Forecasters predict that China’s economy will overtake the US economy some time in the 2040s and become the world’s biggest in dollar value. On a purchasing power parity basis, China will catch up earlier.
But the trouble with these sorts of projections is that they tend to look at China’s growth rate now and then project it forward along with that for the US. The point at which they intersect is the point at which China’s economy will overtake the US economy. But as some analysts have also pointed out, a great deal is going to need to happen to the Chinese economy before it gets anywhere close to rivalling that of the US.
No country is rich because its citizens work in factories making simple items such as plastic toys and cigarette lighters. China will only ever become a country with developed-country levels of incomes because the bulk of its citizens have stopped making these things; because they have moved higher up the skills ladder and are employed in services. That is the paradox of many “industrialised” countries: no longer do they have significant industries.
Haier, China’s No.1 whitegoods producer, is held up so often as the first attempt by a Chinese company to build a global brand that it has become something of a cliche. Partly owned by the northern city of Qingdao, the company claims a third of the market for small fridges in the US and a billion dollars in overseas sales, but it ranks high on the list of world producers only because most of its sales are for the Chinese domestic market. It has a long way to go before it will ever compete with the true world market leaders, the likes of Whirlpool and Bosch-Siemens with their streamlined production facilities and huge investments in design and innovation.
One problem for Haier is that it costs a lot to ship whitegoods from China to the big markets of the West. The problem of cost has grown more so in recent months because China’s dramatic expansion into world trade has massively forced up shipping rates. And so Haier has resorted to opening production facilities in the US. But the whole point of Haier’s competitive advantage is that it is a low-cost producer and yet workers at its US plant are paid 10 times the hourly rate of Chinese workers.
Right now China is doing well from what’s called economic convergence, whereby it doesn’t need to incur the expense of research and development because it can beg, borrow and steal it from other economies that already have it, and by shifting workers out of low-productivity employment in rural areas to higher-productivity employment in factories. But the problem with this is that each extra unit of growth carries with it lower prospects for continuing growth at current levels.
If China is going to be as rich by the 2040s as analysts say, then it is going to have to be a very different place. China’s private sector has been important for introducing flexibility and at driving exports but virtually all of China’s heavy industries remain in state hands. Half of all bank loans still go to state-owned enterprises and most will never be repaid. China remains one of the most corrupt countries in the world, and the Chinese Communist Party, the world’s biggest, most corrupt organisation. All of this will need to change.
China will need to invest heavily in education, much more than it does now. It will need a comprehensive legal system that is enforced. Property rights will need to be better recognised. And it will need to have a political revolution so that the market for ideas is robust and unconstrained. This will mean greater plurality in the political arena and in the media. Is that likely? It all depends on what China’s political leadership really cares about.
Does it care more about economic development or preserving its own power? Clearly, it is the latter. Converting China from a paddy field to a factory does not threaten the leadership’s political power. But the next stage of economic development: forming an ideas-based, creative, services-oriented economy will present a direct threat to the leadership. So it is unlikely to happen any time soon.
Extract from The Age