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The Chinese model is not sustainable in the long run "“ and the global community must do all it can to help China rise again
There is no question that China's growth has been anything short of exceptional. However, that success may have run its course. China will have to rise again in order to rebalance growth while reducing inequality and environmental degradation. The plight of 1.6 billion people depends on it, and the entire world economy. The global community should do all it can to help China succeed.
Like Japan, South Korea, and others before, China has deployed a hybrid mix of state and market-led forces to globalise its economy over the past 30 years. Like its East Asian predecessors the Chinese miracle has been built on exports to the west. The results have been unprecedented, with a growth rate of approximately 10% that has lifted 566 billion people over the $1.08 "extreme poverty" threshold set by the World Bank.
Yet the Chinese model is not sustainable in the long run. It has created severe inequalities and environmental degradation and has contributed to the global imbalances that were at the root of the financial crisis. There is an across the board consensus that China needs to diversify demand toward its domestic market.
Yilmaz Akyuz, chief economist of the South Centre, estimates that close to 60% of China's imports are used in the export sector and only 15% of imports are for domestic consumption. China's share of both private consumption and wages to GDP has been falling since the 1990s. Indeed, exports may have contributed to 50% of China's pre-crisis growth.
Akyuz rightly argues that China will need to generate a higher share of wages through value-added production that lowers the foreign content of exports. Through technology upgrading, through the substitution of high technology parts and components via domestic production, through factory wage increases, through government transfers to rural households, and through other social infrastructure projects, China will adequately boost domestic demand.
China has the track record to make this happen, but it will take a lot of effort. The country has built up the most successful export machine since the industrial revolution. And China's 12.5% of GDP stimulus package was a great start in the new direction. There is no reason to believe that China's developmental state cannot be steered toward domestic markets too. Though, it is much easier to become a low-skilled manufacturing hub than a value-added high-tech hub.
Some signs are encouraging. Of course, China recently put its exchange rate back on a gradual course of appreciation. In response to mass strikes across the country, during the past month many of China's manufacturing centres have raised the minimum wage, some by up to 48%. Also this month China initiated a green car subsidy programme whereby auto companies get a subsidy for producing cleaner cars for the domestic market "“ a programme that not only will help domestic demand and help China move up the value chain but will help mitigate its environmental ills that cost the Chinese economy 8-10% per year of GDP and accentuate global climate change.
China's success at developmentalism and its ability to finance change by tapping over-investing state-owned enterprises and from loans backed by China's mammoth reserves make it a good bet that China can succeed again.
That is, if it is given a chance.
The US and others continue to complain that China isn't appreciating their currency or ripping open its capital markets fast enough. Foreign investors are warning that China's wage hikes may cause an investment exodus although such an overblown frenzy could disrupt markets and China's ability to stay the course. Foreign firms also decry China's "indigenous innovation" programme that will help China eventually move away from low-wage export labour and toward value added domestic consumption and consumption for balanced growth. Finally, developed countries insist on making China pay for more expensive green technologies without offering a financing mechanism.
The west can't have its cake and eat it too. The west can't tell China to increase domestic demand and rebalance its economy through domestic consumption (without increasing carbon dioxide emissions), and at the same time shun China's incremental approach to to monetary policy, strikes and wage increases, policies for financial stability, and green industrial innovation. China should be enabled to succeed. A country of 1.6 billion people that is now one of the only rudders working in the global economy is too big to fail.
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2 Aug 2010, 8:07AM
Who exactly will we be supporting?
2 Aug 2010, 8:11AM
Foreign investors are warning that China's wage hikes may cause an investment exodus
To where?
2 Aug 2010, 8:12AM
China doesnt need help, especially from America which is now the most endangered major economy in the world and shows no signs at all of being able to reform itself. The whole point is that China has reached this current position by its amazing capacity to change and to meet obstacles and challenges. I read many Chinese economists, and none of them are claiming that bthe current position is sustainable or permanent. They all have the insights listed in this article and have already proposed the continual process of rethinking, re-evaluating, adapting, changing that is now an integral part of Chinese government economic and social management. A few years ago China was the provider of cheap low quality goods. Now it is right up at the top in terms of technological sophistication, ahead of the USA in many fields. That could not have happened in a country that is complacent and thinks it can continue unsustainable conditions. China is constantly changing its industrial and agricultural base with advances that are almost beyond compare, and finding and building new markets. We, and I think the writer, has been asleep while this has been happening. If a country is able to lift out of poverty the millions that China has, is able to reduce its vehicle emissions to levels just a fraction of that in the USA, is able to launch a wind energy system as vast and as quickly as the Chinese have, I dont think they need the insights of a Guardian CIF writer.
2 Aug 2010, 8:16AM
"lifted 566 billion people over the $1.08 "extreme poverty" threshold
I knew China had a lot of people but blimey!
2 Aug 2010, 8:17AM
The results have been unprecedented, with a growth rate of approximately 10% that has lifted 566 billion people over the $1.08 "extreme poverty" threshold set by the World Bank.
Wow - that is impressive. I had no idea China was that big. Has China colonised other planets, or is there some UN population report explaining how the population has increased to 500 times its original size?
2 Aug 2010, 8:17AM
2 Aug 2010, 8:23AM
Why don't we all make sure that all products we buy have "Made in China" labels on them... I'm sure that will help.
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