China is by far the most important economy in the configuration of the much touted 'new geography of global trade.' In this week's article I shall explore some of the issues arising from China's economic performance since its take-off. By common agreement most economists trace the beginning of China's take-off to the years 1979-1980. This is the same period they have identified for India and for both their take-off commences more than two decades after Japan's in 1957.
China's economy is by any measure huge. In terms of absolute purchasing power it is now the second largest economy in the world, after the United States of America. When measured in terms of real GDP (that is after deflating nominal GDP by the index of inflation) it is the sixth largest economy in the world. The expansion of this huge economy has been fuelled by export-led growth with the result that by the end of last year (2004), China had become the world's third largest exporter
Despite its enormous size, China does not have the industrial raw materials, energy or foodstuffs to support this rapid expansion and it has been forced to resort to imports to fill the deficit. China is no longer the self-reliant Maoist economy of a few decades ago capable of growing and satisfying the needs for its growth from internal resources. Indeed, it has become so open that China is the world's third largest importer as well.
China's renown as the fastest growing economy over a period of time is based on its averaging a rate of growth of 8.2 per cent per year over the past two decades (that is since its take-off in the period 1979-80). This growth has been more than twice as fast as that of its rapidly growing regional neighbour India, where it has been about 3.7 per cent per year. Indeed China's growth rate exceeds Japan's, which had recorded a growth rate of 7.2 per cent for the two decades after its own take-off in 1957. Until China, Japan's growth performance was the outstanding miracle of the growth performance of the global economy in the first three decades after World War II.
Growth and low incomes
For all its growth performance however, China's real per capita GDP is still low - US$1067 (2003). This is less than 3 per cent of the US, which was US$ 35,606 and Japan US$38,223 in the same year (2003). Despite its rapid growth and its highly developed and proficient high-skill, high-technology manufacturing sector, China therefore remains, from the level of income enjoyed by its population, a 'poor developing country.'
Many different factors have contributed to China's explosive growth. There is, however, general agreement that a key one has been that the expansion and growth of its productive capacity and productivity has led to a situation in which the profits generated in the process of its expansion have been invested in research and development (R&D), technical progress and high-skilled high-technology productive capacity. This has created a 'virtuous' cycle of growth and increased competitiveness for China.
China has also promoted its active integration into the world economy. This is reflected in its promotion of foreign direct investment (FDI) by TNCs as the cornerstone of its industrialisation. It is also reflected in its successful pursuit of membership in the WTO, where it now plays a leading role, as befits its status in global trade.
Possible pitfalls
Despite China's manufacturing achievements and its solid skills and technology base there are areas of its economy which require serious attention as potentially serious pitfalls lurk there. One of these is that its per capita income is far too low relative to its technological and industrial capabilities. There is therefore an urgent requirement to spread the gains of economic growth in the form of higher income levels among the broad mass of its population. As we shall indicate later, such a development would increase the scope for rising domestic demand to be a principal stimulus for its economic growth.
Another concern that is apparent is that China's economic performance is 'locked-in' to the positions of foreign TNCs and their global value chains. China's own TNCs do not as yet have the required capacity to lead the rapid rates of growth it is now experiencing. As we saw last week the foreign TNCs have elaborated a structure which is highly reliant on imported inputs to fuel further industrialisation and the growth of exports of manufactures. This dependence is now very broad-based, as almost all essential industrial raw materials, natural resources, agricultural crops and food items are imported at significant values, leading as we saw to China becoming the world's third largest importer (as well as exporter).
China and the hierarchy of global trade
The foreign TNCs gear much of their global production to satisfying final demand in the rich, already industrialised economies of the north. This situates China as a leading exporter of manufactures and importer of primary commodities. In other words China occupies a similar classic position in the hierarchy of the global division of labour as that held before by the present rich countries of the north as a result of their industrialisation.
From this perspective the Chinese economy faces three crucial constraints. First, it faces the constraint of adequate foreign exchange to finance this rapid growth of imports. With strong inflows of FDI and a buoyant export sector this is not by any means an urgent situation requiring immediate intervention. But, it does suggest that when either of these areas of buoyancy falters (FDI inflows or exports) there is a threat of China's growth rates hitting a wall and beginning to plateau out.
Second, this situation also exposes the economy to pressures from rising commodity prices. We have seen some of this in the case of rising oil prices. Overall, however, the danger to my mind is not one of a permanent secular rise in commodity prices, but periodic spikes in prices induced by shortages in supply. These will occur from time to time over the medium-term and each spike would require its own individual response.
Finally, China faces the constraint of finding a trade-off between export-led and domestic-driven economic growth. As we noted above, the latter requires that the gains from economic growth are spread among the mass of the population in the form of rising wages and incomes. Over the long run, the most consistent sustainable source of growth for a continental economy like China would be the transmission of domestic well-being and improved welfare of the Chinese population onto the Chinese economy. To this extent I would be bold enough to say that if China is to secure continued and sustainable growth and if these benefits are to be successfully transmitted to the poor countries, it would require putting economic and social reform at the centre of China's agenda for realising its future. If this does not occur, we can expect that, as I said last week, the more things change the more they remain the same; trade will not be what the UNDP hopes it to be - a pillar for development of poor countries.