Select Committee on Treasury Fourteenth Report



8. Although the current era of globalisation can be seen as having begun shortly after the Second World War, a number of important developments affecting the intensity of globalisation have taken place in very recent years. The Bank of England has observed that:

9. As the Bank of England suggested, there are two main elements particular to globalisation in recent years. The first is the economic impact of political developments in central and eastern Europe and the former Soviet Union. Mr Stephen King argued that it was "difficult to describe the latest period of globalisation without reference to what happened in the Soviet Union, Russia now, of course, but the Soviet Union previously".[26] Russia has averaged real GDP growth rates of over 6% over the last decade.[27] Although the countries of central and eastern Europe have seen less steady growth over the last decade as a whole, real GDP growth of over 5% a year has been achieved in the region as a whole since 2004.[28]

10. The second element of the recent intensification of globalisation arises from the scale of the contribution of economic developments in China and India. Those developments are far from historically unique in their characteristics, but are striking in their scale, as Mr Stephen King highlighted: "other countries have experienced economic catch-up—Japan, South Korea and Ireland spring to mind—but these started from a higher per capita income in the first place [than China and India] and had small populations by Chinese and Indian standards".[29] The difference in scale can be illustrated by examination of evidence about the recent economic development of China and India.

The Chinese economy

11. China has emerged as a major player on the world economic stage after a long period as a sleeping giant, transforming itself from a closed economy before 1978 to an increasingly open economy.[30] China has reduced trade barriers significantly in the past fifteen years or so. Its weighted average import tariff decreased from 43% in 1991 to 20.1% in 1997. In 2001, China joined the World Trade Organisation and removed the 40% local content requirements in the automotive sector. In 2005, trade accounted for roughly 70% of the Chinese economy.[31] Since 1991, China has achieved annual average rates of real GDP growth of around 10%. Growth has been in excess of 10% in each year since 2003.[32] Although this rate of growth is not unique, its importance is magnified by the scale of the Chinese economy, as the Treasury highlighted in evidence to our predecessors: "Because the Chinese population is so much larger [than other countries which have achieved comparable rates of growth], the ramifications for the global economy of China's growth are so much greater".[33] In 2005, China had 934 million people of working age, compared with 616 million in the EU, USA, Canada and Japan combined.[34] China now educates around 2 million graduates each year.[35]

12. Rapid rates of economic growth, combined with the size of China's economically active population and its rapid integration into the world economy, have led to China playing an increasingly significant role in the world economy. China is estimated to have accounted for 13% of global output in 2003, weighted by purchasing power parities, compared with 3% in 1980.[36] China is estimated to have contributed 31% of global growth in the period from 2001 to 2004 weighted by purchasing power parities, compared with a 21% contribution by the G7 economies—those of the USA, Japan, Germany, the United Kingdom, France, Italy and Canada—combined.[37]

The Indian economy

13. India has also seen high levels of real GDP growth in recent years, with annual rates in excess of 7% in each year since 2003.[38] The Indian economy has also become much more open: the weighted average import tariff decreased from 87% in 1991 to 20.3% in 1997. In 2001, the government removed automotive import quotas and permitted 100% foreign direct investment in the automotive sector.[39] As with China, the impact of India's growth is widely felt because of its rapid integration in the global economy and because of the scale of its working population. India now produces 260,000 engineers a year.[40] India is estimated to have contributed 9% of world economic growth in the period from 2001 to 2004 weighted by purchasing power parities.[41] The significance of Indian economic development in the context of globalisation lies not simply in current performance, but in future potential, and it is to prospects for globalisation that we now turn.

25   Treasury Committee, Twelfth Report of Session 2006-07, The Monetary Policy Committee of the Bank of England: ten years on, HC 299-II, Ev 7 Back

26   Q 3 Back

27   International Monetary Fund, World Economic Outlook, April 2007: Spillovers and Cycles in the Global Economy (hereafter WEO 2007), Table 5, p 217 Back

28   Ibid. Back

29   Ev 135 Back

30   HC (2004-05) 314-i and ii, Ev 50 Back

31   Ibid., Q 14 Back

32   WEO 2007, Table 5, p 217 Back

33   HC (2004-05) 314-i and ii, Ev 48 Back

34   HM Treasury, Long-term opportunities and challenges for the UK: analysis for the 2007 Comprehensive Spending Review (hereafter Long-term opportunities and challenges), para 4.10, p 48 Back

35   HM Treasury, Globalisation and the UK: strength and opportunity to meet the economic challenge, December 2005 (hereafter Globalisation and the UK), Box 1.2, p 11 Back

36   HC (2004-05) 314-i and ii, Ev 51. Purchasing power parity exchange rates equate the price of a basket of identical goods and services from two countries in a common currency. Use of purchasing power parities is seen as particularly relevant when computing values for world GDP: see ibid., Ev 50. Back

37   Globalisation and the UK, Chart 1.1, p 10 Back

38   WEO 2007, Table 5, p 217 Back

39   McKinsey Global Institute, New Horizons: Multinational company investment in developing economies, October 2003, p 3 Back

40   Globalisation and the UK, Box 1.2, p 11 Back

41   Ibid., Chart 1.1, p 10 Back

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