China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Bumpy Way to a New Chinese Growth Model

April 4, 2012

China wants to develop a new growth model that focuses more on private consumption as a growth-creating part in the economy – at the expense of the, until now, existing dominance of exports and investment. This relatively new objective has been announced officially, too.

This new orientation is logical. Heavy export dependence can under certain circumstances cause major problems, as is currently the case in China. The extreme high Chinese investment ratio in recent years – up to roughly 50 per cent of GDP – means an obvious risk for certain insufficient allocation of capital. And the opening of better consumption opportunities is not only a matter of creating new economic growth opportunities. It is also an important social issue.

In real life, however, the way to a more consumption-oriented society won’t be that easy – and certainly more complicated than many Western economists and commentators believe.

First, private consumption is already now growing quite considerably. Too little attention, however, is paid outside China to the issue of the increasingly uneven income distribution. Improvements in this respect are urgently needed to achieve fundamentally improved conditions for private consumption.

Second, acceptable social minimum standards have to be created for health care, pensions, education, etc., for achieving some fundamental downturn of the households’ high savings rate. Chinese political leaders know about these needs – but they also know that consumption-accelerating conditions cannot be created with short notice. It is much more of a medium and long-term project.

Third, as was said in the last edition of this blog, product quality improvements are needed as well – particularly in order to attract the younger urban generation to consumption goods that are “Made in China”. Imported consumption goods reduce economic growth – not the other way around.

Forth, Chinese exporters still have a strong lobby, which at the moment is reflected by a more cautious exchange rate policy. Exporters must be successful in the future, too. Otherwise the surpluses of the current account balance could be wiped out at some point – a development that would be counteracting China’s way to a more consumer-friendly trend.

Fifth, we do not know very much about the details of economic policy after the change of leadership at the end of this year. The Chinese people’s confidence in the future is needed for sustainable progress in private consumption to an increasing part of the Chinese people. Confidence, however, assumes continuous efforts and good/acceptable results.

Stronger growth inspirations to consumers do not come automatically.

 

 

 

 

 

Hubert Fromlet
Professor of International Economics
Editorial board

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The Beijing Consensus, the Delhi Discord and other Myths

March 7, 2012

I’d like to make a few observations about China and India, both of which are viewed with awe by much of the world, particularly following their near-immunity to the 2008/09 financial crisis, when both countries’ soaring growth continued, in marked contrast to the rest of the world which went into long, drawn-out recessions. What policy lessons one draws from these countries’ experiences, around the crisis and longer term, are critical to the success of other countries’ development. Though China and India are both relatively low income countries, China now has a per capita income that is more than twice as large as India’s, following a decade of double-digit economic growth, while India itself is doubling every decade. So while their incomes and productivity levels lag considerably behind the most advanced economies, they are advancing rapidly and now contribute nearly a third of global growth.

Some observers have taken China’s development experience as evidence that a state-dominated growth model can be effective and even should be emulated in more advanced countries (World Bank Growth Commission, 2009). This viewpoint has been dubbed by some as the Beijing Consensus (Yao, 2010), which could serve as a counterpoint to the often-parodied Washington Consensus of rapid market liberalisation. Yet this characterisation of China’s `other way’ represents a deep misconception about the factors which drove growth in China following its post-1978 reforms. In fact, the gradual emergence of a private sector, in its various guises, was the overwhelming driver of reform, and this was enabled by a decentralisation of governance, and a slow withdrawal of the state (Dougherty et al., 2007; Huang, 2008). At the same time, this process has been enabled by a rise in education quality and human capital accumulation that has strongly supported growth.

Consequent with China’s development experience is India’s more messy development process, where changes in policies are debated at length, and scandals are the subject of discussion for years. This viewpoint is often characterised — implicitly — as a kind of Delhi Discord, the product of extensive debate and slow deliberation in a federal country with a lively democracy. What is under-appreciated here is that the long debate and slow deliberation are the result of basic rule of law and strong institutions that are relatively responsive to public opinion and monitored by a diligent (if activist) and independent Supreme Court. Such institutions have enabled the private sector to flourish in domains where regulatory barriers are no longer binding, particularly as the License Raj has been rolled back since the 1980s. However, regulatory restraints and entry barriers still exist in a number of domains — notably labour regulation — which stunt the scaling up of manufacturing (Dougherty, 2009). In addition, a legacy of weak educational provision has been less than supportive of growth.

What lessons can we take from these contrasting development experiences? The risk of a blow-up in the Chinese case cannot be eliminated. Given weak governance institutions, political transitions such as the one taking place at present are highly unstable, and have even spilled over to complicate economic policymaking. For instance, they have made sensible monetary and exchange rate policy almost impossible. Moreover, personal whim still plays a pivotal role, at central and local levels, with additional stress from the lack of effective vents for political expression. A major scandal or domestic economic crisis could easily trigger a major social meltdown.

In contrast, India’s more institutionalised economic policy making environment provides outlets for crisis-management that Chinese policy makers can only envy. While India’s more deliberatory system may have held back or slowed certain reforms, it has provided a more balanced foundation for growth, which the country is only now beginning to enjoy. Even with recent corruption scandals — large as they may seem — India enjoys a system of de jure and de facto anti-corruption institutions that are more effective than would be expected given its current stage of development.

 

 

 

 

 

Sean Dougherty
Senior Economist, Head of Latin America Member Unit, OECD Economics Department

 

© Sean Dougherty 2012. The author is an official at the OECD. The above remarks are purely personal.

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High Product Quality – a Major Challenge and Opportunity for China

Swedish Quality has for many years been a strong and internationally well-known concept. Sweden is also recognized as one of the most innovative nations in the world. This is no coincidence, because there is a clear connection between quality and innovation, a connection that China needs to understand deeper if it is to succeed in its endeavor of becoming an Innovative Nation by 2020.

Quality is nothing new to China. It is enough to look at Chinese antiquities – ceramics, old furniture, old buildings, clothes and other things from the imperial age, and you realize that China was producing goods of the highest quality. However, due to a complex array of reasons China emerged as a nation in 1979 in a desperate need to totally rebuild itself. At this time the country was more concerned with solving immediate problems, rather than solving the problems in a resource efficient way. This circumstance together with the fact that the market economy was poorly developed and competition immature lead to an economy where producing “good enough” products sufficed.

Since the focus has been on solving problems quickly there has been a widespread tendency to avoid the obstacles that you constantly meet when your task is to develop and produce a product of the highest quality. Instead shortcuts are the name of the game or rather ways around the problem that makes the product work – for the moment.

Having quality as the guiding star, on the other hand, does not allow for such short term solutions. The search for excellence forces the innovators and the whole organization to solve all problems encountered. This may be exceedingly painful, but equally rewarding when a solution to a problem has been found. Part of the innovative, problem solving process is to allow for mistakes and failures. As in scientific experiments, failed experiments also teach us something.

China, coming out of a 30 year period of a command economic model is still suffering from many societal and organizational structures from this period that do not encourage experimenting, failures and wide cross functional cooperation. This is further holding back both the development of innovation and the resulting high quality products.

In industry, we see clearly how industries in China not only are governed by one ministry, but often by several governmental bodies, with little internal coordination. The result is a regulatory framework, full of contradictions and with poor enforcement. This is a huge problem, because innovation is often driven by the combination of strict market competition, but also an enlightened, future looking regulatory framework of a country or of a trade union.

There is no lack of innovative brains in China. On the contrary China produces more engineers than any other nation, but they need the right environment and the right guidance to bloom out. Foreign companies setting up R&D centres in China witness that their local employees are as innovative as any employee and are often much more hard-working and dedicated to the task.

We also see impressive indigenous innovation in China in areas such a solar power, pharmaceuticals, online social and business portals, applications for handheld devises etc. Most of these are however, developed for the specific needs of the Chinese domestic market and are still limited seen in the whole context of the Chinese economy.

For China to be a real creator of internationally sellable innovations the whole of society needs to gear up for this challenge. It starts at the top. When Swedish business delegations meet with Chinese top leaders we are often commanded for our high quality and innovative products and solutions, but we are also told that we are too expensive to succeed in China. This can of course be a conceited strategy to encourage more foreign investments in China, but it could also be an alarming lack of understanding of the difference between the investment cost and the life cycle benefit of a product or of a solution.

The beautiful thing, which China yet has to realize, is that high quality products and solutions are most often also more economic and more sustainable than cheap low quality alternatives. I often say that developed nations cannot afford cheap products.

If the Chinese leaders insist on directing China in a direction of cheap products, and with an inconsistent regulatory framework, China will not only find itself with a continued high real cost for most things in society, with environmentally unsustainable systems, but also it will find itself without real and valuable innovation.

It all starts with the concept of quality!

 


 

 

 

 

Mats Harborn
Executive Director, Scania China Strategic Centre, Chairman Swedish Chamber of Commerce in China

 

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