January 21, 2007—What will China and India’s economic success mean for the rest of the world over the next 15 years?
That’s the big question behind a new book, Dancing with Giants, released January 22 in London, by the World Bank’s Development Research Group and the Institute of Policy Studies in Singapore.
While the two populous Asian giants enjoyed nearly double-digit growth rates over the past decade, other countries—low, high and middle income alike—began to worry that India and China’s success might come at their expense.
The two now account for 37.5 percent of the world’s population, but just 6.4 percent of the value of world output. As their per capita production and consumption approach levels similar to today’s developed economies, major effects on global markets seem inevitable, notes the book.
“Many countries will have to adjust,” says co-editor L. Alan Winters, director of the Bank’s Development Research Group.
But in fact many opportunities will be created by these very dynamic partners in the world economy, including increased trade with the giants to meet the demands of their industry and rapidly expanding middle classes. In addition consumers will benefit from the flow of competitively priced goods and services produced by the Giants, he explains.
But with the rise of the Asian powerhouses, a few countries may grow slightly more slowly if they cannot find a “niche” safe from Chinese and Indian competition, says Shahid Yusuf, economic adviser to the Development Research Group and co-editor of Dancing with Giants.
“They recognize that in many areas of manufacturing they will face Chinese and Indian competition far into the future, so they are all now thinking, how are we going to find a space between the developed countries on the one hand, who are not prepared to yet vacate everything and leave it for the others to take over, and the growing capabilities of China and India?”
“Policy makers and mid- and large-sized businesses in the world’s major economies need to factor China and India into their development plans,” says Winters. “It’s our firm belief that there is room for everyone to prosper, but governments will need to be flexible and create conditions in which firms and entrepreneurs can respond to new opportunities.”
Becoming More Dominant
Despite the challenges to the Giants’ continuing rapid growth -- including pollution, rising energy prices, income inequality, and governance issues, all of which the book discusses -- both countries are assumed to continue growing at around 6 percent per year over the next 15 years, twice the rate expected for the world economy as a whole.
China and India currently account for nearly 5 percent and 2 percent of world GDP, respectively.
“Over the medium-term, they won’t become the largest economies in the world—maybe not even the largest traders in the world—but they will become more important” says Winters.
They are on track to gain a bigger share of the services market and to increase their shares of foreign direct investments, and growth in India’s manufacturing sector could mean double its share of GDP. In addition, the Giants will continue to expand their demand for energy and resources and increase their greenhouse gas emissions, predicts the book.
On the energy and environment front, a one-time opportunity exists for reducing the growth in emissions if China’s and India’s ambitious investment plans aim for appropriate standards. Doing so will not be unduly costly nor will it curtail their growth significantly, says Winters.
China and India are also expected to become more integrated into global financial markets, and to diversify and invest more abroad. China will probably not accumulate liquid dollar and Euro holdings to the same extent it has in the past, which Winters says may serve to increase interest rates slightly, putting pressure on major borrowers, including the USA.
“We expect China and India to be investing their savings in more productive activities abroad, through equity outflows, and outflows of foreign direct investment,” says Winters.
Chinese investment is expected to move further into resource-rich areas in Latin America and Africa, and into technology companies in North America and Europe, such as auto parts and electronics, that would provide them with “technological spillovers,” Yusuf says.
He says the trend toward investment in raw materials could have the effect of containing the growth of the manufacturing sector in African and other resource-producing countries and pushing these countries “more into resource-intensive activities,” while industry grows in China and India.
Dancing with Giants acknowledges that these trends already have a powerful momentum and they hold inherent opportunities, not just risks or threats to competitors. Stepping back and analyzing the dynamic roles of these two Giants can help governments and policy analysts plan for the future, stresses Winters.