Australia's Competitiveness: From Lucky Country to Competitive Country

By Michael J. Enright and Richard Petty

In this in-depth overview of Australia's economy, Michael Enright and Richard Petty — leading scholars on international competition—look at the data behind the news reports to offer a complete view of Australia's stable and wealthy economy. The book compares Australia with other similarly sized OECD economies as well as other Asia-Pacific economies and looks at fifteen international sources of data on competitiveness. It features a large-scale survey on Australian companies and offers deep insight on the country's future in terms of economics and economic policy. Revealing an honest assessment of Australia's true position in the world, the book looks at how Australian businesses see themselves and offers policy positions for government and firms to make the most of Australia's unique global economic position.

• Backed by CPA Australia, one of the world's largest accounting bodies
• Written by two global authorities on economic competitiveness
• Captures the thinking of more than 6,000 business leaders both within and outside of Australia
• Explains how Australia has weathered the global recession and looks at Australia's relationship with China

For business leaders and policy makers in need of an in-depth look at the current and future state of Australia's economy, this book offers valuable and comprehensive information.

• Language: English
• Publisher: Wiley
• Release date: May 8, 2013
• ISBN: 9781118497395

Book preview

Chapter 1

Australia’s Economic Performance

The starting point for the analysis of any economy should be an understanding of its past and present performance. The performance is what needs to be explained by more detailed analysis. This in turn provides the baseline from which we can try to build a picture of what Australia does well, and not so well, and assess what Australia needs to do to improve performance in the future.

Aggregate Performance

Australia’s economy has been one of the best performing in the OECD since 1990. Nominal GDP went from just over AUD 400 billion in 1990 to just under AUD 1,400 billion in 2011 (Figure 1.1). This was around 1.6 percent of global GDP. Australia’s annual GDP growth has been positive every year since 1991. Australia experienced real annual GDP growth on the order of 3 to 4 percent per year until the onset of the Global Financial Crisis in 2008, when growth dipped down to roughly 2 percent per year (Figure 1.2), which was still better than most other OECD nations. Australia stayed in positive territory, in part as the result of a stimulus package, which at AUD 42 billion was one of the world’s largest in proportional terms.¹

FIGURE 1.1 Australia Nominal GDP, 1990–2011

Source: Australian Bureau of Statistics, Australian National Accounts, June 2012.

FIGURE 1.2 Australia Real GDP Growth Rate, 1990–2011

Source: Australian Bureau of Statistics, Australian National Accounts, June 2012.

Australia’s nominal per capita GDP went from nearly AUD 24,000 per person per annum in 1990 to AUD 62,337 per person per annum in 2011 (Figure 1.3). In US dollar terms, Australia’s 2011 per capita GDP of USD 67,554 comfortably outstripped the USD 48,043 figure of the United States. It has also been well ahead of the OECD average (Figure 1.4). At the same time, Australia’s Gini coefficient in the late 2000s of 0.336 was only slightly above the OECD average of 0.316, indicating income inequality slightly greater than the OECD average.

FIGURE 1.3 Australia Nominal per Capita GDP, 1990–2011

Source: Australian Bureau of Statistics, Australian National Accounts, June 2012.

FIGURE 1.4 GDP Per Capita in Current USD, Australia vs. OECD Average, 1990–2011

Source: OECD, StatExtracts, April 2012.

Australia has seen its workforce participation rate increase from around 63 percent in the late 1990s to over 65 percent since 2007. Australia’s unemployment rate spiked at over 12 percent in the early 1990s before falling below 5 percent before the Global Financial Crisis. Although the unemployment rate approached 6 percent in 2009–2010, it was back down near 5 percent by 2011 (Figure 1.5). Australia has high workforce participation and relatively low unemployment.

FIGURE 1.5 Australia Workforce Participation Rate vs. Unemployment Rate, 1990 to May 2012

Source: Australian Bureau of Statistics, Labour Force, Australia, May 2012.

Perhaps the most interesting comparison of Australia with other countries is in GDP per person of employment age (taken as 15 to 64 years of age) in current US dollars shown in Table 1.1. This measure is, in our view, a better measure of an economy’s strength than GDP per capita or GDP per employed person, because the former counts a very young or very old population against the country, and the latter in essence penalises the country for employing marginal workers. GDP per person of employable age indicates the output the economy can generate given the potentially productive population. On this measure, Australia was nearly 40 percent below the United States in 2002 and more than 30 percent above the United States in 2011. Figure 1.6 shows that over the 1990 to 2011 period, Australia actually outperformed all of the other countries in the figure in growth in this measure.

If you have trouble viewing this table on your e-reader, you can download a copy at www.wiley.com/go/enright-petty (password: compete123).

TABLE 1.1 GDP Per Person 15–64 Years Old, Current US Dollars

Sources: International Labour Organization, Economically Active Population, Estimates and Projections, 6th ed., October 2011; World Bank, World Development Indicators, September 2012.

FIGURE 1.6 GDP Per Person 15–64 Years Old, Current USD, 1990 = 100

Sources: International Labour Organization, Economically Active Population, Estimates and Projections, 6th ed., October 2011; World Bank, World Development Indicators, September 2012.

Despite the notoriety of Australia’s primary sector, its proportion of GDP has remained remarkably constant over the last 20 years, at 9.5 percent of GDP in 1990 and 9.7 percent in 2011.² Of course, there are multiplier effects of the primary sector that are not captured in the simple ratio. The main shifts in the composition of Australia’s GDP over the last 20 years have been in manufacturing (22.1 percent of GDP in 1990 and 18.0 percent in 2011); the service sector (51.5 percent in 1990 and 57.7 percent in 2011); and the sum of use of residential housing, taxes net of subsidies, and statistical discrepancies (16.9 percent of GDP in 1990 and 14.7 percent in 2011).

Australia’s trade has grown substantially over the last two decades (Figure 1.7). Exports were around 19.8 percent of GDP in 2010, indicating that Australia is more trade dependent than the United States (exports equal to 12.6 percent of GDP in 2010), but much less so than Canada (29.4 percent) and several small European economies which in some cases have exports equal to 50 percent of GDP or more. Australia moved from a fixed to floating exchange rate in 1983. The low for the Australian dollar was 47.75 US cents in April 2001, and the high was 110 US cents in July 2011 (Figure 1.8), indicating a substantial strengthening of the currency. By October 2012, the Australian dollar was still above 100 US cents.

FIGURE 1.7 Australia Exports and Imports in Goods and Services, Current Prices, 1990–2011

Source: Australian Bureau of Statistics, Australian National Accounts, June 2012.

FIGURE 1.8 Exchange Rate, USD per AUD, June 1990 to June 2012

Source: Australian Bureau of Statistics, Balance of Payments and International Investment Position, June 2012.

Measured as a percentage of GDP, Australia has a significantly lower level of public debt compared to most OECD nations, and a debt level even lower than fiscally conservative Switzerland and Hong Kong (see Table 1.2). Australia’s debt level had been even lower before the stimulus package put in place to combat the Global Financial Crisis. The Australian Government’s 2012–2013 budget called for a return to surplus in that year.³

TABLE 1.2 Public Debt as a Percent of GDP, Selected Nations 2011

Source: International Monetary Fund, World Economic Outlook Database, April 2012.

Table 1.3 compares Australia’s economic performance with a selection of comparator countries. With respect to the OECD comparators, Australia’s GDP growth for the period 1990–2011 was higher than most, GDP per capita for 2011 was near the middle, and exports as a percentage of GDP were lower than most, indicating less trade dependence than most of the OECD countries. Measuring productivity as GDP per hour worked for 2011, only Canada, Israel, and New Zealand performed worse than Australia, although taking the compound annual growth rate (CAGR) for this measure for the period 1990–2011, Australia’s performance was middling.

TABLE 1.3 Major Indicators Compared with Selected OECD Economies

Sources: OECD, StatExtracts, April 2012; World Bank, World Development Indicators, September 2012.

Table 1.4 compares Australia’s performance with other Asia-Pacific economies. Comparing Australia against Asia-Pacific economies, Australia’s GDP growth for the period 1990–2010 was higher than Japan and New Zealand, but lower than all other countries. Australia’s 2010 GDP per capita was significantly higher than all other nations in the table, and only Japan was less trade dependent.

TABLE 1.4 Major Indicators Compared with Asia-Pacific Economies

Sources: OECD, StatExtracts, April 2012; World Bank, World Development Indicators, September 2012.

According to the IMF, Australia’s projected real GDP growth to 2017 is much lower than that of China, Developing Asia, and Emerging and Developing Economies for each year, and is projected to be lower than the world overall each year. Australia is projected to outperform advanced economies, major advanced economies, and the European Union each year to 2017, and to outperform or equal the performance of the United States (Table 1.5).

TABLE 1.5 World Economic Outlook on Real GDP Growth, 2012–2017, Percent

Source: International Monetary Fund, World Economic Outlook Database, April 2012.

Australia’s interest rates have been fairly high compared to those of many other OECD nations. Figure 1.9 shows Australia’s interest rates against selected OECD countries and the Euro Area for the period 1997 to 2011. Australia cut interest rates 50 basis points in May 2012 and a further 25 basis points in June 2012 with additional cuts being projected by many economists.⁴ The cash rate of 3.5 percent in the latter portion of 2012 was the lowest since 2009.

FIGURE 1.9 Short-Term Interest Rates for Australia, the Euro Area, and Selected OECD Countries, 1997–2011

Notes:

1. Three-month money market rates.

2. No individual interest rates for the Eurozone members since the formation of the Eurozone in 1999.

Source: OECD, StatExtracts, April 2012.

Australia’s consumer price index (CPI) shows the country’s headline inflation. Australia’s CPI has been relatively high compared to many other OECD countries during the period 2001 to 2011 as shown in Table 1.6.

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TABLE 1.6 Consumer Price Inflation for Australia and Selected OECD Countries, 2001–2011

Sources: World Bank, World Development Indicators, September 2012; OECD, StatExtracts, April 2012.

Productivity

A nation’s economic performance is heavily influenced by its productivity performance. In Australia, there is widespread agreement that following a period in the 1990s during which there were significant improvements, productivity growth has slowed (Figure 1.10).

FIGURE 1.10 Labour Productivity Index, 1990–2011

Notes:

1. Due to data availability, the labour productivity index for 1990–1993 does not include Rental, Hiring, and Real Estate Services; Professional, Scientific, and Technical Services; Administrative and Support Services; and Other Services.

2. Reference year for indexes is 2009–2010 = 100.0.

Source: Australian Bureau of Statistics, Experimental Estimates of Industry Multifactor Productivity, 2010–2011, December 2011.

When comparing Australia’s productivity position versus other countries, charts like that in Figure 1.11 show Australia’s productivity growth being far lower from 2001 to 2010 than it was from 1991 to 2000 and being near the middle of the countries shown from 2001 to 2010. Charts like Figure 1.12, which compare unit labour costs in manufacturing, are used as evidence that Australia is losing competitiveness in manufacturing, at least since around 2004.⁵

FIGURE 1.11 International Labour Productivity, Average Annual Growth in Period

Note:

Labour productivity is defined here as real GDP per hour worked.

Source: OECD, StatExtracts, April 2012.

FIGURE 1.12 Unit Labour Costs in Manufacturing, US Dollar Basis, 1990–2010

Notes:

1. Unit labour costs are defined as the costs of labour input required to produce one unit of output, and are computed as compensation in nominal terms divided by real output. Indexes: 1990 = 100.

2. The data relate to all employed persons (employees and self-employed workers).

3. For Australia and Sweden, compensation is adjusted for employment taxes and government subsidies to estimate the actual cost to employers.

Source: Bureau of Labor Statistics, US Department of Labor, International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, October 2011.

The Reserve Bank of Australia (RBA) has used data from the Australian Bureau of Statistics to assess labour productivity growth and multifactor productivity growth across sectors of the Australian economy. Labour productivity measures output per labour hour worked, while multifactor productivity measures output for a given amount of labour and capital inputs combined. Labour productivity growth is mostly higher than multifactor productivity growth because it includes the labour productivity that is generated by capital deepening. Taking the periods 1993/1994 to 2003/2004 and 2003/2004 to 2010/2011, the RBA has shown that multifactor productivity growth in the latter period in Australia was lower than in the former period in 15 out of 16 major sectors, with only the Administrative and Support industry exhibiting marginally positive growth. The Mining and Utilities industries showed the biggest declines; followed by Wholesale Trade and Other Services sectors; the Accommodation and Food Services; Manufacturing; Rental, Hiring, and Real Estate; Transport, Postal, and Warehousing; and Professional, Scientific, and Technical sectors.

The RBA analysis (see Table 1.7) shows that for the market (essentially nongovernmental) sector as a whole, labour productivity growth was positive for both periods, but in the 2003/2004 to 2010/2011 period labour productivity growth was slower than the growth in capital stock, indicating negative multifactor productivity growth. Excluding mining and utilities, both labour productivity growth and multifactor productivity growth were positive in both periods, though lower in the second than the first. The mining and utilities sectors both exhibited negative labour productivity growth from 2003/2004 to 2010/2011, with capital deepening and multifactor productivity growth both negative. This indicates that more capital and more labour were needed for a unit of output toward the end of the period than the beginning in both sectors.

TABLE 1.7 Decomposition of Trend Productivity Growth, Annual Average Percentage Change

Sources: Australian Bureau of Statistics; Reserve Bank of Australia; Author Analysis.

The fall in measured productivity in the Mining sector is consistent with increasing commodity prices making it profitable to develop more marginal and costly resource deposits, resulting in additional capital and labour investments. In the Utilities sector, it is suggested that that structural changes and significant investment in new large-scale desalination plants that have been built as part of the solution for the droughts that vex Australia have been a drag on productivity in that sector. In both cases, investments take a long time to come to fruition, meaning that increased capital investment and labour deployment in the short term is not matched by increases in output, thus detracting from productivity measures in the short term.⁶ Thus in both cases, estimated productivity declines can be completely consistent with rational investments that benefit Australia as a whole, but register as having a negative impact on productivity. Given this situation, we have to take the reports of productivity declines in these sectors with some circumspection.

Explaining Australia’s productivity situation is complicated by the fact that it is hard to identify statistically the causes for the slowdown, there is measurement error in the estimates of productivity growth that are used, and productivity is the result of many interacting factors that make it very difficult to disaggregate the impact of the various effects. According to the RBA, there are several theories as to why productivity growth has slowed for the economy as a whole.⁷ One is that gains from incorporating modern information and communication technology (ICT) that were made in the earlier period have not been matched subsequently, indicating that some of the benefit might have been one-off rather than continuous. Another is that the quality of the workforce did not improve as much (as measured by an increasing percentage of the workforce with qualifications or other measures) in the second period as the first. Another is that Australia introduced major reforms in the 1980s and 1990s, including an opening up of the financial markets, labour reforms, tariff reductions, privatisation, a national competition policy, and tax reform, and that the benefits from these reforms were already obtained in the earlier period.

Others have suggested that instead of productivity-enhancing reforms, in recent years Australia has seen productivity-destroying regulation and taxation.⁸ The Productivity Commission has come up with a long list of suggested reforms, including improvements to regulations and to the setting of regulations, removing impediments to the efficient allocation of resources, creating better incentives for firms to perform while working to enhance their flexibility and capabilities, making further commitment to an open and competitive economy, and making investments in human and physical capital to improve productivity.⁹ There is clear frustration within the business community at the lack of productivity-promoting reform, which has been mirrored by the Treasury Secretary saying that a lack of reforms is worsening the productivity situation, and the Governor of the Reserve Bank calling on the Australian Government to implement productivity-enhancing reforms.¹⁰

There is also a complacency hypothesis¹¹ that suggests that Australia’s improved terms of trade have led to gross national income increasing faster than productivity, that this has kept wages high, corporate profits up, and unemployment down, and that there has therefore not been an imperative to improve productivity. Complacency seems to have developed a political culture that is focused on finding narrow political advantage rather than on improving the productivity of the economy,¹² leading to calls for Australian politics to be rehabilitated and for proper leadership to emerge to serve the national interest.¹³ Complacency is dangerous because most observers agree that Australia’s terms of trade are likely to weaken in coming years. As this happens, real income growth will slow unless productivity growth picks up.

The question that arises is if Australia’s overall economic performance has been good, how is that consistent with faltering productivity performance? The apparent answer is that the effects of lower productivity growth have been masked by the resources boom, which has had a positive impact on Australia’s terms of trade, put upward pressure on the exchange rate, and caused national income to grow faster than productivity. In fact, an analysis of data from the Australian Bureau of Statistics for the period 1992 to 2012 reveals that real gross national income per hour worked in Australia grew at roughly the same rate from 2003 to 2012 as it did from 1992 to 2002. In addition, comparing Australia’s growth in GDP per hour worked in current US dollars to that of other countries indicates that Australia has been an excellent performer by this measure (see Figure 1.13).

FIGURE 1.13 Output per Hour Worked, Current USD, 1990 = 100

Source: OECD, StatExtracts, April 2012.

The effect of this situation on the manufacturing sector has been an increase in costs, which, because of international competition, cannot be passed on as higher prices. Lack of increased productivity in the resources sector has been offset, or even caused, by rising demand and prices. Lack of increased productivity growth in the nontradable sectors has resulted in higher prices for nontradables in Australia.¹⁴

In considering productivity growth in the future it is worth noting that in the event that there is a continuation of the slowdown in the resources sector, which started in 2012, then capital and labour will shift to other sectors, at least in part. Investment decisions are not static, and if commodity prices fall, the economy will adjust, albeit with costs associated with the adjustment. The fear is that the adjustment might come too late for some sectors and companies that could be lost in the meanwhile, and that a failure to raise productivity will make Australia worse off than it would have been otherwise.

We should note that while productivity concerns in Australia are valid, the way productivity growth is typically measured has to be related to the specifics of the Australian context. International productivity growth measures usually fix prices and exchange rates to a base year. The idea is that productivity growth should be growth in volume for a particular set of inputs independent of price changes and exchange rate changes. That is fine for modest changes in prices and exchange rates, but not for large changes. When resource prices double, or increase by a factor of seven, which iron ore prices did from 2004 to 2011, or the Australian dollar nearly doubles in value versus the US dollar, which it did from 2002 to 2011, and companies then make completely rational investments to expand output in some industries and contract it in others, then the productivity measures are less meaningful than they would otherwise be, particularly when combined with the known difficulties of estimating productivity. We know of no managers in 2012 making investments based on the assumption that the inputs or outputs of their firms are priced at year 2000 or year 2005 prices and exchange rates, though that is what the productivity comparisons tend to do.

In addition, there is the question of what to do about the productivity issue. It is a nonstarter to tell companies to avoid making profitable resource investments because they don’t show up as improvements in productivity or based on the possibility that terms of trade may shift. On the other hand, when it comes to government or the nation, the responsible course is to prepare for an uncertain future by working to improve productivity. One way to avoid complacency is to push ahead on the reform agenda to improve efficiencies throughout the economy. Another is to invest in education, training, infrastructure, enhanced workforce participation, and in building linkages with foreign markets. Another is to provide some limited support to industries that can become winners in the future, by providing information on technologies, markets, and best practices, or by support for research and development. The trouble with such support is that such investments must be funded. While the resources sector is an apparent source of revenue, there are limits to the tax revenue that can reasonably be raised from this sector, particularly if programs are to be sustainable in the face of volatile resource prices. In any case, working to improve the economy’s productivity is always a good idea, particularly when it might be politically difficult or inopportune to do so.

Global Trends

Australia will also need to understand, mitigate, and leverage trends in the global economy if it is going to chart a prosperous path into the future. Among the trends in the global economy that will influence Australia going forward are the aftermath or potential repetition of the Global Financial Crisis (GFC), the rise of Asia-Pacific economies, the improved connectivity possible through modern information and communication technology, the globalisation of companies and industries, and the development of the so-called Flat World.

The GFC and Its Aftermath

The Global Financial Crisis and its lingering aftermath will affect world markets for at least a decade. The crisis, which started with US financial institutions with large exposures to the US real estate market when it collapsed, showed numerous structural weaknesses in national and international financial systems. Policies to foster home ownership in the US in particular brought new customers and new types of loans into the market. Implicit or explicit guarantees through agencies like Fannie Mae and Freddie Mac encouraged financial institutions to make loans to customers who would not have been considered good credit risks previously. The packaging and securitisation of mortgages created securities that received ratings from ratings agencies that were much higher in retrospect than they should have been. The development of numerous synthetic securities and derivatives based on these and other instruments drove rapid growth in the financial sector, but created entire classes of assets that few people really understood.

When the housing market in the United States started turning down, the illusion of diversification of risks became apparent. While many mortgages might have been packaged into securities in an attempt to diversify risk, this strategy came undone when the entire asset class starting going down together. The illusion of diversification became even more apparent when it became clear that numerous financial institutions had insured their securities with a single insurer, AIG. The collapse of Bear Stearns and then Lehman Brothers precipitated a global crisis as the financial system became frozen, counterparty risk became unknowable and therefore unacceptable, and companies and individuals throughout the major economies could not get financing. Only massive intervention by governments and central banks prevented much of the world’s financial system, and with it much of the world’s economy, from collapsing.

The ripple effects seen during the GFC showed the extent to which the global economic system is connected in sometimes unexpected ways, how risk could be dramatically mispriced, how regulatory systems were inadequate to deal with modern financial engineering, how ratings agencies could not possibly assess some of the securities they rated, how boards of directors could not adequately oversee managers, how the interests of bankers could diverge dramatically from everyone else, and how there is no international architecture to protect the global economy from similar crises.

The GFC left several legacies. Perhaps the most important is a legacy of wealth and job destruction that has affected the savings and employment prospects for millions around the world. Another is a massive amount of government debt that was run up in the attempt to stave off catastrophe. Another is massive deleveraging on the part of banks and other financial institutions that is making finance generally less available for many companies and individuals in many parts of the world. Another is a more conservative approach toward investing and financing on the part of real economy companies. Another is consumer caution in the face of economic and financial uncertainty. Overall, it is likely that the effects will be felt for a decade or more.

The run-up in government debt in many countries around the world has created a crisis of its own. While Greece’s problems preceded the GFC, the crisis created the perfect storm of global and domestic downturn, financial instability, and difficult financial conditions that has made its debt unsustainable. The spectre of the potential impact on European banks and other Eurozone countries has resulted in massive bailout packages orchestrated by the main European Union countries, the European Central Bank, and the IMF to try to stave off a disorderly default. However, even if Greece manages to avoid such a default, and even if it manages to get its fiscal house in order, this will require wrenching austerity in the midst of its worst recession in decades. Even that will not fix another underlying problem, which is that the adoption of the euro has prevented less productive Eurozone economies from devaluating against the German and French currencies in order to stay competitive. Without the ability to devalue and without the ability to increase productivity faster than more advanced Eurozone countries, Greece and some of the other European countries, like Portugal, Spain, and Italy, may face difficult times well into the future.

In the United States, several rounds of stimulus, bailouts, and quantitative easing have run up massive debts and have devalued the US dollar substantially. This combination is likely to leave the US unable to upgrade its infrastructure and business support systems, and unable to change what has become an uncompetitive tax system for companies. Japan is in an even worse situation, with government debt already significantly higher than GDP, political paralysis, and a domestic economy that appears impervious to reform and positive change.

Uncertain government finances, shaky banking systems, deleveraging, and uncertain financial markets will continue to have a strong impact on employment, aggregate demand, trade, and investment. As indicated above, uncertainty and shakiness will probably be a feature of the global economy for a decade or more. In such a situation, in which governments are printing money and many countries appear to be trying to export their way out of their problems, the international competitive environment is likely to be tougher than ever, even for countries that have avoided the worst excesses.

The Rise of Asia-Pacific Economies

One of the bright spots in the global economy in recent years has been emerging markets, particularly emerging markets in Asia. The rise of Asia-Pacific economies, most notably China and India, but Indonesia and other economies as well, has been one of the most important stories in the world economy for the last few decades. The rise of these economies is rebalancing the global economy toward the Asia-Pacific region. These markets represent substantial new opportunities for companies from the rest of the world, but particularly from the rest of the Asia-Pacific region where proximity and familiarity should allow for easier market development.

The Asian Development Bank (ADB) estimates that Asia as a whole will increase its share of global GDP from 26 percent in 2010 to 40 percent in 2030 and 52 percent in 2050, which would be similar to its share of global population. During that period, the ADB expects that the urban population of the region will grow from 1.6 billion to 3 billion and that Asian cities will be leading engines of the world economy.¹⁵

China’s economy has grown at an average of roughly 10 percent per year in real terms since the onset of the country’s economic reform program in 1979–1980. Even in the recent Global Economic Crisis, the slowest rate at which China’s economy grew during the period was 8.5 percent. For the 12th Five Year Program period, the Chinese Government has forecast that real GDP growth will average 7.5 percent. By 2010, China was the world’s second-largest economy, its leading exporter, its third-leading importer, its leader in terms of international reserves, the leader in terms of inward greenfield foreign direct investment, and the leading producer and market in a wide range of industries crossing most industrial sectors. While the Chinese Government’s attempts to rein in inflation and property prices have slowed the economy’s growth, there are still several positive dynamics, including rapid urbanisation, improved infrastructure, increasing affluence and purchasing power, the development of national and regional markets, improvements in the financial sector, and the spread of development into the interior of the country. The IMF claims that China is on a path to become the world’s leading economy according to purchasing power parity exchange rates (PPP) by 2016, and the World Bank claims that China will have the world’s largest economy at market exchange rates by 2030.

India has the world’s tenth-largest GDP at market exchange rates and the third-largest in terms of purchasing power parity exchange rates. While India’s development has not been nearly as spectacular as China’s (the two economies were similar in size in 1980; today China’s economy is three-and-a-half times the size of India’s), India’s recent development has also been impressive. India began its economic reform process in 1991. By 2010, in real terms, its GDP was 3.5 times the 1991 level, while per capita GDP was 2.6 times the 1991 level, and exports were 10 times the 1991 level.¹⁶