<ul><li>CHIN DIA -    FUTURE ECONOMIC POWERS? </li></ul><ul><li>Professor Andrew Scott    London Business School   </li></ul>
China
GDP Growth <ul><li>Staggering growth performance – can it be maintained? </li></ul>
Chinese Modern Economic History <ul><li>1949-78 saw government focusing on high growth through government-directed investm...
“ Reform and Opening” <ul><li>Transition economy and developing country </li></ul><ul><ul><li>Industrialization: agricultu...
<ul><li>China and India both introduced market oriented reform </li></ul><ul><li>China has gone further with reforms and a...
Consequences of partial reform <ul><li>“ Hard issues” remain because of gradually addressing politically feasible, impleme...
China’s Financial Challenges
Ageing in China (1) <ul><li>As countries develop they achieve a demographic transition – move from high fertility/high mor...
Ageing in China (2) <ul><li>Has provided a large population of employment age which has kept wages low and savings high </...
 
 
<ul><li>Fertility rate now less than replacement rate </li></ul><ul><li>Fertility rate had fallen sharply even before one ...
 
<ul><li>China still has very low levels of unit labour costs even if wages rise </li></ul><ul><li>But unless other reforms...
Policy Issues <ul><li>Rising Inequality </li></ul><ul><li>Growing the Public Sector and Welfare State </li></ul><ul><li>Ex...
Rapid credit and liquidity growth has boosted real investment and led concerns of a bubble. Monetary policy tightening  - ...
Fear of “Panda Bears” is financial system with poor price signals and politically directed lending has misallocated credit...
China – A Property Bubble?
Implications for China <ul><li>East of China getting more expensive and moving up value chain. Shift in type of exports to...
India
Resilient to the crisis
Demographics promising
Very different growth paths. India has lower savings and investment, poor infrastructure, labour laws and restrictions on ...
The major problems <ul><li>Slow pace of reform, insufficient international economic integration </li></ul><ul><li>Institut...
 
 
The next stage <ul><li>India has some key advantages compared to China – relatively well developed capital markets, entren...
Can India grow as fast as China? <ul><li>India already growing very fast – Chinese growth is fastest ever </li></ul><ul><l...
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Andrew Scott on the future of India and China

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Last week the Asia Pacific Summit 2011 took place in London, presented by the London Business School and sponsored by leading telecommunications company Telstra International. The Summit brought together a wide scope of experience and perspective – from the academics of the London Business School to the heads of some of the world’s leading businesses.

The two day event incorporated lectures, speeches, case study presentations, panel sessions and interactive workshops all aimed at examining the many potential challenges and pitfalls of doing business in Asia Pacific, as well as key strategies to overcome them.

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Andrew Scott on the future of India and China

  1. 1. <ul><li>CHIN DIA - FUTURE ECONOMIC POWERS? </li></ul><ul><li>Professor Andrew Scott London Business School </li></ul>
  2. 2. China
  3. 3. GDP Growth <ul><li>Staggering growth performance – can it be maintained? </li></ul>
  4. 4. Chinese Modern Economic History <ul><li>1949-78 saw government focusing on high growth through government-directed investment and mobilisation of rural workers into industry. Very closed economy. </li></ul><ul><li>In 1978 embarked on pragmatic reform process – dual track process. Large state owned enterprises coexisting with smaller private sector enterprises. New Special Economic Zones with substantial export and import tariff reduction. Growing international orientation. ‘Open door policy’ a reversal of Maoism. </li></ul><ul><li>Reform process strengthened by entry into WTO </li></ul>
  5. 5. “ Reform and Opening” <ul><li>Transition economy and developing country </li></ul><ul><ul><li>Industrialization: agriculture to industry </li></ul></ul><ul><ul><li>Urbanization: rural to urban </li></ul></ul><ul><ul><li>Privatization: state-owned to private </li></ul></ul><ul><li>Economic models: </li></ul><ul><ul><li>Lewis model: dual economy </li></ul></ul><ul><ul><li>Gradualist transition: “dual track” versus “big bang” </li></ul></ul><ul><li>Economic growth: </li></ul><ul><ul><li>Factor accumulation – savings/capital </li></ul></ul><ul><ul><li>Factor reallocation – labour/migration </li></ul></ul><ul><ul><li>Productivity gains: allocative efficiency, TFP </li></ul></ul>
  6. 6. <ul><li>China and India both introduced market oriented reform </li></ul><ul><li>China has gone further with reforms and also achieved faster and more robust growth </li></ul><ul><li>Why? Before market based reform China did better and deeper work on preconditions: </li></ul><ul><ul><li>Land reform </li></ul></ul><ul><ul><li>Near universal literacy rates in younger age groups </li></ul></ul><ul><ul><li>Reductions in endemic morbidity and undernutrition </li></ul></ul><ul><ul><li>Wide ranging social security arrangements </li></ul></ul><ul><ul><li>Functioning system of local governance </li></ul></ul><ul><ul><li>Expansion of female participation in labour market </li></ul></ul>
  7. 7. Consequences of partial reform <ul><li>“ Hard issues” remain because of gradually addressing politically feasible, implementable reforms, while leaving the complex issues yet to be resolved. </li></ul><ul><li>Growth model: extensive growth vs. intensive growth. Recent investment in R&D and 10 years of technology focused industrial policy has not resulted in significant TFP growth. </li></ul><ul><li>So far, able to insulate political institutions of a single-party, Leninist state from the economic imperatives of capitalist market economy. How far can this separation be maintained? How much political reform will occur? </li></ul><ul><li>Chinese growth driven by labour subsidy (cheap wages, capital subsidy (negative real interest rates) energy subsidy – can it shift to different method of growth? </li></ul>
  8. 8. China’s Financial Challenges
  9. 9. Ageing in China (1) <ul><li>As countries develop they achieve a demographic transition – move from high fertility/high mortality to low fertility/low mortality </li></ul><ul><li>China has been a demographic overachiever. Has achieved in 40 years what other countries did in 100-150 years </li></ul><ul><li>The rapidity of China’s demographic transition a significant source of economic growth </li></ul>
  10. 10. Ageing in China (2) <ul><li>Has provided a large population of employment age which has kept wages low and savings high </li></ul><ul><li>Around 15-25% of Chinese growth due to this demographic effect and around 5-20% of its savings </li></ul><ul><li>Demographic transition expected to end 2013 – then goes into reverse. At this point China will pay for its demographic overachievement – growth will be less as a consequence of ageing population and less savings and investment </li></ul>
  11. 13. <ul><li>Fertility rate now less than replacement rate </li></ul><ul><li>Fertility rate had fallen sharply even before one child policy of 1979 </li></ul><ul><li>One third of couples not affected by one child policy – for them fertility rate still less than replacement rate </li></ul>
  12. 15. <ul><li>China still has very low levels of unit labour costs even if wages rise </li></ul><ul><li>But unless other reforms compensate likely to see China as less important location for global investment and grow more slowly </li></ul>
  13. 16. Policy Issues <ul><li>Rising Inequality </li></ul><ul><li>Growing the Public Sector and Welfare State </li></ul><ul><li>Exchange Rate Policies </li></ul><ul><li>Domestic and External Financial Deregulation </li></ul><ul><li>A Property bubble? </li></ul>
  14. 17. Rapid credit and liquidity growth has boosted real investment and led concerns of a bubble. Monetary policy tightening - interest rates increased by 100 bps and reserve requirements by 450bps
  15. 18. Fear of “Panda Bears” is financial system with poor price signals and politically directed lending has misallocated credit. Opaque banking system, off balance sheet exposures – especially local authority debt
  16. 19. China – A Property Bubble?
  17. 20. Implications for China <ul><li>East of China getting more expensive and moving up value chain. Shift in type of exports to higher value added (hence shift in exchange rate, tightening of environmental policies etc) </li></ul><ul><li>Lower value added production shifting to the West of China. West of China geographically more remote so will “export” basic manufacturing to the East </li></ul><ul><li>Next stage of Chinese growth – more domestic led and shift from China being seen as cheap production base or possible large consumer market. See Chinese firms much more evident in Western world </li></ul>
  18. 21. India
  19. 22. Resilient to the crisis
  20. 23. Demographics promising
  21. 24. Very different growth paths. India has lower savings and investment, poor infrastructure, labour laws and restrictions on FDI. Not good for manufacturing so pursued services
  22. 25. The major problems <ul><li>Slow pace of reform, insufficient international economic integration </li></ul><ul><li>Institutions and Corruption </li></ul><ul><li>Regional divergence </li></ul><ul><li>Fiscal Policy </li></ul><ul><li>Public sector </li></ul>
  23. 28. The next stage <ul><li>India has some key advantages compared to China – relatively well developed capital markets, entrenched rule of law, modern banking system, lower dependency ratios now and in the next few decades </li></ul><ul><li>Disadvantages: low investment, weak human capital, restrictive FDI and labour laws </li></ul><ul><li>India seems prepared to reform further and open up more. Keen to target manufacturing sector to broaden the benefits of growth </li></ul><ul><li>But with low skills and strong labour laws will Indian manufacturing just be very capital intensive? </li></ul>
  24. 29. Can India grow as fast as China? <ul><li>India already growing very fast – Chinese growth is fastest ever </li></ul><ul><li>For Indian growth to last as long as Chinese need to extend health and education progress, raise female participation </li></ul><ul><li>India can also get additional boost to growth by reform in manufacturing sector </li></ul><ul><li>India may have to accept lower growth than China due to breadth of regional and ethnic diversity and democracy – policy in India has to “muddle through” more than in China </li></ul><ul><li>Opposite view: India has good institutions, China doesn’t. China outperformed relative to its institutions and has difficult reforms ahead. By contrast India has underperformed relative to institutions and can grow fast from relatively easy reforms. </li></ul>

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