Updated: Aug 30
China sustained an annual growth rate of gross domestic product (GDP) nearly 10 per cent for more than three decades, spurred by the reforms that paved it’s a way for huge growth potential and created conditions to catch up with other high-income economies of the world. The radical drivers of china’s growth- a growing labour force with much cheaper rates as compared to the rest of the world, expansion of manufacturing, urbanization, expanding exports, accumulation of capital, opening to foreign investments. From following, policies of other major economies china have now stepped into the shoes of influencing world’s major high-income economies to follow it’s lead. China’s economic rise is indeed the most intriguing economic phenomenon. Before transitioning into a planned market economy in late 1970s china had been suffering from poverty it’s per capita income being US$154 IN 1978 which was less than one- a third of the average in sub-Saharan African countries. China has since then changed it’s an inward-looking approach to outward-looking overtaking Japan as the world’s second-largest economy and Germany as the world’s largest exporter of merchandise. Productivity is the focal point of china’s growth and it’s ability to become a high-income economy. In future, higher productivity can be achieved through some comprehensive programs to address the three D’s – first removing distortions improve and enhance market competition and allocation of resources of the economy. Second, the acceleration of the diffusion of advanced technology and management practices in China. Lastly, fostering discovery and nurturing china’s innovative capacity.
China’s Rapid Growth And Evolving Economy
Prior to the economic reforms and trade liberalization, china followed policies that kept it’s economy very poor, centrally controlled, vastly inefficient and relatively isolated to other economies of the world. After opening up foreign trade and investments and implementing free-market reforms in 1979, China has become one of the fastest-growing economies. This tremendous growth has enabled china on average to double it’s a gross domestic product every eight years and raised an estimated 800 million people out of poverty. China has not only become the world’s second-largest economy but has also become the world’s largest merchandise manufacturer, holder of foreign exchange reserves, and the world’s largest economy on purchasing power parity basis. This has resulted in China becoming a merchandising trade partner, the biggest source of imports and it’s a third-largest export market commercial partner of the United States. China is the U.S’s largest. China is also the largest foreign holder of U.S treasury securities which keeps U.S interest rates low and also help fund the federal debt. China still has room for growth and compete with other high-income economies. It's per capita GDP stands at approximately US$10,000, which is about a fourth of OECD (Organization for Economic Co-operation and Development) countries. China is still growing transforming and emerging rapidly.
Economic reforms were often in a gradual fashion, experimental, pragmatic and taking advantage of local pilots before expanding to new policies. Adoption of gradual and progressive approach that was based on evidence from local experiments which is often referred to as “touching stones to cross the river”.
China’s remarkable development since the 1970s has had a significant impact on it’s economic and demographic structure. The shift from a predominantly agricultural and rural economy to an urban-based industrialized one has a key significance. There has been a noteworthy change in the demographic composition as well as the more urban population had been getting employed in services and industry sector. The centre of gravity in the Chinese economy has rapidly shifted from more agriculture-oriented to now more industrialized one. In 1960s agriculture contributed approximately 40 per cent of the GDP followed by 10 per cent in 2011, during this time industry contributed to almost half of the GDP and service sector had doubled its share in GDP from 20 per cent in 1980s to 40 per cent in 2011. However, the service sector in China remains relatively smaller than in other emerging economies like Brazil, India, South Africa where services contribute 67,55 and 67 per cent respectively to the GDP. In fact, the size to china’s service sector contribution to its GDP is similar to that of much poorer economies like Cambodia, Vietnam and Ethiopia.
Structural changes can also be seen in manufacturing and service sectors with manufacturing sector experiencing a rapid shift in four phases. First, from 1978- 1985 China was still a resource-based economy producing and exporting resource-based goods such as coal, gasoline and oil. Followed by fast growth of labour-intensive export from 1986- 1995. Furthermore, the third phase from1996-2000 in which export from china included electrical machinery and transport equipment. Lastly, during the last decade, China has recorded fast export growth in high technology products IT products, electronic and life science equipment. Structural changes can be observed in the employment pattern and services sector as well. Change in the service sector from informal service activities, state-owned trading marketing and educational/health services to a dynamic more privately owned and formal sector. As for the case in employment in 1980 agriculture was a major employer with 70 per cent of the country’s workforce engaged in agricultural activities. It’s the ratio the workforce employed in the service and industrial sector was much smaller but by 2010 and since then there has a significant rise in employment in the service and industrial sector.
A RAPIDLY CHANGING AND MORE UNCERTAIN GLOBAL ENVIRONMENT
As china’s economy transforms in the dynamic world, it faces new global challenges and opportunities shaped by two megatrends- technological advancement and protectionist sentiments. Technological disruptions of industries and workplace are increasing and becoming predictable and more persistent. The adoption of digital technologies in manufacturing known as industry 4.0 or the fourth industrial revolution is expected to remould manufacturing. Big data analytics, cloud computing and internet of things have expanded the digital service economy and has modernized business services and operations. Digital platforms such as rapidly growing e-commerce can reduce the cost of entering new markets thus promoting entrepreneurship and competition. China has already made its name and has become a global leader in industries enabled by digital technologies such as fintech and e-commerce as well and in artificial intelligence. Online retail sales have grown rapidly more than 70 times from 2008 to 2018. From only one per cent online retail sales in 2008 to the share reaching twenty-four per cent in 2018 making it the highest in the world. China also faces a more challenging global environment with slow down due to protectionism.
The Productivity Challenge
With the recent slowdown in economic growth, China needs to increase its productivity to boost its economy. China’s economy has long relied on expanding labour force and high investment level for its economic growth. But these drivers of the economy are running out of steam. Productivity growth in china has remained low since the global financial crisis and has since then remained relatively low. An estimate of china’s total factor productivity was approximately 3.51 per cent in the ten years before the global financial crisis to 1.55 per cent in the decade post-crisis. Total factor productivity is used not only to measure economic efficiency but also innovations.
SIX STRATEGIC CHOICES
China’s policymakers had to make a strategic choice among the various alternative policies available. This paper identifies six strategic priorities identified by china.
1. Striking the right balance between the three drivers of growth
China’s recent policies have put emphasis on the third D, fostering development and new technologies. Investments in new technologies can have a big impact in helping the country on the global technological frontier. New technology fields being less crowded than the established ones it can provide new technologies to take a leading front. China remains on average, quite distant from the global technology frontier thus having substantial room for further potential growth. To take advantage of the further potential growth china has to pay attention to the first and second D’s – reducing distortion in the allocation of productive resources and promoting the diffusion and adoption of existing technologies, production process and management practice. The first and the second Ds are likely to help in potential growth in the immediate future for some time.
2. Reshaping Industrial Policies
China, since it’s early years of reforms, has used industrial policies to accelerate it’s the development and catching up with the high-income economies. China now being at a more advanced stage of development needs to start considering a new approach to industrial policies. To be effective, industrial policies need to focus on market failures and to be market conforming and enhancing.
3. Adjusting the balance between state and market
A strategic choice for a state is to be less market interventionist and more market supportive. However, in china state-owned enterprises (SOEs) are at the core. Fair competition between SOEs and non-SOEs is important to expose firms to competitive pressure and thereby encouraging firms to adopt more select more productive enterprises regardless of their ownership structure.
4. Attaining mutually beneficial international trade and investment relations with global partners
Global trade tensions have bought uncertainty and risks to the global economy. China being the world’s second-largest economy and the world’s largest trader can play a major role in working with global partners to achieve a mutually beneficial global economic relations. China opposes to protectionism and advocates open and inclusive economic system, international partnership and global collaborations.
5. Balancing supply-side reforms with demand-side reforms
China needs to rely more on consumption growth and less on investments while maintaining overall aggregate demand. Retrospectively, domestic household consumption in china played a relatively small role in driving china’s growth, reflecting it’s a high saving rate. But with growing consumption rate government can accelerate growth by encouraging lower household savings through reforms and policies.
6. Preparing for the future impact of technological changes
The Policymakers need to start preparing china’s workforce for technological workplace. New innovations and technologies may result in new employment opportunities but it might also replace the previous job requirements. Also, the workforce would have to be more skilled and technically skilled. Share of labour has declined over the past decade due to technological innovations therefore China needs to prepare for the future due to this change.
Building Up Human Capital
Being one of the biggest economies and the most populous nation in the world china faces unique challenges in developing its tremendous human resources. China has moved forward steadily toward establishing a nationwide policy of developing human capital and adopting practical measures of implementation since it’s the policy of “ reform and open-door” first being initiated in the late 1970s.
POLICIES TO FOSTER AND PROMOTE ECONOMIC GROWTH
Low returns on human capital reduce incentives to individuals. Educational and labour market policy has caused investments to be vested towards physical capital investments more than human capital. High rates of social returns to investment can be acquired by taking funds as well as from abroad and funds raised by enterprises in china and invest in human capital from the new capital markets being proposed. Subsidizing can be crucial in encouraging education and job training though it may not be feasible as it would increase the government’s expenditure. But as compared to other countries china’s expenditure on it’s gross national product is far less than as compared to other developing countries. Another way to foster human capital growth is to cut the less direct cost to government which would free up labour markets for human capital. Free labour market would act as the same incentive to operate as increasingly govern capital markets and product markets in china thereby promoting skill formation. If a person gets a 30-40 per cent return on human capital investment they would willingly bear the expenses of schooling and education.
Another policy could be equalization of regional rates of return to human and physical capital. It has been observed that Chinese policy has favoured certain regions over the other. It has also been observed for some time now that local government has been playing a dominant role in education financing. Richer regions enjoy relatively more funds than the poorer regions. Elimination of regional disparity would allow economic development.
Recent studies in the united stated, Europe and other countries around the world have emphasized the value of competition in among school in improving the performance of educational institutions. A more efficient infrastructure to promote the formation of human capital by the privatization of institutions and organizations such as business schools and technological institutions.
Another potential policy can be to promote ties between industries and universities. A partnership like these have been seen but there is still room for more.
Allocating Resources Judiciously
CHINA’S FINANCIAL SECTOR DEVELOPMENT
China has made various policies to support investment-led growth. The financial sector has expanded significantly giving the country some of the world’s largest bank, bond and stock markets. Due to this rapid increase questions have been raised upon china whether the financial sector has gotten “too big” which might cause an imbalance between the financial sector and the real sector.
China’s financial system remains largely in the banking industry. During the global financial crisis, china’s five largest commercial banks accounted for most of the assets. But their share had declined to 36.8 per cent at the end of 2017. It is also to be noted that the rate of asset growth of smaller banks was twice than that of five big banks during 2019-2016. Along with the significant accumulation of debt in the economy rapid expansion of the financial system has been observed raising concerns regarding financial vulnerabilities.
FINANCING SMALL AND MEDIUM ENTERPRISES AND ENTREPRENEURS
In China small and medium enterprises contribute more than 90 per cent of the firms, employ more than 80 per cent of the total urban workforce and contribute to more than 60 per cent of the GDP but access to credit is to fewer than 30 per cent. In recent years authorities have encouraged commercial banks and financial service providers to lend to small and medium enterprises (SMEs). They will facilitate differentiated and monetary and credit policies, government guarantee foods and tax incentives.
FACILITATING FREE FLOW OF LABOUR
With the expected decline in the working population, china will have to utilize it’s underutilized labour in agriculture, increase in the female labour force and fully use the working adult labour force. A key improvising aspect for judicious utilization of labour would be to promote labour mobility allowing labour to be accessible and available at places where it can be most productive.
Law Reforms Improvising China’s Economy
Over decades a large number of scholars and researchers have devoted themselves to exploring determinants of economic growth and development strategies. Numerous variables including policy choice, technological development, capital accumulation and legal system have been studied both on the empirical level and theoretical level. In addition to and as compared with informal institutions which can operate efficiently only under certain conditions such as sufficient information, small scale groups and repeated interactions, legal institutions administered by the state have exerted a greater influence on the economic performance of the country.
In 1960s significance of law and economy had been studied extensively in the disciplines of law and economics. The connection between law and economics have been observed to a large extend confirmed by various empirical and theoretical studies. China still shows symptoms of the financially repressed economy such as managed credit, controlled exchange rate and regulated interest rates. While most of the countries also had controlled interest rates and credit allocations at one point they ultimately removed such restrictions in a view to halting undesirable outcomes such as financial repression.
Labour costs are also distorted by legal and institutional agencies such as notorious hukou system. As compared with urban residents who have secure jobs, receive high salaries and are entitled to various social benefits, the migrants suffer significant discrimination and exploitation in the labor market. There are some other institutional weaknesses also contributing to discrimination in income to the migrants for example, “ Chinese labour legislation stipulates workers individual rights regarding contract wages, working conditions and so on, it fails to provide them with collective right namely right to organize, right to strike and right to bargain collectively in a meaningful sense.” The abuse of workers right is very much prevalent in form of breach of contract, excessive overtime, horrible working conditions, industrial injuries and abusive management being among few.
Most of the policy measures implemented have not been directed towards law and regulations that have caused serious distortions in factor markets. Loopholes in Chinese policies cannot be corrected without a systematic legal reform.
Alleged Coronavirus Conspiracy
There are a whopping amount of theories circulating regarding china’s culpability in the coronavirus (COVID-19) pandemic. The united states have very explicitly accused china of being responsible not only for letting it spread globally but as well as generating it in a laboratory.
On April 30, the office of director national intelligence of the United States released a statement saying, “it was investigating whether the outbreak began through contact with an infected animal or if it as a result of an accident at a laboratory in Wuhan.”
The statement also concurred “that with the wide scientific consensus the COVID-19 virus was not man-made or genetically modified.” Cut to short the intelligence seem to have emphasized that even though the virus did originate from china there was no direct evidence that it had escaped Wuhan’s research facilities.
In late November word had already gotten off of the mainland that there was a virus in Wuhan. On December 15th the U.S trade bill was signed phase I. Six weeks later, the trade truce was signed with an out clause, that said, if there was any kind of act of God pandemic, then they didn’t have to make good on what they had committed to by from the united states. Within days they announced the first coronavirus. Hence it seems to have already known by the Chinese government that virus was running around for six weeks before they shut down Wuhan. Which is ostensibly criminal and should be prosecuted when proved in future. There seems to be a practical impossibility on the fact that in a city like Wuhan with the city which is of a similar size of New York 11 million people that there were so few cases.
Moreover, major media outlet like Fox news or national public radio (NPR) of the United States; on both the sides of the aisle came out and reassured to the United States that it was just the flu. Within 24 hours of the first case being reported in South Korea, the United States’ first case was reported on which it took no action. While South Korea was testing everybody and shutting down the entire country the United States did nothing and assured it’s citizens that it was just the flu. The intelligence agencies of the United States should have known what was going on in Wuhan .hence it is not just China but a lot of other agencies which should be held accountable for what has been going on in this pandemic.
From the past three decades, China has been one of the fastest-growing economies in the world. It had expanded 10 per cent per year in real terms thereby surpassing Japan as the world’s second-largest economy becoming an economic superpower globally However there have been concerns over china’s growth sustainability otherwise if not taken care of there might be an economic crisis in the future. China’s leaders and policymakers have though recognized a need for transitioning from investment-driven growth pattern to a growth pattern which relies rather on expanding domestic consumption.
The Chinese government has even adopted policies to respond to global climate change. There is no perplexity in the fact that Chinese policymakers have taken into notice all the major areas that need reforms and policies. However, it hard to predict whether such a systematic reform will be adopted before the opportunity window closes.
Navin Kumar Jaggi