Business Page –  The Chinese miracle

Sunday, February  19th, 2006

Introduction:

Following the recent hand-over to the Government of Guyana of the very attractive Convention Centre by the Chinese government, it is more than time that Business Page turned its attention to that fast re-awakening giant. After three decades when the economic miracle was all about the Asian Tigers - Hong Kong, Taiwan, Singapore and South Korea - the countries that are attracting the most attention currently are not two small and agile economies but two of the world's most populous nations.

One is still communist but with a love for things capitalist while the other is the world's largest democracy with major partners who are practicing communists. It is perhaps purely coincidental that they are also two of the world's oldest civilisations, beginning some time around four thousand years ago and heading once again to becoming truly great powers in the more modern world.

That they are now the awe of the world should probably come as no surprise. The two countries in their various forms over the centuries have survived the onslaught of invasion, colonisation, wars, famines and natural disasters and yet managed to give the world some of its greatest gifts - paper, medicine, philosophers and religious persons such as Confucius and Gautama Buddha, artifacts, political and accounting systems, carefully planned cities with elaborate water- supply systems, sewage facilities, and centralised granaries, the use of copper and bronze and management systems that still make sense today.

Coming in from the cold:

China, a country that not too long ago was outside of the world's mainstream has since its accession to the WTO grown into a major world economic power, so much so that hardly a week goes by without a major article or discussion on the incredible expansion of its economy. That it is now totally mainstream can be measured by its successful bid for the 2008 Olympic Games and the designation of Shanghai as host of the World Expo 2010. It is admired by some, respected by others and feared by yet others still.

Given the great paradox that China is, each of these is totally justified.

According to the latest IMF statistics for 2005, China and India were the two most rapidly growing major economies in the world for that year, expanding in nominal terms by 15% and 12% respectively.

The combined growth of the two giants of 14.5% was more than 4 times that of Europe and 2.4 times that of the USA. These are no doubt extremely impressive statistics and have caused some amount of phobia, principally about China, particularly when the USA publishes any figures showing how the trade balances have turned against the US.

One US television host, Lou Dobbs, almost daily complains about the Chinese, the Mexicans and the Indians and given half a chance he would build one huge protective wall around the US economy.

The different perspective:

Put into one perspective, the figures are not as daunting as they first appear. The contribution to world growth by China and India in absolute terms is still dwarfed by the more slowly growing economies of the US and Europe. Nominal increase in the US was $700B, in Europe it was $447B while the combined total of China and India was $340B. In this same vein, the USA accounted for 28% of world output, China 4.4% and India 1.7 per cent. Every percentage point of growth in the US is equivalent to 7 times that of China and 18 times that of India. Every one percentage point increase in Japan was the equivalent to 3 times that of China and 7 times that of India.

But there is another measure that suggests that China and India are indeed assuming roles of major economic players. Using the purchasing power parity (PPP) which eliminates inflation differences and exchange fluctuations, the growth in China actually exceeds that of the US, though not by much.

What is beyond doubt and dispute, however, is that these two countries have largely been responsible for the significant reduction in the number of the world's poor, raising the hope that the poverty element of the Millennium Development Goals can be substantially achieved.

Uncomfortable liberals:

China simply cannot be ignored even by the liberals who are uncomfortable with its stance on human rights, press freedom, democratic reforms outside of the Communist Party, Taiwan and Hong Kong, attitude on environmental issues, militarisation and the threat to neighbours, and exchange rate policies that many think are unfair.

Indeed, any discussion on any major international issue inevitably invokes China, be it oil and other non-renewable resources; China's rather indifferent attitude to the environment; its insatiable appetite for raw materials which causes it to seek business with some questionable governments across the world; the explosion in the market for mobile telephones which triggers references to China's young but large population; the internet and press freedom (or lack thereof) which brings talk of China's heavy hand; human rights which adverts attention to the country's impatience with those who seek to question its record; and for some most ominously of all, the shifting balance of military power, which raises questions about China's secret defense/ offence budget and increasing militarisation.

The Great Leap Backward:

China some centuries ago had a per capita income that exceeded that of Western Europe and had for centuries enjoyed the role of technological superpower. As Europe flowered as a result of the Renaissance, industrialisation and colonisation, China stagnated and by 1975 per capita income of China was a mere 7.5% of Western Europe's - an astounding and yet fascinating decline.

It is usually simplistic to identify a single cause for the decline of any nation, but certainly in that country's modern history two events stand out for their economic, social and political impact. These are the incorrectly named Great Leap Forward (1958-1961) in which Chairman Mao sought to introduce rapid industrialisation by some exotic and irrational policies that led to widespread starvation, and the Cultural Revolution (1966-1975) that sent the country's intellectual and bourgeois class into the countryside and millions to their deaths.

Reforms:

Major reforms followed Mao's death in 1976 and the economy has been so successful that per capita income has doubled every nine years, extreme poverty has been drastically reduced and the economy has, (so far), defied predictions of a reversal. In 1991, The Economist dismissed China's prospects and predicted in relation to its economy it would become "the biggest exporter of canned mushrooms."

The slowing down will come at some time and already there are active steps by the government to cool the economy.

Slowing down is also a function of numbers, the movement from industrialisation and investments to services, tightening of credit, greater emphasis on the neglected environment and international competition. Apart from the low base from which China started in 1978, its phenomenal growth has been the result of a) more easily measured non-agricultural production; b) globalisation which allowed the country effectively to export its low-cost labour in the form of low-cost products; c) reopening the universities and the emphasis placed on education by those who had suffered under the Cultural Revolution; and d) major policy reforms including specially designated free-trade zones.

Even as growth continues to remain strong there are vast investment imbalances across the giant country, and in spite of privatisation and the end of state collectives, the economy is still subject to blunt party actions as and when it considers it necessary, while the state remains a major role in the economy particularly in defence and the utilities.

Who's Hu?

The big question is whether economic progress will drive the movement towards political democracy, and the answer is so far not encouraging. The party and its leader are still all powerful and Hu Jintao as party leader is not only the country's president but also its commander-in-chief. Jiang Zemin, his predecessor, was influential enough to allow for the introduction in the party's constitution an acknowledgement of capitalism under the slightly disguised name of "advanced productive forces," but the position taken by a party leader not too long ago that "history has proved that in China copying the model of western political systems is a dead end road" is still the conventional wisdom in that country. Hu Jintao seems to be cut from that same cloth.

The future of China:

The Economist which seems as obsessed with China as the Americans, considers that "China's impressive economic growth hides a multitude of problems, including increasingly resented disparities between rich and poor, rampant corruption and capricious party rule - as hundreds of thousands of local protestors in recent years have demonstrated, quite literally, out on the streets." The paper believes that "come a crunch China's policies are not going to be driven by a concern for the greater good, whether of the Chinese people or the region as a whole, but by what is good for maintaining party control."

At least The Economist believes that the history of China is far from over.

Next week we will look at India.