appears that progress is being made in reforming the financial system, but as of now it remains a point of vulnerability and an obstacle to a rapid opening of the capital account and flexibilization of the exchange rate. china faces the problem of a rapidly ageing population. while this will be a problem from the viewpoint of fiscal transfer programs ( which however are on a proportionately much smaller scale than in richer countries ), the processes of urbanization and industrialization can continue by drawing on the massive rural population. environmental issues will have to be dealt with, and it is clear from the trends in global commodity prices that china may well face continuing adverse terms of trade changes as well as rising domestic resource costs. income disparities in china, between the coast and inland provinces, between the cities and the countryside, between rich and poor, have been growing rapidly, and are receiving increasing attention from the government. these, combined with the breakdown of the social safety net of earlier times, produce social and political tensions that could threaten the continuation of the growth process. and political pressures associated with the desire for democratization, which tends to rise as income levels increase, constitute another source of tension. however, its impact on the growth rate of the dollar value of chinese gdp would be smaller. china ’ s high saving rate has been attributed in part to the absence of a convincing social safety net, and to uncertainty about future economic growth. in addition, high growing economies have generally been high savers, a feature which the late franco modigliani used to assert was fully consistent with the life cycle hypothesis. the chinese economy suffers from one disadvantage that the other asian miracle economies did not : it is already very large. this raises the question of whether it can continue to rely on exports to power its growth – for the capacity of the rest of the world to absorb chinese exports must be determined by the global growth rate. 12 the answer is that china probably cannot continue to rely on export - led growth, and therefore that the switch to domestic demand led growth, which has been talked about for some time, is essential if growth is to continue in the 7 - 10 percent per annum range. is china vulnerable to a 1990s style asian financial crisis? there are some negative symptoms. the first is a share of investment in gdp that according to the official data exceeds 40 percent. this cannot be efficient, it must be part of the process of generating bad loans, and is reminiscent of pre - crisis investment rates in some

prospect is inhibited by the strained relations between india and pakistan. the dynamics of a south asian economic bloc built around india would be different from those of east asia because, unlike in the case of china, there is no japan – no advanced industrial economy – in the neighborhood. v. the rise of asia : economic implications the rise of asia, especially the rise of east asia and of india, is already reshaping the world economy. concerns over globalization that have become so prominent a part of the economic debate in europe and also in the united states, focus on the impact on the wages of less skilled workers in the west of the hundreds of millions of chinese and also indian workers who are entering the global labor force. one often hears the view that “ china has a comparative advantage in everything ”, an argument that every economist can demolish, but doing so does not diminish the anxiety level. part of the anxiety must derive from the discomforts of the adjustment process forced by the dynamism of asia ; and part must derive from the fact that the wages of unskilled workers in the west may be adversely affected by such competition. policy can deal with these consequences, through adjustment aid, and through education, but unless that is done, the negative fallout from this competition will likely continue. the last time i heard this degree of anxiety was in asia during the asian crisis, when many of china ’ s neighbors expressed the same concerns. then i used to ask people whether they would prefer to have a prosperous or a poor neighbor. most opted for the prosperous neighbor, though i often had the sense that they might prefer that their neighbor progress at a more measured pace. by now most of the developing countries and most of china ’ s neighbors can count the gains from china ’ s ( and india ’ s ) booming growth. china ’ s voracious appetite for raw materials, which has produced a boom in commodity prices, has helped many developing countries, as well as commodity rich industrial countries like australia. china ’ s investments in africa – where indian companies have also long been active – have lately received media attention. china and india ’ s energy needs have helped push oil and other energy prices to their highest sustained levels, and have contributed to the prosperity of energy producers in the middle east, in russia and central asia, and also in africa where there are now many oil exporters. china ’ s and india ’ s energy needs have driven their oil companies into the international arena, competing