- Thursday, 27 October 2016 18:32
by Dr. Ashfaque H. Khan
The author is Principal and Dean of NUST School of Social Sciences and Humanities, Islamabad
Until 1978, China barely existed in the global economy. Its growth experience remained modest and unnoticed by the global economic powers. After 1978, China cautiously opened its economy, grew at an unprecedented pace and transformed itself from a poor and inward looking economy into a modern, industrial and one of the stronger economies of the world.
Such a rapid economic transformation in a country as large as China has never occurred in human history. China’s economic performance over the last three and a half decades (1980-2015) has simply been remarkable. During this period, China has achieved two historic transformations. Firstly, it has succeeded in transforming a rural-agrarian economy into a modern-industrial economy. Secondly, it transformed a command economy into a market-based economy.
China’s growth experience over the last thirty-five years has been sustained, broad-based and impressive. Its real GDP grew at an average rate of 9.8 percent in the 1980s, 9.9 percent in the 1990s, and 10.3 percent in the decade of 2000s, but slowed somewhat to 8.0 percent during 2010-15. The initial conditions of Chinese economy in 1978 made economic growth an urgent priority. Early success in reform quickly transformed this priority into a national objective. A mix of fiscal, administrative and employment policies were employed to maintain social stability during the period of rapid economic growth and structural changes. Maintaining social stability in the backdrop of additional 9 million new entrants in the job market each year, as well as workers affected by policy shifts was not a mean achievement. Rapid economic growth and structural changes in the midst of occasional bouts of serious inflation, such as in the late 1980s and early 1990s, were serious macroeconomic challenges on which, China remained successful in maintaining macroeconomic stability on the one hand and continued to achieve double-digit or near double-digit economic growth effectively through the prudent use of monetary and fiscal policy. Such a high and sustained economic growth enabled China to take 728 million people out of poverty compared with 152 million by the rest of the world during the same time.
In just one generation, China has achieved what other countries took centuries to accomplish. For example, it took 155 years for Britain in the 18th Century to double its per capita income; it took US and Germany about 60 years in the 19th Century to double their per capita income; Japan took 33 years in the early 20th Century and China took just 12 years in the later 20th Century to double their per capita income. In a country with population exceeding the combined population of Africa and Latin America, China’s achievement is the most impressive development of our times. Perhaps no other country in the world would come near to the achievements of China in the coming decades or centuries. China’s challenge over the next one and a half decade is nothing but daunting, that is, enabling 1.34 billion people to move from the middle-income into the high-income bracket against the back drop of recurring global economic and financial crisis.
Where does China stand today? With the size of the Chinese GDP on PPP basis of $19.5 trillion and per capita income of over $14,300 in 2015, it is the largest economy in the world surpassing the United States in 2014 for the first time in modern history. The restructuring of the economy and resulting efficiency gains contributed to a more than ten-fold increase in GDP since 1978.
China overtook Japan in terms of size of the economy in 2010. It is the world’s largest exporter and second largest importer as well as the largest manufacturer and user of automobiles, surpassing the US in 2011. China commands the world attention, as its weight in the global economy increased significantly over the years. When its industrial production, house building and electricity consumption slows, the news weighs on global stock markets and commodity prices. When its Central Bank eases monetary policy, it creates almost as big a stir as a decision by the Federal Reserves of the US. When China’s President/ Prime Minister stresses the need to maintain higher economic growth, his words carry more weight in the market than similar homage to growth from European leaders. No previous industrial revolution and economic news originating from China have been so widely watched by global markets today.
With over $4 trillion foreign exchange reserves, China has emerged as the single largest lender of the last resort for the United States. It has invested $1.5 trillion in the US treasury bonds and as such has become the single largest source of financing US budget deficit. Accordingly, China owns 22 percent of the entire outstanding stock of the US public debt. China has integrated itself with the rest of the World in a meaningful way. It is the largest trading partner of more than 142 countries, including India, Brazil, Japan, South Korea and Africa. In 2015, China’s currency has been accepted as part of the IMF’s Special Drawing Rights (SDRs) basket. Never before in history has China experienced such an enviable ascendancy.
How Did China Grew So Fast?
How has China achieved such economic ascendancy or how has its economy grown so fast for so long a period? Firstly, consistency and continuity of policies over the past three and a half decades have been the hallmark of Chinese development strategy. The reforms that China launched for its growth strategy were inspired by Deng Xiaoping, who played an important role in building consensus for a fundamental shift in the country’s strategy. From 1980-2015, China continued to follow the same strategy and policies with minor adjustments.
Secondly, China continued to open its economy through market-oriented reforms in a gradual and experimental way. It was indeed a pragmatic approach to reforms, as China believed in “transition without tears”. This was no accident as it was based on the government’s recognition that big-bang reforms could be self-defeating. It pursued a ‘dual track’ policy in which it continued to support state-owned firms in old priority sectors but continued to liberalise and encourage private sector enterprise in other areas. It was the China’s state policy to develop thecoastal provinces economy first and rural areas later and by 2014, 279 million migrant workers and their dependents were relocated in urban areas to find jobs.
Thirdly, China strengthened its local government at various levels by allowing them to compete in attracting investment, developing infrastructure and improving local business environment. Officials were rewarded for achieving development goals. Such competition among local governments turned out to be a strong growth driver.
Fourthly, China continued to dismantle regional barriers to the movement of goods and services with a view to establishing a single national market. Major infrastructure investments were undertaken to connect different regions. A large integrated national market allowed firms to achieve economies of scale and improve their profitability.
Fifthly, China invested heavily in human capital, particularly in education, health, technical and vocational training. From 1978 to 2015, more than 4.04 million Chinese students were sent abroad for higher education, of which, nearly 2.8 million completed their education and 2.22 million (80%) have returned to China to contribute to its development. These students have largely obtained higher degree in the field of management, sciences and economics.
Sixthly, China saved over 40 percent of its GDP during the last 35 years and invested almost the same amount, which continued to propel growth throughout the period.
After 35 years of rapid economic growth, China has reached another turning point in its development path. There is a realisation in China that many countries achieved middle-income status in the post-war era but fewer attained the status of high-income country. China does not want to remain stuck in the so called ‘middle-income trap’ but wants to achieve the status of high income country by 2030.
It is against this backdrop that China has launched its Vision 2030 with development goals of becoming a modern, harmonious and creative high-income country. The development strategy that China pursued over the past three and a half decades was directed at meeting the challenges of a different era. Not only is it true that China faces a different challenge, but its capacity to address them has changed as well. No strategy can last forever. Successful strategies must be flexible and adjust in accordance with changing conditions.
In order to achieve the development goals of Vision 2030, China began to adjust its growth strategies after 2010, that is, during its 12th Five Year Plan period (2010-15). Ever since the global economic meltdown of 2007-2008, the global economy witnessed its most tumultuous times since the Great Depression. The developed economies are still beset with slower growth, higher unemployment and large excess capacities in housing and manufacturing sectors. European economies have not yet fully recovered from debt crisis of 2010. All these have repressed domestic demand, dampened growth and slowed the demand for Chinese exports.
Realising the changing global dynamics, the Chinese policy-makers began transitioning from investment and export-led growth model to consumption-led model of growth. It was believed that China’s investment and export-led growth model resulted into over-investment, cycles of excessive credit expansion and a large trade surplus. Facing frequent bouts of inflation, asset price bubbles and a vanishing demographic dividend, Chinese policy-makers firmly recognised the need to engineer a transition to slower and more sustainable growth going forward. At the center of this endeavor is the household consumption led growth.
From 1992 to 2010, consumption as proportion of GDP declined from 45.3 percent to 33.8 percent in China. Household consumption as percent of GDP was 60 percent in Japan, 59 percent in Germany and 71 percent in US in 2010, as opposed to only 34 percent in China. China also realised that it can no longer rely exclusively on the demand of western world, particularly after the 2008 global economic meltdown for its exports. Hence, transition towards consumption-led growth was a deliberate attempt to secure a relatively slower and yet sustainable growth during the vision 2030 period. Accordingly, the world witnessed a slowing Chinese economy; its growth slowed to an average of 8.0 percent during the 12th Five Year Plan period (2010-2015). China’s 13th
Five Year Plan (2016-2020) envisaged an average growth of 6.5 percent.
The critiques of Chinese growth strategy began to paint a doomsday scenario suggesting that the ‘middle-income trap’ for China is here to stay. Painting of such a doomsday scenario is not new for China. After 1978, China registered an annual average growth of almost 10 percent in the 1980s. Critics continued to paint dismal scenario, but China responded with another annual average growth of 10 percent in the 1990s. Painting gloomy scenario for Chinese economy continued to dominate the Western press, particularly after the global economic meltdown of 2008. China, once again, responded with over 10 percent average annual growth in the decade of 2000s.
The post-2010 Chinese growth strategy envisages doubling the size of the GDP and per capita income to become a “moderately prosperous” society in ten years, that is, during 2010-2020 period. China is moving exactly according to its strategy despite the negative press from the Western World. Chinese economy grew at an average rate of 8.0 percent per annum during 2010-15, that is, during the 12th Five Year Plan period. In order to double the size of the GDP and per capita income by 2020, the arithmetic suggests that Chinese economy should grow at an average rate of 6.5 percent during 2016-2020, that is, during the 13th Five Year Plan period. With this rate of growth, China will be adding the size of the Indonesian GDP in its GDP each year. Therefore, setting a growth target in the range of 6.5 to 7.0 percent during 2016 is in line with Chinese strategy to double the size of the GDP and per capita income. Given its past record, there should not be any doubt about the will of the Chinese leadership to deliver on the target.
China’s new development strategy under Vision 2030 has six pillars that include: i) implementing structural reforms to strengthen the foundation of a market economy; ii) accelerating the pace of innovation and creating an open innovation system; iii) improving income equality; iv) strengthening fiscal reform; v) seeking mutually beneficial relations with the world; vi) and investing in environment.
China has been growing at an average rate of almost 10 percent per annum during the last 35 years. Even if it grows a third as slowly in the next 15 years (6.5 percent per annum), China is most likely to avoid the ‘middle-income trap’ and can attain the status of high-income countries within a generation and a half – a remarkable achievement for any country, specially the one of the size of China. Managing the transition from middle to high-income society will be a challenging task, particularly in an uncertain and volatile global environment. The post-2008 global financial crisis period was highly risky as the global economy was entering a new and dangerous phase. Chinese economy withered the storm and maintained an average growth of over 8 percent during 2010-15. With relatively slower growth of 6.5 percent during the remaining 15 years, China is most likely to avoid ‘middle-income trap’ and achieve the status of high-income society by 2030. With this, China will achieve the objective of becoming a modern, harmonious, creative, and high-income society at the end of 2030.
Undoubtedly, the 21st century is an ‘Asian Century’ in general, and Chinese Century in particular. By 2050, according to the World Bank estimates, the size of the Chinese GDP would be more than $40 trillion, but in reality it is expected to be $75 trillion on PPP basis – more than two and a half times of US GDP and five times of Japan’s GDP. Studying the rise of China is a must for those who have interest in Chinese economy, society, politics, culture and diplomacy. Pakistan has maintained an all-weather strategic relation with China since its inception. With such a close and strategic relations, Pakistan is likely to benefit immensely with the rise of China.
Lessons for Pakistan
The economic rise of China within one generation is unprecedented in modern history. The factors that contributed to the emergence of China as an economic power in such a short period of time included: i) consistency and continuity of policies, ii) continued pursuance of economic reform agenda, iii) heavy investment in infrastructure, iv) heavy investment in human capital, v) maintaining high saving and investment rates, vi) appointing right man for right jobs; vii) zero tolerance on corruption, and viii) strengthening local governments.
Is Pakistan ready to emulate China? Maybe yes. Pakistan needs to reform its economy. Every sector of the economy requires reform. Structural reform is key to economic growth and development. Pakistan needs to introduce reforms in agriculture, industry, taxation, expenditure, energy, banking and finance, civil service, judiciary etc. Reform is a continuous process, that is, the only constant is change. For a sustained and a high economic growth, Pakistan will have to change its spending priorities. Heavy investment in infrastructure (energy, ports, shipping, communication, etc.) and human capital are key to sustain higher economic growth.
Saving and investment are key determinants of economic growth. Pakistan’s performance in both saving and investment is much to be desired. Both saving and investment rates in Pakistan are low, and hence its reliance on foreign savings is rising to maintain higher level of investment, leading to the accumulation of debt. Pakistan will have to increase its saving rate by eliminating the government’s dissaving initially. To do so, Pakistan needs to pursue a prudent fiscal policy in which resource mobilisation should take the centre stage.
To emulate China, Pakistan will have to get rid of the “Apna Admi Culture”. Right man for right job should be the number one priority of the leadership. Corruption is poisonous to economic growth. One of the key elements of Chinese success was the crackdown on corruption. Is Pakistan ready to fight corruption to achieve higher economic growth? And finally - honest, competent and well-paid civil servants are the backbone of any country’s development. The quality of Pakistan’s civil servants is on the decline for a variety of reasons including the declining quality of its university education. Pakistan needs urgent reforms in its civil service.
The rise of China owes a great deal to its leadership. Chinese were fortunate to have their leaders who were intelligent, visionary, fiercely independent and brutally honest. Beside the above-listed reform agenda, Pakistan needs a leadership who is brutally honest, fiercely independent, visionary and intelligent. If we find leadership of such quality to lead the nation, then given the above-listed reform agenda, Pakistan too can witness its economic rise like China.