Friday, June 27, 2008

Tale of the dragon and the elephant

The focus of the current article would be on India and China, which are considered as two of the fastest growing economies of the world. According to the newly released report titled 'Asian Development Outlook 2007 Update (ADO Update)' by the Asian Development Bank, developing economies from Asia are expected to register impressive economic growth in 2007, driven by fast growth in the People's Republic of China (PRC) and India. PRC and India, which together account for 55.3 percent of the total gross domestic product (GDP) in developing Asia, recorded their fastest growth in 13 years during the first half of 2007, and the fastest in 18 years in the fiscal year 2006, respectively. The present analysis, would cover the existing economic scenario in India and China—internal as well as external, in the backdrop of economic reforms, which are associated with the openness to foreign trade and (long-term) investment. In China, the merchandise trade ratio to gross domestic product (GDP) exceeded 60 percent, which was more than double of India's. China attracted direct foreign investment of US $ 79 billion a year, about 13 times than that for India.
'The heat is on'
In India, the balance of payments (BoP) data show that FY 2006 has seen growth of exports by 20.9 percent, and import by 22.3 percent, and the trade deficit widened to US $ 64.9 billion. The current account deficit rose marginally to US$ 9.6 billion from a year earlier. The capital account surplus nearly doubled from a year earlier to US$ 44.9 billion. The balance of payments surplus has escalated to US $ 36.6 billion from US$ 15.0 billion. The net direct investment flows as a whole doubled to US $ 8.4 billion. Net portfolio investment fell to US$ 7.1 billion from US$ 12.5 billion. In China, high trade surpluses and capital inflows have boosted foreign exchange reserves. Foreign exchange reached US$ 1.3 trillion by end-June, 2007 up by US$ 266 billion in 6 months. The trade surplus (US $ 122.5 billion) and actual foreign direct investment (up 12.2 percent to US$ 31.9 billion), accounted for 54 percent of the total foreign exchange accumulation in the first half of 2007, while non-FDI capital inflows contributed 46 percent (against just 3.0 percent in 2006). During the year 2006, India's international reserves amounted to US $ 1,76,105 million (as end of the period); whereas for the same year, Chinese international reserves amounted to US $ 10,72,564 million (calender year), which is almost six-times than that of India. The following table 1, provides a detailed picture of the balance of payments scenario for both India and China. From the table 2, one can find about the economic growth faced by India and PRC during the last four years. The PRC has registered higher economic growth in the recent years compared to India.Economies in transitionIt can be recalled that both India and PRC, historically, have very restrictive regimes, including outright prohibition on foreign direct investments (FDI), which got opened up only during the past 20-25 years (see table 3). The reforms process in the PRC started in the year 1978, thanks to the efforts of Deng Xiaoping (one can remember the term 'Four Modernisations'), which got further consolidated in the late 1980s, and again in 2002 upon its accession to the World Trade Organisation (WTO) (because of the support coming from the United States). The PRC's successful effort to bring foreign direct investment (FDI) in the special economic zones (SEZs), needs to be mentioned here. Special export processing zones (EPZs) along China's southern coast allowed it to exploit its comparative advantage in low-wage labour. Due to the ongoing reforms in the state-owned enterprises (SOEs) in China, there was substantial reduction in the workforce. The loss of manufacturing sector employment could be felt more in the state sector. Under the new competitive climate, starting from the mid-1990s, SOEs and the agricultural collectives started adopting the capital intensive technologies in China. However, services still continue to be constrained by high entry barriers, excessive state involvement, opaque regulatory process and overly burdensome licensing and operating requirements. China has promised that by the year 2006, it will drop all form of discriminations against the foreign firms. China has become the final processing and assembly platform for a large volume of exports originating from its Asian OECD neighbours but destined for European and North American markets. Despite the processing exports in China being less value-added and more labour-intensive, the expansion of manufacturing employment has slowed down in China. The intellectual property rights regime in China is considered as weak, which is a major stumbling block before China's trading partners. The year 1991 is regarded as the key reform year for India, following which phase-wise reforms started in terms of fiscal reforms, monetary reforms, trade reforms, banking sector reforms, currency and foreign exchange related reforms, etc. However, in the case of India, it is said that the labour market reforms is yet to be carried out, in the backdrop of labour market militancy, which exists in certain states of India. The labour laws are considered to be restrictive in India. India reduced its trade barriers since the 1990s, along with an expansion of exports of mostly capital and skill intensive products. It is perceived by some economists that too much openness of the economy can be a bane instead of a boon, since this can lead to flight of capital, de-industrialisation and massive unemployment. The Indian growth process has been termed as service sector-led growth, whereas Chinese growth process has been described as manufacturing-centric. However, the unorganised services constituted two-thirds of the service sector output in India, during the last decade. Among sectors attracting high cumulative FDIs, electrical equipments retained the first spot, to be followed by services and telecommunications, in India.
ICT scenario
The IT (Information Technology)-enabled services and business process outsourcing (ITES-BPO) in India have shown their superiority, sustained cost-advantage and fundamentally-powered value proposition in the global market, according to the Economic Survey 2006-07 (Government of India). The IT industry's contribution to gross domestic product (GDP) rose from 1.2 percent in 1999-2000 to an estimated 4.8 percent in 2005-06. The value of the electronics hardware exports has increased from US$ 1.2 billion in 2000-01 to US$ 2.12 billion in 2005-06. The value of the computer software exports has increased from US$ 7.8 billion in 2000-01 to US$ 25.8 billion in 2005-06. The total number of professionals employed in the IT and ITES sector has grown from an estimated 2,84,000 in 1999-2000 to 12,87,000 in 2005-06, in India. In the year 2005, Chinese ICT (Information and Communication Technologies) spending is estimated at US $ 118 billion, following growth of 22 percent a year in current US $ since 2000. According to the Information and Communication Outlook 2006 (OECD 2006), India and China account for 6.5 percent of exports and almost 5 percent of imports of computer and information services and other business services. In 2005, ICT-related FDI inflows in China valued US $ 21 billion. China is ranked as the sixth largest ICT market in 2005. During 2007, China's rapid growth continued to be largely investment led, although net exports have been contributing a growing share. India's domestic demand gained further momentum, taking growth there to more than 9 percent. Chinese share of world total trade in ICT goods was worth less than US $ 35 billion in 1996. However, by the year 2004, Chinese ICT goods trade reached almost US $ 329 billion. Since the year 2002, China has become a net exporter of high-technology goods to OECD (Organisation for Economic Co-operation and Development) countries. Chinese ICT firms do not merely assemble and re-export to OECD countries, but also compete in aspects of production process that utilise skilled labour, and absorb higher technology inputs. Rodrik (2006) finds that the Chinese exports is not merely about the volume of exports or its large pool of labour that allows the country a huge labour cost advantage, but it is also about what it produces and sells, which is associated with a productivity level that is much higher than a country at China's level of income. Research also shows that the worst weaknesses of China’s state-led capitalism are—excessive reliance on creaking state companies rather than more efficient private ones, a weak financial sector, pollution and rampant corruption.
There are risks before the two emerging economies, namely India and China, unless they take bolder steps to reforms, which aims at both internal and external macroeconomic stability without affecting the medium-term growth rate and rate of employment generation. The strengths and weaknesses need to assessed by both India and China, before they move into another round of reforms, and openness. Lastly, it must be mentioned that globalisation has also seen rise of Multi National Enterprises (MNEs) from the emerging market economies (EM) such as Brazil, China, Korea, India, Malaysia, Korea, Malaysia, Mexico, Russia, Singapore, Chinese Taipei and Turkey. These MNEs are termed as the 'second wave MNEs', who appear to be driven directly by firm-to-firm contracting in a global setting. Firms in the developing economies now manufacture for others, which allow them to capitalise on their cheap labour while avoiding the expense and risk of marketing, distribution and research and development (R&D). Another feature of globalisation has been the vertical fragmentation of manufacturing production into discrete activities that can be performed in different locations by different firms for producing wide range of products. EM-MNEs utilise various types of strategic and organisational innovations in order to establish a presence in industrial sectors, which is already populated with world class competitors. These firms have also invested in brand-building. At the end, one can say that China and India can become economic superpowers provided the growth experienced by them is inclusive in nature.
References and statistics:
Divergent Asian Views on foreign Direct Investment and Its Governance', by Douglas H. Brooks and Hal Hall, Asian Development Review, Vol. 21, No. 1, pp. 1-36
'Poverty and Inequality in China and India: Elusive Link with Globalisation', by Pranab Bardhan, The Economic and Political Weekly, September 22, 2007, pp. 3849-3852.
'Key Indicators of Developing Asian and Pacific Countries', The Asian Development Bank, pp. 91-95, pp. 98-102, pp. 202-207 and pp. 230-236.
The Economic Survey 2006-07, Ministry of Finance, Government of India, pp. 139-147.
Information Technology Outlook 2006 Highlights, pp. 3-15.
'Regional Economic Outlook, Asia and Pacific', April 2007, International Monetary Fund
'Asian Development Outlook 2007 Update' (ADO Update), The Asian Development Bank
'Jobless growth in Chinese manufacturing', by Jayati Ghosh and CP Chandrasekhar, 'Strengthening Productive Capacity in Emerging Economies through Internationalisation: Evidence from the Appliance Industry', by Federico Bonaglia and Andrea Goldstein, Working Paper No. 262, July 2007, OECD Development Centre
'China's Trade and Growth: Impact on Selected OECD Countries', by Malory Greene, Nora Dihel, Przemyslaw Kowalski and Douglas Lippoldt (Unclassified), Working Party of the Trade Committee, OECD Trade Policy Working Paper No. 44, 28-Nov-2006.
'What's so special about China's exports?', by D Rodrik, NBER Working Paper 11947, Cambridge, MA, January 2006.

No comments: