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Asia and Pacific Regional Round Table:

“The China and India Factor: Implications for


Developing Countries in the Asia and Pacific Region”

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

1. Economic Performance of China and India


A. Gross Domestic Product
B. International Trade
C. Foreign Direct Investment

2. Sources and Sustainability of Growth


A. Factor Accumulation
B. Total Factor Productivity
C. External Capital Inflows

3. Impacts on Other Developing Countries in Asia and the Pacific Region


A. Threats and Opportunities
B. Reshaping Industrial Landscapes
C. Impact on Natural Resources and Environment

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

1. Average Annual Growth Rate of Selected Asian Countries


2. Sources of Output Growth in China and India (% Per Year)
3. TFP Growth for India
4. TFP Growth for China and India by Different Estimations
5. Composition of Private Capital Inflows
6. Industry Exports as a Percentage of Total Exports, China and India
7. Sectoral and Fuel Shares of Energy Consumption in China and India
8. Welfare Gains from Asian Economic Integration (JACIK)

List of Figures

1. Share of GDP in the World Economy


2. GDP Growth of Selected Countries
3.a. Product Structure of Exports of Selected Asian Countries
3.b. Product Structure of Imports of Selected Asian Countries
4. Pattern of Intraregional FDI Flows in Asia, 2002-2004
5. Trend of FDI in Flow in Asia
6. Primary Energy Use of Coal and Total CO2 Emissions from Fossil Fuel Consumption,
China and India, 1980–2003
7. Growth Incidence Curves for China (1990–99) and India (1993–99)
8. Frequent Antidumping Target Countries: 1995-2007.6
9. Frequent Countervailing Target Countries: 1995-2007.6
10. Model Scope of UNIDO Works

List of Appendix

1. Leading Merchandise Exporters and Importers in Asia, 2005


2. Leading Exporters and Importers of Commercial Services in Asia, 2005
3. WTO Disputes Involving China as of November 2007
4. WTO Disputes Involving India as of November 2007
5. Asia-Pacific Intra-Regional FTA Network

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.

1. ECONOMIC PERFORMANCE OF CHINA AND INDIA

A. Gross Domestic Product

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,

Table 1. Average Annual Growth Rate of Selected Asian Countries


GDP Agriculture Industry Manufacturing Services
year 90-00 00-05 90-00 00-05 90-00 00-05 90-00 00-05 90-00 00-05
China 10.6 9.6 4.1 3.9 13.7 10.9 12.7 11.1 10.2 10.0
India 6.0 7.0 3.0 2.5 6.3 7.5 7.0 6.9 8.0 8.5
Japan 1.1 1.4 -1.6 -0.9 -0.3 0.0 … 0.8 1.9 1.7
Korea 5.8 4.6 1.6 -0.1 6.0 6.3 7.3 7.0 5.6 3.7
Lao PDR 6.5 6.2 4.8 2.8 11.1 12.1 11.7 10.4 6.6 6.7
Malaysia 7.0 4.8 0.3 3.4 8.6 4.6 9.5 5.2 7.3 5.3
Philippines 3.3 4.7 1.7 3.9 3.5 3.3 3.0 4.3 4.0 6.0
Thailand 4.2 5.4 1.0 1.9 5.7 6.9 6.9 7.2 3.7 4.5
Vietnam 7.9 7.5 4.3 3.8 11.9 10.2 11.2 11.5 7.5 6.9
Source: World Bank, World Development Indicators 2007, 190-192.
it is projected that in 2020, the shares of China and India from the world GDP will reach to
7.9% and 2.4% whereas those for Japan and Germany will decrease to 8.8% and 5.4%.1
Average growth rates of individual economic sectors are more impressive, especially
China with a two digit growth since 1990 in industry, manufacturing and services sectors. It is
noted that services sector in India has also shown the growth rate of 8.5% since 2000. Figure
1 illustrates the trend of GDP shares for selected countries. It shows the conspicuous decline
of Japan since the middle of the 1990s while China takes up more and more shares of the
world economy. If the current trend is sustainable, the share of the Chinese economy would
soon become larger than that of Japan or Germany. India’s share in the world GDP is
currently about as large as that of Korea, which has remained stable for a substantial period of
time.

Figure 1. Share of GDP in the World Economy

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

Germany United States Japan China


R. of Korea India Taiwan

Source: World Bank, World Development Indicators 2007.

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.

Figure 2. GDP Growth of Selected Countries

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.

Figure 3.a. Product Structure of Exports of Selected Asian Countries

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

Figure 3.b. Product Structure of Imports of Selected Asian Countries

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

C. Foreign Direct Investment

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.

Figure 4. Pattern of Intraregional FDI Flows in Asia, 2002-2004

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.

M&As have become a major mode of entry into developed-country markets by


TNCs from South, East and South-East Asia. In recent years, an increasing number of mega
deals have been undertaken in the United States and Europe by Asian TNCs. In 2005, for
example, a group of Hong Kong investors acquired the Bank of America Center in San
Francisco for $1 billion; BenQ (Taiwan Province of China) took over the mobile phone
business of Siemens for $323 million; Tata chemicals (India) acquiried Brunner Mond
(United Kingdom) for $109 million. Most of the leading investor countries in the region are
also among the largest investors in the developing world. China’s FDI outflows surged in
2005, reaching $11 billion, driven mainly by some mega M&As in manufacturing and natural
resources. Given the strong performance of the Indian corporate sector, there is considerable
potential for outward FDI from India.

Figure 5. Trend of FDI in Flow in Asia

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

Source: UNCTAD, World Investment Report 2006.

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).

2. SOURCES AND SUSTAINABILITY OF GROWTH7

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

It is theoretically proven that growth, if it depends largely on factor accumulation, is


unlikely to be sustainable since factor accumulation cannot continue forever. On the other
hand, growth that is driven largely by total factor productivity (TFP) growth can be
sustainable.10
Jorgenson and Vu (2005) focus on the possible impact on growth of the information
and communication technology (ICT) revolution, by breaking up capital into ICT and non-
ICT capital.11 They also account for human capital accumulation by distinguishing between
growth in labour hours and labour quality. Their decomposition of growth is shown in Table 2.

Table 2. Sources of Output Growth in China and India (% Per Year)


Period 1989-1995 Period 1995-2003
GDP Capital Labour TFP GDP Capital Labour TFP
Growth ICT Non- hours quality Growth ICT Non- hours quality
(%) ICT (%) ICT
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

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.

Table 3. TFP Growth for India


Period TFP Growth Contribution to Growth of NDP
(% per year) Per Worker (%)
1950 – 1965 1.9 41
1966 – 1980 0.1 4
1981 – 1992 2.5 46
1993 – 2004 3.6 59

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.

Table 4. TFP Growth for China and India by Different Estimations


China India India
(Hu and Khan) (IMF) (World Bank)
1953-78 1.1 1960s -1.0 to 1.1
1979-94 3.9 1970s -2.1 to 0.3 1979-98 1.3 to 1.5
Middle 1990s 1.5 to 3.4 1994 to 1997 2.4 to 2.8
Late 1990s 0.3 to 2.9
Source: Srinivasan, T.N. 2005. “Productivity and Economic Growth in South Asia and China,”
Pakistan Development Review (2006).

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.

C. External Capital Inflows

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.

Table 5. Composition of Private Capital Inflows


1990 2004
China India China India
Private Capital 8,107 1,843 73,829 17,852
Flows
($ Millions)
FDI 3,487 237 54,936 5,335
Portfolio, Bonds -48 147 3,690 3,772
Portfolio, Equity 0 0 10,923 8,835
Banking 4,668 1,459 4,280 -40
Gross Private 2.5 0.8 10.0 5.9
Capital Flows
as % of GDP
Net FDI Inflows 1.0 0.1 2.8 0.8
as % of GDP
Net FDI Outflows 0.2 0.0 0.1 0.2
as % of GDP

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.

3. IMPACTS ON OTHER DEVELOPING COUNTRIES IN ASIA AND THE PACIFIC


REGION

A. Threats and Opportunities

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.

Table 6. Industry Exports as a Percentage of Total Exports, China and India


Industry export 1995 2000 2004
China
Pharmaceutical products 1.1 0.7 0.6
Iron and steel 3.5 1.8 2.3
Electrical equipment 5.9 9.7 10.0
White goods 0.7 1.1 1.3
Road vehicles 1.8 2.6 2.8
Textiles 26.0 21.4 16.2
India
Pharmaceutical products 2.3 2.8 2.9
Iron and steel 3.0 2.9 6.0
Electrical equipment 1.3 1.8 1.9
White goods 0.0 0.0 0.1
Road vehicles 2.8 2.0 2.8
Textiles 27.0 27.2 17.4
Source: United Nations Commodity Trade Statistics database. Quoted from Winters and Yusuf, 2007.
Dancing with Giants: China, India and the Global Economy, 50.

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.

C. Impact on Natural Resources and Environment

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

Note: CO2 = carbon dioxide; Mtoe = million tons of oil equivalent.


Sources: International Energy Agency, OECD (2005). Drawn from Winters and Yusuf, 2007. Dancing
with Giants: China, India and the Global Economy, 141.

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

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
Renewables 15.9 11.5 7.9 37.6 30.3 15.9
Note: Mtoe = million tons of oil equivalent.
Source: Winters and Yusuf, 2007. Dancing with Giants: China, India and the Global Economy, 157.

4. POLICY IMPLICATIONS

A. For China and India

The aggregate growth performances of China and India mask considerable


unevenness of growth at the sub-national level. Chinese provincial GDP growth rates
(between 1978 and 2004) ranged from a low of 5.9 percent in Qinghai to a high of 13.3
percent in Zhejiang. In India, growth rates of state domestic product between 1980 and 2004
ranged from a low of 1.7 percent in Jammu and Kashmir to a high of 8.7 percent in Goa.
Among India’s 16 major states, Bihar (including the newly created state of Jharkand) had the
lowest growth rate—namely, 2.2 percent—and Karnataka had the highest—7.2 percent.
A second dimension of uneven growth in both countries is found across sectors.
Growth rates in the primary sector (agriculture) not only have lagged behind those in the
secondary (industry) and tertiary (services) sectors, but also actually have declined since 1980.
the particular form of sectorally uneven growth experienced by China and India—primary
sector growth rates lagging behind growth rates in the secondary and tertiary sectors, and
rural incomes growing more slowly than urban incomes—has meant less poverty reduction
than might have been the case otherwise.
The unevenness of economic growth across households at different levels of living
can be seen clearly in the growth incidence curve (GIC), which gives the annualized rate of
growth over the relevant time period at each percentile of the distribution (ranked by income
or consumption per person). Figure 7 displays the Chinese and Indian GICs for the periods
1990–99 and 1993–99, respectively. In both cases, growth rates at the bottom of the
distribution were lower than those at the top. The gradient is less steep for India. Growth rates
in China in the 1990s rise sharply as we move up the income ladder, with the annual rate of
growth in the 1990s increasing from approximately 3 percent for the poorest percentile to
more than 10 percent for the richest. Although the growth rate in the overall mean was 6.2
percent, the mean growth rate for the poorest 20 percent (roughly according with China’s “$1
a day” poverty rate in 1995) was 4.0 percent. The GIC for India for the 1990s shows a slight
U shape, with the lowest growth rates—approximately 1 percent—for people around the 10th
percentile, and a smaller difference between growth rates at the top (close to 2 percent) and
those at the bottom (just over 1 percent) than was the case for China.

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.

Figure 8. Frequent Antidumping Target Countries: 1995-2007.6

600

500

400

300

200

100

0
China Korea Chinese United Japan Indonesia India Thailand Russia Brazil
Taipei States

Source: WTO, <http://www.wto.org/english/tratop_e/adp_e/adp_e.htm>.

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.

Figure 9. Frequent Countervailing Target Countries: 1995-2007.6

50

45

40

35

30

25

20

15

10

0
India Korea Italy Indonesia EU Thailand Canada Brazil Chinese
Taipei

Source: WTO, <http://www.wto.org/english/tratop_e/scm_e/scm_e.htm>.

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.

B. For Other Developing Countries in the Region

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'.

Table 8. Welfare Gains from Asian Economic Integration (JACIK)


Estimated Welfare Gains in US $ Million
Scenario I Scenario II Scenario III
(Trade Liberalization) (Trade and Investment ( Trade, Investment and
Liberalization) Mobility of Skilled Workers)
Japan 107626 111807 150695
Korea 13043 13317 14076
China-HK 6327 7100 16328
ASEAN 13451 13553 19405
India 6971 7379 9937
JACIK 147418 153156 210441
Rest of World -27293 -45306 109916
World 120125 107849 320357
Source: Mohanty et al., 2004.

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.

C. Agenda for UNIDO

In general, one of the distinctive contributions of UNIDO to client countries is to


directly address private interests as well as public concerns. Unlike many other international
organizations or forums where governments of member countries have exclusive access or
authorities, UNIDO works intrinsically involve economic cooperation with private as well as
public sectors of pertinent countries. Moreover, its work may demand coordination among
various international organizations to properly implement multi-dimensional policy missions.

Figure 10. Model Scope of UNIDO Works

IMF UNCTAD World Bank WTO


International
Cooperation
UNIDO

Gov 1 Gov 2 Gov 3 Gov 4


National Policy
Making
Private Private Private Private
National Sector Sector Sector Sector
Economy

Therefore, UNIDO is uniquely situated in terms of UN missions to assist industrial


developments by embracing trilateral functions of international coordination, assistance of
national policy development, and mobilization of private economic sectors. Depending on
client countries’ economic, social and political situations, UNIDO should be flexible in
finding better balances among those tri-dimensional measures.
For example, WTO initiated a new work program on “Aid for Trade” in December
2005 to support basic infrastructures of many developing countries to take advantages of
market access opportunities.22 To make this program more effective and differentiated from
other overseas development assistance, the role of UNIDO may be crucial to link financial
resources to trade facilitation that will eventually serve industrial development although
UNIDO is not heavily engaged in that initiative at the current stage. Since many countries in
Asia and the Pacific region are also major recipients of Aid for Trade programs, UNIDO will
be able to play a critical role in advancing that initiative.
The scope of UNIDO works normally covers the following aspects of economic
policies:
Promoting Industry Development
Enhancing Trade Capacity
Rationalizing Energy Policies
Alleviating Environmental Problems
Although concrete policy recommendations for different countries may vary depending on
industry structures of pertinent countries, it is generally agreed that trade facilitation measures
need to be improved to enhance trade capacities. In fact, trade and industry capacity building
of developing countries in the region mandates not only trade facilitation in a more
conventional sense dealing with customs processes but also regulatory harmonization in a
broader range of trade-related domestic regulations. In this regard, UNIDO may provide
pertinent countries with valuable opportunities and assistance to assess specific need and
policy agenda. Moreover, UNIDO may contribute to these countries by assisting the
development of appropriate trade remedy systems which are required to seek and
accommodate more trade liberalization.

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)

Annual percentage change

Value Share Value Volume

2005 2000 2005 2000-05 2003 2004 2005 2000-05 2003 2004 2005

Exporters

Asia 2778.8 100.0 100.0 11 18 25 16 8.5 11.5 14.5 10.0

China 762.0 15.0 27.4 25 35 35 28 ... ... ... ...


Japan 594.9 28.9 21.4 4 13 20 5 2.5 5.0 10.5 0.5
Hong Kong, China 292.1 ... ... 8 13 16 10 8.5 15.0 14.5 8.5
domestic exports 20.1 1.4 0.7 -3 7 2 0 -2.5 8.5 -1.5 -2.5
re-exports 272.1 ... ... 9 14 17 11 9.5 15.5 16.5 9.5
Korea, Republic of 284.4 10.4 10.2 11 19 31 12 12.5 17.0 22.5 9.0
Singapore 229.6 8.3 8.3 8 15 24 16 9.5 16.0 20.0 12.0
domestic exports 124.5 4.7 4.5 8 19 23 17 9.0 22.5 18.0 11.0
re-exports 105.1 3.6 3.8 9 10 25 14 10.0 9.5 23.0 13.5

Taipei, Chinese 197.8 9.1 7.1 5 11 21 8 1.5 3.5 7.5 4.0


Malay sia 140.9 5.9 5.1 7 11 21 11 ... ... ... ...
Thailand 110.1 4.2 4.0 10 18 20 14 4.5 8.0 7.0 4.0
Australia 105.8 3.9 3.8 11 8 23 22 2.0 -1.5 4.5 3.5
India 95.1 2.6 3.4 18 16 32 26 ... 2.5 ... ...

Indonesia 86.2 3.9 3.1 6 8 10 22 ... ... ... ...


Philippines 41.3 2.4 1.5 1 3 10 4 ... -1.0 ... ...
Viet Nam 31.6 0.9 1.1 17 22 27 23 ... ... ... ...
New Zealand 21.7 0.8 0.8 10 15 23 7 3.5 2.5 6.5 -0.5
Pakistan 15.9 0.5 0.6 12 20 12 19 ... 12.5 5.0 ...

Importers

Asia 2598.9 100.0 100.0 12 19 27 16 8.0 13.5 14.5 7.5

China 660.0 15.0 25.4 24 40 36 18 ... ... ... ...


Japan 514.9 25.3 19.8 6 14 19 13 3.5 7.0 7.0 2.5
Hong Kong, China 300.2 ... ... 7 12 17 10 7.5 12.5 13.5 7.0
retained imports 28.1 2.3 1.1 -4 -1 13 3 ... ... ... ...
Korea, Republic of 261.2 10.7 10.1 10 18 26 16 7.0 7.5 12.0 6.5
Singapore 200.0 9.0 7.7 7 10 27 15 5.0 6.5 22.0 9.5
retained imports 94.9 5.0 3.7 5 9 30 16

Taipei, Chinese 182.6 9.4 7.0 5 13 32 8 4.0 6.5 15.5 2.5


India 134.8 3.4 5.2 21 26 37 39 ... 21.0 ... ...
Australia 125.3 4.8 4.8 12 23 23 15 8.5 11.5 14.5 9.0
Thailand 118.2 4.1 4.5 14 17 25 25 6.0 12.0 10.0 8.0
Malay sia 114.6 5.5 4.4 7 4 26 9 ... ... ... ...

Indonesia 69.5 2.9 2.7 10 10 30 27 ... ... ... ...


Philippines 47.4 2.5 1.8 5 3 9 8 ... -1.0 ... ...
Viet Nam 36.5 1.0 1.4 18 31 25 17 ... ... ... ...
New Zealand 26.2 0.9 1.0 14 23 25 13 8.5 11.0 15.0 6.0
Pakistan 25.3 0.7 1.0 18 16 38 41 ... 1.5 22.5 ...

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 ... ... ... ...

Source: WTO, 2006. International Trade Statistics, .


Appendix 2. Leading Exporters and Importers of Commercial Services in Asia, 2005
(Billion dollars and percentage)

Value Share Annual percentage change

2005 2000 2005 2000-05 2003 2004 2005

Exporters

Asia 525.3 100.0 100.0 11 10 26 14

Japan 107.9 23.7 20.5 8 8 25 14


China 73.9 9.7 14.1 20 18 34 19
Hong Kong, China 62.2 13.0 11.8 9 4 18 13
India 56.1 ... 10.7 ... 21 ... ...
Singapore 45.1 9.5 8.6 9 12 19 10

Korea, Republic of 43.9 9.6 8.4 8 16 28 8


Australia 27.7 6.0 5.3 8 18 19 8
Taipei, Chinese 25.6 6.4 4.9 5 7 11 0
Thailand 20.5 4.5 3.9 8 3 21 8
Malay sia 19.0 4.5 3.6 7 -9 24 14

Macao, China a 8.8 1.1 1.7 ... 18 44 ...


New Zealand 8.2 1.4 1.6 14 25 19 7
Indonesia a 7.5 1.6 1.4 ... -21 ... ...
Philippines 4.5 1.1 0.8 6 -1 19 10
Viet Nam a 4.4 0.9 0.8 ... 11 18 ...

Importers

Asia 573.5 100.0 100.0 9 9 24 12

Japan 132.6 31.0 23.1 3 3 21 2


China 83.2 9.7 14.5 18 19 31 16
Korea, Republic of 57.7 9.0 10.1 12 11 24 17
India 52.2 ... 9.1 ... 23 ... ...
Singapore 44.0 7.7 7.7 9 13 23 9

Hong Kong, China 32.4 6.7 5.6 6 1 19 5


Taipei, Chinese 31.4 6.9 5.5 4 4 20 5
Australia 28.9 5.0 5.0 10 18 26 9
Thailand 27.5 4.2 4.8 12 9 27 20
Indonesia a 23.2 4.2 4.0 ... 2 ... ...

Malay sia 21.6 4.5 3.8 5 7 8 15


New Zealand 7.8 1.2 1.4 12 20 24 14
Pakistan 7.2 ... 1.3 28 48 ... ...
Philippines 5.8 1.4 1.0 2 -1 8 0
Viet Nam a 5.3 0.9 0.9 ... 10 17 ...

a Includes Secretariat estimates.

Source: WTO, 2006. International Trade Statistics, .


Appendix 3. WTO Disputes Involving China as of November 2007
Dispute Name DS Disputing Rulings
Number Member
As Complainant
United States — Definitive Safeguard Measures on Imports of 252 PR/ABR
Certain Steel Products
United States — Preliminary Anti-Dumping and 368
Countervailing Duty Determinations on Coated Free Sheet
Paper from China
As Defendant
China — Value-Added Tax on Integrated Circuits 309 US Mutual
Settlement
China — Measures Affecting Imports of Automobile Parts 339 EC
China — Measures Affecting Imports of Automobile Parts 340 US
China — Measures Affecting Imports of Automobile Parts 342 Canada
China — Certain Measures Granting Refunds, Reductions or 358 US
Exemptions from Taxes and Other Payments
China — Certain Measures Granting Refunds, Reductions or 359 Mexico
Exemptions from Taxes and Other Payments
China — Measures Affecting the Protection and Enforcement 362 US
of Intellectual Property Rights
China — Measures Affecting Trading Rights and Distribution 363 US
Services for Certain Publications and Audiovisual
Entertainment Products
Note: PR means panel report and ABR means Appellate Body report.
Appendix 4. WTO Disputes Involving India as of November 2007
Dispute Name DS Disputing Rulings
Number Member
As Complainant
Poland — Import Regime for Automobiles 19 Mutual
Settlement
United States — Measures Affecting Imports of Women’s 32
and Girls’ Wool Coats
United States — Measures Affecting Imports of Woven Wool 33 PR/ABR
Shirts and Blouses from India
Turkey — Restrictions on Imports of Textile and Clothing 34 PR/ABR
Products
United States — Import Prohibition of Certain Shrimp and 58 PR/ABR
Shrimp Products
Communities — Restrictions on Certain Import Duties on 134
Rice
European Communities — Anti-Dumping Investigations 140
Regarding Unbleached Cotton Fabrics from India
European Communities — Anti-Dumping Duties on Imports 141 PR/ABR
of Cotton-type Bed Linen from India
South Africa — Anti-Dumping Duties on Certain 168
Pharmaceutical Products from India
United States — Anti-Dumping and Countervailing Measures 206 PR
on Steel Plate from India
United States — Continued Dumping and Subsidy Offset Act 217 PR/ABR
of 2000
Brazil — Anti-Dumping Duties on Jute Bags from India 229
Argentina — Measures Affecting the Import of 233
Pharmaceutical Products
United States — Rules of Origin for Textiles and Apparel 243 PR
Products

European Communities — Conditions for the Granting of 246 PR/ABR


Tariff Preferences to Developing Countries
European Communities — Anti-Dumping Duties on Certain 313 Mutual
Flat Rolled Iron or Non-Alloy Steel Products from India Settlement
United States — Customs Bond Directive for Merchandise 345
Subject to Anti-Dumping/Countervailing Duties
As Defendant
India — Patent Protection for Pharmaceutical and 50 US PR/ABR
Agricultural Chemical Products
India — Patent Protection for Pharmaceutical and 79 EC PR
Agricultural Chemical Products
India — Quantitative Restrictions on Imports of Agricultural, 90 US PR/ABR
Textile and Industrial Products
India — Quantitative Restrictions on Imports of Agricultural, 91 Australia Mutual
Textile and Industrial Products Settlement
India — Quantitative Restrictions on Imports of Agricultural, 92 Canada Mutual
Textile and Industrial Products Settlement
India — Quantitative Restrictions on Imports of Agricultural, 93 New Mutual
Textile and Industrial Products Zealand Settlement
India — Quantitative Restrictions on Imports of Agricultural, 94 Switzerland Mutual
Textile and Industrial Products Settlement
India — Quantitative Restrictions on Imports of Agricultural, 96 EC Mutual
Textile and Industrial Products Settlement
India — Measures Affecting Export of Certain Commodities 120 EC
India — Measures Affecting the Automotive Sector 146 EC PR/ABR
India — Import Restrictions 149 EC
India — Measures Affecting Customs Duties 150 EC
India — Measures Affecting Trade and Investment in the 175 US PR/ABR
Motor Vehicle Sector
India — Import Restrictions Maintained Under the Export 279 EC
and Import Policy 2002-2007
India — Anti-Dumping Measures on Imports of Certain 304 EC
Products from the European Communities
India — Anti-Dumping Measure on Batteries from 306 Bangladesh
Bangladesh
India — Anti-Dumping Measures on Certain Products from 318 Chinese
the Separate Customs Territory of Taiwan, Penghu, Kinmen Taipei
and Matsu
India — Measures Affecting the Importation and Sale of 352 EC
Wines and Spirits from the European Communities
India — Additional and Extra-Additional Duties on Imports 360 US
from the United States
Note: PR means panel report and ABR means Appellate Body report.
Appendix 5. Asia-Pacific Intra-Regional FTA Network

Source: R. Fiorentino et al., “The Changing Landscape of Regional Trade Agreements: 2006 Update” , 21 (WTO Discussion Paper No. 12).
Slide 1

The China and India Factor: Implications


for Developing Countries
in the Asia and the Pacific Region

D UKGEUN AHN
Graduate School of International Studies
Seoul National University

Slide 2

I. Economic Performance of China and India


A. Gross Domestic Product

Average Annual Growth Rate of Selected Asian Countries


GDP Agriculture Industry Manufacturing Services
year 90-00 00-05 90-00 00-05 90-00 00-05 90-00 00-05 90-00 00-05
China 10.6 9.6 4.1 3.9 13.7 10.9 12.7 11.1 10.2 10.0
India 6.0 7.0 3.0 2.5 6.3 7.5 7.0 6.9 8.0 8.5
Japan 1.1 1.4 -1.6 -0.9 -0.3 0.0 … 0.8 1.9 1.7
Korea 5.8 4.6 1.6 -0.1 6.0 6.3 7.3 7.0 5.6 3.7
Lao PDR 6.5 6.2 4.8 2.8 11.1 12.1 11.7 10.4 6.6 6.7
Malaysia 7.0 4.8 0.3 3.4 8.6 4.6 9.5 5.2 7.3 5.3
Philippines 3.3 4.7 1.7 3.9 3.5 3.3 3.0 4.3 4.0 6.0
Thailand 4.2 5.4 1.0 1.9 5.7 6.9 6.9 7.2 3.7 4.5
Vietnam 7.9 7.5 4.3 3.8 11.9 10.2 11.2 11.5 7.5 6.9
Source: World Bank, World Development Indicators 2007, 190-192.

2
Slide 3

I. Economic Performance of China and India


A. Gross Domestic Product

Share of GDP in the World Economy

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

I. Economic Performance of China and India


B. International Trade

Product Structure of Exports of Selected Asian Countries

Source: UNCTAD, 2005. Trade and Development Report.


Drawn from Winters and Yusuf, Dancing with Giants: China, India and the Global Economy (2007), 40.

4
Slide 5

I. Economic Performance of China and India


B. International Trade

Product Structure of Imports of Selected Asian Countries

Source: UNCTAD, 2005. Trade and Development Report.


Drawn from Winters and Yusuf, Dancing with Giants: China, India and the Global Economy (2007), 41.

Slide 6

I. Economic Performance of China and India


C. Foreign Direct Investment

Pattern of Intraregional FDI Flows in Asia, 2002-2004

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.

6
Slide 7

I. Econom ic Perform ance of China and India


C. Foreign Direct Investm ent

Trend of FDI in Flow in Asia

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

Source: UNCTAD, W orld Investment Report 2006.

Slide 8

II. Sources and Sustainability of Growth


A. Total Factor Productivity

Sources of Output Growth in China and India (% Per Year)


Period 1989-1995 Period 1995-2003
GDP Capital Labour TFP GDP Capital Labour TFP
Growth ICT Non- hours quality Growth ICT Non- hours quality
(%) ICT (%) ICT

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

Source: Jorgenson and Vu (2005).

8
Slide 9

II. Sources and Sustainability of Growth


B. External Capital Inflows

Composition of Private Capital Inflows


1990 2004
China India China India
Private Capital 8,107 1,843 73,829 17,852
Flows
($ Millions )
FDI 3,487 237 54,936 5,335
P ortfolio, Bonds -48 147 3,690 3,772
Portfolio, Equity 0 0 10,923 8,835
Banking 4,668 1,459 4,280 -40
Gross P rivate 2.5 0.8 10.0 5.9
Capital Flows
as % of GDP
Net FDI I nflows 1.0 0.1 2.8 0.8
as % of GDP
Net FD I 0.2 0.0 0.1 0.2
Outflows
as % of GDP

Source: Srinivasan, T. N. 2003a. “China, India and the World Economy”, Working Paper 286, Stanford
University Center for International Development.

Slide 10

III. Im p a c ts o n O th e r D e ve lo p in g C ou n trie s in A s ia a n d th e P a c ific R eg io n


A . T h re a ts a n d O p p o rtu n itie s

T hreat O pportun ity

Losing m anufacturing R apid ly growing dem ands


bases, particularly in in C hina and India
em erging industrial sectors
H uge energy dem and
Losing foreign direct
inv estm ent T echnolog y transfer

R isk of m arginalization M ore possibility for


industry cooperation

10
Slide 11

III. Impacts on Other Developing Countries


in Asia and the Pacific Region
B. Reshaping Industrial Landscapes

Industry Exports as a Percentage of Total Exports, China and India


Industry export 1995 2000 2004
China
Pharmaceutical products 1.1 0.7 0.6
Iron and steel 3.5 1.8 2.3
Electrical equipm ent 5.9 9.7 10.0
W hite goods 0.7 1.1 1.3
Road vehicles 1.8 2.6 2.8
Textiles 26.0 21.4 16.2
India
Pharmaceutical products 2.3 2.8 2.9
Iron and steel 3.0 2.9 6.0
Electrical equipm ent 1.3 1.8 1.9
W hite goods 0.0 0.0 0.1
Road vehicles 2.8 2.0 2.8
Textiles 27.0 27.2 17.4
Source: United Nations Com modity Trade Statistics databas e. Quoted from W inters and
Yusuf, 2007. Dancing with Giants: C hina, India and the Global Ec onomy, 50.

11

Slide 12

III. Impacts on Other Developing Countries in Asia and the Pacific Region
C. Impact on Natural Resources and Environment

Sectoral and Fuel Shares of Energy C onsumption in China and India


China India
2005 2020 2050 2005 2020 2050
Total Final Consum ption (M toe) 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

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

Note: CO2 = carbon dioxide; Mtoe = million tons of oil equivalent.


Sources: International Energy Agency, OECD (2005). Drawn from W inters and Yusuf, 2007. Dancing with
Giants: China, India and the Global Economy, 141.

13

Slide 14

IV. Policy Implications


A. For China and India

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).

14
Slide 15

IV . P o lic y Im p lic a tio n s


A . F o r C h in a a n d In d ia

Fre qu e nt A ntid u m p in g T arg et C ou n trie s: 1995-2 00 7 .6 F re q ue n t C o u n te rv a ilin g T a rg e t C o un trie s : 19 95 -200 7 .6

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

IV . P o lic y Im p lic a tio n s


B . F o r O th e r D e v e lo p in g C o u n trie s in th e R e g io n

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

IV. Policy Im plications


B. For O ther Developing Countries in the Region

W elfare Gains from Asian Econom ic Integration (JACIK)


Es tim ated W elfare G ains in US $ M illion
Sc enario I S cenario II Scenario III
(Trade Liberalization) (T rade and ( T rade, Investm ent and
Investm ent Mobility of Sk illed W ork ers)
Liberal ization)
Japan 107626 111807 150695
Korea 13043 13317 14076
China-H K 6327 7100 16328
AS EA N 13451 13553 19405
India 6971 7379 9937
JAC IK 147418 153156 210441
Rest of W orld -27293 -45306 109916
W orld 120125 107849 320357
Source: M ohant y et al., 2004.

17

Slide 18

IV . P o lic y Im p lic a tio n s


C . F u tu re A g e n d a fo r th e U N ID O

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

The China and India Factor: Implications


for Developing Countries
in the Asia and the Pacific Region

D UKG EUN A HN
dahn@ snu.ac.kr