A new World Bank study, Dancing with Giants: China, India and the Global Economy, helps put the two Asian powerhouses in perspective and examines challenges they will face that could affect their own impressive growth rates.
Today, China makes up 5% of the world economy and India comprises 2%, measured at current foreign exchange rates.
This means that the potential for global shocks being generated by China and India is slight, Alan Winters, director of the World Bank development research group co-editor with Shahid Yusuf of the study, told Emerging Markets.
Expanding China and India will have a strong impact, however, on certain sectors and specific countries, however. Their combined demand for primary resources is huge. China alone absorbs one-third of the world’s steel output and about 25 percent of global production of aluminum and copper.
As a result, the two fuel a “big positive shock to commodities’ demand and other big consumer of primary resources will face higher prices and suppliers will earn higher prices,” Winters said.
Over time, this commodity shock will decrease. “As China becomes richer and more sophisticated, it will become less commodity-intensive,” Winters says.
For now, the strongest impact of the Chinese and Indian economies will be felt in Southeast Asia, particularly in countries such as the Philippines and Thailand which supply components to China. In time, China may begin producing components like circuits and hard discs and reduce its reliance on suppliers in the region.
An area of concern worldwide is the rise of carbon emissions. Together, China and India account for 22% of global carbon emissions today and World Bank models show that by 2050, the two countries would contribute 50% of carbon gases, Winters said.
The prospects for bringing renewable energy onstream is not bright. “If they take the standard growth path, most of the energy increment will come from coal,” Winters said. This is aggravated by the fact that China is following an American model of urban development that creates sprawling cities and depends on use of the motor car, he cautions.
Despite their awesome economic performance, there are “some possible fragilities” in the growth paths of China and India. “Both have to concentrate on growing inequalities and governance to maintain their high growth rates,” says Winters.