China’s commitment to growth will drive the global economy

By Gordon Brown
September 12, 2013

From outside China, the Bo Xilai trial looks like the Chinese news event of the year, one of the preoccupations of Western media, along with corporate corruption and the clampdown on American and European companies. Yet these issues are no more than sideshows to the most important economic event of recent times, the unveiling and ratification of a major program for reforms for the next decade, which will occur at the Chinese government’s third plenum in November. The reforms promise to bring another great leap forward in China’s dramatic ascent.

Chinese officials will reveal how long China will need to make the transition from an investment-led, middle-income country to an innovative, consumer-driven, high-income one — and thus when it will become the world’s largest economy. Can China circumvent what we know as “the middle-income trap” that has for decades denied high-income status for Latin America and Asian countries like Malaysia and Thailand?

The challenges that China’s new leadership faces in pushing for rising levels of innovation, entrepreneurship and skills will be the main discussion points this week at the New Champions summit in Dalian, China, organized by the World Economic Forum under the leadership of executive chairman Klaus Schwab. The summit recognizes the important truth that China’s degree of success will determine global growth: it will determine whether the twenty-first century will be the Asian century, and whether by mid-century Asia — which not long ago represented just 10 percent of the world economy — will represent half or just a third.

On paper the November plenum of the 18th party committee is just the latest in a sequence of party events that celebrate China’s new leadership. Yet it is the culmination of a carefully planned process of deliberation on reforms. It started with the Central Work conference last year, the second plenum in March, the National People’s Conference in June and, most recently, this summer’s brainstorming session at the seaside Beidaihe retreat. Historically, third plenums have turned out to be much more than run-of-the mill events. At the third plenum of the 11th party committee in 1978, Deng Xiaoping launched the market reforms that set China on its industrial course to becoming the world’s second-largest economy. During the third plenum of the 14th committee in 1993, under Zhu Rongji, Chinese leadership ratified a “socialist market approach” of combining markets and state decisions, which led to an unprecedented era of industrial growth.

Now with the third plenum focusing on China’s next challenge — the shift to a high-productivity, high value-added, consumer-based economy — the aim is to double average incomes by 2020, to achieve 70 percent-plus urbanization by 2025 and to have the world’s largest supply of graduates. If it succeeds, China will quickly surpass America as the world’s largest economy. By 2025 it will probably move from middle-income status to high-income status and make around 1 billion of China’s 1.3 billion population “moderately prosperous” middle-income citizens on their way to realizing what President Xi Jinping has called the “Chinese dream.”

By “deepening reforms in all aspects” across those remnants of the command economy that survived the market push from the 1980s, economic policy — once focused exclusively on rapid growth — will now give priority to structural change, reinforcing what President Xi calls “socialism with Chinese characteristics.” According to this week’s statement by the new premier, Li Keqiang, “[China] can no longer afford to continue with the old model of consumption and high investment.” Reform, as he puts it, is “the driving force.” A self-imposed revolution will “let go of administrative powers and return to the market whatever can best be handled by the market,” bringing China closer to the European model of a “social market economy.”

It is, of course, inevitable that as China moves from a focus on export-led growth, it will have to address structural issues, such as restrictions on labor mobility and private credit. In recent years, under the first wave of modernization, China’s progress to middle-income status has been astounding and dramatic. In the first decade of the century, China became the world’s largest manufacturer. In 2009, China surpassed Germany as the world’s largest exporter. In 2010 it passed the U.S. to become the world’s largest car producer. But already, even before this next stage of modernization — diversification — is underway, China is gradually reducing its role as a processor of lower-value-added technological goods. As a share of national income, services have just overtaken manufacturing, and since 2011 consumer spending has been a bigger driver of growth than investment. In the future, China will depend less on exports to the West. In the last 10 years, merchandise exports to developing economies have already doubled, to 25 percent. And China is now sending capital around the world. Its portfolio of $110 billion in loans since 2000 rivals that of the World Bank.

For 35 years, China’s export-led growth — almost 10 percent annually – has been spectacular, lifting 500 million Chinese out of poverty. But as the World Bank “China 2030” report acknowledged (in conjunction with China’s economic ministry), productivity per worker and income per head are still far below America’s, so the second wave of modernization must break China out of that feared potential “middle-income trap.” Typically, a country’s growth slows as soon as its income is among the top 30 percent in the world. This slowdown occurs because as a country’s income rises, it is no longer able to compete on low wages, and it is unable to compete on value-added because of low productivity. Indeed, the China 2030 report forecasts the loss of 80 million of China’s 130 million manufacturing jobs to lower-wage Asia and Africa.

Despite international worries — most recently about both off-balance-sheet debt and the impact of the withdrawal of the West’s quantitative easing — China’s leadership believes it can beat the odds. Many economists, like Ruchir Sharma, author of Breakout Nations, believe that within fifteen years China will make it to a $20,000 average per capita income by combining its current manufacturing dominance with its future role at the geographic center of a global supply chain.

Of course, China no longer can rely on “one-off” advantages such as the move from an agricultural to an industrial economy, comparatively low-cost labor, and the boost from membership in the WTO. With its urban population expected to expand by 300 million, and aspirations rising among the Chinese people, China knows it will have to move quickly to exploit the “Third Industrial Revolution” from 3D printing and digital design to nanotechnology, biotechnology and genetics, hence its one million research and development workers and its plans for 100 million more graduates. The new growth agenda will need that talent, but it will also need an obsessive focus on innovation, enterprise and social reform — the topics under discussion at the World Economic Forum. The requirements are:

* Liberalization of interest rates and the prices of producer goods and utilities;

* A fairer competitive environment for private enterprises;

* The opening up of the land ownership and household registration systems;

* Local government fiscal reforms and the end of an overreliance on highly volatile land sales through the creation of a solid local tax base; (Debts owed by all levels of administrations, government financing vehicles and other public entities are estimated at twice the annual gross domestic product.)

* The gradual internationalization of the yuan, most recently with free convertibility with the Australia dollar and the UK currency swap agreement;

But perhaps the most important barriers to long-term success are the disparities in wealth, now being addressed under the premier’s desire to “promote social equity.” This is a prompting for tax reform and plans for better health and welfare benefits. A phrase unfamiliar to the West, but now increasingly the subject of official pronouncements, is “the mass line” – a campaign that encourages Communist Party leaders to prioritize the needs of the people.

But like other emerging (in China’s case, re-emerging) market economies in an increasingly interdependent world, China’s success depends not just on a new reforming government, but on a continuously expanding world economy. China’s historic decision to join the G20 was not just a recognition of the country’s new status in the world, but the start of a new era of Chinese world leadership. Chinese leaders are too shrewd to believe post-2008 stories about the decoupling of the West and the rest. But, with the West looking inwards, recent G20 meetings, including last week’s in Russia, have done little to halt the slowdown in world growth from a potential 5 percent to 3 percent. Without concerted global action, Japan is expected to grow by only 1.8 percent annually until 2025, with Europe doing little better. Even the now faster-growing America may record little more than 2 percent average growth during that time period.

The global way forward is through cooperation comparable to the creation of the liberal trading orders in the years after World War Two. The West — once the world’s biggest producer and consumer — could stimulate world growth. In the mid-2020s Asia — already the world’s biggest producer and soon to be the world’s biggest consumer — will be strong enough to drive the world economy forward. But today we are at a transition point. The majority of production is now outside of the West. But with the majority of consumption still in the West, neither the West nor the emerging markets can prosper in isolation from each other. China and America should return to the idea pioneered by the G20 of 2009: a global growth compact under which China agrees to boost growth, increasing its consumer imports in return for America and Europe boosting growth through expanding investment and infrastructure The IMF calculated that strategy would increase growth by 3 percent over 3-4 years and create up to 50 million jobs. Today inflation is low, there is surplus of savings and if, as one study suggests, the United States could increase its share of China’s imports from its current 7 percent to 10 percent, that increase alone would over time boost U.S. exports by an additional $100 billion, and support almost 500,000 new jobs, a win-win for both countries.

Instead of struggling through the fallout from yet another failed G20, heightened cooperation would raise growth, increase employment, raise living standards all round and address poverty — the rocket the post-crisis world now needs.

PHOTO: A man transports a family of passengers on his electronic tricycle cart in Beijing June 6, 2013. REUTERS/Kim Kyung-Hoon 

 

9 comments

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The (missing) element in this exposition of China’s future transition is the structural changes in international trade that are necessity to enable developing countries to move from cheap exporter to fully diverse and rich self-supporting economies.

Worldwide absolute free trade rhetoric is the greatest hindrance to this kind of successful transition. The world doesn’t need more super-competitive trade, we need stability, and so does China. A little less churn, leading to jobs moving from country to country finding the cheapest way forward, and little more local production and sales.

Each country should be allowed / encouraged to support its own industries, without needing the artificial support of hidden barriers to free trade, such as the USA’s banning of coal seam gas exports, and all the structures that Japan, in particular, has put in place.

The simplest way to do this is have an internationally agreed 15% tariff on all imports of both goods and services. The EU can then give up on its pointless and fruitless attempt to crush Chinese trading aggression through dumping enquiries and duties.

In regard to services, a “tariff” is easily organised via the kind of self-reporting GST system that applies in Australia – a 5 minute task once a month once the correct systems are put in place.

Posted by GrahamLovell | Report as abusive

China’s best hope for the future is that economists never discover the inverse relationship between population density and per capita consumption and, consequently, that the U.S. never wakes up to the reality that it is the unwitting participant on the wrong side of a parasitic trade relationship.

Like other badly overpopulated nations, China’s economy will be forever plagued by the low per capita consumption that is the product of severe over-crowding. Almost without exception, badly overpopulated nations either exist in abject poverty or they are heavily dependent on manufacturing for export to less densely populated nations – primarily the U.S. – to sustain even a modest standard of living. Such nations come to the trade table with badly bloated labor forces and markets emaciated by over-crowding.

The result is a massive global trade imbalance that nearly collapsed the global economy five years ago. Only a coordinated program of massive deficit spending by central governments and an unprecedented campaign of money-printing by central banks has been able to sustain the illusion of a recovering economy.

As the world’s population continues to grow at a rate of 70 million people per year, its biggest challenge will be rising unemployment and poverty as per capita consumption inevitably declines.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive

Excellent article. It amazes me that so many of the western leaders and economists still don’t believe that China can and will do things that we can’t due to our form of government and markets. 20th century thinking will not prevail and the Chinese know that. They are well suited to become the new 21st century leaders of the world.

Posted by tmc | Report as abusive

Forever the optimist. Are we all to suppose that the trillions invested in Chinese real estate that now sits idle will have no effect on China’s near-term economic prospects? And, Chinese debt – Wow! Are we also to believe that these profligate investments around the globe – unique in human history – can continue forever?

It must be great to be a wild-eyed optimist who envisions utopia.

Posted by ptiffany | Report as abusive

What a fascinating topic. Great comments too. One can almost feel the hand off of the American Dream to the Chinese Dream as our inequality gap grows wider.

What vision Chinese leaders have! A financially healthy middle class will perpetuate more consumption within.

Our leaders say we can’t do that because We’re Broke.

Posted by SaveRMiddle | Report as abusive

@Pete_Murphy, Your own theory on the global economy states that the way the Americans are going about it is self destructive and will eventually destroy our economy (as it has been doing). I agree with you completely that the United States of Corporate America is handling global economics completely wrong for the American middle class. If it had one single spokes person, I’m sure it would agree too. It would also say that that’s not it’s job, not its “Mission Statement”. A considerable amount of the rest of the world also knows that and are not doing the same thing. Just because China has played the game, does not mean that it is now hooked on it and will try to continue it. Your book and posted arguments are about the need for a different view of economics, one that takes into account population much more than the current theories do. Can you not consider that the Chinese, who have the largest population and have felt the affects more than anyone, have already thought of that and are following their own economic theory? Most westerners actually can’t. The USCA and much of the EU are hell bent on growth and short term profits. They absolutely and flat out refuse to plan past the next year, or at best five years. And none of that planning is for the people, only for the corporation. The Chinese have show through their one child policy that they indeed have though of the future of their people. And not just the current generation of them, but also for their children and grandchildren’s futures. And they are willing to make huge personnel sacrifices to ensure that future. So perhaps we should be less presumptuous about how they should handle their future. For the last fifty years they have shown one hell of a track record. One comparable to even to the once mighty United States at the height of its glory. I think if we just wait and see, we’ll find that they have a very good handle on how their society will go forward. It will become the largest economy, of this there is little doubt. But I think it will also show that, as you sometimes eluded to, the American way has lost it’s way, and that there are better ways to manage a society in the 21st century.

Posted by tmc | Report as abusive

Unfortunately, China makes millions of inferior quality products that end up in the land fields worldwide after just a few weeks or months of use.
Yes, we all need growth and stability, but first and foremost, we need sustainability. Otherwise, 50 years from now our children and grandchildren will be walking outside in the gas masks…

Posted by UauS | Report as abusive

Given Gordon Browns position while the economy was driven over a cliff (UK Chancellor of the Exchequer, then Prime Minister) his analysis is probably not one to put too much stock on.
There is no good reason why the “west” couldn’t have been in a good position to compete better… if it was for politicians like Gordon Brown.

Posted by Tiu | Report as abusive

@Pete_Murphy

Thank you for the reminder that it is not simply sociologists and ecologists who understand the concept of negative density dependence. It is astonishing the sheer lack of understanding so many have of this most basic precept; it is a simple rule that once species exceed a certain limit their sustainability, resource efficiency, and productivity drop precipitously.

In this, the PRC is but the most egregious example of a nation-state whose government fails to recognize this “law”. That the PRC has not seen any major improvement in personnel or resource efficiency in decades (as can be most notably seen by the utter lack of improvement in matters such as per capita innovation rates and the like) hardly surprises in this. Even with the increased resource draw meant to offset these inefficiencies, it is telling that (even if the world manages to support it) the PRC is expected to level off at a per capita income around 44% that of nations like the US by 2050.

As noted, however, it is unlikely the world will be unable to sustain such a draw. In this, it is not only the PRC, but the majority of nation-states which are utterly unsustainable. Even the US, with its vast natural resources, would have to decrease its population to 200 million maximum to achieve long-term sustainability; this isn’t even getting into ideal population, which would put it around 30-50 million. Expanded globally, this would put the world population at around five-hundred million to one billion individuals.

What makes this all the more infuriating is that, if we acted soon, we could actually achieve such a drop in global populations humanely; by creating global resource pools to support aging populations while implementing restricted growth plans, we could achieve such a drop before the end of the century (theoretically). But no, it is virtually inconceivable that the nation-states of the world will ever cooperate as such or be willing to undertake the short term drops in GDP and the like to achieve long-term sustainability and unimaginable prosperity. For proof of this, we need only return to the PRC, and look upon the graves of those cut down by pollution, whose number grows by more than a million each year.

Posted by Oro_Invictus | Report as abusive