L. Alan Winters Shahid Yusuf

1
Dancing with Giants China, India and the Global
Economy

• L. Alan WintersShahid Yusuf
• Development Research GroupThe World Bank

2
China economic shock is unprecedented
China,

China,Maddison1978-2003
UnitedKingdom,1820-70
UnitedStates,1820-70
Percent
Initial share
4.9

5.2
1.8
Annual growth
7.5
2.1
4.2
World growth
3.1
0.9
0.9
Excess growth
4.4
1
.2
3.3
Number of years
25
50
50
3
Post-war growth spurts
Percent of world GDP (PPP)
16
China
12
Japan
8
Germany
4
South Korea
Taiwan, China
0
1
3
5
7
9
11
13
15
17
19
21
23
25
Years since turnaround
4
Consumption of primary commodities rivaling the
U.S.
China
India
USA
Percent of world consumption
Rice
29.7
21.4
1.0
Soybeans
19.2
3.7
24.0
Sugar
6.6
15.2
12.5
Aluminum
22.5
3.0
19.4
Copper
21.6
2.3
13.8
Steel production
31.5
3.5
8.5
Coal
32.9
7.1
20.6
Oil
7.4
3.4
25.3
5
Manufacturing and manufactured exports

• China accounted for 7 percent of global
  merchandize exports and 6.1 percent of imports
• India accounted for less than 1 percent of
  exports and imports
• Chinas manufacturing industry is 41 percent of
  GDP, while Indias is only 16 percent
• Domestic market for goods 1 trillion in China,
  250-330 billion for India

6
China

• Will remain a formidable exporter in labor
  intensive goods such as textiles, garments,
  shoes, and toys.
• Is already the largest exporters of
  electronics/ICT products.
• Is investing heavily in human capital to upgrade
  product range 600,000 science and engineering
  degrees awarded yearly.

7
India

• Most rapidly expanding industry is IT enabled
  services.
• Exports 12 billion in 2003-4, employment of 3
  million.
• But the sector is still small relative to the
  global market and capability greatest at low and
  middle tech activities.
• Manufacturing industry less well developed and
  less export oriented than Chinas.

8
Product structure of exports
Japan
Korea
China
India
100
80
60
40
20
0
1965
1975
1985
1995
2003
1965
1975
1985
1995
2003
1987
1995
2003
1975
1985
1995
2003
Medium-skill and technology-intensive manufactures
Labor- and resource-intensive manufactures
Electronics
High-skill and technology-intensive manufactures
Low-skill and technology-intensive manufactures
Primary commodities manufactures
9
Impact of China-India through a CGE Model
Additional growth (2 pa) and quality upgrading
Textiles
Apparel
Machinery
Electronics
deviation from base
Korea
10
3.7
7.0
7.9
Indonesia
15.6
21.4
4.4
12.0
Vietnam
15.6
35.5
12.8
12.6
Rest of S. Asia
6.4
25.5
8.1
8.9
USA
10.5
15.3
4.2
11.0
MENA
14.8
29.4
12.9
15.9
Subsaharan Africa
10.4
10.3
16.1
24.9
10
Impact of China-India through a CGE Model
Additional growth (2 pa) only in metals,
machinery, electronics, motor vehicles and
business services
Textiles
Apparel
Machinery
Electronics
deviation from base
Korea
61.4
40.5
36.2
54.5
Indonesia
38.7
96.2
38.1
77.9
Vietnam
48.9
203.1
53.2
57.9
Rest of S. Asia
23.3
156.1
48.2
64.8
USA
36.6
81.0
24.2
56.6
MENA
30.2
173.0
47.8
63.9
Subsaharan Africa
17.0
32.2
50.0
70.4
11
Current financial integration
Liabilities
Assets

Portfolio
Debt
Reserve
Other
FDI
0.6
0.6
0.6
4.1
16.0
China
0.4
0.6
0.3
0.1
3.3
India
22.0
20.6
21.5
18.5
1.5
USA
12
Current balance sheets (percent of GDP)
China
India
Assets
Liabilities
Assets
Liabilities
Portfolio
0.3
2.9
0.1
9.1
FDI
1.9
25.7
1.3
6.4
Private debt
13.3
11.9
2.6
17.0
Reserves
31.8
--
18.3
--

Total
47.3
40.5
22.3
32.6
13
Energy markets and emissions

• Local and global pollutants
• Energy prices
• Trends
• Projections to 2050
• Business-as-Usual (BAU) energy use
• Alternative more energy efficient paths (ALT)
• Domestic policy choices and investment to achieve
  ALT

14
Increase in oil use,2001-2005
Increase of crude oil demand relative to 1Q
'01(million of barrels per day)
8
China
India
6
Other non-OECD
OECD
4
2
0
1Q01
1Q02
1Q03
1Q04
1Q05
-2
-4
15
OPEC spare capacity
Millions of barrels per day
8
Algeria, Indonesia, Iran, Kuwait, Libya, Qatar,
Saudi Arabia, UAE
Iraq, Nigeria, Venezuela
6
4
2
0
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
16
Efficiency scenarios

• Supply (requires heavy investment)
• Hydro 20 percent, nuclear 30 percent of new, bio
  to 10 percent
• 15 percent gain in new industry use of coal
• 8 percent gain in new generation from coal
• Demand changes by 2050 (little investment)
• 25 percent efficiency in production energy use
• 60 percent improvement in household equipment
• 50 percent increase in car fuel efficiency

17
Enhancing energy efficiency - emissions
2005
2020
2050
Country scenario

CO2 emissions
China
BAU
0.90
1.96
3.61
ALT
97.6
72.8
59.9
India
BAU
0.26
0.49
1.56
ALT
97.2
71.6
63.2
BAU is measured in GtC Alt is the alternative
scenario as a percent of BAU
18
Enhancing energy efficiency - investment
2005
2020
2050
Country scenario

Energy investment
72
120
113
China
BAU
101
114.3
92.2
ALT
India
BAU
18
37
74
ALT
102.1
110.5
103.5
BAU is measured in billions of dollars Alt is
the alternative scenario as a percent of BAU
19
Future performance some assumptions

• Technology innovation and industrial change
• SOE and financial reforms
• Inequality
• Governance
• Water
• Local pollution
• Trade barriers

20
Growth assumptions
Real growth(percent per annum)
Contribution to world growth (percent)
Share (percent)(2004 prices)
1995-2004
2005-20
1995-2004
2005-20
2004
2020
China

4.7

7.9

9.1
6.6

12.8

15.8

India

1.7

2.4

6.1
5.5

3.2

4.1

USA


28.4

28.5

3.3
3.2

33.1

28.6

Japan

11.2

8.8

1.2
1.6

5.3

4.6

a
Germany

6.6

5.4

1.5
1.9
3.0

3.3
Brazil

1.5

1.5

2.4
3.6

1.5

1.7
World

100.0
100.0
3.0
3.2

100.0
100.0

21
Trends in inequality
Gini coefficient of inequality
45
40
China(income)
35
30
India(consumption)
25
1978
1983
1988
1993
1998
2003
22
Divergence between regions
Annual growth rate of per capita state GDP
between 1978/1980 and 2004
Percent
14
Chinese provinces
12
10
8
6
4
Indian states
2
0
1
2
3
4
5
6
7
8
9
10
Per-capita GDP of province(state) in 1978
(1980)relative to poorest province(state)
23
Sectoral growth
Average annual growth rate(percent)
16
China
India
14
12
10
8
6
4
2
0
Industry
Agriculture
Services
Industry
Agriculture
Services
1980-85
1985-90
1990-91
1995-2000
2000-05
24
Governance does matter

• Giants grew fast but with only average
  governance
• Three possible explanations
• High returns (size) removal of prohibitions in
  1970s
• Improvements to average levels in 1970s
• Better than other poor countries

25
Constraints on opportunism

• China no overt contests, but
• Collective leadership 1980s onwards
• Credible commitments to cadres
• Strong economic benefits for population
• India centralisation of 1970s halted, reversed
• Actively contested democracy, but
• Politics still somewhat clientilist reduces
  incentives for policies for general good.

26
Governance challenges manageable

• India constraints on reform
• Importance of distributional issues
• China growing outside options for cadres
• Promotion criteria emphasize growth
• But population increasingly focused on equity and
  corruption
• Increasingly expensive to maintain cadre loyalty
• Exogenous shock could disturb equilibrium

27
Implications for other countries

• Generic
• Investment climate infrastructure, human
  capital
• Flexibility
• Improve own energy efficiency
• Specific cant be precise
• Low income prepare for vacated markets,
• Resource owners redistribute, niche
  manufacturing
• Middle-income upgrading via FDI (Asia), local
  innovation (LAC) skills, design,
• High-income dont panic

28
Summary

• Huge growth surprise
• General gains, but potentially large adjustment
  in manufacturing largest for intermediate
  suppliers
• Lower asset accumulation, more non-reserve assets
• Energy one time opportunity on emissions
  the Giants are not THE global problem
• Flexibility is the best preparation

29
For more detailsbuy the book order form
attachedor visit website for full text and
background papers

• http//econ.worldbank.org/dancingwithgiants

30
Contents

• Introduction Dancing with Giants L. Alan
  Winters and Shahid Yusuf
• China and India Reshape Global Industrial
  Geography Shahid Yusuf, Kaoru Nabeshima, and
  Dwight Perkins
• Competing with Giants Who Wins, Who
  Loses? Betina Dimaranan, Elena Ianchovichina,
  and Will Martin
• The International Financial Integration of China
  and India Philip R. Lane and Sergio L. Schmukler
• Energy and Emissions Local and Global Effects of
  the Rise of China and India Zmarak Shalizi
• Partially Awakened Giants Uneven Growth in China
  and India Shubham Chaudhuri and Martin Ravallion
• Governance and Economic Growth in China and
  India Philip Keefer