According to economic historian Angus Maddison, in 1500, China and India together accounted for 49.3 percent of world's gross domestic product. Each country took up about a quarter of world's output. But ever since then, European countries have gained world power, and the two countries began their long relative decline.
For much of the 19th century, they were dominated by Western powers. By 1870, their combined GDP fell to 29.2% of world's total output. In the 20th century, their decline continued, and by 1973, China and India took up only 7.7 percent of global output. China accounted for 4.6 percent and India 3.1 percent.
But China and India are on their way back. China took the initiative by implementing reforms and opening up its markets in the late 1970s. China is now at the center of the world's economy. India followed suit, and has, during the past two years, been enjoying high economic growth. Now people are extolling the rise of China and India in the global economy.
Some commentators have even concocted new terms like "Chindia," to herald the rise of the new global force. Futurologists even talk about a tri-polar scenario of the United States, China and India dominating the global economy in the 21st century.
Indeed, the rise of India and China is often compared to that of the United States in the late 19th century - the current United States is the result of the affluent young labor force in the agriculture and clothing industries in the 19th century.
According to the U.S. National Intelligence Council, "the likely emergence of China and India as new major global players - similar to the rise of Germany in the 19th century and the United States in the early 20th century - will transform the geopolitical landscape, with impacts potentially as dramatic as those of the previous two centuries." Indeed, by 2030, the United States, China and India will be the global three economic powers.
This is not to deny that China and India have their own economic problems. In China, there is a wealth gap between urban and rural areas, state-owned companies are financially troubled, the financial industry is debt-ridden, and the economy is open, but politics remain tightly closed.
India, meanwhile, has the world's largest democracy, but is weak in industrial fundamentals. Its economy is currently led by information technology, but, when seen in a longer perspective, this is not sufficient enough to lead a country with a population of more than a billion. Manufacturing should thrive.
In addition, India lacks social infrastructure which is a huge hurdle to inducing foreign investment. FDI into India stands at $6 billion (6.2 trillion won), where as China enjoys $60 billion (62.2 trillion won) in foreign direct investments.
For all that, Chindia will become the global economic power. The strength lies in its infinite supply of cheap labor. Both countries have the world's largest population, and thus have a huge manpower pool to back up manufacturing growth.
China has already become the world's third largest trading country of industrial goods. The future of India, on the other hand, depends on whether it can successfully shift to an industrial nation. India has an economically active population of 650 million. Although the number is still short of China's 800 million, it is still larger than the total productive population of the whole East Asian region excluding China.
Given that India's population growth rate was 1.5 percent in 2003 - higher than that of China - it will soon become the world's most populated country. It also has a huge agricultural population. This means that it has a high potential to become the world's factory as major industrialized countries shift to service-oriented economy.
What does Chindia's rise imply to Asia including Korea? Their growth certainly poses huge threat to the Asian countries. China's growing exports to foreign markets is hurting major East Asian countries whose economies are highly dependent upon exports. It is also absorbing a huge amount of FDI that had previously flowed into its rival East Asian countries.
How about opportunity? Chindia certainly provides chances to Korea. What is important is that Korea should make different approaches to each country, considering the existence of the growth gap between the two countries.
It is true that two giants are rapidly rising. Yet India trails behind China by more than ten years in terms of GDP. India's GDP was approximately $600 billion (622.5 trillion won) in 2003, and is estimated to hit $1 trillion (1.03 quadrillion won) by 2010. In contrast, China's GDP has already reached the level of $1 trillion in 2000.
Assuming that India's economy grows by 7 percent between 2005 and 2010, and China 8 percent in the same period, the two countries' GDP gap will further expand. The growth gap is more evident in terms of exports. India's total exports in 2004 were equal to China's total exports in 1992. So there is an export gap of more than 15 years.
This notable development gap gives different opportunities to the East Asian economy. First of all, China is already benefiting East Asian countries. Three northeast Asian countries, namely Korea, Japan and Taiwan are already huge exporters of parts and intermediary goods to China. A large part of Japan's economic recovery was due to its massive exports to China.
China's rise has given opportunities to Korea too. First, Korea's economy, despite stagnant domestic demand, was able to maintain relatively stable growth, helped by its massive exports to China. Economic cooperation between Korea and China has shifted from Korea investing in China for the purpose of exporting finished goods to the third country, to promoting direct exports to China.
In 2004, 60 percent of Korea's total manufacturing investments went to China. In the same year, exports to China stood at $49.8 billion (51.6 trillion won). Between January and September 2005, exports to the country reached $45.4 billion (47.1 trillion won), up 25.2 percent from the same period of the previous year. What is notable is that while Korea's total exports grew 12.3 percent in the January-September period, the export to China was double that amount.
India, meanwhile, is potentially beneficial to Korea, but the degree of economic cooperation between the two countries is relatively small at the moment. Korea's investment in India has taken the form of some large corporations like LG and Samsung investing in its domestic market.
Unlike the case with China, investments in India for third country exports are barely seen. Indeed, exports to India are relatively small compared with those to China. Indian exports stood at only $3.6 billion (3.7 trillion won) in 2004 and $3.3 billion (3.4 trillion won) for the first nine months of 2005. This amount is less than 10 percent of Korea's exports to China.
More importantly, Korea imports minimally from India so that it posts huge trade surplus with the country. Imports from India between January and September of this year stood at only $1.5 billion (1.55 trillion won).
As seen above, India will only catch up China in a certain time lag. This means that India will become an important market to Korea in the long term. Korea, which already has been benefiting from China, has to think about future economic cooperation with India. A good way is to increase imports from the country to reduce the huge trade surplus.
By Park Bun-soon Researcher at Samsung Economic Research Institute
http://www.koreaherald.co.kr/SITE/data/html_dir/2005/11/18/200511180029.asp
