The book draws on China scholars from Australia, Japan, Thailand, the United Kingdom, the United States and, of course, China. One of the authors depicts the Chinese economy as a speeding car, which will face many potential hazards along the rocky road to prosperity. Certainly, if China is to continue along its remarkable path in the next two decades, it will need to steer its way skilfully through a number of challenges.
One of the key challenges facing China in the decades ahead is how to steer its way through the turning point – or more accurately, the turning period – in economic development. The turning period is characterised by the end of the labour-surplus economy and rising wages in some sectors of the economy, and there are some indications that China has entered this period already – although the precise timing is a topic of much debate. This has implications for the future industrial structure and composition of trade, as China loses its comparative advantage in exporting labour-intensive goods. This will impact on the hundreds of millions of ‘farmers-turned-migrant workers’, who have been a critical source of labour supply to China’s dynamic export sector and who stand to suffer the most when that dynamism passes. These migrant workers will require deeper labour market reforms if they are to become true ‘migrants-turned-urban residents’, which in turn will give them the flexibility to adapt to employment shocks and structural change in the decades ahead.
Another major challenge for China is the need to re-balance its growth pattern in a number of ways. In the past, China’s unbalanced growth has been fuelled by highly resource- and energy-intensive production, which has contributed to mounting demand pressures in global resource and energy markets. In order to alleviate this pressure, China must begin moving towards a low-carbon growth economy. Similarly, China must find effective ways to combat the dire consequences that its rapid growth and development has had upon the global and local environment.
Previously, China’s growth relied heavily on exports and investments. This overreliance contributed to rising global imbalances and to numerous structural problems, and there is now widespread recognition of the need to rebalance growth towards domestic consumption and productivity. Entering the turning period will in some part address this as higher wages naturally lead to higher consumption. But more remains to be done.
In particular, China’s gradual and piecemeal approach to economic reforms – in which product markets have been completed liberalised while factor markets have not – has clearly been beneficial. But unless factor market reforms are completed, the stability, balance and sustainability of future growth will be threatened. Completing these reforms may take decades in some areas, but will have substantial payoffs for both the global and Chinese economies.
Sharing the benefits of growth is not just an economic issue but also an ethical one. This is particularly the case for the CCP, whose legitimacy has long been based on egalitarian principles. Just one of the many types of inequality that shape China’s economic landscape is the vast regional divide, which the Chinese government is intent on ‘considerably reducing’ by 2050. On a different level, China’s health care system has become increasingly inequitable and costly, with those least able to pay bearing the brunt of ineffective reforms. Uneven access to healthcare, rising income inequalities, inadequate social welfare systems, and the slowdown in poverty alleviation are some of the most undesirable outcomes of China’s rapid growth in the past, and may pose serious threats to social stability in the foreseeable future.
Intricately linked to all of the economic challenges above is the question of political reform. Some scholars such as Yang Yao argue that democratisation will be essential for China to counterbalance the formation of strong interest groups. Others see it as a way of establishing effective central-local government relationships in China.
If successful, the next two decades are likely to see China elevated to a position of global primacy alongside the United States. Success is not guaranteed, however, and will require many changes from the status quo. If China has been a speeding car, it’s done a fantastic job so far; the Chinese leadership could be likened to a Formula 1 pro. But it may be time to slow things down just a little bit. More importantly, it is surely time for all of the players in the Chinese economy to start wearing seatbelts!
Jane Golley is a senior lecturer in the China Economics and Business Program at the Crawford School of Economics and Governance, ANU.
Jane Golley co-edited ‘China, The Next 20 Years of Reform and Development’ with Ross Garnaut and Ligang Song, which can be downloaded here.
As an economist, I have been often puzzled by a number of economic issues concerning economic development and management in both the industrialised and developing economies.
One is the so called international imbalances and related closely to that is China’s heavy reliance on exports and investment for growth in the past up to now.
Just consider the issue of a country’s growth as an optimisation issue. If there are international markets the country can export to fully utilise its domestic resources as much as possible, why should it not be an optimal choice? Japan did that before, Korea did that before and Taiwan did that before. When it became China’s turn, now it’s regarded as a problem that caused global imbalance! What a puzzle and what a joke!
So is my puzzle with investment. Let’s analyse the main differences between the industrialised and developing economies in traditional economics of Solow growth model. The key difference is capital per capita or per worker. What and how can developing countries mitigate or eliminate that difference? It is investment. Is there any other way to increase capital without investment? I doubt it.
Another fundamental is how to manage the economy. China used to be a planned economy but has become a largely a market economy. Traditional and orthodox economics tells us that it is macroeconomic policies, namely monetary and fiscal policies to get full employment and low inflation. Apart from that it is difficult to talk about economic structure because that becomes an autonomous by-product of good macroeconomic policy and private entrepreneurs. However, we are now confronted with China’s economic structural issues. What can we say about it?
Then we are confounded with political reforms, democracy or lack of it. I remember that in the past there were the terms of Japan Inc, its industry policy and certain organisational characteristics, as well as some for Korea. While I am not saying they were not democracy, those terms must have meant something, maybe that were not fully consistent with the orthodox western democracy and a liberal economy.
Japan’s road to prosperity in the second half of the last century had its uniqueness, so had Korea’s and Taiwan’s. China has its own, even it means it is at a much larger scale.
While I agree with Jane Golley’s point that ‘be prepared that some of our predictions may well turn out to be wrong’, I am not sure it is upside or downside biased.
For another issue altogether, the transitional or turning point in the Chinese economy in terms of the end of surplus labour means the argument that China’s currency is under-valued is low currency itself. It will be disastrous for China to bow to the US pressure to appreciate its currency prematurely. The rising labour costs will reduce current account surplus.