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Will China's growth sustain 30 more years? ( 05/11/04)

    Will China's economy retain its current growth trajectory for three more decades?

    The answer hinges on two factors: whether China can sustain a high private deposit amid structural changes with labour forces, and whether productivity can be improved to become the main driver of economic growth.

    Many economic issues in China are catching attention from home and abroad, such as the equity restructuring of large State-owned companies, reform of State banks, securities market regulation, farmers' income and development of private businesses. This year, the administration has made a series of major policy shifts, setting a crucial stage for furthering China's market-oriented reforms.

    Under these circumstances, whether China can manage to achieve more efficient growth and how long the growth will last deserves contemplation.

    To get a clearer insight we firstly need to review China's growth mode in the past and the factors that may have restricted the growth in private income.

    Most people who have visited China in the past 25 years have been amazed by the economic and social progress happening here. In terms of either the growth of the gross domestic product (GDP) or the rising of trade volumes, China is by far the world's most dynamic and eye-catching economy.

    China achieved an average annual GDP growth of above 9 per cent from 1978 to 2003, a stunning record worldwide. With its GDP surpassing 11 trillion yuan (US$1.33 trillion) in 2003, China has become the world's sixth largest economy. China's role in the world economic arena is rising as it speeds up to embrace globalization on economic and financial fronts.

    But even in Asia, China still lags far behind Japan and some emerging economies in terms of per capita GDP, largely because its economic reform started from a very low point.

    World Bank calculations based on purchasing power parity reckon that China's per capita GDP at present equals Japan's level in 1950.

    So there is still a long way to go for China to catch up with the per capita GDP of Japan or the United States.

    Many economists have discovered that a large part of China's economic growth is driven by the input of resources. This conclusion indicates that China is at the stage of industrialization rather than post-industrialization.

    China's industry-propelled growth is largely attributable to a continuous growth of young labour forces, which is a key factor in understanding the fast growth record in not only China but also economies in East Asia.

    In the eyes of economists, economic growth is a phenomenon about population. First, the accumulation of capital needed to support growth comes from citizens' saving tendencies. A labour-intensive economy has more deposit capacity than an ageing society. Secondly, economic growth relies on the growth of labour forces, especially young labourers. Sustained growth also depends on education standards.

    In China, labour forces are mainly outsourced from rural areas. In the past 25 years, some 160 million rural labourers have quit traditional farming and found employment in cities or non-farming sectors.

    Although agriculture still employs more than 60 per cent of China's population, its share in the country's financial revenue has declined to less than 15 per cent, dropping from 40 per cent or so in late 1970s. This also shows that China's growth is mainly based on an industrialization course featuring expansion of the manufacturing sector.

    Continuous supply of labour forces has improved China's private saving capability substantially, which means surplus income that can be reinvested to fuel economic growth.

    The importance of labour supply in China's growth dynamics means it is necessary to review the way China's population increases.

    After years of decline, China's birth rate is now equivalent to that of other emerging East Asian economies. The low birth rate in the country is mainly a result of the family planning policy initiated in the late 1970s.

    Some scholars have estimated China will see zero growth in young labourers in 2015. Some have also projected that by 2030, 20 per cent of China's population will be over 60-years-old, compared to 8 per cent now, and the number of pensioners will be more than 40 per cent of the number of working people.

    The ageing process and the slowdown in labour supply will combine to limit room for China's future growth. We hope raising this question will prod the government to think about solutions.

    As well as population and private saving, another issue demanding thorough analysis is productivity.

    A World Bank report has found that China's productivity did increase for a long time after it started reforms in the late 1970s. But such growth has mainly resulted from the transfer of labour forces from farming to non-farming sectors rather than progress of technology. While the inter-industrial labour transfer slows down, the growth of productivity slows down.

    If this finding is true, then technological innovation should be an objective China seeks to achieve in the future.

    Many people who have visited China in recent years are impressed by the "economic development zones" and the manufacturing boom in many places. Some places have built the "development zones," often coupled with preferential policies, to attract foreign investment. Meanwhile, some places not lucky enough to have a development zone have opted to foster local manufacturing businesses regardless of the environment problems they cause.

    These measures are widely used in Chinese counties and townships to promote the local economy. But most businesses fostered in this way are either doing transit trade, or manufacturing products at the price of land, resources, environment and sustainability. Few would connect their growth with the term "efficiency."

    In fact, China is an economy of scarce capital, resources and land but abundant labour forces. That means it is the abundant human resources that keep China's economy moving forward. But as we all know, competitive businesses arise from creativity and enterprising spirit, rather than simple transit trade or excessive exploration of natural resources.

    Why does China have few strong and competitive enterprises despite fast economic growth and a strong investment of up to 40 per cent of GDP? This is related to the current government-navigated growth mode.

    To overcome the barriers to greater efficiency the government needs to have a better understanding of growth and change the ways of acquiring it.

    It is necessary to have a system to restrict economic pursuits that damage the environment and tolerate and encourage private creation and enterprise.

 


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