Macroeconomics – Competition with China and India

The phenomenon of rapid economic growth in China and India is often discussed within the frameworks of is possible threat to the global world economy. Recent forums dedicated to financial issues, as well as the major increase of the numbers of papers in the economic press (FT, Business Week etc.) especially since stock markets in China took a major hit end of February, show that “China has gone from being interesting to being important” (Business Week, March 2007) also for investors and not only for economy. The prospective future seems to be at hand. There is nothing to worry about. However, historical European countries such as Germany and France are not disposed to overoptimistic conclusions – neither historically, nor politically. The general balance of risks and perspectives inclines towards favorable economic situation. However, the situation is not as optimistic as it seems to be.

The US Treasury Secretary also considers that the countries should double their efforts. It is necessary to continue the implementation of tax reforms, to favor the development of industries and formation of appropriate labor force market, and to make the heading policy more flexible. These remarks are obviously addressed to China and India. Besides, the U.S. government worries about China’s “military modernization program, economic dynamism, expanded diplomatic influence across Asia and increased global search for energy resources”. So, what is going on? The answer might be quite simple. Last year the world economic system faced a ‘silent revolution’. For the first time in the history China and India became the subjects of the world economy.

Twenty years ago the world had no slightest idea of the Chinese and Indian economies. The China’s share in the worldwide GDP exceeded no 1 per cent. It was actually lost in the categories like ‘mistakes and omissions’. However, in result of rapid economic growth (average 9% per year) China became the sixth largest national economy making the total of about 6% of the world’s GDP.

Last year the industrial world could feel the ‘hot breath’ of Chinese economic dragon. According to the absolute majority of analysts, the growth of Chinese domestic and foreign demand became one of the main factors contributing to cost increase for raw materials and semi-manufactured goods all over the world.

China and India have strong economy and almost no flexibility. Moreover, it is difficult to define the exact share of China and India in the world economy due to so-called controlled and non-marketable sector. The countries occupy a leading position by such indexes like the most preferable countries for initial investments, the most preferable offshore zones for location of the offshore enterprises and manufactures, and the most preferable zone for IT services attraction and utilization.

Compared to other huge markets of the developing countries, the entrepreneurs find China and India more attractive markets both in the short-term and the long-term perspectives, leaving such countries like Brazil, Mexico, and Poland far behind.

The countries present two completely different markets. Whereas China is known as the leading manufacturer and the most rapidly growing consumer goods market, India is the largest supplier of IT services and the leader in business processes outsourcing. India’s market is oriented towards the long-term perspective. The investors prefer China because of the market size, access to export opportunities, numerous initiatives countenance by the governments, moderate working expenses, proper infrastructure and favorable macroeconomic climate. The India offers the following: well trained labor force, talented management personnel, the supremacy of the legislative authorities, transparency of business transactions, cultural similarities and favorable business climate. Since 2002, when Chinese Premier Zhu Rongji traveled to India’s political, commercial and tech capitals, China and India started improving ties, not just for trade but for economic cooperation.

What are the threats to the global economy?[U1]  China and India became the ‘economic knot’ of the entire Asian region. Therefore, cost reduction of labor force on a global scale is one of the main threats to the global economy. In result, the products, where labor force is one of the main components of expenses will also become cheaper. Another way of putting it is that one shouldn’t think to locate the routine labor intensive manufacture outside the country with hundreds million people satisfied with 1-2 dollars rate per hour. On contrary, the countries assigning a specialization to industry involving high-skill jobs expect to derive benefit from the situation. The additional expenses are also expected by raw material exporters. Last, but not least, expanding ties between India and China would help the latter to benefit from India’s experience in the World Trade Organization to move from mass manufacturing of inexpensive goods to more sophisticated businesses.

India and China are set to overtake even the strongest market forces in the world.  The rapidly growing manufacturing units and consumer goods markets of China, and the strong IT services and BPO industry of India has seemed to be huge boosts to domestic the economies.  Soon India would lead the IT industry market in the world and China would dominate the manufacturing industry in the World.  Several global giants are actually setting up back-end offices and manufacturing hubs in these two Asian nations.

The markets in India are growing at the rate of about 30 % every year, and about 44 % of the global outsourcing business is actually based in India.  India has been able to dominate the global outsourcing business as it has several education institutions producing well-trained professionals.  Besides, they are able to speak English and can effectively communicate with their western counterparts.  On the other hand, China is known for its labor-oriented workforce and infrastructure abilities that would be a suitable plus point for the manufacturing industry.  Earlier, the strong markets of the world were actually ignoring the markets of India and China.  However, considering the rapid growth, these markets cannot henceforth ignore India and China.

These two counties still offer huge amount of opportunities, which until now have remained untapped.  Today markets are growing in those areas where a great proportion of the human population exists.  Although, there may be several obstacles in the path of growth and development for the Indian and the Chinese markets, it does seem definite that these two countries would grow further.  There would also be demand in the international market for cost-effective and skilled labor.  Both, India and China have taken a lot risks, and for now at least, these risks are paying huge dividends (Money Week, 2005, ZD Net, 2007, & Schaaf, 2005).

References:

Schaaf, J. (2005), Outsourcing to India: Crouching tiger set to pounce, [Online], Available: site: http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000192125.pdf, [Accessed: 2007, September 10].

The Money Week (2005), Underground threats to the global economy, [Online], Available: site: http://www.moneyweek.com/file/25075/underground-threats-to-the-global-economy.html, [Accessed: 2007, September 10].

ZD Net (2007), China and India set to lead global innovation, [Online], Available: site: http://news.zdnet.co.uk/emergingtech/0,1000000183,39287977,00.htm, [Accessed: 2007, September 10]. [U1]

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