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# **_4.1. The Structure of Import Demand_**

There are three major consequences of changing economic structures which affect the product composition of imports. First, at low per capita incomes, the income elasticity of demand for agricultural products in general (and food in particular) is relatively high. As incomes rise, the relative income elasticity of demand for manufactures grows, and as incomes increase further, the demand for services becomes increasingly important in final demand. Second, with the changing sector distribution of GDP, there is a shift in labor and employment across sectors. As the industrial sector expands, labor and employment migrate from agriculture in the rural areas to the manufacturing sector in the cities. Third, as economic output becomes more diversified, specialization and interchange grows. Together with the growth of urbanization, this requires heavy investments in infrastructure.

These three trends result in a growing demand for commodities. “Soft commodities” feed agricultural inputs into food, and provide intermediate inputs (such as cotton and timber) into manufacturing. The demand for “hard commodities” (such as minerals and metals) and energy grows as a consequence of investments in infrastructure and the expansion of the manufacturing sector.

China’s (and India’s) growth-paths reflect each of these trends. Significantly, it reflects the experience of an economy at an early stage in the evolution of this growth-path. We can illustrate this by focusing on some of the key parameters of China’s recent growth trajectory (see, also, Farooki, 2009). China’s economy has shown a rapid transition from agriculture to industry. The share of agriculture in GDP fell from 27 percent in 1990 to 11.3 percent in 2008. In the same period, the share of industry increased from 42 percent to 49 percent of GDP. This was accompanied by large scale rural-urban migration. In 2007, 45 percent of the population (594m) lived in urban centers. By 2015 the urban population is projected to rise to 684m, and to 890m in 2030. This growth in urban population between 2007 and 2030 will exceed the total combined population of the US and Europe.

This process of urbanization is reflected in the growth in demand for infrastructure in general and new infrastructure and housing in particular. It is one of the reasons leading observers to conclude that infrastructure-intensity is highest at the early stages of industrialization and at relatively low levels of per capita income (Canning, 1999; Auty, 2008). New projects tend to be much more commodity intensive as compared to expansion and reconstruction investments (World Bank, 2009). As Table 7 shows, the share of new projects in urban fixed investments in China increased from less than a third to almost a half between 1995 and 2007.

**Table 7: Percent Share of Total Investment in Fixed Assets in Urban Areas by Type** **<u>of Construction in China (1995-2007)</u>**

|**Year**|**New Construction**|**Expansion**|**Reconstruction**|**Maintenance and**<br>**Equipment**|
|---|---|---|---|---|
|1995|30|29|12|29|
|2000|32|24|15|29|
|2007|44|17|12|27|

Source: Chinese Statistical Yearbook 2008.