The Rise of China and India and the Commodity Boom: Economic and Environmental Implications for Low-Income Countries

The rapid growth of China and, more recently, of India, is having major effects on every facet of the global economy. The supply of labor-intensive manufactured exports (from China in particular) has been accompanied by a huge expansion in their imports both of raw materials and of skill-intensive manufactured parts and components. This ‘offshoring’ of intermediates production by large, labor-abundant economies has economic and environmental implications for other developing economies drawn into their trade networks. We sketch a trade-theoretic model showing how the growth of the ‘giants’ generates adjustment pressures on their trading partners and competitors among 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, recognizing that commodity extraction and production can have strong environmental impacts, 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.