Transforming China and India: Challenges and Opportunities

1. Transforming China and India: Challenges and Opportunities Chris Milner (GEP, School of Economics, University of Nottingham)

2. Entry into the Global Economy • Before the 1990’s both China and India had highly protected and inward-looking economies • China’s (India’s) tariffs on imports averaged over 40% (90%) in 1992 and were complemented by an array of non-tariff barriers (licences, quotas & state trading restrictions) • Extent and speed of liberalisation and opening up of these two giants has been dramatic • in particular for China

6. Comparative Growth Performance • Common features • control of population growth • role of trade liberalisation and export growth • growth clusters/uneven growth • Distinctive features • greater role of domestic savings and investment in China • greater role of FDI in technology-upgrading and export development in China • greater role of internal migration in China • greater role of manufacturing (services) sector in China (India) • China has substantially outperformed India

9. China and India in the Global Economy • Between 1990 and 2004 China and India’s exports grew considerably more rapidly than world exports • China is forecast to be world’s largest exporter by 2010 • of particular interest because much of the exporting is to the OECD countries • evidence of rapid technological upgrading in production and product terms • China and India already represent major markets, but have enormous further potential (given population size and scope for income growth) • the share of imports in GDP has grown rapidly • as yet, most of the imports are in raw materials, capital goods and intermediate goods

11. Challenges to the British Economy • Strong expectation that globalisation increases average incomes in long-run, but that there may be some groups that lose and short-term adjustment costs • China, India and other emerging economies are increasing pace of adjustment required • particular concerns about employment and relative wage effects • Types of adjustment issues: • direct competition from imports to firms and workers, especially those involved in labour-intensive manufacturing and services • outsourcing of activities in import-competing and export-oriented activities in both manufacturing and services • direct export competition in these markets from upgrading domestic firms and in third markets from new exporters

12. Opportunities for the British Economy • Direct exports of goods (associated with rise in production, incomes and technological-intensity) and services • Outward FDI opportunities in manufactures and services • platform for host markets and exporting • outsourcing to increase cost competitiveness • Inward FDI opportunities • outlet for trade surpluses? • platform for EU market? • ‘tariff-jumping’ motives?

13. Comparative Data on China and India Note: 2005 data, except for education data which is for 2004

14. Challenges to Sustainability of Development in China and India • Common issues • inequality and social tensions • price distortions and infrastructure congestion (e.g. environmental) • structural issues (regional imbalances, state-owned enterprises) • low productivity in agriculture • degree of bureaucracy and regulation • Country-specific issues • fiscal deficit, low savings and absolute poverty in India • democratic challenge, weak banking sector and macro imbalances in China

16. Conclusions • China and India are increasing pace of globalisation • China in particular is rapidly catching-up technologically • Potential major adjustment challenges in OECD markets • Enormous potential for exporting, FDI and outsourcing • But some structural imbalances in China and India which may affect sustainability of current pace of development