Focus THE IMPACT OF CHINA AND growth in the two largest Asian Driver economies were unique. In recent years other Asian economies INDIA ON THE DEVELOPING (for example, Japan and Korea) have experienced WORLD similarly rapid growth paths. However, whilst China accounted for 20 percent of the world’s population and India for 17 percent in 2002, at no time did the RAPHAEL KAPLINSKY* combined population of Japan and Korea’s exceed four percent of the global total (Figure 2). So, unlike the case of Korea and Japan who could grow without he global economy is undergoing a profound severe disruption to the global economy, we have to and momentous shift. The first half of the 21st T suspend the “small-country” assumption in the case century will undoubtedly be dominated by the con- of the Asian Drivers. The very high trade intensity of sequences of a new Asian dynamism. China is likely China’s growth makes the big-country effect partic- to become the second biggest economy in the world ularly prominent in its case. Between 1985 and 2005, by 2016, and India the third largest by 2035. A clus- China’s exports rose from $50 billion to $772 billion, ter of other countries in the Asian region, such as transforming China into the world’s third largest Thailand and Vietnam, are also growing rapidly. trading nation. These newly dynamic Asian economies can collec- tively be characterised as the “Asian Drivers of Second, China (especially) and India embody Global Change”. The economic processes they markedly different combinations of state and capi- engender are likely to radically transform regional and global economic, political and social interactions and to have a major impact on the environment.This Figure 1 is a critical “disruption” to the global economic and GROWTH OF GDP AND EXPORTS FROM ONSET OF RAPID political order that has held sway for the past five GROWTH: decades. It is reshaping the world as we know it, CHINA, INDIA, JAPAN AND KOREA heralding a new “Global-Asian” era. Growth of GDP Log GDP 4.0 3.5 Role of China and India for global change 3.0 2.5 As mentioned above, the two key Asian Driver 2.0 1.5 economies are China and India. But they reflect very 1.0 different growth paths. China is integrated into an 0.5 outward-oriented regional economy, involving fine 0.0 divisions of labour in many sectors. By contrast (at 1 5 9 131721252933374145 Log Exports Growth of Export least until now) India represents much more of a 6.0 “standalone” economic system. Yet, notwithstanding 5.0 these differences in structure, they pose major and distinct challenges for the global and developing 4.0 economies, for six major reasons. 3.0 2.0 The first is as a consequence of their size.As Figure 1 1.0 shows, from the beginning of their growth spurts 0.0 (1979 and 1992, respectively), neither GDP or export 1 5 9 131721252933374145 China (1979 - 2005) Japan (1960-2004) Korea, Rep. (1963-2005) India (1992-2004) * Department of Policy and Practice, The Open University. Source: World Bank. 15 CESifo Forum 1/2007 Focus Figure 2 army of unemployed, estimated at around 150 million compared SHARE OF GLOBAL POPULATION in % to the 83 million people em- 25 ployed in formal sector manu- facturing in 2002 (Kaplinsky 20 2005). As Shenkar observes, 15 “China’s enormous labor re- serves, with pay scales radically 10 lower in the hinterland than the coast and in urban areas (the 5 average income on the farm, where more than half of the 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Chinese population lives, is less than $25 per month), creates China India Japan Korea, Rep. the equivalent of a country Source: World Bank. within a country; so, instead of Vietnam or Bangladesh replac- talist development compared with the industrialised ing China as a labour-intensive haven, Hunan will world. Chinese enterprises have their roots in state replace Guangdong” (Shenkar 2005, 134). More- ownership, usually arising from very large and often over by 2030, India, also with a large reserve army regionally-based firms (Nolan 2005; Shankar 2005). of underemployed, is likely to have a larger popu- They reflect a complex and dynamic amalgam of lation than China. But China and India are not property rights – “The ownership of each of China’s content to operate in this world of cheap labour large SOEs [state owned enterprises] has spread and mature technologies, and are investing heavily gradually among a variety of public institutions, each in the building of technological capabilities. China, of which has an interest in the firm’s performance … for example, overtook Japan to become the world’s [b]ased on the “ownership maze” and vaguely de- second largest investor in R&D in 2006. fined property rights” (Nolan 2005, 169). With access to cheap (and often subsidised) long-term capital, Fourth, China and India are associated with very dif- these firms operate with distinctive time-horizons ferent forms of regional integration. China is part of and are less risk-averse than their western counter- a distributed regional network of production, reflect- parts (Tull 2006). Indian firms are probably less dis- ing wider regional competitiveness. Traded goods tinct from the western model, although they tend to ‘manufactured in China’ usually emanate from re- be less specialised and often include elements of gional production systems – China’s trade deficit social commitment which are largely alien to west- with East Asia grew from $4 billion in 1990 to ern firms (Humphrey, Kaplinsky and Saraph 1998). $40 billion in 2002, and the region’s share of China’s Associated with these complex forms of ownership merchandise imports grew from 55 to 62 percent in and links to regional and central state bodies, the same period (Lall and Abaladejo 2004). An Chinese firms often operate abroad as a component increasing proportion of China’s trade involves the of a broader strategic thrust. This is particularly processing of imported raw materials and intermedi- prominent in China’s advance in Sub-Saharan Africa ates (widely referred to in the literature as “verti- calised trade”, see Feenstra 1998). Official data show (SSA) in its search for the energy and commodities that this form of trade grew to $404.8 billion in 2003 required to fuel its industrial advance (Kaplinsky, (48 percent of the total trade volume), up from McCormick and Morris 2006). $2.5 billion in 1981 (5.7 percent of total trade) (NiHaoOuZhou_com 2006). By contrast, Indian The third reason why the Asian Drivers present a exports are more an outcome of a “national system new and significant challenge to the global and of production”, so that the spread effects of the developing economies is that they combine low growth paths of these two Asian Driver economies incomes and low wages with significant innovative are likely to be very different. potential. This means that they are able to compete across the range of factor prices. The oft-stated Fifth, both China and India are now heavily engaged belief (and hope?) that China will run out of in global institutions, but whereas India has long unskilled labour is belied by the size of its reserve been a participant, China’s global presence is more CESifo Forum 1/2007 16 Focus recent. Whilst the nature of their political engage- private and non-governmental organisations ments with the rest of the world differs sharply, they have on developing countries? increasingly affect global and regional governance 5. Given the enormous resource and energy hunger (Humphrey and Messner 2006). India plays a major of the Asian Drivers, what are the environmental role as an “advocate” of the interests of the develop- consequences for other developing countries? ing countries, for example as the leader of G22 with- in the WTO. China is pushing the Shanghai Cooperation Organisation (formed by China, Assessing the impact of the Asian driver economies Russia, Kazakstan, Kirgistan, Tadjikistan and on the developing word Uzbekistan) as a significant player in the area of global energy policies. China and India also provide How might we assess these impacts? We can distin- a different policy role-model for many developing guish three sets of structuring principles to aid this economies, with the possible rise of a “Beijing analysis – the channels of Asian Driver interaction Consensus” to rival the Washington Consensus. with the global economy; the distinction between These dynamics represent a transition from a quasi- complementary and competitive impacts; and the unilateral US-dominated world order to a multipolar difference between direct and indirect impacts. power constellation. This could lead to new turbu- lences and conflicts between the rising and the Channels of interaction declining powers within the global governance sys- tem (Humphrey and Messner 2006). There are a variety of different channels through which individual countries interact with other Finally, China and India have huge and rapidly- economies, in their regions and elsewhere. Clearly, growing energy needs. China is already the second these channels are contingent – they change over largest emitter of greenhouse gases (only exceeded time, and vary in importance depending on factors by the US) and by 2015 its energy demand is expect- such as location, resource endowment, trade links, ed to roughly double, and India’s to rise by 50 per- and geo-strategic significance. Six key channels stand cent. The world’s biocapacity will be severely out in importance. stretched if it is to feed China’s and India’s resource hunger and sustain their growth. The first of these are the trade links between the Asian Drivers and the global economy.