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China & India |
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Growing
Asian Markets |
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The
signs heralding China and India's future dominance are clear. China's
GDP has grown at an average of 9 percent a year for the past 25 years
and Chinese leaders set in 2005 a target of quadrupling it by 2020. |
The center of gravity of the global
economy is shifting toward China and India. With combined populations
accounting for one-third of humankind and building on decades of sustained and
rapid economic growth, China and India are poised to become the new economic
powerhouses of the 21st century.
But the more important story of the new century is the rise not just of China
and India, but of all Asia. Equally significant is the prospect that Asia's
rise will lead not to an exclusive Asian or Pacific century to replace the
Atlantic century, but a dynamic and globally connected Asian community
spurring growth in the rest of the world through a network of trade and
investment relationships.
This is a vision grounded in the reality of trends that are already taking
place. Southeast Asian economies have recognized the rise of China and India
and begun to collaborate and adapt to the new order of changing competitive
advantages, global financial flows, and trade links. As these changes continue
to spread through the world, non-Asian countries, too, will eventually have to
restructure their economies, develop new competencies, and realign their
growth strategies to not just cope with the rise of China and India but also
to take advantage of it.
Asia
on the rise: The signs heralding China and India's future dominance
are clear. China's GDP has grown at an average of 9 percent a year for the
past 25 years and Chinese leaders set in 2005 a target of quadrupling it by
2020. If China succeeds, its economy will be second only to that of the United
States. India's economy has also seen sustained annual growth rates averaging
about 6 percent since 1980 and is expected to grow at about 8 percent a year
for the next 10 years.
These high growth rates are the result of bold policy reforms that helped
launch a wave of foreign direct investment (FDI). In China, following Deng
Xiaoping's push toward a market-oriented economy since the 1980s, FDI
increased from $3 billion a year in 1990 to $61 billion a year in 2004. In a
similar trend—albeit one of different proportions—after India launched
economic reforms in 1991, FDI increased from $133 million a year in 1991–92 to
$4.7 billion a year in 2002–03.
Throughout history, the rise of new powers has changed the existing order and
unsettled other powers. The rise of China and India is no different—it poses
challenges for the rest of Asia and, indeed, the rest of the world. But the
challenges are not insurmountable and contain within them opportunities for
the other Asian countries—provided they take proactive steps to adjust to the
new competitive landscape and to leverage off the "Chindia" growth phenomenon.
There is, of course, little doubt that Asian developing countries are facing
intense competition from China and India in trade, manufacturing, services,
and FDI. China, for instance, has been improving the efficiency of its
regulatory and business environment since the 1990s and has developed a broad
range of capabilities backed by heavy foreign investment. It now competes with
Southeast Asian countries in low-cost, labor-intensive operations and in
high-end manufacturing and research and development. India, for its part, has
seen more liberalized trade policies lead to higher export competitiveness,
particularly in its textile and information technology–related manufacturing
sectors. Global producers ranging from Toyota to LG Electronics have
established production bases in India. Not only will China and India continue
to attract a large share of FDI and have a cost advantage over Southeast Asia,
their much-larger domestic markets and pools of engineers and scientists also
give them an edge in higher-value activities.
A growing body of evidence suggests, however, that the growth of China and
India is not a zero-sum phenomenon for the rest of Asia. A study by
Singapore's Institute of Policy Studies (Bhaskaran, 2005) showed that both
China and Southeast Asia increased their share of global merchandise exports
in 1990–2002 but that China's share did not in general come at the expense of
Southeast Asia. More important, as China's trade surplus with the United
States and its FDI inflows have increased, Southeast Asian economies have
gained a larger share of global exports as they have increasingly become part
of the supply chain of industrial components and raw materials that China
needs for its export-led growth. As FDI flows to China and India, it also
continues to flow to the Association of South East Asian Nations (ASEAN)
region: from 2003 to 2004, FDI into ASEAN grew by 20.4 percent, surpassing
flows into China (13.2 percent) and slightly below the amount going to India
(27.9 percent). This win-win situation is not surprising given that production
networks in Asia are highly integrated and characterized by disaggregated
manufacturing across different locations and by a high level of trade in
intermediate inputs.
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China
and India are not just factories churning out low-cost goods and
services but are also rapidly growing markets in their own right, with a
huge demand for consumer and capital goods produced in Asia and
elsewhere. |
China and India are not just factories churning out low-cost goods and
services but are also rapidly growing markets in their own right, with
a huge demand for consumer and capital goods produced in Asia and elsewhere.
China in particular has become an important engine of growth for Asia. Its
total trade, more than 50 percent of which was with Asia, nearly tripled
between 2001 and 2005, reaching $1.42 trillion. Many Asian countries enjoy
trade surpluses with China; China's imports from Asia totaled $440 billion in
2005, up by 20 percent, and accounted for 67 percent of China's total imports.
As a result, China is now one of the largest trading partners of a growing
number of ASEAN economies, such as Malaysia, Singapore, Thailand, and Vietnam.
It has also been the largest trading partner of Japan and Korea since 2004; in
fact, 2005 marked the seventh year in a row of increased trade with Japan, an
all-time record of $189.3 billion. India, too, has been emerging as a growth
engine, albeit from a much lower base. Trade between ASEAN and India increased
sixfold between 1990 and 2004, to reach $18 billion, and Indian Prime Minister
Manmohan Singh has set the target of doubling it to $30 billion by 2007.
This may well be just the beginning of the import growth story for China and
India. According to A.T. Kearney's latest Global Retail Development Index
(GRDI) released in April 2006, India was ranked top for the second year
running as the most attractive market in the world for retailers, while Asia
has surpassed Eastern Europe as the most attractive regional market in the
world. Both China and India are still in the early stages of development, with
much more scope for domestic consumption levels to rise. China's middle class,
for example, is still relatively small at only 5 percent of the population of
1.3 billion and could increase by almost 10-fold over the next decade. India's
middle class could expand from about 57 million now to about 160 million by
the end of the decade.
The rise of China and India will redefine regional divisions of labor and
trade and help the Southeast Asian economies take off on a new and higher
growth trajectory. China and India will bring Asia into the center of the
global economy.
The rise of China and India is helping Asia to not only grow but to become
more integrated. Asian countries are working to create a cohesive Asian
community that allows for both complementary growth and positive competition.
The success of such an Asian community depends on three key factors.
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Growth in
China and India must continue to catalyze economic integration in Asia;
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China and India must continue to
adopt mutually beneficial developmental and foreign policies with respect to
their Asian neighbors; and
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Other Asian
countries must continue to reform and integrate their own economies and
present themselves to China and India as valuable and viable
partners.
Let us examine each of these in turn.
Economic integration in Asia:
This is well under way, bolstered by an array of free trade agreements (FTAs)
in Asia. Intra-Asian trade as a share of the region's total trade rose to more
than 50 percent in 2004 from about 30 percent in 1980. In the past five years
alone, it grew by 15 percent, on average, well above the average growth rate
of 5 percent among the countries in the North American Free Trade Agreement
and 9 percent within the European Union.
Besides trade, there is potential for further integration in financial markets
and cross-border capital flows. Asia has the highest saving rate in the world
(38 percent of GDP in 2004), and Asian official foreign reserves currently
exceed $2 trillion. It has an estimated 2.3 million high-net-worth individuals
compared with 2.7 million in the United States and 2.6 million in Europe, and
their number is expected to grow by 7 percent a year. Although Asian investors
have traditionally looked to Western markets for their investment and
financial planning needs, their savings are increasingly being intermediated
within Asia to be invested globally.
Although Asia has a high saving rate, its financing needs are equally high as
it continues to grow rapidly. Across Asia, from Indonesia to India and China,
there is a huge demand for funds to finance infrastructure projects. Private
companies are also eager to raise funds to feed the growth of their
businesses. To this end, greater integration of Asian financial markets and
intermediation of funds within Asia will allow Asia to partially fund its own
growth.
Regional policies of China and India: Mutual economic benefits
and integration have been possible because China and India have chosen to
pursue development strategies characterized by peace and partnership. They
support the vision of a peaceful, progressive, and inclusive Asian community
and have shown a willingness to engage and cooperate with regional neighbors,
enhancing regional stability and cohesiveness.
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The
emerging Asian community must not become an insular rival to other
regions but a globally connected and engaged partner |
China has repeatedly assured the region that it will stay on the path of
peaceful development and is aware of the potential disruptions to its growth.
It is actively engaging other nations to share the fruits of rising
prosperity. China has, along with Japan and Korea, been working with ASEAN in
the ASEAN+3 process. To help bolster the region against economic downturns,
ASEAN+3 finance ministers launched the Chiang Mai Initiative—a system of
bilateral and multilateral currency swap arrangements that will provide
liquidity in the event of short-term financial crises—and the Asian Bond
Market Initiative to link the economies through the creation of a pan-Asian
bond market. At the broader level, Chinese leaders have also pledged to
support general East Asian cooperation through such mechanisms as the Shanghai
Cooperation Organization, the ASEAN Regional Forum, and the Asia-Pacific
Economic Cooperation forum.
India has—since the early 1990s under former Prime Minister Narasimha Rao—embraced
a "Look East" policy that encourages regional cooperation. As a direct result,
India is today an important ASEAN dialogue partner and a member of the ASEAN
Regional Forum, and, in December 2005, it became an inaugural member of the
East Asia Summit (EAS). In fact, it was at the EAS that Prime Minister
Manmohan Singh outlined his vision of an emerging Asian economic community. He
also envisioned a Pan-Asian FTA that, together with the many other FTAs being
negotiated in the region, will form the building blocks of this emerging Asian
economic community.
China and India are also strengthening their bilateral relations. During
Chinese Premier Wen Jiabao's visit to New Delhi in April 2005, the two
countries pledged to resolve their long-standing border dispute and called for
a doubling of trade (to $30 billion) by 2010. Although it is only natural that
the two Asian giants will compete at some levels, such as foreign investment,
energy sources, and regional influence, there is much room for cooperation and
mutual emulation. China and India have signed a landmark memorandum of
understanding to cooperate in the energy sector.
Cooperation has been possible even though, or maybe because, the two countries
have adopted very different growth strategies. China, whose growth has been
driven by manufacturing, has tapped into domestic savings and foreign
investment to build an impressive infrastructure. India's progress, by
contrast, owes much to private businesses. Although China currently seems to
have the advantage over India in terms of the size of its economy and speed of
growth, this difference can be attributed, in part, to China's 13-year head
start in economic reforms. As India begins to capitalize on the improving
skills of its workforce and advantages in age distribution (35 percent of its
population is under the age of 15), the gap will probably narrow.
To their credit, neither country has played up these comparisons or
differences for political gain; rather, they have tried to turn them into
useful lessons. China, for example, is learning from India how to improve its
performance in the information technology and services sector. In the same
manner, India should learn from China's experience in building infrastructure
and improving workers' skills if it wants to emulate China's success in
manufacturing and in attracting FDI.
Viable partners across Asia: Asian countries have also come
together to ensure that economic development in Asia is diverse and
multiconnected, which will be more stable than a "hubs and spokes"
configuration whereby every link revolves around either China or India. ASEAN,
for example, has set the goal of forming an ASEAN economic community by 2020;
when realized, this community will be a free trade zone and unified production
base of 500 million people that can be a substantial economic entity alongside
China and India. ASEAN countries are also looking to integrate their capital
markets, such that the combined size will be comparable to the markets in
India and China and thus relevant to global investors. An ASEAN index was
launched in September last year, and plans are in place to create
exchange-traded funds tied to a pool of ASEAN stocks.
Economic cooperation has gone beyond trade agreements to include financial
crisis recovery plans and open political dialogue. In addition to the ASEAN+3
process, for example, ASEAN has annual summits with India, China, Japan, and
Korea. ASEAN countries such as Malaysia and Brunei Darussalam are beginning to
explore bilateral economic relations with other Asia-Pacific countries, such
as Pakistan, Australia, and New Zealand.
As the web of bilateral and multilateral relations grows, the region will
become more stable and cohesive. This will be the key to successfully managing
and integrating the rising Asian tide that China and India have set in motion.
Becoming better connected: The emerging Asian community must not
become an insular rival to other regions but a globally connected and engaged
partner. China and India have already taken the lead in connecting the Asian
community to the rest of the world. Apart from the heavy investments that U.S.
multinational corporations have poured into China, or the increasing volume of
international services being outsourced to Indian companies, the two countries
have spread their links to almost every continent across the globe. The
Australian, Latin American, and African mining industry booms, for example,
owe their success largely to Chinese projects and Asia's huge demand for
minerals and resources. India, in its quest for resources, has approached
Russia, currently constructing a nuclear plant at Kudankulum in India's
southern Tamil Nadu region; the plant, which will feature two reactors of
1,000 megawatts each, will be commissioned in 2008. As growing trade and
economic partners of the EU, China and India also work with Europe on other
fronts, such as Europe's satellite program.
Nor can other Asian economies afford to be closed and insular. ASEAN, for
example, has been inspired to broaden its political engagement with dialogue
partners. It held a commemorative summit with Australia and New Zealand in
2004 in Vientiane and a summit with Russia in December 2005 in Kuala Lumpur.
Some Asian countries are casting their sights even farther; Singapore, for
example, has developed close links with Middle Eastern countries, and even
hosted the inaugural Asia–Middle East Dialogue in June 2005.
In addition to political linkages, Asian economies have continued to explore
trade and economic linkages farther afield. Brunei and Singapore, for example,
successfully engaged Chile and New Zealand to establish, in January 2006, a
multilateral FTA known as the Trans-Pacific Strategic Economic Partnership.
Singapore also has bilateral FTAs with the United States, Jordan, Panama, and
the European Free Trade Area. Other Asian countries are also expanding the
geographical reach of their bilateral FTA pursuits.
Asian economies are leveraging China and India's expanding global links and
importance to establish their own relevance in global value chains. I have
already described how ASEAN economies have tapped into a larger share of
global trade by forming strategic regional production chains that link to
Chinese manufacturing sectors. In addition to trade, Asian countries can take
advantage of their geographical and, in some cases, cultural affinity to China
and India. Singapore, for example, is positioning itself as an international
market intelligence hub on India by setting up a network of public and private
institutions that provide analysis and research about the subcontinent.
As Asia—led by China and India—reaches out to engage the world, it must and
will ensure that its rise as a global economic powerhouse is not a threat to
the security or prosperity of other nations and regions. China and India have
chosen a development strategy based on peaceful partnership, laying the
foundation for a harmonious, cohesive, and dynamic Asian community. As Asia
connects to the world, there is every reason to hope that the same principle
and structure of a community based on complementary growth and positive
competition, held together by overlapping political and economic
relationships, can serve as a model for the rest of the world. The Asian
Century will be the Global Century.
Source: Finance
and Development Magazine |
