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21 September 2005 Why the rise of China and India
can benefit us all As is often the case with great shifts in the world economy, the rise of China and India have been met with a mix of excitement and fear in Britain, Europe and the United States. The rest of the world stands to benefit from this dramatic change, just as it benefited from the rise of the US in the 19th century - but governments must keep their economies open and flexible and not resist necessary structural changes. In many respects China is following the earlier Asian success stories, Japan and the four "Tiger" economies, Hong Kong, Singapore, Taiwan and South Korea. At times, their prowess in low-cost manufacturing and acquisitions of western assets were seen as an economic threat before they were recognised as just another growth node in the world economy. The opportunities flowing from China's economic growth are manifold. China is already a very open economy. Its weighted average tariff has fallen to 6% mainly due to unilateral liberalisation decisions, but liberalisation in trade and investment is now being extended as part of China's world trade organisation (WTO) commitments. China is also becoming an increasingly important market for tourism and for services such as education. From the point of view of world consumers, having a workforce of 750m hard-working Chinese adding to world output of quality products at low prices is an enormous overall benefit. Their rising incomes are also adding to the demand for non-Chinese products. The combination of lower prices for manufactures and higher prices for the food, energy and raw materials that Chinese consumers and industries need has led to favourable movements in the terms of trade of many countries. Opportunities to outsource production to India and China should also be counted as a benefit. Outsourcing can reduce costs and preserve the viability of firms and jobs. The world is becoming an integrated production chain. To reap maximum advantage from China's growth, other economies will need to continuously adapt. Rigid labour markets in Europe could mean higher unemployment as Chinese exporters take advantage of the removal of quotas for textiles and clothing, or (as seen recently) prompt protectionist reactions that reduce consumer welfare and hurt already stagnant economies. Countries with big welfare states and high levels of taxation may struggle to attract investment and grow. Burdensome and ill-justified environmental regulations, such as the Kyoto Protocol, will disadvantage countries in the face of competition from China and India, whose immediate priorities are greater prosperity for their people. New Zealand is an example of a country that is well placed to benefit from the arrival of China (and India) on the world economic stage. It has substantially liberalised its economy, including its labour markets and is now close to eliminating its remaining low tariffs. The government is negotiating a free trade agreement with China. If that happens it may be the first of its kind for China, and it would not require major additional adjustments for New Zealand industries. Nevertheless, New Zealand will need to work hard to reduce taxes, improve education standards and abandon foolish policies like Kyoto if it is to maximise the new opportunities in the dynamic Asia-Pacific region. China's development and integration into the world economy may not be without tensions, such as weak enforcement of copyrights and other intellectual property. China's allegedly "undervalued" currency has been an issue for the US and other governments. This concern is largely misplaced: no country can permanently alter its real exchange rate. With the fixed peg between the renminbi and the dollar, China was effectively "outsourcing" its monetary policy to the Federal Reserve and accepting the US inflation rate. It has now implemented a small revaluation and swapped this peg for a link to a trade weighted basket of currencies and thus a "world" inflation rate - not a major change. China's reluctance to liberalise its capital markets faster given current weaknesses in its banking system is understandable. Along with India, it faces many additional challenges, including environmental pollution and the scourge of corruption. India has lagged behind China, but it has advantages over China which may count in the next 50 years: a British legal system, the English language, and democracy. China's ultimate challenge may well be political: can it manage a transition from an authoritarian regime to a law-abiding democracy without social upheaval? A chaotic, poor and militant China would be in nobody's interests. There are grounds for optimism. Capitalism, democracy and freedom are spreading around the world. Neither China nor India looks like becoming a big-government welfare state. In fact trends are in the opposite direction. People are the world's ultimate resource. The increasingly educated and sophisticated citizens of the world's two most populous countries seem set to add hugely to the world's stock of knowledge, scientific breakthroughs and technological innovation in coming decades. This could be their greatest contribution to living standards around the world. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |