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

Article excerpt

Abstract3

The purpose of this paper is to analyse the economic growth of China and India in terms of their integration in the global economy. We begin with a discussion of some stylized facts concerning their recent economic growth, the most significant institutional reforms, with particular reference to trade relations, and their impact on their economic development. We then propose a descriptive analysis of economic growth, opening up of the economies and trade specialisation, by comparing the features and trends of the two countries (by considering trade and foreign direct investment data).

We have also estimated some econometric relations between economic growth and trade/openness, with the addition of control variables (such as the gross fixed capital formation). We initially used a panel data model for the two countries, to be estimated with fixed effects; to test for reverse causality, we re-estimated the fixed effects model by 2SLS (with the inclusion of specific instrumental variables). The effect on economic growth (in terms of GDP per capita) of our variables of interest - Openness and FDI - remains positive and statistically significant in all specifications, which confirms our findings even if we treat these variables as endogenous variables.

The results prove the positive growth effects, for the two countries, of opening up and integrating in the world economy. Note that the robust growth of these two "giants" has contained the initial impact of the recent global crisis and is now sustaining the recovery of the entire world economy. Other policy relevant implications are discussed in the concluding section.

JEL: P52, P33, F14, O53

Keywords: China and India, economic growth, trade opening, trade specialisation, trade and growth

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. …