China and India: Openness, Trade and Effects on Economic Growth

Article excerpt

1. Introduction

In demographic terms, China and India are the two most important countries in the world and they are also rapidly becoming the leading powers in economic terms. Although the two countries have many common features, their recent economic takeoff differs in timing, intensity and key characteristics of the development processes. In a long-run perspective both countries have benefited from opening up to international trade and foreign relations, although they initiated liberalization policies only when their domestic economies were sufficiently strong to face foreign competition.

Their integration in the global economy means that they are certainly affected by world economic developments, such as the last economic crisis. (4) On the other hand, the growth of China and India has a great influence on the world economy, not only in good times (as is well documented, for instance, by Srinivasan 2006) but also in bad times. In fact, the two Asian countries are helping to pull the world out of recession through their imports, despite persisting imbalances in specific trade relations (e.g. between China and the US). The short-run forecasts are also quite promising. (5)

A first aim of this paper is to quantify and characterize the impact of trade on the economic growth of China and India by focusing on trade dynamics, degree of openness, FDI flows and specialisation patterns. A second aim is to econometrically estimate the links between openness and growth, for the two countries, in the last three decades.

The structure of the paper is the following. In Section 2 we shall present some stylized facts--together with a partial review of the main literature--concerning the most significant institutional reforms, with particular reference to trade relations and their impact on economic growth. Section 3 presents a descriptive analysis of economic growth, opening of the economies and trade specialisation. In Section 4 an attempt is made to estimate econometric relations between economic growth and trade/openness (and other control variables). The conclusions highlight key results and policy implications.

2. Reforms, opening and recent economic growth in China and India

China and India share some key common elements: geographically, they share the same continent and are separated by a common border; demographically, they are "giants", with populations exceeding one billion; historically, the two countries have a rich and long history, making them world leaders until the 19th Century. Their development is also similar in economic terms, although key differences are also clear (as will be shown later). The main difference is probably that the two countries have different political systems (with democracy being well rooted in India). (6)

The economic development of China and India has been investigated largely according to very different time periods and comparative perspectives. (7) The long-run historical view highlights that the two economies accounted for nearly half of the world output from 1000 to 1820. Then, after a decline that started in the 19th century and an increasing gap--relative to Europe and the US in the first three quarters of the 20th century--the two countries have caught up considerably over the last three decades. (8) Since 1980 the Chinese and Indian GDP has increased at annual rates close to 10% and 6% respectively, while economic growth in the US and, especially, Europe and Japan has been significantly lower. Also during the global recession 2008-09, China and India showed only a deceleration in their positive growth rates, therefore the two giants continued to catch up also during the last crisis. (9)

The investigation of the recent determinants of Chinese and Indian economic growth is quite complex and involves institutional, supply and demand factors. (10) We highlight here the main institutional changes and reforms, in particular leading to opening up of the two economies. …