China still has more than
half of people of working age employed in agriculture and rural activities, with lower
productivity than non-farm workers. It is estimated that China’s non-farm workforce could
increase by another 70 to 100 million in the next decade depending on assumptions about
expansion of senior secondary and university education.9 Thus, productivity gains from the
7
This part is drawn from Srinivasan, T. N. 2003a. “China, India and the World Economy”, Working
Paper 286, Stanford University Center for International Development.
8
World Bank, 2004, “China Quarterly Update –February 2006,”.
9
Dwight Perkins, 2005, “China’s Recent Economic Performance and Future Prospects,” Paper
presented at a Japan Economic Research Center Workshop in Tokyo, October 22, 2005.
inter-sectoral shift of labour as well as other changes that increase total factor productivity,
including technological improvement, could more than offset the downward pressure on
growth so that aggregate GDP growth could be sustained in the ranges of 8% to 10% a year
for the next couple of decades.
In India’s case, demographic trends are more favorable than China’s. It is true that
some of the Indian states (mainly in the South but also in the West) have already achieved
fertility rates at or below replacement level and more will soon do so. Hence, these states will
also experience an increasing old-age dependency ratio as in China. However in the rest of the
states, which account for more than half of India’s population, fertility rates, though declining,
are above replacement. Hence, India’s population in the age group 15-59 is projected to rise
slightly as a share of total population from 60% in 2005, to 61% in 2050 and dependency will
fall slightly from 67% to 64%. India lags behind China in the educational attainment of its
workforce and hence its catch-up with China on human capital accumulation will also
contribute to growth. Moreover, with a much larger share of the workforce employed in
agriculture and other low productivity activities, India has greater potential than China to
experience significant productivity gains from inter-sectoral shift of labour. Also India’s
saving and investment rates were around 30% in 2004-05 according to Indian official data. In
brief, India can sustain, and in fact increase, the contribution of accumulation of human and
physical capital in its growth.
The GDP weighted average of the rates of gross capital formation in 1990 and 2004
were respectively 38% and 24% of GDP in China and India. Their growth rates of GDP
during 1990-04 were around 10% and 6% in China and India respectively. The crude
incremental capital-output ratios, as measured by the ratio of growth rates to investment rates,
were 3.8 (i.e. 38/10) in China and 4 (i.e. 24/6) in India, suggesting that India is using capital
somewhat less efficiently than China. Put another way, China is able to achieve a 4% higher
rate of growth than India with 14% higher investments, while India with nearly 1.7 times (i.e.
24/14) higher total investment rate gets only 1.5 (i.e. 6/4) times higher growth rate.
This would lead one to conclude that China is using capital somewhat more
efficiently, and two facts support such a conclusion. First, the composition of China’s GDP
with its far higher share of more capital intensive industry (manufacturing) at 46% (39%)
compared to India’s 27% (16%), and lower share of less capital intensive services at 41%
compared to 52%, and second, China seems to have invested more in capital intensive
infrastructure including housing. Indeed, services have been the driving force behind India’s
recent growth. There is some recent evidence that growth of India’s manufacturing sector is
accelerating. If sustained, and if growth in services (and agriculture) does not slacken,
aggregate growth rate will rise.
B. Total Factor Productivity
Table 2 suggests that while India experienced an increase in TFP growth from 2.06%
to 2.49% per year between the two periods, China’s TFP growth declined from an astonishing
6.33% per year to a reasonable 2.49% between the same two periods. The contribution of TFP
growth to GDP growth remained virtually unchanged at 41.0% and 40.0% in the two periods
in India, while it declined from 64.3% to 34.9% between the two periods in China.
A recent and detailed estimate – summarized in Table 3 – of TFP growth for India is
by Virmani (2002) who breaks down the period 1950-51 to 2003-04 into four sub-periods
roughly corresponding to the prime-ministerships of Nehru, Indira Gandhi, Rajiv Gandhi and
the period after the systemic reforms of 1990-91.12
10
As is well known, TFP growth estimates are highly sensitive to the data used and above all to the
methodology of estimation.
11
Jorgenson, Dale and Khuong Vu (2005), “Information Technology and the World Economy,”
Scandinavian Journal of Economics 107 (4), December, 631-650.
12
Virmani, Arvind. 2002. “Sources of India’s Economic Growth,” Working Paper 131, New Delhi,
Indian Council for Research on International Economic Relations (ICRIER).
The acceleration of TFP growth since the initiation of reforms, hesitantly during
1980-90 and systemically since 1991, is evident. It is also striking that in the second period
when the economy was very much insulated from the world economy and state controls on
the economy were not only intrusive and extensive but also intensified, TFP growth fell to
almost zero.
Table 4 displays TFP growth rates for China and India by various other estimations.
They confirm that reforms in China since 1978 and in India in the 80s and 90s increased TFP
growth.
In contrast to the estimates to the TFP growth in Tables 2 - 4 based on aggregate data,
C. Hsieh and Klernow (2006) use microdata on manufacturing industries in China and India.
They find sizable gaps in marginal products of labor and capital across plants within narrowly
defined industries. Their preliminary results suggest TFP gains of around 2 in both countries
if the gaps in marginal products across establishments are eliminated.
China has attracted and continues to attract far more FDI than India. As summarized
in Table 5, the difference in foreign portfolio investment flows is smaller, but in terms of net
private capital inflows China is far ahead.
A significant part of FDI inflows to China are from the Chinese Diaspora (including
residents of Hong Kong and Taiwan). In India also FDI inflows from Mauritius, a country
with a large number of Indian residents of Indian origin accounts for a significant part of total
inflows. Also, China’s policy of creating special economic zones (SEZs) to attract foreign
investment by exempting investors from regulations applicable elsewhere in China
(particularly relating to hiring and firing and foreign ownership) and also providing excellent
infrastructure (power and communications) was highly successful. India is only now creating
SEZs like China’s. But limits to foreign ownership apply to different entrants in different
sectors and restrictive labour laws continue. Lastly, China’s FDI was export oriented and also
directed in part to investment in infrastructure. Given the significantly larger shares,
compared to India’s, of private capital flows in China’s GDP and investment and its tilt
towards exports and growth promoting infrastructure, it is clear that greater integration of
China in world capital flows contributed to its faster growth and at the same time, their export
orientation increased integration in goods markets as well.
Taken together, the likely evolution of factor accumulation and total factor
productivity in the medium term, it is very likely that China would be able to sustain its
average growth in the range of 8% - 10% per year. India would be able to raise its growth
from around 6% of the last two and a half decades to 8% or more. China’s integration with
the world economy is already high. India’s integration will continue to increase so that it will
play a larger role in influencing the growth of the world economy than in has done until now.
Also, China’s policies towards external private capital flows were successful in attracting
substantial flows and their use in export oriented and infrastructural activities not only
contributed to growth but also increased China’s integration in goods markets. This trend is
likely to continue in the medium term. India is only now instituting Chinese- like policies
towards capital inflows and their impact is as yet uncertain. But based on evidence from
surveys of investor intentions there are reasons to be hopeful.
China has achieved a commanding lead in major low-, medium-, and high-tech
industries that it may be in a position to consolidate and enlarge over the next 15 years.
Although many complex capital goods, components, and products that are design and
research intensive are likely to remain the preserve of the advanced countries, China’s
industrial strength could put pressure on manufacturing industries in middle- and low-income
countries and force them to rethink, narrow, and focus their industrial ambitions. Survival in
those economies will depend on achieving industrial and innovation capability that equals or
exceeds China’s. Innovation may drive competitiveness, and other countries must match or
exceed China’s own investment in its innovation system.
India is likely to be a major force in the software, business processes, and consulting
industries (including design and engineering services), competing not so much with such
leaders as Germany, Japan, and the United States as with the mid-range and lower-end players
(including China, which soon might enjoy an edge in terms of technical skills volume). India
is certain to build manufacturing capability but, at least during the coming decade, there is
only a slim prospect that it will emerge as a China-scale exporter of mass-produced consumer
products in such key industries as electronics, autos, and auto parts. India more likely could
become a force in certain kinds of engineering products and services that leverage its skill
base, including software skills. India’s many institutional bottlenecks, gaps in its
infrastructure, and emerging shortages of skills will remain as drags on industrial advance.
There is no doubt that China will be a formidable competitor for labor intensive
manufactures that depend on a semiskilled, disciplined, low-wage workforce for at least
another decade, and if the domestic and international regulatory environment allows it, India
can become a major competitor in this area as well. The world market of manufactures and
business services, however, is not going to be divided between China and India as the main
suppliers while the rest of the world specializes in products based on natural resources and
arable land. The world has not repealed the theory of comparative advantage. China’s success
in so many areas of manufacturing points to the forces that gradually are going to change
China’s competitive position. Wages in the coastal areas of China already are rising to a level
sufficient to reduce the country’s competitiveness at the labor-intensive end. Moving these
plants to areas where wages are still low will postpone the day when China must abandon
many of these sectors, but the rapid movement of workers to China’s cities will raise incomes
in the countryside and thereby will force up wages in the nation’s interior as well.
With the right policies, Indian low-wage manufacturers (along with those in other
low-wage countries) may be major beneficiaries of China’s rising wages, just as China
benefited from the rapid increase in wages in Korea, Taiwan (China), and Hong Kong (China)
over the past 20-plus years. Although India could become a major world exporter on the scale
of China and, over time, experience rapidly rising wages, that is not a realistic prospect in the
next 10 years.
B. Reshaping Industrial Landscapes
The rapid expansion of manufacturing industries in China and India may have
substantial implication for some sectors. The pertinent sectors include textiles and clothing,
white goods, pharmaceuticals, autos and auto parts, steel, and electronics. Together, these
sectors account for close to a third of the merchandise exports of both India and China.
Textiles and clothing account for 7 percent of world exports. China is the leading
producer, followed by India. China’s advantage derives from its integration with the global
production network through foreign investment and direct contacts with the retailers in OECD
countries. Wal-Mart, for example, purchased $18 billion worth of goods from China in 2004.
In contrast, Indian firms have far less direct contact with the retailers.
In the future, India—and China—very likely will remain among the most
competitive producers of garments and textiles because of their elastic labor supplies,
assuming that labor laws and shortages do not push up wages more rapidly than what has
occurred over the previous decade. There is considerable latitude for raising productivity,
quality, and design in the industry. Niche products surely will continue to offer opportunities
for suppliers in other countries. But even against the high-value textiles and fashion garments
produced by Italy, pressure from China and India will mount because of the levels of
investment, the design and engineering skills being mobilized locally and from overseas
sources (as the design industry is becoming globalized and design services can be outsourced),
the increasing sophistication of domestic consumers, and the immense domestic markets. This
is strikingly supported by China’s capacity to diversify its product offerings in textiles and
enter new markets. Since 1990, at the 10-digit level the number of textile product varieties has
risen from 6,602 to 12,698
The market for white goods worldwide amounted to more than $100 billion in 2002.
One-third of demand for large appliances was from the Asia Pacific region, of which half
came from China, the fastest growing market Similarly, the Indian market is expanding and
domestic producers, such as Godrej and Videocom, and MNCs have created two large
clusters to produce white goods in Noida (near Delhi) and Pune (near Mumbai), with help
from government-provided incentives. The household ownership rate for refrigerators in India
was just 15 percent in 2004 and it was low for other durables.
MNCs are expanding their manufacturing capacity in India, but the country’s slow
start means that producers based in India are unlikely to be exporting substantial quantities of
finished products for some time. The export of components, however, is feasible. China has
established a lead in white and brown goods, and it could be that it will extend its lead over
India as MNCs transfer more technology and expand capacity through FDI in China.
Pharmaceuticals is one of India’s brightest prospects and is underpinned by strong
entrepreneurship in the private sector; the abundance of skills in chemistry, biology, and
chemical engineering; and the long-term mastering of complex process technologies made
possible until recently by the absence of intellectual property protection for foreign
pharmaceutical products under Indian law. Here again China is a close match, although its
corporate capability is weaker than India’s. India is the fourth-largest producer of
pharmaceuticals by volume—the 13th in terms of value—and for several compelling reasons
it is likely not only to retain this ranking over the next decade but also to expand its global
market share. China is the second-largest producer of pharmaceutical ingredients and generic
drugs in terms of value after the United States (with 5 percent of world output in 2004 valued
at $54.4 billion). Remarkably, Chinese firms have shown less initiative in this field than in
others, although they exported $4 billion worth of products (including traditional medicines)
in 2004 and are beginning to move into the neighboring fields of biotechnology and stem cell
research. Outside of the United States, India now has the largest number of manufacturing
plants approved by the U.S. Food and Drug Administration, and with the newly strengthened
intellectual property regime, that is a firm basis for future growth. Again, the competition is
likely to be among the advanced countries, China and India, and possibly Brazil, with other
countries certain to be squeezed by the presence of the big players in an industry where size
matters greatly at several levels.
China and India are modernizing their auto industries through joint ventures with
foreign firms. Virtually all the major international auto manufacturers have set up facilities in
China and some (for example, Honda, Hyundai, and Toyota) are entering India. The Indian
government partnered with Suzuki in the early 1980s to form a joint venture, Maruti Udyog,
and began delicensing the auto components industry. In both China and India, auto
assemblers are facing difficult times in procuring parts of sufficient quality from the lower-
tier suppliers. With pressure coming mainly from the MNCs, the Indian automobile parts
industry recently has redoubled its efforts to improve quality, to streamline the delivery
system (just-in-time delivery), and to improve the efficiency of its factory operations.
In its push to raise the level of technology, China is ahead of India. The automobile
industry is one of the most R&D-intensive industries. The list of top R&D spenders includes
many of the well-known automakers, some of which have transferred a portion of their R&D
activities to China. Chinese automakers slowly are increasing their R&D spending as well.
For instance, Geely claims to invest more than 10 percent of revenues in R&D. By
comparison, Tata Motors spends approximately 2 percent of revenues on R&D, and Maruti
Udyog spends only 0.48 percent. This may change because Indian engineering and
metalworking firms, such as Bharat Forge, are gearing up to provide high-value products and
services in conjunction with software houses—particularly products with embedded software.
In this regard, India may be several steps ahead of China.
China’s steel production passed 349 million tons in 2005, making it by far the largest
producer in the world (with 31 percent of the global share) and the fourth-largest exporter
(with sales of 27 million tons approximately on par with imports). The significant
developments with portent for the future are China’s extremely rapid increases in capacity (25
percent between 2004 and 2005 alone); the increasing concentration of production in large-
size modern plants (although many small, antiquated facilities remain); and the growing
technological capacity to produce high-quality construction steel, stainless, galvanized, and
coated steels, and flat products for burgeoning downstream transport and durable goods
industries. These developments point to declining imports and the scope for higher exports.
Compared with China, India’s total output and per capita consumption are small. By fiscal
2004/05, India was producing 38 million tons of steel, and its exports of 3.8 million tons
approximately balanced imports of 3.2 million tons. As India enlarges its transport,
engineering, and white goods industries and modernizes its severely backward infrastructure,
the demand is likely to rise as sharply as it has in China. Thus, it is realistic to expect India to
produce 55–60 million tons of steel by 2010 and as much as 120–130 million tons by 2015.
India is not likely to emerge as a significant exporter of steel—especially high-tech
and specialty steels—during the next decade. It is more likely, if infrastructure, housing, and
industrial development take off, that for a time both India and China will be importers of
certain types of specialized steels. China, however, is sure to ascend the ranks of steel
exporters, edging out the 35 members of the European Union and possibly Russia within five
years.
By leveraging its low-cost labor supply and the impetus gained from WTO accession,
China has doubled the scale of the electronics industry, which now accounts for more than 8
percent of industrial output. In India the electronics sector accounts for less than 3 percent of
a much smaller industrial sector. In little more than a decade, China has made the transition
from limited production of low-quality electronic items to a place in the global production
chain for a wide spectrum of components and finished products. Today there are more than
10,000 foreign-invested firms in China, and it is likely that many more foreign component
producers will relocate there because of lower labor costs, tax incentives, a large domestic
market, and adequate infrastructure.
Conversely, India’s shortcomings in both the private and public sectors have been
marked by a strong reliance on imported technology and inadequate R&D. A shift from
import-induced to R&D-induced technology would be beneficial for the electronics industry
there. India is now, belatedly, attempting to overcome shortcomings by making significant
concessions to export-oriented firms, and so has experienced an increase in exports. But
liberalization is also leading to competition from imports and to a decline in profits across
industry branches. The Indian electronics industry must now compete with China to gain a
share of the gap left by the newly industrialized countries, all the while maintaining its lead in
the export of electronics software.
China is the largest producer of coal in the world. In 2004, its production was almost
double that of the United States (2.2 billion short tons versus 1.1 billion short tons). China’s
estimated total coal resources are second only to the former Soviet Union, although proven
reserves ranked third in the world. China is a net exporter of coal and likely to remain so for
at least another decade. In 2003, coal accounted for 67 percent of China’s primary energy
production of 1,216 million tons of oil equivalent (Mtoe), oil accounted for 12 percent,
natural gas for 3 percent, hydroelectric power for 2 percent, and biomass and other waste for
16 percent.
In 2003, India’s total primary energy production was estimated at 441 Mtoe, with
coal accounting for 36 percent of the supply mix, oil for 9 percent, gas for 5 percent,
hydroelectric power for 1 percent, nuclear for 1 percent, and biomass energy and other
renewables for 48 percent. The use of commercial fuels, such as coal and oil, is growing
rapidly in tandem with the economic expansion (industrialization and growing per capita
income). Nonetheless, unlike China, more than 60 percent of Indian households still depend
on traditional energy sources such as fuelwood, dung, and crop residue for their energy
requirements.
The increasing use of fossil fuels (particularly coal and oil) in both China and India
is generating harmful emissions—particulates (with primarily local effects on health in urban
areas), sulfur and nitrogen (with primarily regional effects via ozone and acid rain on
agriculture and ecosystems), and CO2 (with primarily global effects in the form of global
warming). Demand for oil also is growing rapidly in response to the growing demand for
mobility/transportation. This growing fossil fuel use is generating harmful emissions of
greenhouse gas and increasing public health costs from severe local air pollution. China and
India, however, were not the principal drivers of high oil prices in 2006.
Figure 6. Primary Energy Use of Coal and Total CO2 Emissions from Fossil Fuel
Consumption, China and India, 1980–2003
Turning to the future, energy externalities (local, regional, and global) are likely to
worsen significantly, especially if there is no shift in China’s and India’s energy strategies.
Many developing countries worry that high energy demand from China and India will hurt
their growth by forcing higher prices on international energy markets. This effect is likely to
be small and to be offset partially or fully by the “growth-stimulating” effects of the larger
markets in China and India. China and India themselves worry that shifting their energy
strategies to fuels with lower emissions will reduce externalities and the pressure on world
energy prices in world energy markets—but at the expense of their growth in incomes. In fact,
the evidence suggests that improved efficiency leaves plenty of opportunities to reduce energy
growth without adversely affecting GDP growth. Some of these entail extra costs, but the
financing needs are well within the compass of domestic and world capital markets. Making
these investments will have both global and local benefits.
Table 7. Sectoral and Fuel Shares of Energy Consumption in China and India
China India
2005 2020 2050 2005 2020 2050
Total Final Consumption (Mtoe) 921.7 1,683.2 2,685.1 400.3 609.4 1,268.1
Sector (%)
Industry and services 58.5 62.2 54.6 32.7 39.3 48.3
Transportation 10.2 14.4 20.8 10.4 12.3 16.0
Residential use 31.2 23.5 24.6 56.9 48.4 35.7
4. POLICY IMPLICATIONS
Figure 7. Growth Incidence Curves for China (1990–99) and India (1993–99)
Sources: Ravallion and Chen, 2003 (China, using household income); Ravallion, 2004 (India, using
household expenditure on consumption).
Because both countries started their reform periods with sizable urban–rural gaps in
mean living standards, the unevenness of the subsequent growth process in which urban
incomes increased faster than rural incomes, is likely to have put upward pressure on
aggregate inequality.
Good inequalities reflect and reinforce market-based incentives that are needed to
foster innovation, entrepreneurship, and growth. Scattered evidence suggests that the rise in
inequality with the introduction of market reforms in China and India at least partially reflects
newly unleashed market-based incentives at work, in contrast with the earlier period of
artificially low levels of inequality brought about by regulatory distortions and interventions
that suppressed incentives for individual effort and innovation.
But, geographic poverty traps, patterns of social exclusion, inadequate levels of
human capital, lack of access to credit and insurance, corruption, and uneven influence
simultaneously can fuel rising inequality and prevent certain segments of the population from
moving out of traditional low-productivity activities. Credit market failures often lie at the
root of the problem; it is poor people who tend to be most constrained in financing lumpy
investments in human and physical capital. These bad inequalities—rooted in market failures,
coordination failures, and governance failures—prevent individuals from connecting to
markets and limit investment in human and physical capital.
Policy errors of both omission and commission have contributed to the unevenness
of growth in China and India and to the failure of growth to translate into larger positive
effects on poverty and human development. These errors have been one of three forms: first,
policies that impede the market function; second, policies biased in favor of particular regions
or industries; and, third, policies that neglect certain spheres of activity where public
intervention is necessary. Without the appropriate institutional checks and balances, rising
inequality, even if it is initially of the “good” variety, can engender phenomena such as
corruption, crony capitalism, rent seeking, or efforts by those who benefit initially from the
new opportunities to restrict the access of others to those opportunities or to alter the rules of
the game to preserve their initial advantages. Thus, bad inequalities emerge over time.
Bad inequalities are doubly harmful. First, they directly reduce the potential for
growth because segments of the population are left behind, lacking the opportunity to connect
with and contribute to the growth process. Second, persistent bad inequalities in a setting of
heightened aspirations can yield negative perceptions about the benefits of reform. Because it
is difficult for citizens to disentangle the sources of aggregate inequality in observed
outcomes—to determine whether the underlying drivers are good or bad—societal intolerance
for inequality of any kind emerges. That intolerance can trigger social unrest or harden
resistance to further needed reforms, thereby indirectly threatening the sustainability of
growth. In effect, the persistence of bad inequalities drives out the good ones. Therefore,
measures to address unevenness of economic growth in China and India become ever more
important to sustain continuing economic development.
In addition, accommodating sustainable development by directly embracing
environment concerns in industrial policies has become increasingly more important for
China and India. Sustainable development is not only affecting long term growth potentials of
their own economies but also has a direct implication for exportation to major markets in
developed countries such as the United States and the European Unions. For example, the US
Congress recently furthered its efforts to link environment protection and international trade
by supporting America’s Climate Security Act, although this Act may not be actually enacted
in a very near future.13 More intensifying efforts by other trading partners of China and India
to promote environmental protection in recent years need to be seriously considered in
reforming and designing longer term industrial development policies.
600
500
400
300
200
100
0
China Korea Chinese United Japan Indonesia India Thailand Russia Brazil
Taipei States
Lastly, China and India should be able to address their chronic trade conflicts to
ensure more stable trade environments. As demonstrated in Figure 8, China is the most
frequent target of antidumping actions in the world.14 This problem is indeed systemic in that
non-market economy treatment of Chinese products – a special arrangement that the Chinese
government agreed to be bound until 2016 when it joined the WTO – tends to generate or
aggravate antidumping margins.15 This will remain one of the critical trade obstacles for
Chinese exportation in the future. Moreover, Chinese exports are also subject to “Transitional
Product-Specific Safeguard Mechanism” pursuant to the agreement for accession. Unlike
other WTO members, Chinese exports may be subject to trade barriers on the basis of weaker
13
The Economist, “Getting the Message at Last”, (Nov. 17, 2007), 37.
14
Figure 8 is based on the initiation of antidumping investigations, not actual imposition of measures,
since the initiation itself often makes substantial economic impacts for trade.
On the other hand, the most frequent antidumping user in the WTO system is India. Between 1995
to June 2007, India initiated 474 antidumping investigations to surpass the second most frequent user,
the United States, that initiated 375 investigations.
WTO, <http://www.wto.org/english/tratop_e/adp_e/ad_init_rep_member_e.xls>.
15
Other WTO members can use so-called constructed value for calculating anti-dumping margin if the
Chinese producers under investigation cannot clearly show that market economy conditions prevail in
the industry producing the like product with regard to manufacture, production and sale of that product.
It is reported that around 60 countries agreed bilaterally with China not to use this non-market economy
provision. But, major countries including the US, EU, Japan, and Canada still apply it.
industry injuries of importing countries and even mere trade diversion from other countries
induced by safeguard actions. Turkey already initiated TPSSM to block polyvinyl chloride
16
(PVC) and porcelain tiles17 from China. This measure may have huge implications for
Chinese exportation until 2013 when it expires, unless the Chinese government somehow find
a way to discipline abusive use of TPSSM.
50
45
40
35
30
25
20
15
10
0
India Korea Italy Indonesia EU Thailand Canada Brazil Chinese
Taipei
In contrast, exports from India have suffered most from countervailing duties that are
supposed to counter illegal government subsidies. Figure 9 shows the frequent targets for
countervailing investigations and India is by far the most frequent target country. Unlike
antidumping actions that address individual firms’ pricing decisions, countervailing actions
are challenging the consistency of government subsidy programs with the WTO obligations.
In this regard, the Indian government should be more careful in implementing its subsidy
policies not to cause trade remedy actions from its trading partners and thereby instability and
uncertainty of export markets. China has not had serious problems yet with countervailing
measures because in major markets such as the United States and the European Union,
16
WTO, G/SG/N/16/TUR/2 (dated Aug. 21, 2006).
17
WTO, G/SG/N/16/TUR/3 (dated Aug. 21, 2006).
countervailing actions are limited due to its non-market economy status.18 But, recently, the
US Commerce Department changed the policy and began to impose countervailing duties
against China while it still treats China as non-market economy.19 Therefore, how China and
India address trade remedy measures of their major trading partners will remain an important
challenge to establish stable trading environments.
The key issues for other developing countries in the region are how to be connected
to China and India to enhance cooperative economic relationship so that they can become
parts of economic development. Whether products are primary products, intermediate
products or final products, China and India may put substantial pressure on those countries
that are competing in industry sectors – in particular, manufacturing sectors in China and IT
service industries in India. Instead, aligning industry structures with those of China and India
to maximize complementarity of the economies would become much more beneficial to
countries in the region.
For example, Korea and Taiwan did see their world market shares for low
technology manufactures decline in the 1990s. This fall, however, is what one would expect.
Not only were these countries moving into more sophisticated sectors of manufacturing where
their rising labour costs were less of a handicap, but they were also 'hollowing out' their
manufacturing, transferring production to other Asian economies (for example, to China and
Indonesia in the case of footwear) but continuing to occupy roles in the industry as marketers,
designers and producers of components. This is one of the tendencies that have driven the
regional division of labour in Asia and the rapidly rising trade in intermediate goods. Korea
and Taiwan are not so much losing out to China as repositioning themselves within global
production networks. The manufacturing exporters in the region that might have been under
threat — Malaysia, Thailand, Indonesia and the Philippines — all saw their shares of global
low-technology manufactured exports rise. The big losers have been elsewhere in the global
economy. In footwear, for example, those big losers so far have been not China's East Asian
competitors but countries like Brazil.
In case of investment, various studies have shown that the massive inflows of FDI
into China witnessed in the 1990s have not led directly to declines in FDI in other parts of
18
By definition, in a non-market economy, government subsidies are inevitable. So, while non-market
economy status demands special treatment in antidumping actions, countervailing actions are restricted.
19
US Department of Commerce, Coated Free Sheet Paper from the People's Republic of China:
Final Affirmative Countervailing Duty Determination, C-570-907, 72 FR 60645 (October 25, 2007).
See also, US DOC, Final Determination of Sales at Less Than Fair Value: Coated Free Sheet Paper
from the People's Republic of China, 72 FR 60632, A-570-906 (October 25, 2007).
Asia. While China's share of total Asian FDI rose, the absolute levels of FDI going to other
Asian countries continue to rise. An econometric analysis by Chantasasawat et al. (2004),
which covered the period 1985 to 2001, concluded that China has a positive effect on the
level of FDI in other Asian economies.20 It also concluded, importantly, that policy variables
such as rates of corporation tax and trade openness were more important determinants of FDI
flows than the “China effect”. This implies that other Asian economies should worry more
about the determinants of their competitiveness that are under their own control rather than be
focused on potential threats from China.21
The recognition of this potential has spurred new initiatives to deepen integration
between these parts of Asia. The boldest initiative is JACIK, a framework for integrating the
economies of Japan, ASEAN, China, India and Korea. The Indian think tank RIS has
calculated that such a scheme, if put in practice, would generate welfare gains for all
participating countries. The RIS findings have been corroborated by a recent study conducted
by the Asian Development Bank. 'Greater regional integration will propagate commercial
linkages and transfer the stimulus of Asia's rapid growth economies, particularly China and
India, to their neighbours'.
There is no doubt, however, that there are a number of tasks which cannot be solved
by individual governments and require cooperation between Asian governments. Kumar
(2005) lists the following:
• Mobilizing Asian foreign exchange for Asian economic development: 5% of
combined JACIK foreign exchange reserve would amount to US$ 100 billion and
20
Chantasasawat, B., Fung, K.C., Iizaka, H. and Siu, A., 2004, 'The Giant Sucking Sound: Is China
Diverting Foreign Direct Investments from Other Asian Economies?', paper presented at 6th Asian
Economic Panel Meeting, Seoul, October 2003.
21
However, the conclusions concerning competition for FDI are contested. For example, Enright
(2005) concluded that the rate of growth of FDI into China was negatively correlated with the growth
of FDI into other Asian nations, particularly Indonesia and the Philippines.
would constitute a substantial pool for funding regional public goods.
• Cooperation for energy security: given Asia's dependence on imported energy, in
particular petrol, an Asian strategic petroleum reserve would provide a cushion in
emergencies and reduce the danger of international conflict.
• Cooperation in development of transport infrastructure and connectivity. Major
investments are required in regional infrastructural projects such as Asian railways,
highways, IT infrastructure, and satellites.
• Cooperation in core technologies aimed at reducing the digital divide. Pooling Asia's
substantial and complementary capacities in hardware and software, could be used to
develop low cost solutions for connecting poor and remote areas to agglomerations.
No single actor can improve connectivity and sustainability; it requires building alliances
between public and private sectors and between governments in the region.
22
WTO & OECD, “Aid for Trade at a Glance 2007” (2007).
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Appendix 1. Leading Merchandise Exporters and Importers in Asia, 2005
(Billion dollars and percentage)
2005 2000 2005 2000-05 2003 2004 2005 2000-05 2003 2004 2005
Exporters
Importers
Memorandum items:
ASEAN
Exports 652.9 26.1 23.5 9 17 20 15 ... ... ... ...
Imports 594.3 25.4 22.9 9 12 25 16 ... ... ... ...
SAPTA
Exports 127.9 3.9 4.6 15 16 27 23 ... ... ... ...
Imports 185.8 5.4 7.1 18 23 33 34 ... ... ... ...
Exporters
Importers
Source: R. Fiorentino et al., “The Changing Landscape of Regional Trade Agreements: 2006 Update” , 21 (WTO Discussion Paper No. 12).
Slide 1
D UKGEUN AHN
Graduate School of International Studies
Seoul National University
Slide 2
2
Slide 3
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1970
1972
1974
1976
1980
1982
1984
1986
1990
1992
1994
1996
1998
2000
2002
2004
1978
1988
2010 2015
Source: World Bank, World Development Indicators 2007.
Germany United States Japan China
R. of Korea India Taiwan
Slide 4
4
Slide 5
Slide 6
6
Slide 7
80000.000
70000.000 Ch in a
In d ia
Ko re a
60000.000
S o u th A s ia (-Ind ia)
S o u th -Ea s t As ia
50000.000
FDI in flow
40000.000
30000.000
20000.000
10000.000
0.000
1970
1972
1974
1978
1980
1982
1984
1988
1990
1976
1986
1992
1994
1996
1998
2000
2002
2004
-10000.000
yea r
Slide 8
China 9.94 0.17 2.12 0.87 0.45 6.33 7.13 0.63 3.17 0.45 0.39 2.49
India 5.03 0.09 1.18 1.27 0.43 2.06 6.15 0.26 1.77 1.22 0.41 2.49
8
Slide 9
Source: Srinivasan, T. N. 2003a. “China, India and the World Economy”, Working Paper 286, Stanford
University Center for International Development.
Slide 10
10
Slide 11
11
Slide 12
III. Impacts on Other Developing Countries in Asia and the Pacific Region
C. Impact on Natural Resources and Environment
Sector (%)
Industry and services 58.5 62.2 54.6 32.7 39.3 48.3
Transportation 10.2 14.4 20.8 10.4 12.3 16.0
Residential use 31.2 23.5 24.6 56.9 48.4 35.7
Fuel Share (% )
Coal 54.3 58.9 62.7 29.2 37.8 57.9
Oil 23.1 22.6 20.5 25.0 22.6 17.7
Natural gas 2.5 3.5 3.4 3.8 5.3 4.5
Nuclear 0.5 0.5 2.4 0.8 0.1 2.1
Hydro 3.7 3.0 3.1 3.7 3.9 1.9
Renew ables 15.9 11.5 7.9 37.6 30.3 15.9
Note: M toe = m illion tons of oil equivalent.
Source: W inters and Yusuf, 2007. D ancing with Giants: China, India and the Global Economy, 157.
12
Slide 13
III. Im pacts on Other Developing Countries in Asia and the Pacific Region
C. Im pact on Natural Resources and Environm ent
Prim ary Energy Use of Coal and Total CO 2 Em issions from Fossil Fuel Consum ption
13
Slide 14
Sources: Ravallion and Chen, 2003 (China, using household income); Ravallion, 2004 (India,
using household expenditure on consumption).
14
Slide 15
50
45
600 40
500 35
30
400
25
300
20
200 15
10
100
5
0
0
C h in a Ko re a C h in e s e Un ite d J apan In d on e s ia In d ia
Ta ip e i S ta te s
In d ia Ko re a Ita ly In d o n e s ia EU Th a ila n d
S o u rce: W TO , < http ://w w w .w to .org /en g lish /tra to p_ e /adp_ e /ad p_ e .h tm > a nd
< h ttp ://w w w .w to .org /en g lish /tra to p_ e /scm _e /scm _ e.htm > .
15
Slide 16
A s ia -P a c ific In tra -R e g io n al F T A N e tw o rk
S o u rc e : R . F io re n tin o e t
a l., “Th e C h a n g in g
L a n d s c a p e o f R e g io n a l
T ra d e A g re e m e n ts : 2 0 0 6
U p d a te ” , 2 1 (W TO
D is c u s s io n P a p e r N o .
1 2 ).
16
Slide 17
17
Slide 18
M o d e l S c o p e of U N ID O W o rk s
P ro m o tin g In d u s try D e v e lo p m e n t
E n h a n cin g T ra d e C a p a city
R a tio n a lizin g E n e rg y P o licie s
A lle v ia tin g E n viro nm e n ta l P ro b le m s
18
Slide 19
D UKG EUN A HN
dahn@ snu.ac.kr