3.3.2 Key players in the world economy
What will be the likely impact of the growing economic power of China and India on individuals, national and multinational firms in the 21st century?
Main areas for study:
- Differences between India and China (for example state ownership of firms)
- Economic growth and export rates
- Predicted economic power compared to US and EU
- Increased purchasing power and foreign investment
- Implications of India and China population size
- Barriers to market entry
- Trade opportunities for UK firms
Introduction:
India and China both are largest populated countries in the world. In recent years India and China are growing economically. Thesecountries are according to their nature in Asia most likely advantageous to many businesses. Other countries like UK, US and some of the other countries like Japan and other European countries are interest in these countries to invest. These countries are becoming specialized economic zones for many countries to operate businesses. India is becoming known as the world’s services provider where as China is known as the world’s factory. During recession time India and China economic power not much affected therefore many countries now focusing on India and China for trading activities. In accordance with liberalization, Globalization, privatization policies undertaken by many countries in this race china is slowly opening its doors. In fact labor resources, infrastructure and other natural resources encourage other country businesses to invest in these countries. Not only that the growing economic power of these two countries influencing other individual businesses, national businesses and multinational businesses. However, there are some differences between India and China these are discussed in the following.
- Differences between India and China:
State ownership: China seems to be stuck halfway between a command economy and a market economy, with capital allocation still largely state controlled. But India is following mixed economy system means some businesses are private and some are public sectors. In India private own companies are welcomed unlike china but recently china also opened the door for many private companies.
Sectors: India is becoming known as the world’s services provider where as China is known as the world’s factory. Because china labor sources and other resources most likely suitable for secondary sector where as India providing services because English speaking population is more in India than China. Most of the outsourcing utilized by US and UK from India for example call centers.
Population:India and China together comprise 37.64% (India: 17.14 & China: 20.5) of the worlds population.In both Giants, population growth has been slowing and is expected tocontinue to do so. China’s population grew by only 0.6 percent a year to reach 1.32 billion10; it is expected to peak in 2032 and declinethereafter11 India’s population grew by 1.4 percent reaching 1.14billion,urban 27.8% and its growth is expected to slow to 0.7 percent a year between 2030and 2040 (by which time it will have overtaken China). These trends reflectsharply lower fertility, with people age 15–64 accounting for 71 percent inChina in 2005, falling to 69 percent in 2020 and to 62 percent in 2040. Thecorresponding percentages for India are 63 percent in 2005, and 67 percent in2020. China’s decline in the work cohort is likely to be at least partly offset byincreasing employment participation rates, but India’s younger profile is onereason to believe it will start to close the income gap by the second quarter ofthe century.China has increased its urban population share from 21 percent in 1981 to43 percent in 2005 with absolute declines in the rural population. Population level by 2026 (estimated) 1.46billion in china and 1.45billion in India. Population 14 and under (2007) in India 337 million*(note that the number of under – 5s in India is greater than the whole UK population) where as China’s population is 274million. Population aged between 20 – 30 in 2026 (estimated) 190million in china and 240 million in India. (10. A billion is 1,000 millions11. For comparability we use United Nations population projections rather than local ones)
Literacy:The literacy rate level in China is 91%, in India it is only 58% (i.e. 42% of the population cannot read or write). Therefore if the growth rate led to job opportunities for a wider range of people, many would be unable to take up the jobs due to illiteracy.Even though English speaking people are more in India than China.
Government: India is a democratic country where as China is communist country. India is having democratically elected government headed by prime minister. China (now it is PRC – People’s Republic of China) was a Soviet style centrally planned economy.
Language and culture: India is the integration of different languages it is divided into 28 states and each state has its own language as well as different cultures and belief of people. The national language is Hindi and following all the business transactions in English domestically and internationally. China’s national language is Chinese, most likely this is the language used by many people, and English speaking people are less in China than India. Than India China has variety of cultures, mainly they are Buddhists.
Infrastructure: India’s infrastructure is lower than China, for example road transportation such as motorway construction is poor.
Technology: Both countries in technology have some differences China is most suitable for manufacturing units than India where as India can provide services than China. China has advanced technology than India. In India IT developments are far better than China.
Industrial policy: China has centrally organized planned economy system but now it is slowly open up chances to private sector and inviting foreign direct investment. Even China Export market has been increased. India has democratic style of organization and a mixed economy system. In India privatization growing faster than China and most likely service sectors are increasing in India than manufacturing sectors. In 21st century India concentrating to develop secondary sectors even. Therefore both giants are suitable for foreign individual companies and even for multinationals.
Currency and exchange rates: Indian currency is (rupees) abbreviation for rupees: (Rs)for fraction unit (paisa). India is following floating exchange rate system. Indian currency is common every where in India. In conversion US dollars, UK pounds, Euros are acceptable.1Ruppee = 100paisa. The denomination of Indian currency in notes is Rs1, Rs2, Rs5, Rs10, Rs20, Rs50, Rs100, Rs500, Rs1000, in coins Rs1, Rs2, Rs5. Reserve bank of India operating the currency. Travelers can bring any amount of dollars and Indian rupees can be converted into dollars. China currency is (Renminbi)short official name CNY(China Yuan)abbreviation: (RMB) symbol (¥)monetary unit: Yuan fractional units Jiao and Fen. China is also following floating exchange rates. The currency used in Hong Kong, Macau and Taiwan is different in Hong Kong (Hong Kong Dollar) abbreviation HKD $. Actually Hong Kong has a separate administration and currency but it came back to China recently but it is following Hong Kong Dollars as a currency. Macau currency isPataca, Abbreviation MOP$. Taiwan currency is New Taiwan Dollar, Abbreviation NT$. Colloquially in Chinese, the Yuan is called Kuai, and the Jiao is called Mao.The conversion among Yuan, Jiao and Fen is 1Yuan = 10Jiao = 100Fen. Currently the paper money is used is 1Jiao, 5 Jiao, 1Yuan, 5Yuan, 10Yuan, 20Yuan, 50Yuan and 100Yuan. The coin used is 1Yuan and 5Jiao. Do not easily accept the money of other denominations. In Hong Kong and Taiwan Chinese currency allowed to use most likely 100Yuan. 5,000 US dollars and 20,000RMB can be taken into China. If the money you take exceeds that limitation, you need to apply for permit. You can apply for a permit in Bank of China. There are no limitations toward travelers’cheque.
Culture: India has different cultures each state has different traditions and culture where as China has a common culture but according to the regions people believes and tradition is different. India has all communities because of this it is difficult to operate business in India than China.
- Economic growth and Export rates: Many analysts argue that India’seconomy has failed to live up to its potential, especially relative to other developingcountries, such as China, which has a comparable population size, but has enjoyed fargreater economic development in recent years. Table 1 indicates that both India andChina experienced significant growth in population, GDP and per capita GDP (bothmeasured on a PPP basis), trade, and FDI over the past 13 years. However, on severaleconomic fronts, India lost significant ground to China.
Table 1 Selected Comparative Data for India and China
1990 and 2003
India / China / India’s SizeRelative
to China
1990 / 2003 / 1990 / 2003 / 1990 / 2002
Population (millions) / 850 / 1,062 / 1,139 / 1,295 / 74.6% / 74.6%
GDP, PPP basis ($billions) / 1,189 / 2,951 / 1,583 / 6,675 / 75.1% / 44.2%
Per Capita GDP in $PPPs / 1,400 / 2,780 / 1,390 / 5,150 / 100.1% / 54.0%
Exports ($millions) / 17,975 / 54,000 / 62,090 / 438,500 / 28.9% / 12.3%
Imports ($millions) / 23,438 / 68,800 / 42,354 / 413,098 / 55.3% / 16.7%
FDI stock ($millions) / 1,592 / 34,559 / 68,513 / 490,243 / 2.3% / 7.0%
PPP refers to purchasing power parity, which reflect the purchasing power of foreign data in U.S. dollars.
In 1990, India’s economy (GDP on PPP basis) was about three-quarters the size ofChina’s, but by 2003 it fallen to 44% China’s size. India’s living standards (per capitaGDP on PPP basis) were slightly greater than China’s in 1990, but by 2003 it had fallento 54% of China’s. India’s exports relative to Chinese exports fell from 29% in 1990 to12% in 2003, while imports dropped from 55% to 17%. India made small gains in FDIflows relative to China over this period (rising from 2% to 7%); however, the total levelof FDI stock in China remains substantially higher than in India. In fact, FDI flows toChina in 2003 alone (nearly $54 billion) were 54% higher the cumulative stock of FDI inIndia through 2003 (about $35 billion). Many economists attribute the sharp wideningeconomic gaps between India and China to differences in the pace and scope of economicand trade reforms undertaken by each country, where China has substantially reformedits trade and investment regimes (which has contributed to sharp rises in GDP growth,trade, and FDI flows), India’s economic reforms have been far less comprehensive andeffective. For example, China’s average tariff has fallen from 43% in 1992 to12% in2002. India’s average tariff during this period dropped substantially, from 128% to 32%,but still remains among the highest in the world.
China and India share at least two characteristics: Their populations are hugeand their economies have been growing very fast for at least 10 years. Alreadythey account for nearly 5 percent and 2 percent of world gross domestic product (GDP), respectively, at current exchange rates. Arguably, China’s expansion since 1978 already has been the largest growth “surprise” ever experienced by the world economy; and if we extrapolated their recent growth ratesfor half a century, we would find that China and India—the Giants—wereamong the world’s very largest economies. Their vast labor forces and expanding skills bases imply massive productive potential, especially if they continue(China) or start (India) to invest heavily in and welcome technology inflows.Low-income countries ask whether there will be any room for them at thebottom of the industrialization ladder, whereas high- and middle-incomecountries fear the erosion of their current advantages in more sophisticatedfields. All recognize that a booming Asia presages strong demands, not onlyfor primary products but also for niche manufactures and services and for industrial inputs and equipment. But, equally, all are eager to know which markets will expand and by how much. Moreover, the growth of these gianteconomies will affect not only goods markets but also flows of savings, investment, and even people around the world, and will place heavy demands onthe global commons, such as the oceans and the atmosphere.
Economic Growth
For decades, China and India plodded along under ideologies that favored the visible hand of government over the invisible hand of markets. Their economic systems stifled growth and left both countries poor. In 1980, real per capita income stood at $556 in China and $917 in India.
To jump-start their economies, China and India shifted strategies, letting private enterprise flourish and opening markets to trade and investment. The new policies have led to rapid economic development. China’s real per capita income has grown an average of 8.4 percent a year since 1995, climbing to $4,766. India’s 5 percent average annual growth has raised per capita income to $2,534.
Both China and India have unleashed pent-up economic energy, but they’re not traveling the same development path. China has followed the traditional route, becoming a center for low-wage manufacturing and exporting clothing, toys, electronics and other goods. India has emphasized services, using its large English-speaking labor force for call centers, data-processing operations and the like.
Growth rates give China’s goods-dominated strategy the better track record so far. But India’s approach may pay off better longer term. A look at per capita incomes around the world shows that the wealth of nations eventually depends more on services than industry.
We are interested in the Giants because they are large and growing (and areexpected to continue to do so), and because their growth impinges on othercountries via their international transactions. This section considers the firstof these reasons: How large and dynamic are the Giants, how does theirgrowth compare with others’ growth, and what determines the nature of theirgrowth?
Putting the Giants in Perspective
We start by comparing the Giants with other large economies currently andin 2020. For comparing poverty or even economic welfare across countries, itis sensible to use purchasing power parity (PPP) exchange rates; but for assessing the effect of one economy on another, current actual exchange rates provide a better basis. Such international effects must operate via the international transfer of goods, services, or assets; given that the latter are tradable,their prices do not vary dramatically across countries, so PPP adjustment isnot appropriate. The GDP data in table 1.1 suggest that China is perhaps one-sixth as large as the United States in current dollars, and that India is onesixteenth as large. In terms of impact, a given proportionate shock emanating from Germany or Japan would outweigh one from China, let alone onefrom India.
Table 1.1 Gross Domestic Products in Six Large Economies
Percent
Share of world GDP Average annual Average contribution
(2004 $ and real growth rates to world growth
exchange rates)______
Economy 2004 2020 1995–2004 2005–20 1995–2004 2005–20
China 4.7 7.9 9.1 6.6 12.8 15.8
India 1.7 2.4 6.1 5.5 3.2 4.1
United States 28.4 28.5 3.3 3.2 33.1 28.6
Japan 11.2 8.8 1.2 1.6 5.3 4.6
Germany 6.6 5.4 1.5 1.9 3.0 3.3
Brazil 1.5 1.5 2.4 3.6 1.5 1.7
World 100.0 100.0 3.0 3.2 100.0 100.0
Turning to the growth of output and income, China and India have performed very strongly since 1995, especially compared with other largeeconomies (see column 3 of table 1.1). China accounted for 13 percent of theworld growth in output over 1995–2004; and India accounted for 3 percent,compared with the United States’ 33 percent, whose slower growth rate is offsetby its much higher starting share in 1995. Looking forward, the table projectsGDP growth to 2020 based on the World Bank’s central projections for theworld economy as of early July 2006.These projections are offered not as pre dictions but as plausible assumptions from which we can start to think aboutthe relative magnitudes of the Giants’ growth.
Table 1.2 Welfare and Trade Changes as a Result of Global Growth,2005–20
____Welfare______
2001 US$ % OutputExports Imports
Trading partner billions change (% change) (% change) (% change)
Australia and 285 70.3 66.3 58.2 86.1
New Zealand
China 1,965 146.2 161.9 187.8 167.7
Japan 936 24.5 27.6 87.6 65.8
Hong Kong and 385 83.0 87.3 94.3 94.3
Taiwan (China)
Malaysia 118 126.8 127.8 132.1 136.3
Singapore 76 89.4 105.9 156.5 150.5
India 631 116.5 124.4 189.9 151.4
United States 5,838 58.4 60.8 67.1 65.6
EU25 and EFTA 3,191 40.2 41.1 38.6 42.4
Note: EFTA = European Free Trade Association; EU = European Union
Which has been growing faster?
- Increasing purchasing power and foreign investments:
Increasing purchasing power: in recent years India and China economically grown and people purchasing power also increased. Now the percentage of population below the poverty line in both countries has been decreasing. Both countries are developing education and mostly concentrating on urbanization and industrialization. People attitudes, styles have been changing. Furthermore both countries are highly populated countries in the world. Employment rate has been increasing even more to increase employment both countries liberalized the policies and mostly inviting foreign investments.
Evaluation:
Advantages / DisadvantagesMore demand for the goods and services / Competition will be higher because customer bargaining power will be more.
Employment will be more because of firms high productivity / High inflation may arise because of high employment and customer purchasing power so firm’s cost of production increases.
More profits and businesses can maximize the sales. Firms can charge premium prices. / Customer may demand more where firms may not supply required quantity and quality.
Businesses have the chance of expanding the business. / Firms may be enforced to use high technology and expertise which will increase the cost of the business.
Foreign Direct investment:
Foreign direct investment occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.
Or
FDI refers to the purchase of a significant stake in the ownership of a foreign company in order to gain a certain degree of management control.
FDI takes two forms. The first is a green – field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.
(some of the examples in world wide FDIs : Star bucks a coffee retailer of USA invested in Japan in 1996, FDI by Volvo a Sweden car manufacturing company in south Korea, it acquired of Samsung’s money losing construction equipment division. Toyota, Larsen and Turbo a cement company, Mercedes Benz etc., in India)