Readers would have missed last week's column where I had intended to conclude my observations on China and its role in the changing geography of international trade. This would have been a continuation of my appraisal of whether there is a realistic expectation that South-South trade could emerge as a pillar of global development as the UNDP indicated in its recent Human Development Report (2005). I have had to do quite a bit of travel recently and I discovered that completing three consecutive weekly columns while "on the road" as it were was not logistically possible. This, despite the head start of drafting outlines of the articles well prior to my departure. This week's article is therefore what I should have published last week.
China: Performance, Pitfalls and Challenges
In my last article (Stabroek News, November 20) I had stressed both the performance and the pitfalls arising from China's new insertion into the global economy. Despite its spectacular growth and the massive size of its economy today many pitfalls lie ahead. China's per capita GDP is still only about 3 percent that of the USA. In this sense therefore, its living standard is still that of a "poor developing country". Moreover, its growth is highly dependent on foreign direct investment (FDI), which makes it ultimately dependent on the growth of demand for its exports from the already rich industrialized economies. There are other pitfalls in the area of the environment, as problems of pollution, waste disposal, and industrial disasters threaten environmental degradation on a continental scale.
The challenge before China as I see it is for the transition of its economy to a situation where its engine of growth is driven by the improvement of domestic well-being and welfare of the broad mass of the Chinese population, not foreign demand in the rich industrialized countries. In this type of circumstance I predict that China's growth would not only be sustainable but more likely to improve the lot of other poor countries as this would propel South-South trade in a positive direction. Some aspects of this earlier appraisal need further elaboration as clearly there are threats and challenges arising from China's spectacular performance.
Productivity Gains
If we examine the broad contours of China's growth a number of features stand out. One is despite the legendary difficulties of finding an adequate set of national accounts data for China covering the period before and after its take-off in 1978, economists have constructed comparable data, which show that like for most other modern economies the main source of growth in China has been productivity gains.
In a recent Viewpoint published in the Beijing Review (May 26, 2005) and circulated by the Prime Minister it was pointed out that in the first period of China's rapid growth (up to the mid 1990s) there was a high rate of capital investment - to the order of 7 percent per year. Despite this output produced by each unit of capital remained the same. As economists would put it the capital-output ratio was held fairly constant. Labour, an abundant factor in China, also did not show a spectacular contribution to economic growth. Indeed, before China's take-off in 1978 the contribution of capital and labour combined to China's economic growth was 82 percent. After the take-off, the contribution of these two productive factors fell to 58 percent. This means the remainder of this growth, which is 42 percent, had to come from improved productivity.
I have discussed in this series on at least four separate occasions and indeed worked out on one occasion for readers' benefit how this accounting for growth is done by economists. In particular I examined the actual data pertaining to Guyana. The significant insight of this type of "growth accounting" analysis is that in a modern growing economy the main source of growth is productivity gain. In other words it is how much smarter, more efficient, and more effective we are in our economic processes that mainly determine how fast and sustainable the economy grows. Capital investment and natural resources exploitation cannot sustain rapid growth in a modern economy in this age of technological growth and globalisation. The key to growth lies in all the things that have to do with productivity - knowledge, research and development (R&D), training and so forth.
The Chinese economy is excellent testimony to this process at work. Economists estimate that productivity has been growing in China at 4 percent per year. This is about four times higher than it was in China before its take-off in 1978 and well in excess of that, not only other developing countries but developed ones as well!
Causes
A question often asked is, what has been responsible for this unprecedented take-off of the Chinese economy? Apart from the intrinsic capabilities of its natural and human resources, policy measures, and in particular the economic reforms introduced after 1978 have had a great deal to do with China's economic successes. Almost as a total reversal of its earlier "socialist path of development" a series of economic reforms were introduced throughout the society in the late 1970s. These were based on capitalist market principles. Thus market incentives replaced moral incentives and state direction under a planned economy as the regulatory framework. The reforms were also put in place decisively. There were no half-hearted half-way measures. Price and profit incentives were given to rural producers and small and medium enterprises. And, state-run corporations were given autonomy to pursue profit goals, independence in price fixing, along with freedom to pursue their own investment strategies.
Labour markets in the country were reformed to permit labour to operate efficiently in the new environment. In addition banking and credit controls were removed and financial institutions encouraged to play a lead role in financing firm expansion and innovation.
On top of these far reaching measures the Authorities also pursued a vigorous policy of opening up the Chinese economy to global markets. Thus we saw earlier that China has become both a major exporter and importer.
This opening up has been concentrated in the area of trade (where it has made China's growth export-led) and foreign investment (where China has now become a key component of the global value chain of the world's major transnational corporations).
The jury is still out as to whether in light of the issues considered over the past few week in this column China will emerge as a positive factor in favour of fostering development in poor small states like those of CARICOM.