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PARK Bun-Soon

Korea and the Rise of Chindia

PARK Bun-Soon

Nov. 30, 2005

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At the opening of the 16th century, China and India economically dominated the world. According to the leading economic historian Angus Maddison, they together accounted for 49.3% of the world's total production of goods and services. In the year 1500, each of these two giants had taken up roughly a quarter of the world's total GDP output.

Then followed a long period of their descent as Europe ascended in power. China and India soon came under the Western domination for much of the 19th century, their combined share of global output slipping to 29.2% by 1870. By 1973, their share plunged to 7.7%, with China claiming a meager 4.6% and India's down to 3.1%.

At the opening of the 21 st century, China and India are clawing their way back to economic health. Leading this process is China , which began implementing reforms and opening of its markets in the late 1970s. Today, China is once again becoming the center of global economy.

India is hotly in pursuit, casting aside its image as a slow-crawling economy. The rise of India has prompted commentators to place her performance next to China's. Their collective achievements are extolled with a new term of "Chindia miracle" as they rise to become the two pillars of the global economy. Sometime in this century, the world economic order will be maintained by a new tripolar system comprising the United States , China and India .

Chindia is to today what the United States was in the early 20 th century. America's affluence today owes its origin to young immigrant workforce that moved in from the old world and worked its agricultural and textile industries. According to the US National Intelligence Council, "the likely emergence of China and India as new major global players - similar to the rise of Germany in the 19 th century and the United States in the early 20 th century - will transform the geopolitical landscape, with impacts potentially as dramatic as those of the previous two centuries." Indeed by 2030, the US, China and India will be the three global economic power.

But that prospect should not obscure the enormous hurdles that China and India today face. China is hobbled by a big wealth gap splitting its urban and rural areas, a hugely bloated sector of state-owned enterprises, a debt-ridden financial system, and an economy only partially open and political system tightly closed.

India's size makes it the world's largest democracy, but it is a nation standing on a pair of wobbly industrial feet. India's economy is led by a thriving information technology sector, but that alone is hardly sufficient feed her billion-strong population. It needs a matching manufacturing sector to do so, but it is bereft of infrastructure essential for industrial development. That repels foreign direct investment: India has received a mere US$6 billion worth of FDI but China over US$60 billion.

But these problems, serious as they are, pale next to their vast potential. Chindia's main strength lies in their virtually infinite supply of cheap labor. They have the biggest population in the world, a vast pool of manpower to support a strong manufacturing growth. This is evident from the fact that China already has become the world's third largest trading country in industrial goods. India's future depends on how successfully it can tap its 650-million-strong workforce to develop a solid manufacturing base.

That's a bit smaller than China's size of 800 million economically active population, but India's manpower pool is still larger than the total economically active population of the whole East Asia except China . India's population grows faster than China's at 1.5% in 2003, so it can replace China as the world's most populated nation. India also has a gigantic farming population, meaning it has high potential of turning itself into the world's next workshop after China .

What implications does Chindia's rise have on the rest of Asia and on Korea specifically?

First of all, China's growing exports hurt major East Asian economies that are dependent on foreign markets. China absorbs most of FDI that previously flowed into the rest of East Asian countries.

As for Korea , its opportunity will depend on what approaches it takes to China and India .

First on India : She trails behind China by more than ten years of GDP gap. India's GDP was approximately US$600 billion in 2003, and is expected to reach US$1 trillion only by 2010. China's GDP was worth US$1 trillion in 2000. Assuming that India's economy grew 7% a year between 2005 and 2010, and China's by 8% in the same period, their GDP gap would open wider. The growth gap is more evident in exports. India's exports in 2004 were equal to China's exports in 1992, leaving an export gap of more than 15 years.

Such gaps offer opportunities to the East Asian economies as China has already demonstrated. Korea , Japan and Taiwan are huge exporters of manufacturing parts and intermediary raw materials to China . Japan owes its economic recovery largely to massive exports to China .

Korea is no exception. In spite of its stagnant domestic demand, its economy has maintained a stable growth largely thanks to exports to China . Pattern of economic relations has changed from Korea investing in China for the purpose of exporting finished goods to promoting direct exports to China . In 2004, exports to China rose to US$49.8 billion. In the first nine months of 2005, China exports totaled US$45.4 billion, up 25.2% year-on-year. Korea's global exports in this period grew 12.3% but shipments to China had doubled.

Korea's economic ties with India , for the most part limited to investment by conglomerates like LG and Samsung, will take time to mature. Trade is relatively small when compared with China . Korea's exports to India were worth US$3.6 billion in 2004; it totaled US$3.3 billion for the first nine months of 2005, or less than 10% of Korea's exports to China . Korea's imports from India remained weak, resulting in huge trade imbalance. Between January and September this year, imports from India amounted to US$1.5 billion.

All this makes it clear that Indo-Korean economic relations have much to expand in the future, that it is rich in potential. And this is the right time to ponder the meaning of future cooperation in a variety of trade and investment. A good way to make a start is to find ways to increase imports to close the trade gaps with India .

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