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Changing the Industrial Geography in Asia.
The Impact of China and India

Shahid Yusuf and Kaoru Nabeshima
Cover - Table of Contents
1.- Introduction

During a 13-year period extending from roughly 1995 to 2008, the world economy experienced an upheaval resulting from a great burst of globalization that brought the 20th century to a close. The new century is being ushered in by a second upheaval following a severe financial crisis that plunged the global economy into recession in 2008–09. Through an analysis of industrial trends, patterns, and national manufacturing capabilities that emerged after 1985, this volume examines the consequences of the first upheaval for Asia’s industrial geography and explores the likely outcomes of the second upheaval for industrial development and trade across the Asia region.
The first upheaval witnessed a massive migration of manufacturing industries and certain business services from advanced countries to developing economies. This migration transformed East and parts of South Asia into the industrial heartland of the world. The second upheaval, which could continue for a decade or more, will most likely consolidate Asia’s industrial preeminence; in addition, it could result in the redistribution and concentration of industrial activities in the two most populous and fastest-growing economies in Asia—China and India. The growth of Asia’s share of global manufacturing activities and major business services is already tilting the balance of economic power in Asia’s favor (Grether and Mathys 2006). In 1973, one-quarter of purchasing power parity (PPP) adjusted world gross domestic product (GDP) came from Asia while 51 percent came from the West. By comparison, as of 2003, Asia’s share had risen to 43 percent, surpassing the West’s 40 percent share (see table 1.1).

2.- Development Experience of China and India

Two stylized facts of significance emerge from the experience of fast-growing Asian economies and of other developing economies. First, rapid growth of GDP is correlated with the expansion of manufacturing industry. Figure 2.1 shows the relationship between average real growth in manufacturing value added and real growth in GDP for developing countries between 1995 and 2005. The data come from World Development Indicators, maintained by the World Bank. The trend line represents a simple bivariate regression. From the figure, it is apparent that the slope is positive. While causality is hard to establish, the result suggests that one percentage point increase in manufacturing value added growth is associated with 0.33 percentage point increase in GDP growth.
Second, each of the high-achieving Asian economies relied on exports of manufactures generated by the development of competitive industries—which were quick to exploit international market opportunities. Manufactured goods composed as much as 90 percent of the exports of the Philippines during 1996–2006 and about 50 percent of the exports of Indonesia and Vietnam...

3.- Trade Dynamics in China and India

No observer of China in the 1980s or even in the mid-1990s foresaw how rapidly China would industrialize, the scale of the industrialization, and the market penetration of China’s manufactured exports. In the mid-1990s, even those observers who noted the acceleration of India’s growth over the preceding decade did not anticipate that India would become the poster child of business process outsourcing (BPO), or that it would turn into a powerhouse of information technology–enabled services (ITES). Now the conventional wisdom is that China could become the preeminent economy within two decades, and India could be in third or fourth place a decade later. All such forecasts must be treated with skepticism, because extrapolation based on a reading of the recent past—and “recent” could capaciously embrace 20 to 30 years—can be highly questionable. It was virtually unimaginable in the 1970s that the Soviet Union would be economically crippled and begin unraveling just a few years later. When Japan was viewed as “Number One,” when Japan’s manufacturing firms seemed invincible and Japanese banks towered over their Western counterparts, informed observers were convinced that the Japanese century was about to dawn. By the same token, in the early 1960s, informed observers favored Ghana and Pakistan over Korea. Now, following the hobbling of the United States by wars, indebtedness, industrial hollowing, and a financial...

4.- Unfolding Industry Dynamics in East and South Asia

Since 2001, developments including the ascent of China, the improved long-term potential of the Indian economy, the growth of intraregional trade in Asia, and the declining share of the United States in the exports of East Asian economies induced many to believe that, in spite of ongoing globalization, the Asian countries were decoupling from the United States. This view gained adherents, although the growth of the U.S. economy and the expanding U.S. trade deficit meant that in 2005 the United States absorbed close to 16 percent of total world imports, against 18.4 percent in 2000 and 14.2 percent in 1995. With more than a third of the global growth contributed by China and India between 2005 and 2007, China came to be viewed as an economic force comparable to the United States. Initial worries that Chinese firms would erode the exports of other Asian countries eased somewhat once other East and Southeast Asian countries found that their exports to China were growing. The threat from China’s textile exports following China’s accession to the World Trade Organization (WTO) also proved to be less acute than other Asian countries—particularly South Asian ones—had anticipated. China’s textile exports rose steeply after 2003, but worldwide demand and product diversification by other exporters enabled firms in Pakistan, Bangladesh, and Sri Lanka to cushion the shock. The emergency protections against Chinese imports provided by the United States and European Union also helped to create some breathing room for these countries. Southeast Asian countries found that they were able to achieve mutually acceptable trading relations with China,...

5.- The Drivers of Asia’s Industrial Geography

The preceding chapters examined the evolving composition of industry in Asia and how countries are competing with China and India in global markets. In this chapter, we look at some of the factors that will affect industrial change and trade flows over the medium term. We highlight the following five factors:
• The adjustment and growth of the U.S. economy
• Savings and investment in China, India, and other major Asian economies
• Technological shifts
• Industrial networking, clustering, corporate competitiveness, and the pattern of trade
• The evolution of industrial capabilities in other Asian countries
These are by no means the only relevant ones—there are other economic and geopolitical factors that will play a mediating role; however, the above five deserve primacy for reasons we will explain.

6.- Industrial Strategy at a Crossroads

For at least three decades most of the industrializing economies of East and South Asia have delivered rates of growth that are above average for developing economies. With a few exceptions, such as the Philippines, East (including Southeast) Asian economies grew much faster than the norm, and with the exception of Nepal, the South Asian economies stayed above the rates for the rest of the developing world. The outstanding performers among these economies all hewed to a model of growth whose drivers were investment—domestic and foreign—and exports. Other factors such as political stability, fundamentally sound macropolicies, trade liberalization, and human capital no doubt contributed, but these would have been insufficient in the absence of the virtuous spiral generated by the dynamic intertwining of exports and domestic investment in technology and productive assets. Export-led growth was the rallying cry throughout East Asia; it was what kept “animal spirits” high through good times and buoyed or revived economies when the economic climate soured because of a domestic shock or an international downturn. After the East Asian crisis of 1997–98, many commentators were quick to announce the demise of the East Asian model; however, the economies of the region defied the odds and recovered—although, because of weakening investment and a slowing of export growth, only China regained the precrisis momentum.

7.- Index

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