The Economic Implications of the Rise of China and India

1 August 2007

The economic prowess of China and India, the two drivers of Asia’s current resurgence, is expected to increasingly define global growth prospects for the near and medium term. The implications are of particular concern to neighbouring low-income countries.

While recent analytical literature dealing with the economic consequences of the rise of China and India has mainly focused on their impact on the international economy in general, and developed countries in particular, a recent study by the Centre for Policy Dialogue (CPD)1 looked into the effects of the two countries’ economic dynamism on the development prospects of their low-income Asian neighbours.

Findings the study paint a mixed picture. One the one hand, the increase in Chinese and Indian exports does not appear to have reduced the exports low-income Asian countries (LIACs). On the other hand, however, in most product categories where Chinese – and in some cases Indian – exports have experienced a major upsurge, these countries’ export performance has remained modest. In addition, since the coming of age of the two Asian giants, most of their low-income neighbours have failed to substantially increase their exports to either China or India.

Low-income Asian Countries

While a new set of Asian economies were taking off during the eighties and nineties, a number of other South and Southeast Asian economies remained outside of this growth pole, struggling to maintain moderate growth while slowly moving toward economies led by industry rather than agriculture. The LIACs covered by the study include Bangladesh, Cambodia, Laos, the Maldives, Mongolia, Myanmar, Pakistan, Sri Lanka and Vietnam. Notwithstanding the fact that these countries have varied benchmark conditions and diverse levels of capacity of economic integration, they share a number of characteristics when it comes to dealing with the rise of their two overwhelmingly large neighbours.

China and India’s Economic Resurgence

Existing literature shows a tendency for China’s consumer goods exports to crowd out those from other Asian countries in third markets. Less-developed countries of this region are competing with both China and India, which have a comparative advantage in the markets of labour-intensive manufactured goods due to their cheap skilled labour force and advanced technologies. Investors from other Asian economies have responded by investing directly in China, with a resulting loss of employment at home.

An alternative hypothesis holds that the rapidly expanding trade volume of China and India has become a major engine of growth in the Asian region, and exports from countries producing goods that are in high demand in either country are likely to benefit. Scholars holding this view argue that China has started shifting from an export-oriented economy to one more driven by domestic demand, and that this shift will open up its huge domestic market to other regional economies. Some researchers have also noted that Asian economies have important complementarities.

In short, the rise of China and India may result in at least the following consequences:

  • crowding out LIAC exports in third markets;
  • providing new opportunities to LIACs through the growth of their domestic markets;
  • making other developing countries more attractive as platforms for producing for the Chinese and Indian markets and integrating them into supply chains that produce goods for the global economy; and
  • making LIAC exporting industries more competitive by providing them with lower-priced intermediate goods.
  • Methodology

    CPD carried out a number of tests in order to identify the potential effects of China and India’s new-found economic clout on their low-income neighbours.

    First, we analysed the exports of these countries to the US and the EU, which represent their largest foreign markets. This permitted the identification of the top five product categories for each of these countries (at Harmonised System two-digit level during 2005). Then, a list of categories that figured in the top five of at least two of the countries was compiled. This exercise yielded two lists of nine product categories – one for the EU and the other for the US. These were merged into a single list containing the five products that topped the lists in both markets, i.e fish- and fishrelated products, knitted and unknitted apparel, other made-up textiles and various types of footwear (see table opposite).

    In 2005, these five categories accounted for 74 and 68 percent of LIAC exports to the US and the EU markets respectively. In the same period, they made up 14 percent of Chinese and 25 percent of Indian exports to the US. The corresponding figures for the EU market were 16 percent for China and 27 percent for India.

    Exports to the US & EU

    Our analysis shows that LIAC exports to the US and the EU for the five major product categories increased from 1996 to 2005. Depending on the category, the expansion in the US market ranged between 27 and 116 percent per annum, while the figures for the EU varied between 14 and 27 percent. A large part of LIAC export growth in Europe during the period under review may be explained by the duty-free access offered by the EU to least-developed countries under the Everything but Arms (EBA) initiative.

    Similar trends were seen in both these markets for Chinese and Indian exports, although former’s growth was stronger. Except for fish-related products (HS03), China’s exports soared after its WTO accession in 2001, and even fisheries trade recovered in 2002.

    While LIAC exports grew at a moderate rate from 1996-2005, the growth of Chinese exports from 2001 onwards in both US and EU markets should be of concern to policymakers. Although the surge of China has not caused LIAC exports to fall, China’s likely further expansion may lead to a depreciation of prices in low-income Asian countries, which could render their producers uncompetitive.

    With regard to the US, LIACs export growth outsripped that of India between 1996 and 2005 except for the category of ‘made-up textiles’ (HS63). In the EU market, India’s export growth of product categories examined has also been slower than that of the LIAC over the same period. Apparently, India has not posed a major challenge to its low-income neighbours as yet.

    Exports to India & China

    We also examined low-income neighbours’ performance in China and India. Due to inconsistencies in data, the analysis was not homogenous. However, it provided important insights based on which it is possible to make some informed comments.

    Between 1995 and 2005, LIAC exports into China increased at an average rate of 36 percent per annum, largely due Vietnam, whose exports grew at an average of 61 percent per annum. The annual average growth of exports from Pakistan (25 percent) and Mongolia (49 percent) also contributed to the overall increase.

    In the Indian market, between 1997 and 2004, LIAC exports increased at an average of 29 percent per annum. The major contributor to this growth was Sri Lanka, whose exports rose by US$331 million at a yearly rate of 183 percent, thanks to the India-Sri Lanka bilateral free trade agreement. The second biggest contributor was Myanmar, which saw its export rise by US$172 million at an average rate of 13 percent per annum.

    As seen above, just two or three LIACs’ exports performed well in the Chinese and Indian markets between 1995 and 2005; Vietnam, Pakistan and Mongolia for China, and Sri Lanka and Myanmar for India. The poor performance of the other four LIACs in these markets corroborates that not all low-income countries are getting benefits from the surge of India and China.

    Concluding Observations

    The impact of the rise of China and India on other countries can be seen both from complementary and competitive perspectives. While it is not evident from the statistical analysis of historical performance, it is however predicted that in future most countries will be affected on several fronts – both directly and via substitute/complementary products, and these effects may be reinforcing or offsetting. The LIAC export performance shows that more advanced economies may experience a complementary relation, while low-income countries may face competition.

    To take advantage potential opportunities for regional co-operation, low-income Asian countries need to put more emphasis on examining ways and means to foster closer ties between their product and factor markets. Since export compensation is mainly observed in markets for capital goods, where China’s income elasticity of import demand is the highest, LIACs should explore the potential opportunities of low value-added and lower-end exportoriented industries. During the initial phase, they could promote horizontal co-operation by developing an industrial structure based on low-tech, labour-intensive industries with a regional specialisation. However, integrated infrastructure facilities (such as an integrated Asian transport network) are essential for regional and horizontal integration among lowincome Asian countries.

    Since there is a great variety in the Asian nations’ stages of development and economic integration, they could, for a number of years at least, follow a systemic competitiveness globally while being supportive locally, following the flying-geese pattern of development. For instance, if China and India were to relinquish some of their labour–intensive and comparatively low value-added industries (such as textiles and one-dollar stores), new opportunities for could open up their low-income neighbours. However, given that a large rural portion of the Chinese and Indian economies is yet to be integrated into the modern manufacturing sector, this transfer is not likely to place in the short term.

    It is thus important to ensure that low-income countries are able to participate in the substitute or complementary product cycle of the Asian value chain and counterbalance the challenges generated from the rise of China and India. Co-operation with the two leaders could be helpful in facilitating strengthened global integration of these countries.

    Debapriya Bhattacharya is Executive Director of the Centre for Policy Dialogue in Dhaka and Syeed Ahamed is Research Fellow at the University of Melbourne, Australia.

    Chinese Version

    This article is published under
    1 August 2007
    The revised template for US free trade agreements with developing countries contains a number of important changes that respond to concerns expressed by scholars and civil society actors about the...
    1 August 2007
    Many conjectured that massive disruption of textiles and clothing trade would follow the elimination of quotas in 2005 and that countries such as Mauritius would be among the losers. These...