China and India are now major forces in the world economy.

Since it set out on the ‘capitalist road' 20 years ago, China 's growth has been phenomenal. But India 's growth rate is now close to matching China 's: both economies grew by 8-9 percent last year.

Per capita incomes in China and India are now US$4,390 and US$2,570 respectively, according to World Bank figures (PPP basis). In the past two decades, millions of people in these countries have been lifted out of poverty.

Economic reform continues apace in China with the closure or privatisation of state-owned enterprises, moves to enshrine stronger legal rights to private property, and entry into the World Trade Organisation.

In a symbol of globalisation, the site in Shanghai where the Communist Party was founded is now a shopping and entertainment complex, anchored by a Starbucks coffee shop.

India 's economic directions now seem secure. In this year's elections the government will campaign on a platform of ‘India Shining' but a change of government would mean little change in economic direction. The business community and much of the media are pressing the government to liberalise faster.

China is already a dominant force in labour-intensive manufacturing. India has internationally competitive IT and pharmaceutical industries as well as a large, well-educated, English-speaking labour force.

The rise of China and India is often seen as a threat to investment and jobs in Western countries, including New Zealand . But New Zealand will clearly benefit if these countries grow richer and become larger markets for what we produce, rather than stay poor.

The economy is far better structured to benefit from these new sources of growth than when it was protected and rigid. The opportunities will be not only for sophisticated goods and services but also for food, intermediate goods and commodities.

Contrary to commentators such as Rod Oram and Vincent Heeringa, the terms of trade outlook for resource-based products seems favourable. China 's terms of trade fell by 30 percent in the past decade as productivity growth drove down the relative price of its exports, whereas New Zealand 's remained much more stable. There is nothing wrong with profitable production of commodities.

But to compete and prosper, New Zealand will have to be flexible and competitive, and match trends in Asia and elsewhere. There is little prospect of China and Asia developing welfare states. After years of free housing, health care and education, most Chinese now pay for some of these services. In India , parents are abandoning the government school sector. Tax rates are likely to fall, and India 's top income tax rate of 30% is already below New Zealand 's.

China and India face huge challenges: bureaucracy and corruption in both, a shaky banking system in China , and many others. China 's regime is resistant to notions of democracy and human rights.

But my guess is that what beckons for both countries is ongoing economic liberalisation and development and political democratisation, because they beckon for countries the world over.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz