A dif­fer­ent road for­ward

Through­out his­tory, there are count­less ex­am­ples of mid­dlein­come coun­tries be­com­ing stuck in that cat­e­gory for decades or even­tu­ally fall­ing back to low-in­come sta­tus.

The Pak Banker - - Editorial - Yu Yongding

China's per-capita in­come, at $3,800, has sur­passed the thresh­old for a mid­dle-in­come coun­try. But even as econ­o­mists and strate­gists busily ex­trap­o­late its fu­ture growth path to pre­dict when it will catch up to the United States, the mood in China be­came somber and sub­dued in 2010. In­deed, Premier Wen Ji­abao sees China's growth as "un­sta­ble, un­bal­anced, un­co­or­di­nated and ul­ti­mately un­sus­tain­able".

Eco­nomic growth, of course, has never been lin­ear in any coun­try. Through­out his­tory, there are count­less ex­am­ples of mid­dlein­come coun­tries be­com­ing stuck in that cat­e­gory for decades or even­tu­ally fall­ing back to low­in­come sta­tus. The No­bel lau­re­ate econ­o­mist Michael Spence has pointed out that af­ter WWII, only a hand­ful of coun­tries were able to grow to a fully in­dus­tri­al­ized level of devel­op­ment.

China's progress over the past three decades is a suc­cess­ful vari­a­tion on the East Asian growth model that stems from the ini­tial con­di­tions cre­ated by a planned so­cial­ist econ­omy. That growth pat­tern has now al­most ex­hausted its po­ten­tial. So China has reached a cru­cial junc­ture: with­out painful struc­tural ad­just­ments, the mo­men­tum of its eco­nomic growth could sud­denly be lost.

China's rapid growth has been achieved at an ex­tremely high cost. Only fu­ture gen­er­a­tions will know the true price. The coun­try's in­vest­ment rate now stands at more than 50 per­cent - a clear re­flec­tion of China's low cap­i­tal ef­fi­ciency. There are two wor­ry­ing as­pects of this high rate. First, lo­cal gov­ern­ments in­flu­ence a large pro­por­tion of in­vest­ment de­ci­sions. Sec­ond, in­vest­ment in real es­tate devel­op­ment ac­counts for nearly a quar­ter of the to­tal.

Some lo­cal gov­ern­ments are lit­er­ally dig­ging holes and then fill­ing them in to ratchet up the GDP. Con­se­quently, there are sim­ply too many lux­u­ri­ous con­do­mini­ums, mag­nif­i­cent govern­ment of­fice build­ings and soar­ing sky­scrapers. Ho­tels in China's pro­vin­cial cities make five-star es­tab­lish­ments in Western cap­i­tals looked shabby.

China has be­come one of the world's most pol­luted coun­tries. Dust and smog choke its cities. All of the coun­try's ma­jor rivers are con­tam­i­nated. Al­though progress has been made, de­for­esta­tion and de­ser­ti­fi­ca­tion re­main ram­pant.

Drought, floods and land­slides have be­come com­mon­place. Re­lent­less ex­trac­tion is quickly de­plet­ing China's re­source de­posits.

With China's trade-to-GDP ra­tio and ex­ports-to-GDP ra­tio al­ready re­spec­tively ex­ceed­ing 60 per­cent and 30 per­cent, the econ­omy can­not con­tinue to de­pend on ex­ter­nal de­mand to sus­tain growth.

Un­for­tu­nately, with a large ex­port sec­tor that em­ploys scores of mil­lions of work­ers, this de­pen­dence has be­come struc­tural. That means re­duc­ing China's trade depen­dency and trade sur­plus is much more than a mat­ter of ad­just­ing macroe­co­nomic pol­icy. Af­ter decades of rapid ex­pan­sion, China has be­come the work­shop of the global econ­omy. The prob­lem is that it is no more than a work­shop. A lack of in­no­va­tion and cre­ation are the econ­omy's Achilles' heel.

For ex­am­ple, in terms of vol­ume, China has be­come the world's largest car pro­ducer, churn­ing out 17 mil­lion ve­hi­cles this year. But the pro­por­tion of mod­els de­vel­oped by do­mes­tic car­mak­ers is neg­li­gi­ble.

In an era of rapid tech­no­log­i­cal progress, cre­ativ­ity and in­no­va­tion, the global eco­nomic land­scape can change rapidly. With­out a strong ca­pac­ity for in­no­va­tion and cre­ativ­ity, even a gi­ant has feet of clay. And when a gi­ant falls, many get hurt.

While China's liv­ing stan­dards have dra­mat­i­cally risen over the past 30 years, the gap be­tween rich and poor has sharply widened.

In­come dis­tri­bu­tion has re­mained skewed in fa­vor of the rich for too long, and the govern­ment has failed to pro­vide de­cent pub­lic goods. With the con­trast be­tween the op­u­lent life­styles of the rich and the slow im­prove­ment of ba­sic liv­ing con­di­tions for the poor fo­ment­ing so­cial ten­sion, a se­ri­ous back­lash is brew­ing.

If China fails to tackle its struc­tural prob­lems in time, growth is un­likely to be sus­tain­able. Any struc­tural ad­just­ment is painful. But the longer the de­lay, the more painful it will be.

China's strong fis­cal po­si­tion to­day gives it a win­dow of op­por­tu­nity. But that win­dow will close fast, be­cause ben­e­fi­cia­ries of spe­cific re­form poli­cies have mor­phed into vested in­ter­ests, which are fight­ing hard to pro­tect what they have.

What the pub­lic re­sents most is the col­lu­sion be­tween govern­ment of­fi­cials and busi­ness­peo­ple, de­scribed by the re­spected Chi­nese econ­o­mist Wu Jinglian as "cap­i­tal­ism of the rich and pow­er­ful".

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