China, India and the commodity boom: Economic and environmental implications for low-income countries

The international role of China has risen steadily for two decades - and has become even more important in the current global recession. The growing supply of labour-intensive manufactured exports from China has been accompanied by a huge expansion in its imports both of raw materials and of skill-intensive manufactured parts and components. This offshoring of intermediates production by a large, labour-abundant economy has economic and environmental implications for other developing economies. More recently, the rapid expansion of the Indian economy and trade indicates that it too will soon exert similar effects on global markets. We sketch a model showing how the growth of these developing-country giants generates adjustment pressures on other developing economies. We discuss in particular how differences in relative factor endowments of resource-rich economies can produce quite different outcomes in the context of product fragmentation and expanding commodity trade. We also explore the effects on production, trade, environment and prospects for future growth in resource-rich economies, particularly in the context of weak institutions and other market failures. We illustrate these different impacts by considering the cases of Indonesia, Malaysia and Thailand and highlight implications for growth, development and policy.