World Energy Outlook 2007

fear that Chinese and Indian exports might swamp their domestic markets and
prevent them from entering new export markets.
These factors explain the apprehension of many countries – rich and poor –
about the pace of economic expansion in the two emerging giants and their
growing importance in international trade and financial flows. Rapid
economic growth, fuelled by high saving rates, will also drive China’s and
India’s acquisition of overseas assets. China’s growing trade surplus is adding
to these concerns. But there is a positive side to the story. These developments
will, on balance, bring net economic benefits to the rest of the world in the
medium to long term. Growth in China and India opens opportunities for
other developing and industrialised countries to increase exports. In order to
be able to increase their exports, China and India will need to increase imports
of intermediate inputs, raw materials, energy resources and products,
technology and investment goods. The surge in exports from Africa and Latin
America over the past decade has been largely driven by demand from China
and India. Their demand for high-technology goods will also continue to rise,
boosting imports from industrialised countries. In addition, rising incomes
and living standards in China and India, together with a probable increase in
those countries’ exchange rates, will create opportunities for low-income
countries to move into low-skill activities abandoned by producers in the
giants. Wages have been rising much faster in China than in many other
developing countries (World Bank, 2007). Increasing capital flows from
China and India could also boost investment and growth in the rest of the
world.
Increasing demand for mineral resources to fuel China’s and India’s economic
expansion, including metals, clays and aggregates for the construction industry,
is expected to put upward pressure on prices in the long term. 6 This will have
major consequences for the competitiveness of processing industries, the terms
of trade and economic growth. Resource-poor countries will inevitably be hit
hardest. Prices have already increased sharply in recent years (Figure 3.6),
driven partly by strong Chinese demand. Prices of some resources, notably
aluminium, lead and tin, have started to fall back from recent peaks as new
production capacity has come on stream. But increasing extraction of these
finite resources could lead to higher marginal production costs in many cases,
pushing up prices over the coming decades. This is expected to occur for oil
and gas, the prices of which are assumed to rise over most of the projection
6. Bloch et al. (2007) finds that commodity prices rise on average by 1.5% for every 1% increase
in world industrial output, with a maximum lag of one quarter. The barter terms of trade of
commodities to finished good also rise when world industrial growth exceeds 4% per year.
Higher US interest rates and a stronger dollar have a generally negative impact on commodity
prices.
146 World Energy Outlook 2007 - GLOBAL ENERGY PROSPECTS: IMPACT OF DEVELOPMENTS IN CHINA & INDIA