Greater China

Mar 17, 2007

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SPEAKING FREELY
From growth to 'quality of growth'
By Huw McKay

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.

The just-ended 2007 session of the National People's Congress (NPC) marks a clear rhetorical turning point for the Chinese administration. The very strong message coming from the summit is that improving the quality of growth and the distribution of its

benefits are policy priorities. This is a clear shift away from the basic policy stance of the reform period, when the quantity of growth was foremost on the agenda.

The term "quality of growth" may be interpreted in many ways. One, the term may imply that the administration wishes to increase the productivity element of growth at the expense of input driven expansion. Two, it may indicate that the sectoral composition of growth is to be skewed in a more mature direction. Third, the energy efficiency of growth might be under consideration. Listening to China's leaders over the past few days indicates that all three interpretations are over-arching objectives of the policy platform. Identifying a goal and achieving it are different matters.

The productivity element of the growth program can rely on the virtuous circles of catch-up to do much of the work. At present Chinese output per worker is some 15% of the global benchmark, the United States. That is equivalent to the position Japan found itself in at the onset of the 1950s. History shows that Japan narrowed its productivity gap with the United States at an annual rate of 1.5 percentage points through the 1950s. That pace accelerated to 2.9 percentage points per annum in the 1960s. Replicating the Japanese performance would require China to double its current rate of productivity catch-up.

With that in mind, the administration has established a long-run imperative to boost the technological sophistication of the foreign direct investment (FDI) it attracts. Recent proclamations that promise to shore up property rights, intellectual and otherwise, are clearly aimed at attracting investment in the knowledge intensive industries where China currently has a rather weak international presence.

Further, restrictions on the internal flow of labor will progressively be relaxed to release pent-up demand for rural-to-urban migration. Taking a rural laborer and converting him into a factory hand creates an increase in that individual's productive capacity. When 420 million people are involved in the process, as is anticipated over a 30-year time span, that points to a quantum leap in the aggregate productivity level.

China's technocrats recognize that they need to address the education system as part of the productivity drive. Labor quality is an important part of the growth-potential equation. It becomes even more so once the demographic dividend is spent. China's base labor input to growth will become a drag from 2015 in the absence of a higher participation rate. The authorities are preparing now.

Shifting the structure of the economy toward a consumer orientation is not quite so automatic. Household consumption comprised about two-thirds of overall expenditures in 1978. Today it is just two-fifths of the total. The decline of consumption has been due to the rise of exports and supporting investments. Gross fixed-capital formation (investment in structures, buildings, machinery, equipment and fixed intangibles, but excluding inventories) currently comprises just under half of the economy.

This is a problematic mix. If investment is almost half of the economy, how can it be slowed down without slamming the overall growth rate? If consumers see growth slowing down, they will naturally feel less secure in their employment. They are then more likely to increase precautionary savings rather than opening their wallets.

A decent welfare safety net might help keep precautionary savings down, but the current structure does not inspire confidence. Thus the need to strengthen the social-security

Continued 1 2

China yearns for Hu's 'harmonious society' (Oct 11, '06)

A healthier - and better armed - China (Mar 6, '07)

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