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Title: The rise of China and India and what this means for the rest of us


1
The rise of China and India and what this means
for the rest of us
  • Open Minds
  • January 31 2008
  • Wendy Dobson
  • Rotman School of Management, U of T
  • Web address www.rotman.utoronto.ca/iib/

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China and India
  • The 2020 and 2050 prediction game its all
    about size
  • What triggered the growth?
  • Differing growth strategies
  • Different development paths
  • 5. Despite spectacular rise domestic problems
    preoccupy them
  • 6. Implications for the rest of us
  • Conclusion its all about adjustment and
    shifting patterns of comparative advantage

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Source National intelligence council, 2004
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What triggered the growth? 1950-75 Centrally
planned closed economies Answer Crises in both
countries triggered radical changes in
institutions 1978 in China ) Household
Responsibility System
introduced 1991 in India ) License raj
dismantled They abandoned central planning and
joined the capitalist world ? market systems
introduced And people responded .
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  • The likely emergence of China and India as new
    major global playerssimilar to the rise of
    Germany in the 19th century and the United States
    in the early 20th centurywill transform the
    geopolitical landscape, with impacts potentially
    as dramatic as those of the previous two
    centuries.  In the same way that commentators
    refer to the 1900s as the American Century, the
    early 21st century may be seen as the time when
    some in the developing world, led by China and
    India, come into their own.  
  • The population of the region that served as the
    locus for most 20th-century historyEurope and
    Russiawill decline dramatically in relative
    terms almost all population growth will occur in
    developing nations that until recently have
    occupied places on the fringes of the global
    economy (see graphic on page 48). 6
  • The arriviste powersChina, India, and perhaps
    others such as Brazil and Indonesiacould usher
    in a new set of international alignments,
    potentially marking a definitive break with some
    of the post-World War II institutions and
    practices.
  • Only an abrupt reversal of the process of
    globalization or a major upheaval in these
    countries would prevent their rise.  Yet how
    China and India exercise their growing power and
    whether they relate cooperatively or
    competitively to other powers in the
    international system are key uncertainties.
  • A combination of sustained high economic growth,
    expanding military capabilities, active promotion
    of high technologies, and large populations will
    be at the root of the expected rapid rise in
    economic and political power for both
    countries.  
  • Because of the sheer size of Chinas and Indias
    populationsprojected by the US Census Bureau to
    be 1.4 billion and almost 1.3 billion
    respectively by 2020their standard of living
    need not approach Western levels for these
    countries to become important economic powers.
  • China, for example, is now the third largest
    producer of manufactured goods, its share having
    risen from four to 12 percent in the past
    decade.  It should easily surpass Japan in a few
    years, not only in share of manufacturing but
    also of the worlds exports.  Competition from
    the China price already powerfully restrains
    manufactures prices worldwide.
  • India currently lags behind China (see box on
    page 53) on most economic measures, but most
    economists believe it also will sustain high
    levels of economic growth.
  •                                                 
                                                      
                                                     
                                                      
                                                      
                                   
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Rising Powers  The Changing Geopolitical
Landscape
Rising Powers  The Changing Geopolitical
Landscape
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NIEs
Japan
China
ASEAN-4
India
Source IMF WEO 9/2005
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Different growth strategies China - allow
farmers to go to market - allow foreign firms
to invest in labor-intensive manufacturing -
radical restructuring of state owned enterprises,
46 million layoffs (1995 2004) - invest in
roads, ports, airports etc - Communist Party
pursues growth at any cost to maintain social
stability - economic growth driven by
investment India - didnt abolish
entrepreneurs - bureaucrats and regulators
protect the workers - entrepreneurs started
IT sector before government recognized its
significance - IT services drive Indias growth
and trade - most of IT services exported -
generate few jobs
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NIEs
China
Japan
ASEAN-4
India
Source IMF WEO 9/2005
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Energy production and consumption, 2000(MTOE)
  • Production
  • United States 1,676
  • Canada 375
  • China 1,108
  • India 422
  • Consumption
  • United States 2,300
  • Canada 251
  • China 1,142
  • India 502

Source Economist world in figures
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Chinas trade, 2001
  • Exports ( of total exports)
  • 1.Machinery/transport equip 36
  • 2.Electronics 19
  • 3.Apparel and accessories 14
  • 4.Computer and telecom 14
  • 5.Textiles 6
  • Subtotal 89
  • Total exports US 266 B
  • Top destination United States
  • Imports ( of total imports)
  • 1.Machinery and transp equip 44
  • 2.Electric circuits 7
  • 3.Crude Oil 5
  • 4.Plastics 5
  • 5.Steel 4
  • Subtotal 65
  • Total imports US 244B
  • Top supplier Japan

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Source Economist world in figures
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Indias Trade, 2001
  • Exports ( of total exports)
  • 1.Textiles 25
  • 2.Gems jewelry 16
  • 3.Engineering goods 16
  • 4.Chemicals 11
  • Subtotal 68
  • Total exports US 44 B
  • Top destination United States
  • Imports ( total imports)
  • 1.Petroleum products 32
  • 2.Capital goods 12
  • 3.Gems 10
  • 4.Machine tools 8
  • Subtotal 62
  • Total imports US 50B
  • Top supplier United States

Source Economist world in figures
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China s size and dynamism is tying the region
together
Source McKinnon and Schnabl 2003.
2008 Professor Dobson
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Indias significance lies in its entrepreneurs
(investing in rest of world acquisitions in
2003)
  • Transaction Value(US)
  • Reliance industries acquires Flag Telecom (US)
    211M
  • ONGC acquires oil exploration blocs from OMV
    (Sudan) 136M
  • ONGC acquires oil blocks from Gulf Petroleum
    (Sudan) 125M
  • Tata Motors acquires Daewoo Commercial Vehicle
    (Korea) 117M
  • Birla acquires Straits Nifty (Australia)
    94M
  • Ranbaxy Labs acquires RPG Aventis (France)
    70M
  • Wockhardt Life Sciences acquires CP Pharma (UK)
    37M
  • Essar acquires interest in Aegis Communications
    (US) 28M
  • Infosys Technologies acquires Expert Information
    (Australia) 23M
  • United Phosphorus acquires Dow Chem insecticide
    bus (US) 21M

Source FT, 30/01/04
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China much less significant until recently
  • Lenovo acquires IBM PC (2003)
  • CNOOC bids for UNOCAL (2005)
  • Haier bids for Maytag (2005)
  • Many smaller assets in Africa, Latin America
  • New chapter
  • China Investment Corporation government investor
    which along with Chinese banks has invested in
    foreign banks and other companies in past 6 months

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Will China produce all goods and India all
services?
  • China has its own problems
  • Too much labor / unemployment
  • Growing regional inequality two Chinas (coast
    and interior)
  • Large economy but relatively poor population
  • Aging population ?needs a pension system and a
    bond market
  • State-owned banks dominate financial system
  • Continued political grip of the party
  • - How to liberalize politically to keep up with
    economic liberalization?
  • - Accountability and rights corruption/ guanxi
    / lack of property rights
  • State ownership of production ambition to create
    international champions China inc
  • Too much investment (savings are being wasted)
  • Pollution is mounting
  • -Growth at any cost is costly!
  • - How competitive will Chinas exporters be if
    China enforces its own environmental policies)?

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Per capita GDP by province, 2003
Chart Per capita GDP by Province (2003)
                                                  
                       
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INDIA STUDY TOUR 2007
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India has its own problems, too
  • 60 percent of the population still relies on
    agriculture, vs 50 percent in China
  • Education 50 percent of women are illiterate
    and therefore unemployable in modern sector
  • Labor laws protect labor from being employed
    90 percent of labor force is forced into the
    unorganized sector (casual labor)
  • Growing regional inequality (most populous states
    are also the poorest and highest rates of
    illiteracy)
  • Declining quality of public institutions/ elitism
  • Declining clout of central government
  • Much vaunted IT entrepreneurialism needs to solve
    domestic problems!
  • India needs labor intensive manufacturing to
    provide large numbers of jobs.

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INDIA STUDY TOUR 2007
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Facts
In China, between 1981 and 2001 the number of
people in extreme poverty declined by 400 million
-In 2003 urban manufacturing in China employed
100 million people -Chinas 11th Program targets
move 9 million people a year from rural to urban
areas and create 9 million urban jobs a year 45
million urban jobs in five years In India lt10
of the labor force is employed in organized
sector -The central government has set a target
to create 100 million industrial jobs in the next
ten years but 11th Plan mentions employment only
on page 58 -Indias labor force 595 million
people aged15 - 59 years -Chinas labor force
830 million people aged15 - 59 years
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Conclusion both countries face enormous internal
challenges
  • Development challenges are poverty reduction
    through non-farm employment
  • Close link between agriculture and industry (not
    IT services)
  • Poverty ever-more concentrated regionally
  • Every other developing country that has taken
    off has done it by creating jobs in urban
    manufacturing
  • India wants to try to do it using non-farm
    channel
  • Long list of obstacles that need to be addressed
    through policy and regulatory changes and
    replacing institutions that reflect scarcity
    era/ self sufficiency legacy and that challenge
    entrenched vested interests

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Impacts on the rest of the world
  • Positives
  • Intensifying competition in manufacturing leads
    to greater efficiency
  • Changing relative prices and incomes
  • Low costs low consumer prices higher real
    incomes
  • Plentiful capital inflows keep interest rates low
  • Larger global market increases opportunities for
    specialization
  • Chinas example encourages other developing
    economies to reform
  • Not-so-positives
  • Doubling of worlds work force keeps real wages
    low everywhere
  • Greater labor market flexibility is essential
    everywhere
  • Education and technical skills essential to
    produce winners in advanced countries
  • Incremental increase in demand for raw materials
    pushes up prices
  • Pollution (cement plants affect particulate
    readings in Victoria,BC)
  • Unsustainable rate of use of worlds natural
    resources

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What does this mean for Canada?
  • - They will not produce everything
  • - But the global economic geography is changing
  • - North America will become less significant in
    size and growth
  • - Our long-term advantages lie in our people and
    their brains
  • Focus on activities in which we have comparative
    advantage
  • - every business needs to focus on its strengths
    and develop them
  • - improve our infrastructure to support people
    developing their talents, businesses leveraging
    their strengths
  • - invest in kids early childhood education
    that improves their coping skills keep them in
    school and encourage to develop their talents,
    knowledge and skills
  • - help adults to develop more flexible work
    lives
  • - help people to cope with economic change

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What does this mean for us, 2?
  • Rethink North America
  • - NAFTA reduced barriers to trade in goods
  • - Now we need to reduce remaining barriers
    rules of origin, regulatory differences with no
    clear rationale
  • - Common secure North American economic area
  • Gain access to China/India markets
  • - by participating in global supply chains
  • - by producing there
  • - by producing what they want to buy and cannot
    produce themselves (but relying on our natural
    resources is not enough)
  • Build relationships with them participate in
    Asia-Pacific institutions like APEC

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