The Potential Impact of China and India on the Global Economy - Essay Example

The potential impact of China and India on the global economy The member countries of Organization for Economic Cooperation and Development have successfully controlled the global economy for more than 100 years. The emerging markets, China and India in particularly are challenging this status quo. Economic analytics predict that China and India will at some stage of 21st century dominate the global economy and overtake such economic leaders as United States (India by roughly 2050 and China between 2030-2040). It may sound not believable, but the serious threat does exist. India is already on the verge of overtaking Japan in becoming the third largest economy in the world while China occupies second place. Even though India is the home to more people living in poverty than any other country (300 million people live on less than 1 dollar a day), at the closer look, China and India have the potential to become the strongest economies in the world in the nearest future. The concept of "emerging markets" was suggested by the International Finance Corporation to describe the developing economies with the extraordinary potential for rapid growth. According to statistics, majority of the emerging markets have transformed and improved their economic performance over the last two years. Moreover, the total output of the emerging markets (led by China) represents more than half of the global gross domestic product (Siddiqi 2006, p. 48). In 2005, the emerging markets combined GDP by $1.6 trillion outpacing the $1.4 trillion of advanced economies! China and India account for 20 percent of the total increase and have the share of 42% in total merchandise exports. United States, Eurozone and Japan are exporting more than 50 percent of total exports to developing countries. There are three factors which prompted the emerging markets on the higher growth: export-led growth fuelled by increasing American import demand, increased commodity prices and low interest rates (Siddiqi 2006, p. 49). Brazil, Russia, India and China (BRIC countries) are predicted to boost their capacity and become leading industrialised countries by 2025. These four countries are strategically important to multinational companies and become the central targets in the current wave of globalisation. India and China have contributed 30 percent of the global growth between 2000-2005 and their share in the world trade has increased from 7 percent to 15 percent. They have doubled their contribution to world economy in only five years. International corporations are increasing their operations in China and India. Moreover, India and China are also increasing their activity on the international business arena. For example, India's Vedanta Resources invested in Zambia's Konkola Copper Mines and China National Petroleum Corporation has actively invested in African oil-production countries (Siddiqi 2006, p. 51). The stable commodity markets, reflecting the demand for energy and natural resources, have enabled China to overtake Japan as the second largest oil importer after United States. BRIC countries account for 20 percent of world oil demand, while Indian intellectual property second has ensured that its government takes the lead in the negotiations within World Trade Organization. India's annual growth rate is at least 6 percent and even before 1991 when India's finance minister began to dismantle the post-colonial license Raj of state regulation of the economy, the national growth was above 3.5 percent a year (Luce 2006, p. 23). Despite of the rapid growth, more than one-third of global poor population lives in India. Even with a such a high number of poor people, India might capture the large share of the global software, manufacturing, pharmaceutical, and automobile components markets. India's growth derives from the service sector: information technology, back office processing, outsourcing, finances, medical services, media services and consumer industry. China's growth, on the contrary is based on manufacturing sector. Chinese companies operate mostly in joint ventures with foreign companies producing tangible things such as toys, electronic goods and garments of low quality and targeted at export. Thus, India exports services and China exports goods. For example, the American consumer is more willing to buy the CD player made in China rather in India (Luce 2006, p. 24). India's services sector is serving the economy well, but in terms of employment, China is more successful. India has the workforce of 470 million people (only one million employed in software and other services activities), while China has more than 100 million people employed in manufacturing (compared to 7 million in India). As Centron has noted, "China and India are turning their economies around; they are now the dragon and the tiger of the global commerce, experiencing growth rates that no other large country can match" (2006, p. 38). Economically, both countries have emerged from poverty and became the prosperous trading nations. China is already crucial to the well-being of the world economy and India soon will be as well. Militarily, these countries are expanding the power within the region and beyond - the armies are modernized, nuclear-capable missiles are developed. Such developments represent the first significant shift in the balance of military power in world since the Cold War. Diplomatically, China and India have increasing influence: they provide aid to poorer countries, participate in rescue operations, build bilateral ties with states, seek the permanent seats on the United Nations Security Council (Cetron 2006, p. 39). Economists, scientists, and historians agree that the global centre of economic gravity has shifted from the industrialized west to the developing east. China, being the first out of growing economies in the world with the lowest wages of all industrial nations, has decreased the American consumer price index by as much as 2 percent (Cetron 2006, p. 39). This year, according to the plans of Malcolm Bricklin, the Chinese cars will be imported to the United States. These cars will be 30 percent cheaper and are likely to kill the Italian auto industry as well as other competitors. China has improved its relations with United States and its neighbours because of the increasing demand for raw materials. In particular, China has concluded the agreement giving it access to Canadian oil sands and uranium (Cetron 2006, p. 40). At the end of the year 2005, China has invested $20 billion for offshore oil and gas exploration in Argentina. In overall, exports from Brazil, Chile and Argentina have reached $14.6 billion in 2003. This rapid growth in trade has two benefits: it provides another source of raw materials and serves to lure Latin American states toward Beijing's one-China policy. India is behind China in economic development, however, its economy has made major improvements in the very short time. At the current rate of growth, the majority of Indians will be middle class in 20 years - the rate of social progress no other country in the world can match. As it was already mentioned, India leads as an emerging service economy. India has the fast-growing and very profitable service sector in high technology. High technology industry in India is viewed not just as the potential profitable export opportunity, but also as the force to improve national military (Cetron 2006, p. 41). India has the goal to get the status of the great power in the world and this can be achieved through being granted the membership in the United Nations Security Council. The seat was proposed and denied in 1971 when China replaced Taiwan. Since that time China has blocked all attempts to grant India's wish. India has the support of France, Britain and Germany, while China is supported by United States because of its potential to become the major economic power. China has the open-door programs which encourage investors to enter Chinese national economy. In the very short period of time, China has dismantled its highly centralized planning system and returned to the market economy. United States, Western Europe and Japan project that China will become the global largest market for consumer products and become the global center of manufacturing ("American Firms Rushing to Build in China" 2002, 10). McDonalds has more than 400 restaurants in China and plans to add 100 every year. China is the member of the World Trade Organization, and many industries such as telecommunications and banking are open for investment. Nevertheless, the emergence of China as the powerful player on global economic arena is threatening for the East Asian countries and Japan in particular. After the bursting of the IT bubble in 2000, Chinese economic growth was impressive as well as supporting for the world trade and the growth of Asian region. China is ranked third in the world for spending on research and development (behind United States and Japan but ahead of Germany and Great Britain) ("The World Economy" 2004, p. 8). There is no doubt that China is already on the path of becoming the dominant influence on the economies of the East Asian region, while the effect on the other economies of the world are rippling. East Asia accounts for 45 percent of Japanese exports while Chine accounts for only 12 percent. The recent research indicates that good exports from East Asia to United States have decreased by 2.6 percent in 2004, while exports to China have increased by 20.8 percent ("The World Economy" 2004, p. 14). China, as the emerging economic power, is an important source of growth for Japan. If previously the economic growth of East Asia region depended on United States as the source of demand, China's advancement from the producer to consumer decreases the export rate to U.S. and other developed countries. Moreover, exports to China are not related only to IT industry, but also consumer good, iron, steel and machinery. Thus, Japan, as the exporter, becomes less reliant on the American market; however, Japan becomes more vulnerable to the burst of the investment bubble in China. The so-called TI (Transparency International) is one of the most influential investors and traders doing business with the emerging markets. In the early 2000s TI has issued the report on corruption and bribery of foreign markets. South Africa was marked as the world's six likely country to bribe. India and China were in this list as well (Moore 2002, p. 17). Organizations from emerging markets (especially export-oriented China, India and Russia) rank among the first and most of the efforts to strengthen domestic anti-corruption activities fail. Moreover, India consistently scores worst across most regions and sub-groupings. China is the world's fourth largest exporter and ranks as the second most serious offender. Even though China and India are ranked the worst in terms of corrupted markets, the trading activities are steadily increasing. The most important gains from trade come from the long term impact of increasing international competition for the local industry (Siebert 1999, p. 100). The Asian Pacific region which includes China, India and Indonesia as well as Japan, Australia and New Zealand exhibited the strong growth: 50 percent increased despite of the Asian currency crisis in the middle 1990s. Siebert relates this intensive growth to the increased oil consumption of emerging economies. He notes that China's oil consumption grew by 9.5 percent (2000) and GDP grew by 7 percent (Siebert 1999, p. 171). There is the potential demand building up in India and China and at present energy consumption per person is only the small part of that in the developed world. Thus, the increasing economic activities of China and India may lead to the further raise of oil price. The increased demand for oil is directly related to advanced development of economics. As Huang has noted, the fastest route to economic development is to welcome foreign direct investment (2003, p. 74). This assumption is working well for China, while India's experience proved that FDI is not the only way to prosper. India has not attracted as much investment as China because the major emphasis is not on production and manufacturing, but services. International investors are more confident in China's prospects, while the India's commitment to free-market reforms is questioned. Despite of this disparity, both India and China are developing very quickly: China because of foreign investment and India because of the home-grown entrepreneurs. There are several Indian companies which compete internationally with the best European and American companies: software giants Infosys and Wipro and pharmaceutical enterprise Ranbaxy as well as 11 other firms were included in the Forbes 200 ranking. Only four Chinese companies have been included into this list. India has developed the strong infrastructure supporting private enterprises and the capital markets operate very efficiently. China and India are the global next major powers (Huang 2003, p. 74) and they offer the competing models of development. Historically, India and China were the followers of the Soviet Union model of development, but now are taking the different paths. China is focused on state capitalism and relies on hard (roads and energy) infrastructure, while India is stronger in soft infrastructure where knowledge, creativity and initiative count ("India, China, Japan, and ASEAN as Emergent Powers" 2006, p. 1) Notably, two hundred years ago when the world was experiencing industrial revolution, China and India accounted for 45 percent of the global GDP ("Strength in Numbers" 2004, p. 42). Today United States have the largest economy in the world and account for 20 percent of the global GDP as well as dominating trade and investment. The global situation is changing and the revival of the previous economic balance of power is very likely to occur again. China has closed its economy for foreign investment in the 19th century while today it benefits from foreign capitals. It is hard to predict how the emergence of China and India as the global economies will change the economic world, but it is clear that the contribution of these countries was vital during the global economic turndown in 2002-2003. China's GDP is already bigger than UK's, even though it does not mean that life in China has much improved or became better than in UK. Large population of China and India are the advantage is economic terms, but it also means that there are more people to whom the wealth has to be spread. The emerging economies of China and India differ in their development and focus on the different economic aspects. Nevertheless, each country contributes to the distinct sphere of economy: India to services industry and China to manufacturing industry. Both India and China are developing at the rate not experienced by many developed countries and while global superpowers United States and UK experience economic slowdown, the China's and India's economies continue to grow. Cheap workforce and inflow of foreign investment ensure the further economic prosperity of China and India. Products marked "Made in China" can be found in every place of the world, while the India's medications are recognized as advanced by all leading physicians. The world has to prepare thoroughly for the emerging economies of China and India, otherwise, most of the global leading companies will be unable to compete with Chinese and Indian enterprises. Word Count: 2483 References "American Firms Rushing to Build in China" 2002, USA Today, vol. 131, no. 2687, p. 10. Cetron, M & Davies, O 2006, "The Dragon vs. the Tiger: China and India Reshape the Global Economy; India and China Will Vie for Economic and Political Dominance on the World Stage. Here's an Assessment of the Two Nations' Short-Term and Long-Term Prospects", The Futurist, vol. 40, no. 4, pp. 38+. Huang, Y & Khanna, T 2003, "Can India Overtake China" Foreign Policy, July-August, pp. 74+. "India, China, Japan, and ASEAN as Emergent Powers" 2006, Manila Bulletin, 29 January, p. 1. Luce, E 2006, "One Land, Two Planets; the Economy Will Overtake That of the US by Roughly 2050: Along with China, India Will Dominate the 21st Century. But It Is Still a Terrible Place to Be Poor", New Statesman, vol. 135, no. 4777, pp. 23+. Moore, T 2002, China in the World Market: Chinese Industry and International Sources of Reform in the Post-Mao Era, Cambridge Press, London. Siddiqi, M 2006, "Dawn of a New Economic Order The Western Dominance of the World's Economy Is Being Challenged by a Small but Powerful Collection of Emerging Markets Led by China, Brazil and India. The Economic Map of the World in 50 Years' Time Says Our Columnist, Will Be Very Different from What It Is Today", African Business, no. 319, pp. 48+. Siebert, H 1999, The World Economy, Routlegde Publication, London. "Strength in Numbers: The World Economy Is Currently Dominated by the G7 Countries. But the World Is Changing, and We're Witnessing the Rise of Some Economic Giants of the Past" 2004, Geographical, vol. 76, no. 9, pp. 42+. "The World Economy" 2004, National Institute Economic Review, no. 188, pp. 8+. Read More