Gerber Ie7e PPT 17

International Economics
Seventh Edition
Chapter 17
China and India in the
World Economy
Copyright © 2018, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Learning objectives (1 of 2)
17.1 State why China and India are considered disruptive
to the world’s economic status quo.
17.2 Describe the demographic trends in China and India.
17.3 Relate the economic reforms that occurred in China

and India.
17.4 Compare and contrast the transition from socialism

to capitalism in China and Russia.
Learning objectives (2 of 2)
17.5 Compare and contrast Indian and Chinese
growth.
17.6 Discuss the impact of Chinese

manufacturing on industrial economies such as
the United States.
17.7 Use a gravity model to explain Chinese and

Indian trade patterns.
Introduction: New challenges
• China and India have a combined population of over 2.6 billion
and are the second (China) and tenth (India) largest
economies in the world.
– Note that at PPP exchange rates, China is the world’s largest
economy; at market exchange rates it is number two after the U.S.
• Both countries, but particularly China, have suddenly emerged

as major economies after a long period of relative isolation.
• Indian information technology, biotechnology, services have

disrupted markets around the globe…as has Chinese
manufacturing.
Demographic and economic characteristics
(1 of 6)
Population GDP GDP per Capita
(Millions) (US$, Billions) (US$ PPP)
China 1,374 10,983 14,107
India 1,293 2,091 6,162
• China and India have a combined population that is

over one-third of the world, and a combined GDP
that is just under one-fourth of the world total.
• China’s economic growth has doubled its GDP every
7 years since 1991; India’s doubles every 11.
(2 of 6)
(3 of 6)
• Both China and India fell behind after
approximately 1820.
– Neither experienced the industrial revolution as it
occurred in Western Europe and the United States.
– Prior to 1820, they were as prosperous as Western
Europe was at the time.
• Colonial rule, the failure to adopt new technologies,

and military interventions, created a gap between
them and the countries that industrialized.
(4 of 6)
(5 of 6)
• One of the huge success stories of Chinese and Indian growth is that
they have pulled hundreds of millions of people out of poverty.
– Between 1981 and 2011, Chinese rates of extreme poverty (less than $1.90
a day at 2011 prices) fell from 88 percent of the population to 11 percent.
– Indian rates fell from 53 percent to 21 percent.
– One percent of the population in China or India is about 12 million people.
• In addition to poverty reduction, a middle class has emerged in both

countries.
– The top 10 percent of the population has an average of $26,000 per person
in China and $5,500 in India.
(6 of 6)
Economic reform in China and India
(1 of 9)
• Chinese economic reforms began in 1978 under the
leadership of Deng Xiaoping.
– The reforms moved China away from a communist system
where government controlled all aspects of the economy,
towards a system with a mix of government and market
forces.
• Indian reforms began in the 1980s and accelerated in

1991 under the leadership of Manmohan Singh.
– The reforms reduced trade barriers and began to remove
some layers of bureaucracy and regulation.
Economic reform in China and India
(2 of 9)
Trade-to-GDP 1970 2000 2014

China 5.0 39.4 41.5
India 7.5 26.4 48.7
• After the reforms began, both countries

experienced dramatic increases in trade and the
trade-to-GDP ratios.
• China’s ratio peaked in 2006 at 65; after the

financial crisis of 2007-2009, it declined.
Economic reform in China and India:
Chinese economic reforms (3 of 9)
• The Chinese had no master plan.
– Deng Xiaoping described Chinese reforms as “feeling the stones with
your feet to cross the river.”
– This approach was pragmatic and cautious, partly because on one
knew how to transition from socialism to capitalism, and partly to
avoid a backlash against the reforms by hardliners.
• Initial reforms in agriculture:

– Small farmers were given more control over production and allowed to
sell some output in local markets.
• Trade reforms created additional foreign trading companies

(FTC) to relax the grip of the existing 12 FTC on trade.
Chinese economic reforms (4 of 9)
• The most important reforms created several Special
Economic Zones (SEZ) in coastal areas where local
officials were allowed to experiment with new policies.
– These zones were highly successful in creating inward foreign
direct investment, increased trade, and economic growth.
– They served as demonstration effects for the rest of China.
• China applied to join the GATT in 1986, but its

application was not approved until 2001.
Indian economic reforms (5 of 9)
• Indian reforms were triggered by several events:
– The break-up of the USSR, India’s primary trading
partner;
– The success of a number of East Asian economies,
such as Korea, convinced Indian leaders that they
were increasingly falling behind;
– A financial crisis developed in 1991 due to heavy
borrowing by the government and the sudden
decline in remittances sent home by Indian workers
abroad.
• The first set of Indian reforms were targeted on reduction
of regulations and permits required to do business.
– The Indian economy was heavily regulated with many state-
owned enterprises, and many in the major industrial sectors.
• The second set of reforms targeted the privatization of

many enterprises.
– State-owned enterprises in India (and elsewhere) are often
allowed to operate even in the face of continued losses.
– Firm losses are covered out of the state’s budget, and reduce
funds available for other purposes.
• A third area of Indian reforms targeted
international trade and investment.
– India followed ISI policies, the same as Latin
America and other areas of the world.
– Domestic firms were highly protected from foreign
competition and foreigners were restricted in the
their ability to invest.
– The reforms began to dismantle restrictions on
trade and foreign investment.
Shifting comparative advantage (8 of 9)
• China’s transformation was aided by the flow of several hundred million
people from the countryside to the city, from agriculture to manufacturing.
– Given the low productivity of small scale Chinese farms, this shift raised overall
national productivity levels significantly.
– The shift represented a shift in comparative advantage towards low-skilled, labor
intensive manufacturing.
• It was also aided by huge investments in transportation, power plants, and

other public and private infrastructure.
– China invests around 45 percent of its GDP; most countries invest 15 to 25
percent.
• The next shift requires the construction of a more consumer oriented

economy.
Shifting comparative advantage (9 of 9)
• India has not seen the same movement of its
population out of the countryside.
– 69 percent of its population is rural; 51 percent work in
agriculture.
– Compared to China, it has much less low-skilled, urban labor
available to work in manufacturing.
• Neither country scores high on the Ease of Doing

Business Index:
– China is 84 out of 189.
– India is 130 out of 189.
Case study: Why China succeeded and the
USSR did not (1 of 3)
• China’s transition to a market economy was much
smoother than the Soviet Union’s.
– In 1991 the USSR dissolved into 15 separate states.
– Russia, the largest of the newly independent states,
experienced a severe economic decline after the break-
up of the USSR.
• China’s transition to a market economy was more

gradual and began on a regional basis before it
expanded to more of the country.
• China experimented with different policies in different regions as it
gradually lifted some of the regulations that limited business
activity.
– Special Economic Zones, Economic and Technology Development Zones,
High Technology Development Zones.
– China’s dual track strategy localized reforms to specific regions or
sectors while keeping its socialist planning in the rest of the economy.
• Artificially low prices were slowly raised and extended to more

goods.
• China was much slower than Russia to privatize state-owned

enterprises
• The slower rate of reform in China removed the
pressure to immediately develop all new institutions.
– Russia was forced to develop new institutions quickly;
– In China, labor markets, commercial codes and laws,
supplier networks, business regulations could evolve
gradually.
• Chinese conditions differed significantly from Russian.

– Less central planning overall.
– A larger rural labor force with very low productivity levels.
– Less heavy industry, more agriculture.
China and India in the world economy (1
of 8)
• Both countries, but especially China, have
received increasing shares of the world’s FDI.
• Both countries have increased their share of

world exports.
– Chinese goods exports in particular have grown
dramatically since 1990.
– Indian services exports have also grown
significantly.
of 8)
Share of world
exports China India
Goods, 1990 1.8 0.5
Goods, 2015 13.8 1.6
Services, 1990 0.7 0.6
Services, 2013 4.4 3.2
• Between 1990 and 2015, Chinese and Indian exports became a larger
share of total world exports in both services and goods.
• China is the world’s largest exporter of goods and fifth largest

exporter of services. India is 19th in goods exports and 8th in services.
of 8)
• Chinese and Indian trade partners can be explained by
distance and GDP.
– The gravity model of trade hypothesizes that trade between any
two countries is directly related to the size of the market (GDP) and
inversely related to the distance between the markets.
• China trades mostly with the U.S. and EU, both large markets,
and Hong Kong, Japan, and Korea which are large and close
by.
• India’s main trading partners are similar, but also include

China and the oil-rich United Arab Emirates.
of 8)
• Both countries have relatively open markets,
although Indian agriculture remains highly protected.
• Agricultural protection in India is a result of having
over one-half its labor force in agriculture, much of it
in very low productivity, inefficient, activities.
Applied tariff rates, 2014 Agriculture Non-agriculture

China 13.0 4.0
India 45.0 4.5
of 8)
• Chinese growth and trade have had many effects on other
countries.
– Latin American commodity producers experienced a boom in the
demand for their goods in the first decade of the 2000s.
– Some argue that it has deindustrialized parts of the U.S. and other
countries.
 The impact of the growth of Chinese manufactured exports is subject to much
debate and analysis.
 The impact of China is difficult to assess independently from technological
changes such as automation.
 The counter-factual (what would have happened in the U.S. and elsewhere if
China had not grown) is unclear.
• The impact of Chinese trade surpluses is one main concern.

of 8)
of 8)
• Looking forward, China is moving quickly to
develop a more sophisticated manufacturing
sector and to become less dependent on foreign
suppliers for its technological components.
– It has had a notable increase in patent activity;
– Spends heavily on infrastructure and university
education.
• A main part of its strategy is to encourage foreign
investors to bring their technology to China.
of 8)
• India’s service exports are concentrated in information
technology and other business services.
– These are both high-growth areas that rely on English
language skills.
– Business services include medical consultations, data entry,
legal briefs, and many other high and low skilled services.
• A fundamental question about the Indian economy is

whether it can skip industrialization and manufacturing
stages and become a rich country based on a core of
services.
Four issues (1 of 3)
• Issue 1: Will the growth of Indian services
trade lead to the outsourcing and off-shoring
of services production in the United States
and other high income countries?
• Issue 2: How much will China’s strength in

manufacturing disrupt the growth of similar
activities in other parts of the world?
• Issue 3: How will shifts in Chinese growth
patterns affect commodity producers that sell
to it?
• Issue 4: Will China adapt to existing

multilateral institutions or insist on creating
new ones that it has a larger voice in
managing?
• These issues are supplemented by a series of
additional unresolved issues facing the international
economy:
– Increased environmental pressures as more of the world
develops energy sources to power their economies.
– The tension between privately and publically owned firms
that compete in the same industries.
• Regardless of how these issues are resolved, growth in

China and India pulls hundreds of millions of citizens
out of poverty.
The End

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International Economics

17.2 Describe the demographic trends in China and India.

17.3 Relate the economic reforms that occurred in China

17.4 Compare and contrast the transition from socialism

17.6 Discuss the impact of Chinese

17.7 Use a gravity model to explain Chinese and

• Both countries, but particularly China, have suddenly emerged

• Indian information technology, biotechnology, services have

• China and India have a combined population that is

• Colonial rule, the failure to adopt new technologies,

• In addition to poverty reduction, a middle class has emerged in both

• Indian reforms began in the 1980s and accelerated in

Trade-to-GDP 1970 2000 2014

• After the reforms began, both countries

• China’s ratio peaked in 2006 at 65; after the

• Initial reforms in agriculture:

• Trade reforms created additional foreign trading companies

• China applied to join the GATT in 1986, but its

• The second set of reforms targeted the privatization of

• It was also aided by huge investments in transportation, power plants, and

• The next shift requires the construction of a more consumer oriented

• Neither country scores high on the Ease of Doing

• China’s transition to a market economy was more

• Artificially low prices were slowly raised and extended to more

• China was much slower than Russia to privatize state-owned

• Chinese conditions differed significantly from Russian.

• Both countries have increased their share of

• China is the world’s largest exporter of goods and fifth largest

• India’s main trading partners are similar, but also include

Applied tariff rates, 2014 Agriculture Non-agriculture

• The impact of Chinese trade surpluses is one main concern.

• A fundamental question about the Indian economy is

• Issue 2: How much will China’s strength in

• Issue 4: Will China adapt to existing

• Regardless of how these issues are resolved, growth in

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