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SPEAKING
FREELY
Why China is growing so
fast
By Satyabrata Rai
Chowdhuri
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click here
if you are interested in
contributing.
For years, investors
and economists have been scratching their heads
over China's growth rate. As the nation has turned
into the world's workshop, questions about the
reliability of its statistics have become
important. The difference between a China
expanding at 9% and a China growing at 4% is an
astounding US$65 billion in annual output.
China's $1.3 trillion economy is the
second largest in Asia and some say it was largely
responsible for keeping the world from sliding
into recession in 2001- if the numbers are
reliable. Jonathan Anderson, a Hong Kong-based
economist for Goldman, Sachs & Co figures the
annual growth rate is 9.6%. He is not wide off the
mark. In fresh proof that the "cooling down"
policy isn't quite working, figures released by
China's National Bureau of Statistics on Wednesday
revealed that the country grew an amazing 9.5%
from a year earlier to 3.14 trillion yuan ($379
billion) in the first quarter as exports and
investment surged.
A tremendous
achievement indeed. But the question uppermost in
the minds of many remains: how has China achieved
this miracle? Economists studying China face
thorny theoretical and empirical issues, mostly
derived from the country's years of central
planning and strict government control of many
industries, which tend to distort prices and
misallocate resources. In addition, since the
Chinese national accounting system differs from
the systems used in most Western nations, it is
difficult to derive internationally comparable
data on the Chinese economy. Figures for Chinese
economic growth consequently vary depending on how
an analyst decides to account for them.
Although economists have many ways of
explaining or modeling economic growth, a common
approach is the neo-classical framework, which
describes how productive factors such as capital
and labor combine to generate output and which
offers analytical simplicity and a well-developed
methodology. Although commonly applied to market
economies, the neo-classical model has also been
used to analyze command economies. It is an
appropriate first step in looking at the Chinese
economy and yields useful "benchmark" estimates
for future research. The framework does, however,
have some limitations in the Chinese context.
Original data for a new International
Monetary Fund (IMF) research came from material
released from the State Statistical Bureau and
other government agencies. Problematically, the
component statistics used to compile the Chinese
gross national product (GNP) have been kept only
since 1978; before that, Chinese central planners
worked under the concept of gross social output
(GSO), which excluded many segments of the economy
counted under GNP.
Fortunately, China also
compiled an intermediate output series called
national income, which lies somewhere between GNP
and GSO and is available from 1952 to 1993. After
making appropriate adjustments to the national
income statistics, including adjusting for
indirect business taxes, these data can be used to
analyze the sources of Chinese economic growth.
Thus the measurement problem, while real, probably
does not much alter the basic conclusion about
substantial productivity gains after 1978.
Much previous research on economic
development suggested a significant role for
capital investment in economic growth, and a
sizeable portion of China's recent growth is in
fact attributable to capital investment that has
made the country more productive. In other words,
new machinery, better technology, and more
investment in infrastructure have helped to raise
output. Yet, although the capital stock grew by
nearly 7% a year over 1979-94, capital-output
ratio has hardly budged. In other words, despite a
huge expenditure of capital, production of goods
and services per unit of capital remained about
the same.
This pronounced lack of capital
deepening suggests a constrained role for capital.
The labor input - an abundant resource in China -
also saw its relative weight in the economy
decline. Thus, while capital formation alone
accounted for over 65% of pre-1978 growth, with
labor adding another 17%, together they accounted
for only 58% of the post-1978 boom, a slide of
almost 25 percentage points. Productivity
increases made up the rest.
It turns out
that it is higher productivity that has performed
this newest economic miracle in Asia. Chinese
productivity increased at an annual rate of 3.9%
during 1979-94 compared with 1.1% during 1953-78.
By the early 1990s, productivity's share of output
growth exceeded 50%, while the share contributed
by capital formation fell below 33%. Such
explosive growth in productivity is remarkable -
the US productivity growth rate averaged 0.4%
during 1960-89 - and enviable, since
productivity-led growth is more likely to be
sustained. Analysis of the pre- and post-1978
periods in China indicates that the
market-oriented reforms undertaken by China were
critical in creating this productivity boom.
How did this boom come about? The reforms
raised economic efficiency by introducing profit
incentives to rural collective enterprises (which
are owned by local governments but are guided by
market principles), family farms, small private
businesses, and foreign investors and traders.
They also freed many enterprises from constant
intervention by state authorities. As a result,
between 1978 and 1992, the output of state-owned
enterprises declined from 56% of national output
to 40%, the share of collective enterprises rose
from 42 to 50%, and that of private businesses and
joint ventures rose from 2 to 10%. The profit
incentives appear to have had a further positive
effect in the private capital market as factory
owners and small producers eager to increase
profits (they could keep more of them) devoted
more and more of their firms' own revenues to
improving business performance.
Although
China occupies a unique niche in the world's
political economy - its vast populace and large
size alone mark it as a powerful global presence -
it is still possible to look at the Chinese
experience and draw some general lessons for other
developing countries. Most important, while
capital investment is crucial to growth, it
becomes more potent when accompanied by
market-oriented reforms that introduce profit
incentives to rural enterprises and small private
businesses. That combination can unleash a
productivity boom that will propel aggregate
growth. For countries with large segments of the
population unemployed or underemployed in
agriculture, the Chinese example may be
particularly instructive. By encouraging the
growth of rural enterprises and not focusing
exclusively on the urban industrial sector, China
has successfully moved millions of workers off
farms and into factories without creating an urban
crisis.
Finally, China's open-door policy
has spurred foreign direct investment in the
country, creating still more jobs and linking the
Chinese economy with international markets.
Despite significant obstacles relating to the
measurement of economic variables in China, these
findings hold up after various tests for
robustness. As such, they offer an excellent
jumping-off point for future research on the
potential roles for productivity measures in other
developing countries.
Dr Satyabrata
Rai Chowdhuri, MA, PhD, DLitt, is Emeritus
Professor, University Grants Commission, India.
Formerly Professor of International Relations,
Oxford University, UK.
(Copyright 2005
Satyabrata Rai Chowdhuri)
Speaking
Freely is an Asia Times Online feature that allows
guest writers to have their say. Please click here
if you are interested in
contributing. |
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