The development strategies which have been adopted by India and China over the last 20 years.
I. Abstract
The driving forces in the world economy are shifting towards Asia. This paper highlights the development strategies which have been adopted by India and China over the last 20 years. Both the countries have adopted policies aimed at opening up their economies in their quest to transform themselves into developed nations. It is not an easy passage as each of these countries is faced with serious economical challenges. Yet, despite the challenges they have registered spectacular economic growth in the last two decades which are effecting a profound impact on the rest of the world.
II. Content page
No:
Subject
Page
.0
Introduction
3
.1
Research Problem
3
.2
Research Objective
4
.3
Research Question
4
2.0
Research Methodology
4
3.0
Finding
4
3.1
China's economic prospects
5
3.1.1 The phenomenal growth
5
3.1.2 The challenges
6
3.2
India's economic prospects
9
3.2.1 The pace of growth
9
3.2.2 The challenges
1
4.0
Analysis
2
4.1
The world trading system
2
4.2
The world monetary system
3
4.3
Foreign direct investment
4
5.0
Conclusion
5
6.0
Learning outcome/recommendation
6
References
7
.0 Introduction
In 1980, India was the fifth largest economy in the world, while China was eight largest (in terms of Gross Domestic Product (GDP) compared at purchasing power parity exchange rates. By 2001, China has leapt to second place, behind the United States, and India had moved up into fourth place (IMF Survey 2003). Today, these demographic giants account for nearly 40% of the world's population and nearly 20% of the world output. Having vast domestic markets, the two countries have followed inward-looking development strategies for a long period before deciding on opening up. For the last twenty years China and India have pursued opening up economic policies: they have lowered their custom duties, their non tariff barriers and have allowed foreign direct investment. This process of opening up has been accompanied by domestic economic liberalisation, resulting in an accelerated economic growth.
.1 Research problem
China and India with their large population, economic strength, and a huge trading sector are moving towards becoming important players in the global economy. Nevertheless, their quest of being global economic players will be hindered if they do not effectively address the huge development challenges currently being faced.
.2 Research objective
The outcome of the ongoing economic transformation in China and India has a profound impact on the world trading system, world monetary system and the foreign direct investments (FDI).
.3 Research question
America has long been the primary engine of the global economy. Would China and India be capable candidates in becoming the second important engine of growth of the global economy?
2.0 Research methodology
The data for this assignment is obtained from various secondary sources i.e. textbooks, economic articles and reviews from economic and business magazines and also from the World Bank and International Monetary Fund websites.
3.0 Finding
China and India had similar development strategies prior to their breaking out of their deliberate insulation from the world economy and the ushering in of market oriented economic reforms and liberalisation. China began reforming its closed, centrally planned, non-market economy in 1978. India always has had a large private sector and functioning markets which were subject to rigid state controls until the hesitant and piecemeal reforms that were initiated in the 1980s (Srinivasam 2003).
3.1 China's economic prospects:
China is one of the world's great enigmas; this ancient civilisation holds title to being the world's most rapidly growing capitalist economy. At the same time it is the last bastion of Communist dictatorship. Since 1979, China has entered a new historic period of implementing reforms and creating an open-door policy to carry out the construction of modernisation. Under the guidance of Deng Xiaoping's theory of establishing a socialist country with Chinese characteristics, China has generated unprecedented achievements in economic development and other fields (Itoh 1997, p. 4).
3.1.1 The phenomenal growth
China's real Gross Domestic Product (GDP) in 2002 was more than eight times that of 1978, the year when Deng Xiaoping launched the country's economic reform program. Its real GDP growth, which has averaged 10% per year during 1980 - 2001, had slowed to a range of 7 - 8 % per year during 1998 - 2002 (IMF Survey 2003). China's expansion has been particularly impressive recently, when it maintained its growth even in the face of a global growth recession in 2001 and an anaemic recovery in 2002. Its growth continues to be fuelled by a rising ratio of fixed investment to GDP, which is expected to reach 42.2% in 2003 (Srinivasan 2003). World Bank (IMF Survey 2003) notes that this rate of investments exceeded that level reached in the early 1990s when the economy was believed to be overheating. Since 2003, the Chinese government has begun tightening its controls on credit, thus limiting the development of new ventures.
China's external trade has expended even more rapidly than its economy, reflecting a substantial increase in openness over the past two decades. In 1977 China accounted for less than 1% of world trade, a share that by 2000 had increased to 6%, in the process catapulting China to become the world's 6th largest economy (at market exchange rates) and the 4th largest trader in the world. (IMF 2000, p.82). Its foreign exchange reserves stood at about US$383 billion (Srinivasan 2003).
China's inflows of foreign direct investment (FDI) are a third indicator of its economic rise. China, under ...
This is a preview of the whole essay
China's external trade has expended even more rapidly than its economy, reflecting a substantial increase in openness over the past two decades. In 1977 China accounted for less than 1% of world trade, a share that by 2000 had increased to 6%, in the process catapulting China to become the world's 6th largest economy (at market exchange rates) and the 4th largest trader in the world. (IMF 2000, p.82). Its foreign exchange reserves stood at about US$383 billion (Srinivasan 2003).
China's inflows of foreign direct investment (FDI) are a third indicator of its economic rise. China, under its "Open Door" policy, created several special zones on the southern coast in 1980 (Lardy 2003). Initially, the inflows were modest, but by early 1990s, this had increased to more than US$25 billion, reaching US$52 billion in 2002 (Yueh 2003). Yueh (2003, p.10) estimates China's stock of FDI to be in the region of $500 billion and growing. Nevertheless, there is some dispute over the figure on account of "round tripping" in which capital leaves China and returns to take advantage of foreign capital concessions.
3.1.2 The challenges
China's economy has shown remarkable economic growth over the past two decades and many economists project that it will enjoy a fairly healthy growth in the near future. Standards and Poor's DRI, a private international forecasting firm, projects China's GDP to grow at an average annual rate of 7% over the next 15 years (Morrison 2000). Still, China's outstanding economic performances to-date is no guarantee of its future success. There are major challenges which are profound and could seriously hinder this rosy outlook.
The Chinese leadership faces profound challenges as it seeks to sustain rapid economic growth and deliver rising living standards to its population. It must further cut tariff levels and eliminate non tariff barriers in order to meet WTO requirement. This opens up the economy to even more foreign competitions and stimulates structural changes that will add to the unemployment which at 2003 stood at 170 million (Wolf 2003). Apart from the unemployment issue, China's leadership must grapple with income inequality, which is increasing on virtually every identifiable dimension. Both unemployment and income inequality could trigger social unrest and the Chinese government do not want another Tienniam incident which will impact its international standings. The other major challenge which is considered a ticking time bomb would be the famous state owned enterprises (SOE). Most of the enterprises are inefficient, 70% are losing money and at least one-third of it are technically bankrupt (Allen 1997, p.21). Due to the inefficient reforms of SOEs and failure to operate solely on market-based principles, the banking system is in an awkward position. The major state-owned banks remain insufficiently capitalised and suffer from poor risk management due to the interference from the central government. These banks which dominate the financial landscape remain burdened with a high level of non-performing loans. Wolf (2003) mentioned that the total bad loans represent about 60% of GDP and this poses a serious threat to the banking system as three out of four state banks are believed to be insolvent. Apart from the above, the issue of inadequate infrastructure and lack of law need to be addressed. In the case of infrastructure, inadequate transportation and energy systems are the main challenges for further development, especially in western China. Until the infrastructure is improved, the inland regions of China will remain under-utilised and under-developed (Vanhonacker 2004, p.37). As for the lack of law, it is a tough problem in China. Vanhonacker (2004, p.37) pointed out that the lack of law has led to widespread government corruption, financial speculation, and misallocation of investment funds.
The Chinese government needs to overcome these challenges, failing which, could seriously impede, if not reverse, China's buoyant economic performance. To address these challenges and push the economic reforms forward, the Chinese government is focusing on four actions: deepening the reform of SOEs to enable them to compete equals in the market economy; overhauling and regulating market order, and expanding the market system; enhancing macro-control, and deepening reform of the finance, taxation, banking, and investment systems; and opening to the outside world in the light of economic globalisation (Vanhonacker 2004, p.37-38). The plan was outlined in the "Report on the Outline of the Tenth Five-Year Plan for National Economic and Social Development" by Premier Zhu Rongji (Vanhonacker 2004, p.37).
3.2 India's economic prospects:
India was considered as an almost stagnant economy, crippled by regulations and controls, and suffocated by a policy of self sufficiently, which cut off domestic firms from the international environment. In the mid-1980s, partial deregulation and an expansionary fiscal policy to stimulated growth which resulted in an increasing in both domestic and external debt. Still, it made inroads into virtually all areas of industry (IMF Survey 2003). In July 1991, the more methodical and systemic reform package was introduced by the then Finance Minister, Manmohan Singh, who is the current Prime Minister. This reform produced a more stable and sustainable growth from 1992 on.
3.2.1 The pace of growth
For the three decades from 1951 - 1981, India's average annual growth rate was a steady 3.6% that was often termed as the "Hindu rate of growth". However during the 1980 - 2001 periods its average annual rate of growth of GDP was close to 6%. It reached a peak of 7.8% in 1996-97 from the low of 1.3% in the crisis year 1991-92 (IMF Survey 2003). The solidity of the Indian economy is evident from its stability in the backdrop of the Asian crisis in 1997-98 and the world economic slowdown in 2000. With bountiful monsoon rains in 2003, growth is expected to be 8% in 2003-2004 (The Economist 2004, September).
The first reforms in the 1980s set the stage for the 2nd wave of reforms in 1991 that transformed its agricultural economic into a broader based economy with the addition of services and industry. Since the mid 1990s, software and computer services have been the most dynamic component of Indian service exports. India is a force to reckon with in information technology (IT). With 20% of world exports, India has thus become the world leading exporter of IT services, ahead of Ireland and the United States (Chauvin 2003). This sector is highly professional and provides a major impetus to the economy. India is also notable for its biotech and pharmaceutical products.
Furthermore, the liberalisation of private sectors had created a favourable business environment, which has resulted in the emergence of world class companies that can compete with the best in the West. This has also boasted India's corporate image in the international arena. India also had put in place a supervisor system in its financial system to ensure stability and submitted itself to the scrutiny of the Financial Stability Assessment - a diagnostic tool used by IMF (Solomon 2003). Foreign portfolio investors had recognised the strength and potential of the Indian capital market and invested US$7 billion into the market in 2003 (Jafri 2004). Its stock market also registered 80% growth in 2003.
From 1990 - 2001, India has also enlarged its share in world exports. The Indian export performance was especially strong in the following sectors: service, textile, chemicals, and food and agricultural. In 1980, the international trade to GDP of total trade in goods and services stood at about 15%, but by 2001 the figure has risen to around 25% (IMF Survey 2003). Its strong performance in the export market has led to a stunning rise in the country's foreign currency reserves from US$30 billion in 2000 to over US$100 billion in 2003 (The Economist 2003, September).
3.2.2 The challenges
Economic reforms have scored success in installing post-1990s India as one of the world's fastest growing economic after China. That's not to say everything in India is rosy and that the country has no economic problems.
For starters, the Indian government continues to incur large deficits. Years of fiscal deficits in the range of 4% to 8% of GDP has caused government debt to trend higher, currently standing around 80% of GDP in 2003 (IMF Survey 2003). The high cost of servicing debt is a serious constraint on public spending on infrastructure improvements. Another concern is the relatively slow pace of structural reform. The economy was liberalised significantly in the early 1990s, but the pace of reform has slowed down. Bureaucratic red tape continues to impede flexibility, which explains the relatively low amount if FDI and also wide spread of corruption. Large fiscal deficits and the slow pace of structural reform stem in part from the same source: the weak political system. Since the 1980s, India has been ruled by coalition governments, which makes aggressive reform more difficult and frequent changes in government also cause too many policy shift. There is also significant widening of regional disparities in growth and poverty reduction. Some dynamic states like Maharashtra are sprinting ahead while Bihar has been stagnant (The Economist 2004, February). This could put pressure on the federal system and upset the political stability i.e. changes in the government, which was proved in the recent general election when BJP lost the election to Congress. The new government realised the importance and pledged to continue the reforms to ensure economical growth (The Economist 2004, May).
The initial reforms were essentially concentrated at the central government level, which have now been taken to the state level. This is important in particular to promote regional equity as a matter of fundamental significance for a federal polity like India. The government is aware of the challenges and had launched further reforms in its Tenth Five - Year Plan (2002 - 2007). The plan seeks to drive economic growth through trade promotion and liberalisation. The Indian government is projecting an 8% average rate of growth and make India the fastest growing economy in the world by the end of the period (Srinivasan 2003).
4.0 Analysis
"The economic dominance of the USA is already over" declares Peter Drucker ( Chaudhry 2004). The driving forces in the world economy are shifting towards Asia. The economic developments in China and India are causing a profound impact on the rest of the world economy. Thus both the countries represent an opportunity and threat.
4.1 The world trading system
With the re-entry of these countries into the global economy, China is fast becoming the low procedures across a broad spectrum of products. As for India, it is starting to exert downward pressure on some global service sectors. In the case of India, it is seen in the increasingly fast growing new economy service sectors, particularly the export oriented information technology (IT) and service sector. Total revenue from the IT sector has reached US$12 billion in 2003 (The Economists 2004, February). The software sector is the fastest growing major component of the IT industry and its dominance is causing concern to the other software procedures. In America it is now a political issue due to the high workers losing jobs in this sector. As for China, its acceptance into the WTO has a mixed reaction. China is already the fourth biggest industry producer and it is becoming a serious rival for other countries in general. The increase in China's supply of labour intensive manufacturers will reduce their relative price on the world market thus benefiting net importer countries. At the same time, the growth in the economy will result in the Chinese' demand for luxurious goods thus creating opportunities for other countries to export their products to China. In the same breath, the flooding of low cost products will cause concern for other developing countries who are also involved in manufacturing. This will result in loss of jobs and may cause unrest in some countries.
4.2 The world monetary system
The impact on the world monetary system is quite different for both the countries. For India, the Indian Rupee is floated and the exchange rate is determined by the market forces. Continued growth in the export market has caused the Rupee to appreciate against the dollar (The Economist 2003, September). However, the Chinese Yuan is pegged against US dollar and according to a number of world renowned economists that the Yuan is undervalued. There is growing pressure from the international community that the Yuan should be floated. It has been stated that by allowing the Yuan to float, there will be severe impact in the global economy. Firstly, the banking system in China is insolvent. By allowing the Chinese the chance to hold other currencies apart from Yuan, will result in a run in the banking system. This would not only cause China's banking system to be imperil, but would result in a collapse of the Yuan (The Economist 2003, September). Both these developments would send out shock waves bigger than those would from Asia's financial crisis of 1997 - 98 (The Economist 2003, September).
4.3 Foreign Direct Investment
China's commitment to join the WTO appears to represent a major commitment on the part of Chinese government to significantly reform its economy and provide greater access to its markets. The opening up of its pillar industry such as telecommunication, finance sector, infrastructure, coupled with low cost labour and production would expect more foreign multi national companies to shift their operations into China. It is expected that the amount of FDI will increase to US$100 billion in 2005 from US$40 billion in 2001 with the opening of the pillar industry (Vanhonacker 2004). In the case of India, its gradual economic liberalisation, growing incomes, generally low labour costs and the widespread use of English are major attractors for foreign investors. Key sectors of manufacturing, mining, infrastructure and software now permit 100% FDI which is attracting major multi national companies. It was reported in Money Magazine that between 2000 and 2015, the service industry jobs representing US$136 billion in wages will move to India (Updegrave 2004). With statistic like this, it's no surprise that offshore outsourcing has become a major economic issue in the West and in the case of America it is also a hot political issue that is being debated in the current US presidential campaign. If this trend continues, there will be less FDI flowing into other nations especially the developing nations, which spells doom to their economy especially those who rely on FDIs for development.
5.0 Conclusion
Clearly economic, political and structural challenges remain. However, it should not deny that much progress has been made in the last 20 years. Both countries have been successful in shrinking the size of the state's contribution to the economy and expanding the private sector, while their improved economic engagement with the rest of the world is encouraging. Looking ahead, India should eventually start to close the gap with China, given its favourable demographics. Further progress in both countries in terms of financial reform and reduction in the scale and influence of the public sector, will have major implications on the rest of the world economy. With that, China will inevitably emerge from this process as the co-engine of economic growth for the entire world (Erdman 2004). In the case of India, it is destined to join the ranks of United States and China as principle engine of global economic growth within a matter of years, not decades (Erdman 2004).
6.0 Learning outcome/recommendation
What key lesson can be gleaned from this experience? It is clearly seen that the growth of a country is dependent upon the integration between the internal and external environment. In opening the economy to the external environment, a country is able to identify the strengths and weaknesses of its economy. Based on this revelation, new policies should be introduced to realign the economic progress with the nation's aspiration. Therefore, countries that remain alert to the changing dynamics of comparative advantages and are able to position themselves to respond effectively will benefit. This lesson is equally true in the case of India and China as they continue on the path of trade and investment reforms.
III. References
Allen. J. 1997, Seeing Red, China's Uncompromising Take over of Hong Kong, Butterworth-Heinemann Asia, Singapore.
Chaudhry, S.M. 2004, Two Future Economic Powers: India & China, DAWN Business, Available: http://www.dawn.com/2004/02/16, (Accessed: 2004, June 23).
Chauvin, S. & Lemoine, F. 2003, India in the World Economy: Traditional Specialisation and Technology Niches, CEPII, Working paper no: 2003 - 9.
Erdman, P. 2004, India is the next China, CBS Market Watch, Available: http://www.CBS.MarketWatch.com, (Accessed: 2004, June 1).
IMF Report 2000, The Global Implications of the US Fiscal Deficit and of China's Growth, Available: http://www.imf.org/external/pubs, (Accessed: 2004, May 20).
IMF Survey, 2003, A tale of two giants: India & China, vol. 32, no: 21 & 22, December 15, Available: http://www.imf.org/imfsurvey, (Accessed: 2004, June 11).
Itoh, F. 1997, China In The Twenty-First Century: Politics, Economy, and Society, United Nations University Press, Tokyo, Japan.
Jafri, S.A. 2004, India to be 3rd largest economy by 2020, rediff.com, Available: http://www.in.rediff.com.htm, (Accessed: 2004, June 21).
Lardy, N.R. 2003, The Economic Rise of China, Federal Reserve Bank of Cleveland, August 1.
Morrison, W.M. 2000, "China's Economic Conditions", Foreign Affairs, Defence and Trade Division, Available: http://www.ncseonline.org, (Accessed: 2004, May 20).
Solomon, J. 2003, India Is Poised for Faster Growth, The Wall Street Journal, September 25.
Srinivasan, T.N. 2003, China and India: Economic Performance, Competition and Co-operation, Yale University, Available: http://www.econ.yale.edu.pdf, (Accessed: 2004, June 11).
2003, Ready to roll (again)?, The Economist, September.
2004, India's shining hopes, The Economist, February.
2004, The Shine comes off, The Economist, May.
Updegrave, W. 2004, Outsourcing: Short-term pain, long term gain, Money Magazine USA Inc, Available: http://www.money.cnn.com, (Accessed: 2004, June 23).
Vanhonaker, W.R. 2004, The China Casebook, McGraw-Hill Education (Asia), Singapore, pp.2-38.
Wolf, C. 2003, Eight threats to China's economic miracle, South China Morning Post, August 7, Available: http://www.rand.org.html, (Accessed: 2004, May 20).
Yueh, L.Y. 2003, China's Economic Growth with WTO Accession, The Royal Institute of International Affairs, UK, Working Paper no. 1.
MGT 530 International Business
Assignment 1
Nelson Pilay
