The pains of struc­tural trans­for­ma­tion

China Daily (USA) - - VIEWS - The au­thor is deputy chief of China Daily Euro­pean Bureau. fu­jing@chi­nadaily.com.cn

For more than a year, head­lines world­wide have been point­ing to a Chi­nese eco­nomic slow­down. But a closer look at re­gional dy­nam­ics within China tells a dif­fer­ent story— one that is less about de­cel­er­a­tion than chang­ing gears.

Ac­cord­ing to China’s Na­tional Bureau of Sta­tis­tics, the re­sourcerich prov­ince of Shanxi in North China has suf­fered an eco­nomic slow­down, but South­west China’s Chongqing mu­nic­i­pal­ity and Guizhou prov­ince have ex­pe­ri­enced vi­brant growth. North China’sHe­bei prov­ince and three other north­east­ern prov­inces are feel­ing the ef­fects of re­ces­sion, but the heavy-in­dus­try economies of Tianjin mu­nic­i­pal­ity, and North China’s Shan­dong prov­ince and East China’s Jiangsu prov­ince are boom­ing.

After the 2008 fi­nan­cial cri­sis, when slower growth be­came the “newnor­mal” for many coun­tries, China be­gan ac­cel­er­at­ing its eco­nomic re­bal­anc­ing by shift­ing the driv­ers of growth from man­u­fac­tur­ing and ex­ports to­ward goods and ser­vices for do­mes­tic con­sump­tion.

This tran­si­tion has had far­reach­ing im­pli­ca­tions for the fu­ture dy­nam­ics of China’s econ­omy. Pre­vi­ously, the eco­nomic ac­tiv­i­ties that are now flour­ish­ing weren’t cat­e­go­rized as man­u­fac­tur­ing in­dus­tries at all, but as “ser­vices”. But ser­vices do not ex­ist in a vac­uum. All busi­nesses need man­u­fac­tured prod­ucts, trans­porta­tion, in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy (ICT), lo­gis­tics, real es­tate, fi­nance, in­sur­ance and more.

Thus, new de­mand for new ser­vices has vir­tu­ous-cy­cle ef­fects in terms of cap­i­tal in­vest­ment in in­fra­struc­ture and equip­ment. Con­trary to the con­ven­tional wis­dom, the growth of ser­vices in China to meet do­mes­tic de­mand does not mean the end of man­u­fac­tur­ing and cap­i­tal in­vest­ment, much less of eco­nomic growth.

Ser­vice sec­tors stand to make up for much, if not all, of the growth lost to lower out­put in ex­port-ori­ented man­u­fac­tur­ing sec­tors. China’s trans­porta­tion, ICT, fi­nance, in­sur­ance, real es­tate, ed­u­ca­tion and health­care sec­tors have long had in­ap­pro­pri­ately low la­bor pro­duc­tiv­ity, which means they have sig­nif­i­cant room to grow faster.

Ac­cord­ing to a pa­per by econ­o­mists Jong-Wha Lee andWar­wick J. McKib­bin, ser­vice-sec­tor pro­duc­tiv­ity growth in Asia “ben­e­fits all sec­tors even­tu­ally, and con­trib­utes to the sus­tained and bal­anced growth of Asian economies”. Ex­am­in­ing eco­nomic de­vel­op­ment trends in the Repub­lic of Korea, the au­thors find that the av­er­age value added per worker in trans­porta­tion, real es­tate and ICT is now higher than the av­er­age in man­u­fac­tur­ing, and they point to sim­i­lar dy­nam­ics in the United States, Ja­pan and China.

This find­ing sug­gests that rapid de­vel­op­ment in China’s ser­vice econ­omy could re­verse the ex­ter­nally trig­gered damp­en­ing of growth since 2008. But, as the

Ja­panese and ROK tran­si­tions from ex­port to do­mes­tic de­mand­driven growth demon­strate, struc­tural trans­for­ma­tion is a slow and painful process.

China is in the midst of that process, and it must be care­ful not to un­der­mine ex­ist­ing sources of growth lest it fall into a struc­tural trap where the cost of tran­si­tion it­self de­rails new­gains. It is not a good sign that the high costs in many Chi­nese prov­inces have been weigh­ing down over­all growth.

This points to fun­da­men­tal chal­lenges ahead, notwith­stand­ing the sig­nif­i­cant eco­nomic po­ten­tial of Chi­nese con­sumers. For starters, eco­nomic de­vel­op­ment based on di­ver­si­fied do­mes­tic de­mand is more com­pli­cated than ex­port-driven de­vel­op­ment, be­cause these new­sec­tors rely more heav­ily on so­phis­ti­cated fi­nan­cial ser­vices, free and eq­ui­table mar­ket ac­cess, bet­ter ed­u­cated work­ers, and higher in­vest­ment in re­search and de­vel­op­ment.

As a re­sult, the new­busi­nesses emerg­ing from the shift to a new growth model are de­mand­ing far more from China’s cur­rent eco­nomic-gov­er­nance sys­tem than it can bear. Fur­ther struc­tural re­forms would go a long way to­ward fix­ing this prob­lem, but they will also re­quire China’s lead­ers to make tough po­lit­i­cal de­ci­sions that won’t please ev­ery­one.

An­other fun­da­men­tal chal­lenge is China’s slow rate of ur­ban­iza­tion, which is still lag­ging, even after 25 years of ex­port-led growth. Each of a thriv­ing ser­vice econ­omy’s ma­jor com­po­nents— ICT, fi­nance, in­sur­ance, trans­porta­tion and real es­tate— needs the oth­ers to pros­per, and cities are what bring them all to­gether— a phe­nom­e­non of net­work ex­ter­nal­i­ties.

China’s cities will be a key in­gre­di­ent of its long-term eco­nomic suc­cess. Ur­ban­iza­tion should start ac­cel­er­at­ing to­day, and over the next 10-15 years, with the expansion of metropoli­tan ar­eas geared to­ward the needs of ser­vices-led eco­nomic growth. If China can rise to that chal­lenge, it will be well po­si­tioned to clear the re­main­ing hur­dles in its path to­ward high­in­come sta­tus. The au­thor is a pro­fes­sor of eco­nom­ics and di­rec­tor of the China Cen­ter for Eco­nomic Stud­ies at Fu­dan Univer­sity. Project Syn­di­cate

China re­cently said it would turn about 1,000 towns into dy­namic en­vi­ron­men­tal, cul­tural and eco­nomic hubs by 2020, which would cre­ate in­nu­mer­able newjobs and give rise to new­com­mu­ni­ties.

Since China has about 3,000 coun­ties and 18,000 towns and is home to di­verse re­gional cul­tures, the de­ci­sion ap­pears con­ser­va­tive, although turn­ing a town into a her­itage place is a time-con­sum­ing process.

De­spite these facts, the de­ci­sion is en­cour­ag­ing be­cause it in­di­cates China’s new ur­ban­iza­tion pol­icy, which in the past mainly fo­cused on build­ing cities of vary­ing sizes. The move also in­di­cates China’s de­ter­mi­na­tion to ex­plore the rich­ness of its di­verse re­gional cul­tures by pro­tect­ing as well as pro­mot­ing its nat­u­ral and his­toric trea­sures.

As­sum­ing that at least $100 mil­lion a year will be needed for her­itage pro­tec­tion, in­fra­struc­ture con­struc­tion, and pro­vid­ing en­ter­tain­ment and hos­pi­tal­ity in one town, the scale of in­vest­ment will be huge in these times of eco­nomic down­turn.

And since this will be a newengine to drive eco­nomic growth, China has to ex­er­cise ut­most cau­tion. China must avoid the mis­takes it has made in its ur­ban­iza­tion process over the past two decades or more. For ex­am­ple, China should aban­don the fast-paced de­vel­op­ment plan of the past decades be­cause it didn’t aim at cre­at­ing pre­serv­ing her­itage sites in cities.

In this con­text, China could learn from Euro­pean coun­tries’ ex­pe­ri­ences. Of course, that doesn’t mean sim­ply copy­ing Euro­pean ar­chi­tec­tural styles, as many Chi­nese cities have done in the past.

China should strengthen leg­is­la­tion on her­itage pro­tec­tion at the town level. Pro­tec­tion of his­toric build­ings, bridges and her­itages such as forests, rivers and lakes should be made manda­tory. And the pol­icy should ap­ply not only to the 1,000 se­lected towns but also to the en­tire coun­try.

China could also em­u­late the the­me­based plan­ning of Euro­pean coun­tries. For in­stance, Euro­pean coun­tries have turned the towns in val­leys along ma­jor rivers such as the Danube, Rhine, Seine and Loire into agri­cul­tural and in­dus­trial cen­ters, as well as tourist des­ti­na­tions.

China is de­vel­op­ing the re­gion along the Yangtze River, the long­est in the coun­try, into an eco­nomic belt, so the towns along the Yangtze River and its trib­u­taries could es­tab­lish sis­terly re­la­tions with Euro­pean cities in the same way that more than 600 Chi­nese cities have al­ready done. And the de­vel­op­ment of the towns in the river val­leys can be one of the ma­jor ar­eas of co­op­er­a­tion with Euro­pean cities.

Of course, modern fa­cil­i­ties such as mu­se­ums, the­aters, in­door and out­door swim­ming pools, train and bus sta­tions, and park­ing lots should be built. But pre­serv­ing the her­itage sites in the towns and fol­low­ing lo­cal ar­chi­tec­tural styles should also be part of the new ur­ban de­vel­op­ment plan.

The plan should also aim to re­duce the use of fos­sil fu­els and, in­stead, en­cour­age the use of bi­cy­cles and elec­tric ve­hi­cles, in­clud­ing public trans­port ve­hi­cles. The out­skirts of some of the se­lected towns could also be turned into agri­cul­tural parks, and the towns should strictly weigh the pros and cons of at­tract­ing in­dus­trial plants.

More­over, the towns should pay spe­cial at­ten­tion to build­ing hol­i­day re­sorts and nurs­ing homes for the aged, be­cause the de­mand for such fa­cil­i­ties is on the rise across the coun­try.

Per­haps some aca­demic in­sti­tu­tions could also be re­lo­cated to the new­towns to ease the pres­sure on big cities. Such a plan will also bring value-added ben­e­fits for the se­lected towns’ res­i­dents.

And we can only hope the newur­ban­iza­tion plan be­comes an in­te­gral part of the ma­jor so­cio-eco­nomic trans­for­ma­tion trend for China.

CAI MENG

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