Growing with Asian drivers
Published: The Kathmandu Post, 15 November 2006
By: Shyamal Krishna Shrestha


The 'Asian Drivers' refers to two dynamic economies - the People's Republic of China and the Republic of India - which owe their newfound strength to their rapid economic growth, size and growing competitiveness. Both economies have been growing at 7-10 percent annually for the last decade. In 2005, the Asian Drivers accounted for 38 percent of the global population, 7 percent of global gross domestic product (GDP), 8 percent of world trade and 8.2 percent of world exports respectively. The International Monetary Fund predicts that China will replace the United States as the world's biggest economy by 2040 while India will stand a close third.
As the fastest growing economies, what impact will the Asian drivers have on the developing world, especially the low-income nations in their vicinity? There is widespread consensus that the rapid growth of China and India offers great opportunities as well as challenges. Both countries have liberalized their trade regimes, providing access to developing and least developed countries (LDCs) alike. The emergence of China and India as major competitors, buyers and investors is evident in their dominance of certain sectors, growing demand for raw materials, and investment to aid their growth. Production and trade flows are among many vectors through which the Asian drivers affect the growth and distribution prospects in low-income economies and regions.

China and India are making other countries react to their rapid growth and growing competitiveness in labor-intensive industries, including manufacturing. Demand for intermediate inputs has led the Asian drivers to seek suppliers around the globe. As rising demand for raw materials provides a net boost to global demand, it has made a positive impact on commodity markets and contributed in raising both national and global incomes. For instance, China alone accounts for one-third of the increase in world oil consumption and one-quarter of world metal consumption since 2000, mostly imported from Sub-Saharan Africa, now a prime foreign direct investment (FDI) destination. Sub-Saharan Africa's trade with China rose from 1 percent to 10 percent of its total trade from 1995 to 2005. China's drive to buy African oil and other commodities has led to a big increase in bilateral trade, worth US$ 42 billion in 2005. Its FDI flows to Sub-Saharan Africa rose by 300 percent in 2003-04.

A rapidly industrializing India means higher demand for oil, of which three-quarters is imported. Its existing 3 percent share of global oil demand is set to rise to 10 percent by 2030; and the country may have to import all of its energy needs by 2020. India is also looking overseas for energy; talks over the US$ 17 billion gas pipeline from Iran through Pakistan to India may be seen in this light. Its LDC neighbor - Bhutan -- exports hydroelectricity, which constitute 45 percent of the country's export revenues and contributed 12 percent of GDP in 2004. The implications for other LDCs like Nepal, which are yet to harness their natural resources despite the presence of a huge market in its southern neighbor, are amply clear.

As competitors in both domestic and third markets, the Asian drivers also threaten manufacturing prospects of many low-income nations. The productivity and economies of scale of Asian Driver producers in the textiles and clothing (T&C) sector became evident following the expiry of the Agreement on Textiles and Clothing on 31 December 2004. Local industries in other developing country producers are facing stiff competition, resulting in declining prices and contracting employment. Imports of Chinese T&C into the US and the European Union in 2005 surged, posing a threat to other producers while displacing domestic production.

Many South Asian LDCs depend excessively on the Asian drivers for import needs. Cheap Chinese and Indian goods have displaced domestic production, especially in consumer durables and non-durables. While consumers benefit due to lower prices, there are economic risks. For instance, the shares of India and China in Nepal's total imports were 60 percent and 4 percent in 2004. At the same time, Nepal's bilateral trade deficit with India stood at around Rs. 600 million.

Keeping apace with the Asian Drivers requires a fundamental departure from existing industrial policies in many LDCs. Without a rise in manufacturing productivity and exports to offset trade imbalances, LDC industries are faced with the prospect of imminent collapse under the weight of dependency and competition. Preferential trade arrangements (PTAs) in South Asia aim at expanding trade volumes merely through tariff reductions, a process termed as 'shallow integration'. Although the LDCs are provided some special and differential treatment under the South Asian Free Trade Area, the PTA does not address the inherent weakness in the industrial structure afflicting LDCs to overcome their supply-side bottlenecks and raise their manufacturing capabilities.

The transformation for low cost producers to emerge as reliable suppliers requires their growing participation in regional and global production networks and value chains vis-à-vis 'deep integration', wherein regional cooperation is oriented towards raising productivity. Asian lead firms located in China and India could emerge as sources of co-ordination, FDI, technology and market niches for their LDC counterparts. Open trade policies, adequate infrastructure and a sound business environment would, in turn, extend domestic production frontiers outwards. Catching up with the Asian Drivers is no longer an option for the South Asian LDCs.