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China’s growth: the way ahead

Maintaining the current China’s export-oriented growth would require significant gains in market share through lower prices in a range of industries. This, in turn, could be achieved through a combination of increases in productivity, lower profits, and higher implicit or explicit subsidies to industry. The question is: Is such a growth scheme sustainable, both environmentally and as far as international political and economical relationships are concerned?

China’s GDP has grown at an average rate of around 10 percent during 1980−2008. This year, though, as an aftermath of the global financial crisis, it is expected to fall to 7½ percent, a sharp slowdown that reflects China’s dependence on exports, particularly to advanced economies.

In the short to medium term it is difficult to expect a return to the previous growth rates: though some positive signs is already coming to surface, economies in the developed countries – China’s target in their export policy – are not going to reverse the current downward trail until second half 2010. In other words, there is at least one full year from now before Chinese export can start growing again at the previous rates. In the meantime, the Beijing government will have to face the challenge of satisfying its citizens’ growing expectations in terms of quality of life – and that includes social expenses, like pensions and retirements policies, health care, as well as private properties, larger homes, private cars, better working hours, and so on – despite a decreasing economy.

Economically speaking, these demands can be satisfied in two ways: increasing China’s share in the global economy – that is, the quantity of money flowing into China from the rest of the world – or increasing the internal market – that is, giving Chinese more money to spend on products and services Made in China. Or a combination of them.

To win a larger share of the global economy, Chinese industries could reduce their prices, in order to make them (even) more convenient. Evidence from previous experiences suggest that it will prove difficult to accommodate such price reductions within existing profit margins or through productivity gains. It could also prove to be a problem, politically speaking: the reduction in prices and costs would directly mirror itself on salaries and wages, causing likely turmoils and discontent. However, experiences from Asian economies that hadsimilar export-oriented growth suggest there are limits to the global market share a countrycan occupy.

Pushing the internal market would mean re-balancing the current export-oriented attitude of China’s economy. More goods would be to let in. The national balance of payments would be hit hardly. Chinese manufactures could be pushed to move production of lower value added goods to countries like Cambodia, Vietnam, Laos. Jobs could be lost, and social discontent could spread, expecially in the country and in the city’s external rings, where poorer people live and work.

Whatever the answer politicians in Beijing will be able to give to such a complicated question, the whole world will be affected.

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This entry was posted on August 21, 2009 by in News, Politics and tagged , , , .
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