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

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

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

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

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

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?

Comparative Data on China and India ChinaIndia GNI per capita (current US $) Population (millions) GNI (current US $) 2.3 trillion793 billion Sec. school enrolment(%) Tertiary enrolment(%) Note: 2005 data, except for education data which is for 2004

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

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