The Hindu Business Line : China's rapid economic growth hits Asian nations differently

CHINA'S rapidly increasing exports to third parties tend to crowd out the exports of other Asian countries from those markets. But this effect is felt mainly in markets for consumer goods, so it is the less developed consumer goods exporting countries in Asia that get more affected.

Exports of more developed Asian countries to third parties tend to be relatively capital goods intensive.

Therefore, exports of countries such as India and Japan to the rest of the world have not thus far been much affected, nor is it likely that they will face adverse consequences in the years to come.

At the same time the rapidly growing Chinese economy continually increases its demand for imports into the country from its Asian neighbours.

But this demand is largely restricted to capital goods, and, therefore, shores up the prospects of the relatively more developed Asian countries.

In short, more and less developed countries in Asia are affected very differently by the rapid growth of China's economy (which according to some estimates may touch 10 per cent per annum in real terms this year).

This was the main finding of a September 2004 working paper of the US based National Bureau of Economic Research.

The study goes on to say that trade is not the only channel by which Chinese growth impacts on the prospects of its neighbours.

Another channel is foreign direct investment. In respect of FDI, China definitely exerts a strong magnetic influence on net flows from the rest of the world.

But some benefits do become available for Asian countries, including India, by way of opportunities for them, to invest in China, where investments typically generate higher rates of return than in the home countries.

And of course, there is the recently reported example of FDI from China to flow towards countries such as India and Pakistan.

In this sphere too, however, the growth prospects of poorer Asian countries are not much benefited.

They have less to spare for investment in China, and less hope of getting FDI inflows from it.

Besides, even when their labour costs are below the levels prevalent in China, it's extraordinarily well developed infrastructure (and synergy) that tend to divert FDI towards China, rather than to, say Bangladesh, despite the huge labour cost advantage enjoyed by the latter.

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