Macro Economy

Macro Economy Proceedings, Issue No.2, March 2007 (PDF: 290kb)

Contents:

INDIA AND CHINA: PAST TRADE LIBERALIZATION AND FUTURE CHALLENGES

Arvind Panagariya

India and China are widely seen as changing the face of the global economy. Assuming that neither country's currency depreciates in a major way and that inflation is higher than in the United States, Panagariya says their combined GDP could grow at a 10 percent rate in constant dollars, to reach $7.8 trillion in 2015 (at 2005 prices). This would compare to GDP of $18.5 trillion for the United States, if it sustains a real growth rate of 4 percent, and it would represent a dramatic change in the composition of world income. Panagariya analyzes the role of outward-oriented trade and foreign investment policies in stimulating growth in China and India. While both countries achieved rapid growth under progressive opening up, the outcome was less dramatic for India. After comparing the changing policy regimes in the two countries, he attributes the Indian economy's more muted response to opening up to its slower growth in the manufacturing sector, which in turn resulted from domestic-policy constraints, most notably labor-market inflexibilities and infrastructure bottlenecks. Turning to consider the future course of trade policy, he argues that the recent attention paid to preferential trade area agreements is largely a diversion. Both India and China stand to benefit their populations and the world economy more by focusing on national and multilateral tracks of trade and investment liberalization. In particular, he asserts, India must consider extending its successful liberalization of industrial goods to the agricultural sector.

ACCOUNTING FOR GROWTH: COMPARING CHINA AND INDIA

Barry Bosworth
Susan Collins

Since 1980, India and China have achieved remarkable rates of economic growth and their continued growth is likely to dominate the course of the world economy for the next several decades. Bosworth and Collins examine the sources of growth in the two economies through a set of growth accounts. Growth accounts attribute changes in output to the changes in capital and labor inputs and to a residual efficiency factor, called total factor productivity. They constructed updated accounts for India and China for 1978 to 2004 incorporating recent data revisions and disaggregating primary, industry, and services sectors
Their results confirm many themes on the growth of India and China and produce new findings as well. While China's growth has been extraordinary, India's has matched the industrializing economies of East Asia. China's growth concentrated in industry and India's in various service-producing industries. China's growth is spread across all three sectors, with growth of services actually exceeding that in India. Increases in capital per worker and TFP both contributed strongly in China. Comparing India to China highlights its weak performance in manufacturing not its strength in services.
Based on supply-side factors, Bosworth and Collins believe that both economies should be able to sustain their growth, depending upon continued integration with the global economy, including trade in goods and services, and investment flows.