Along the way, export-led growth has also created serious structural imbalances highlighted by underutilised savings, slow growth of residential income and domestic consumption, and heavy reliance on investment. This linkage requires new thinking about the way in which global imbalances need to be tackled.
China has managed nearly double-digit growth rates since it began economic reform and opening in 1978. The reform has transformed the Chinese economy from a planned economy to a mixed economy where the market plays a dominant role in resource allocation. Much of China’s remarkable growth between 1978 and 2000 can be explained by the reform. But the more recent and faster growth in the last decade has been mainly driven by exports.
Joining the WTO in 2001 was a turning point in China’s integration into the world system and allowed China to capitalise fully on its large supply of labour induced by the ‘double transition,’ namely, drastic demographic transition and a fast pace of industrialisation. Using the growth trajectory of other East Asian economies as a reference, China can be expected to sustain fast economic growth for the next 10 to 15 years before its growth rate converges to its long-run steady state.
Export-led growth has also created structural problems that have to be addressed to achieve more balanced growth. The most important problems are high savings and persistent current account surpluses. At a low income level, China has been forced to export its savings to much richer countries. Related to this problem is the slow growth of domestic consumption and the declining share of consumption in GDP. This can be mostly attributed to the slower growth of household income relative to the growth of GDP. The other side of the story is faster growth of corporate income and government revenue. Enterprises have reinvested most of their profits and the government has spent a large proportion of its revenue on capital formation. The result is that China is still an investment-driven economy.
The fundamental cause of these imbalance problems can be traced to China’s double transition. The double transition refers to two profound transformations happening in China. One is its fast pace of industrialisation and the accompanying rural-urban migration, and the other is the extraordinary demographic transition since China implemented the one-child policy in 1979. The double transition has shaped China’s extraordinary growth model, especially after China fully integrated into the world system through accession to the WTO. The double transition has given China vast comparative advantage in labour resources, and the accession to the WTO has allowed China to play this advantage to the full.
Because of the double transition, wage rates are suppressed and the benefits coming from the growth of trade have mostly accrued in the form of returns to capital and to government taxes. As a result, the share of labour income has declined, and this in turn has caused the share of consumption in GDP to decline. The other side of the coin is the increasing share of national savings in GDP. Because of the diminishing marginal return to capital, the growth of investment cannot catch up with the growth of savings, so the current account surplus has increased.
The sustainability of China’s export-led growth depends on the pace of China’s double transition. Two issues will determine the outlook for China’s long-term economic growth. One is when China will use up its demographic dividend, and the other is whether China has passed the so-called Lewis turning point.
The double transition will likely last for another 15 to 20 years. Over this period, China will continue its export-led growth and is likely to sustain high economic growth rates. This will allow China to become the largest economy in the world in today’s prices in the early 2030s. In current prices, the date will be much earlier, possibly in the early 2020s
Export-led growth has brought serious structural imbalance problems to China while sustaining a high rate of overall economic growth. China’s imbalance problems have their roots in China’s double transition and, on this account, will only gradually ease as China completes its double transition in the next 15 to 20 years. This is a relatively long period of time. In the meantime, the imbalance problems may lead to serious social and political unrest that may disrupt China’s growth trajectory.
While other factors (such as the exchange rate, distortion of factor prices, a weak financial sector, and an investment-oriented government) also contribute to China’s imbalance problems, the double transition is its most fundamental cause. The double transition is an inevitable process and helps explain China’s fast economic growth. And it requires new ways of thinking in dealing with China’s and, for that matter, the world’s imbalance problems.
Two conclusions follow. Focusing on nominal parameters such as the exchange rate will not solve the imbalance problems. Structural adjustment should not be directed to eliminating imbalances, but should be geared toward how to utilize the savings created by the surplus countries. China’s savings are created by its double transition. Other emerging countries, notably India, will also emerge as exporters of savings even if savings from China dry up when it finishes the double transition.
Yang Yao is Deputy Director of the China Center for Economic Research at Peking University in Beijing. He holds a PhD from the University of Wisconsin-Madison.
This is an excerpt from a paper delivered to the 34th Pacific Trade and Development Conference in Beijing.
So everything is attributable to the “double transition” and nothing attributable to the political system–i.e., the Chinese Communist Party?
Professor Yao says: “At a low income level, China has been forced to export its savings to much richer countries. Related to this problem is the slow growth of domestic consumption and the declining share of consumption in GDP. This can be mostly attributed to the slower growth of household income relative to the growth of GDP.”
But why has household income grown slowly relative to GDP? Hasn’t that got to do with China’s political economy?
Putting all the problems down to fast industrialisation and demographic transition elides the fundamental problems.
I’m also interested in some data for the claim that “the market plays a dominant role in resource allocation.” Really?
Re:… So everything is attributable to the “double transition” and nothing attributable to the political system–i.e., the Chinese Communist Party?…
…Putting all the problems down to fast industrialisation and demographic transition elides the fundamental problems….
Mathew Robertson raises an interesting point.
I suggest the Chinese Communist Party makes mistakes as has the Washington and Canberra because we are all human.
Perhaps, we need to note the “Chinese Communist Party” has faced hurdles several magnitudes greater than either Washington or Canberra ever faced and delivered greater socio-economic benefits to its people of a scale in world history.
Beijing’s ability to progress modernization faces very difficult and complicated challenges.
The continental size country is composed of a matrix of economic structures in terms of its stage of development and the fact that local government routinely cherry pick which Beijing policy will be complied with.
That is why Beijing works on a trial and then selectively implement basis.
Market forces do play apart in that entrepreneurial individuals and local government identify opportunities then commercialize.
China reminds me of the “Wild West and the era of the US Robber Barons” where anything is possible.
One Beijing resident explained the reason why many locals are so impolite and aggressive is because once they were told what to do and think. Suddenly “overnight” they live in a new market economy world and many don’t know how to behave in the new China world.
What do you think the “fundamental problems” are and what was elided?
The World Bank’s figures for 2010 and 2009 are quite clear that SOE assets have ceased to decline and now represent slightly less than half the total assets. Further, the central organs have many policy interests which tempt them to continually alter capital allocation in the banking system (the regulations on the property market are more recent, but consider the negative real interest rates which are “old” news now). These two outstanding issues alone mean we cannot speak of China as a “market economy” in any general sense – it needs a huge list of qualifications, many of which are “in transition”.
More importantly, it’s no longer clear that political consensus will allow China to manage its macro economy as it did in the past, making a “new model” so simple. For example the currency reform issue has been increasingly handled in an ever-slower piecemeal fashion, with a lot of attention diverted to “internationalization” to relieve pressure on Treasury purchases. This is despite widespread agreement by nearly everyone that “sometime” in the “future” currency adjustment will need to take place. Its clear that the strong consensus on such things, particularly that reminiscent of Zhu Rongji’s time (post Asian crisis pegging was *bold* then, not now), are no longer in effect. We are seeing fragmentation and competing directions, because now the decisions are more complex and the stakes higher. Micromanagement would have saved the government great embarrassment in the 1980’s, true, but it would have spoiled most of the bold reform directives as well.
Here at China Strategic Monitor we’d tend to agree that internalisation would increase the harmonious development of China in a socially rewarding way, but we also expect exports to continue to drive economic conditions for the country for a while yet.