Edited by Jahangir Aziz, Steven Dunaway, and Eswar Prasad

International Monetary Fund, 2006, 298 pp., $35.00 (paperbound)

China and India are the two fastest-growing emerging markets and among the three largest economies in Asia. These two countries are now having far-reaching effects on the global economy, including through their impact on world trade, their demand for energy and other commodities, and their huge accumulation of foreign currency reserves.

What does the future hold for these two giants? How can each continue to grow and develop in a sustainable way? And how will policies and reforms in each country serve to spread the benefits of recent economic gains among their respective populations?

This book attempts to address these questions and also brings together analysis and insights on how China and India have cooperated and learned from each other. It also shows what has (and what has not) worked in each country and offers some suggestions on how each may achieve long-term sustainable development.

The unique contribution of this book is that a majority of the chapters are written by policymakers and practitioners, thereby infusing the analytical material with a strong dose of pragmatism and policy relevance. For instance, Reserve Bank of India Deputy Governor Rakesh Mohan discusses how the forces of globalization can complicate the challenges facing monetary policy-makers in emerging economies such as China and India. In his contribution, Governor Zhou Xiaochuan of the People’s Bank of China contrasts the growth of the services sector, including financial services, in China and India and discusses the importance (and difficulties) of developing this sector in China.

Section I covers banking sector reforms. Nachiket Mor, R. Chandrasekhar, and Diviya Wahi note that India’s banking sector performance has improved in many dimensions but further reforms are needed, including improvements in the financial services infrastructure, reductions in the cost of intermediation, and scaling up of banking services to provide broader access to financial services, especially in rural areas. Nicholas Hope and Fred Hu enumerate the priorities for Chinese banking reforms and provide an assessment of the role that foreign strategic investors could play in the reform process. Luo Ping compares the efficacy of the regulatory structures and reform processes in both countries and notes that the Indian experience may provide some useful lessons for Chinese policymakers.

Section II looks at the development of securities markets. In their papers, G.N. Bajpai and Narendra Jadhav catalogue the development of equity, corporate debt, and government securities markets in India and discuss how policy reforms have contributed to these outcomes. Xinghai Fang, Ti Liu, and Donghui Shi argue that opening up the Chinese securities industry to both internal and external competition could play a crucial role in enhancing its efficiency.

Section III discusses the relationship between domestic financial development and international financial integration. Suman Bery and Kanhaiya Singh argue that although international financial integration has some risks, further integration could stimulate financial sector development and improve macroeconomic policy discipline in India. Eswar Prasad, Thomas Rumbaugh, and Qing Wang contend that although capital account liberalization could play an important role in China’s development, undertaking further liberalization before allowing for greater exchange rate flexibility could pose some risks.

Section IV examines a broader range of macroeconomic policies relevant for sustainable growth. Steven Dunaway and Annalisa Fedelino note that Chinese fiscal policy has been prudent in recent years, with low levels of fiscal deficits and debt (relative to GDP), and has been appropriately guided by a medium-term focus on fiscal consolidation to make room for financing contingent liabilities, including in the state-owned banking system, and rising spending pressures as the population ages. Arvinder Singh examines the factors behind, and the implications of, labor mobility in China and India.

The final section of the book evaluates the scope for further economic cooperation between China and India. Arvind Virmani argues that the bilateral trade potential is very high and discusses the main barriers to realizing this potential. Nalin Surie compares and contrasts the development models of China and India, picking out some important lessons from each country’s experience. He notes that both countries face similar socioeconomic challenges and that effective cooperation between them could have broader benefits for the Asia-Pacific region and the global economy.