The growth of China and India: implications and policy reform options for Malaysia Elena Ianchovichina, Maros Ivanic, and Will Martin* This study explores the trade-related impacts of rapid growth of China and India on the Malaysian economy and evaluates policy options to better position Malaysia to take advantage of these changes. Higher growth in China and India is likely to raise Malaysia’s national income and to expand Malaysia’s natural resource and agricultural exports, while putting downward pressure on exports from some manufacturing and service sectors. Increases in the quality and variety of exports from China and India are likely to increase substantially the overall gains to Malaysia. The expansion of the natural resource sectors and the contraction of manu- facturing and services reflect a Dutch-disease effect that will raise the importance of policies to facilitate adaptation to the changing world economy and improve competitiveness. Most-favoured-nation (MFN) lib- eralisation would increase welfare, and, by increasing competitiveness, raise output and exports of key industries. Preferential liberalisation with India and completely free trade with China would provide greater market access gains than MFN reform, but neither would be as effective in increasing income as MFN liberalisation, and free trade agreements would lead to greater competitive pressure on many of Malaysia’s indus- tries than MFN liberalisation. Increased investments in education and infrastructure could boost manufacturing and services sectors in Malay- sia, while improving trade logistics would benefit sectors with high trans- port costs, including the agricultural and resource-based industries. Introduction The rapid economic growth of China and India is having a major influence on the world economy. Winters and Yusuf (2007) find that China’s growth spurt alone stands out as the greatest ever seen in terms of expanding the shares of world output and trade. Widely cited papers by Wilson and Purushothaman (2003) and others have pointed to the potentially rapid changes in the relative importance of countries associated with the growth of today’s major developing economies, including Brazil, Russia, India, and China. Trade linkages, both direct and indirect, are transforming * Will Martin is Research Manager for Agriculture and Rural Development in the World Bank’s Development Research Group, Elena Ianchovichina, is Lead Economist, Middle East and North Africa region at the World Bank, and Maros Ivanic, is Research Economist, Development Research Group at the World Bank. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organisations, or those of the Executive Directors of the World Bank or the governments they represent. doi: 10.1111/j.1467-8411.2010.01263.x 117 © 2010 The Authors Journal compilation © 2010 Crawford School of Economics and Government, The Australian National University and Blackwell Publishing Asia Pty Ltd.