China after 40 years
View(s):On Tuesday, China celebrated its 40 years of what was called to be the “reform and opening” of the economy. At that time, it was a poverty-stricken economy isolated from the rest of the world – in fact, from the capitalist world.
After the demise of China’s communist leader Mao Zedong in 1976, who had governed the country for more than a quarter century, Deng Xiaoping became the new leader. Deng Xiaoping visited Japan in October 1978 and, saw what a miraculous thriving economy it was! In fact, while China was maintaining its Communist status quo in isolation, Japan had thrived with an “open economy” by sustaining 10 per cent average annual rate of growth until 1973. What Deng Xiaoping witnessed was the outcome of this transformation – the economic prosperity.
Immediately after returning from Japan, he convinced the party leaders on the need for “reform and opening” of the Chinese economy. China laid the foundations for reforms and opening of the economy in December 1978 under the leadership of Deng Xiaoping. This was the beginning of the transformation of the Chinese economy into what it appears to be today – a global super power and, then it began to change the global economy as well.
I wonder how many would have a keen interest in learning from China. Many would be interested in sitting near a rich friend eyeing on his money; but very few among them would be interested in learning from him about how he became rich!
Sri Lanka in 1977
China began its reform programme, one year after Sri Lanka did it in November 1977. By that time, after 20 years of tightened regulated economic policies Sri Lanka was very poor, but China was poorer. GDP per capita of Sri Lanka was US$287 in 1977, compared to $185 in China.
Throughout the past 40 years, China has continued with its reform and opening up policy. It has never stopped the reform process. President Xi Jingping, addressing the nation on Tuesday to mark 40 years of policy reforms, assured the continuity in reforms in the years to come.
In contrast, Sri Lanka’s reform agenda appears to have come to a standstill after 1989, while its open economy seemed to have reversed over the years. People visit the US, Japan, Europe and even China; they appear to have come back thinking that cleaning up canals and repair of culverts together with import controls and subsidies will bring Sri Lanka also to those levels.
Bikes, replaced with motor cars
Out of little less than one billion people in China at that time, as high as 90 per cent were said to be poor. They were vulnerable to the harsh economic realities and misguided policies. In fact, millions of people starved and died in the early 1960s due to a famine.
Today, China’s poverty ratio is less than 3.1 per cent; the reforms and opening policy has enabled China to lift 800 million people out of poverty.
At that time, many would know China for its amazing millions of bicycles filling the streets of urban areas. As BBC reported, there were 5.6 million bikes and 77,000 cars in Beijing; today there are 2 million bikes with 8.5 million cars.
File picture of Chinese tourists enjoying coconut water at a local park. China is Sri Lanka's second largest tourism source market.
Some analysts chose to look at the issue from a different angle; as income rises, they see the increase in riches rather than the reduction in poverty. For them, inequality is the bigger issue. In fact, today China has many of the world billionaires too.
Second largest economy
The Chinese economy has grown on average at about 10 per cent per annum throughout the past 40 years and, become the second largest economy in the world after the US. Its GDP was $150 billion in 1978, which has increased to over $12 trillion now. This is 15 per cent of the world GDP, whereas the US produces 24 per cent of world GDP.
However, the amazement of the difference between the Chinese and the US economies is that China’s economic transformation has challenged the US economic supremacy. The US has a persistent trade deficit and, China is the biggest lender to the US to cover up that deficit. China is number one among foreign governments investing in US bonds. As of now, China owned over $1 trillion US bonds which make up over 20 per cent of foreign debt of the US.
Today, 12 per cent of the world’s exports originates from China, while at the time of opening the economy it was less than 1 per cent. The US cannot compete with Chinese exports, so US investment started shifting to China and the US workers experienced losing their jobs.
It is not surprising that economic supremacy has brought about greater bargaining power to China. It was clear from President Xi Jinping’s speech that China has acquired its global supremacy through economic transformation to the extent that “no one can dictate China’s economic development path”.
Top among the FDI recipients
China’s economic transformation owed much to its foreign direct investment (FDI) flows. According to UNCTAD database, FDI flows to China began in 1980 with the first FDI amounting to $57 million. Then it exceeded $1 billion in 1984, $10 billion in 1992 and, $100 billion in 2010 and continued to remain well above that level over the past seven years.
Today, China is the first among developing countries to receive the largest FDI flows in the world and the second among all the countries in the world, after the US.
FDI flows do not look for the same thing everywhere, while they never bother about certain things that we see as problems. Some may seek advantages of local conditions such as cheap labour or natural resources. Some may look for the bigger markets and efficiency gains. They never look at if the country is democratic or authoritariannor if it is communist or capitalist. But they do consider political stability and safety of their investment. They worry little about special incentives and tax holidays as long as the normal regulatory mechanisms do not deter their investment.
State-owned enterprises
As a dominant feature of its Communist past, China has more than 150,000 state-owned enterprises (SOEs) which control a substantial part of enterprise assets in the country. There have also been significant discussions about the SOE reforms as well.
Unlike in the Western development model, SOEs began going global and becoming state-owned multinational corporations, while China has been leading this initiative.
In a study on SOEs, carried out by OECD in 2013, it was found that out of the world’s 2000 largest listed companies, 204 were SOEs originating from 37 countries: 70 from China, 30 from India, 9 from Russia, 9 from UAE, 8 from Malaysia, 7 from Brazil, 6 from Indonesia, 6 from Poland, 6 from Switzerland, and 5 from France.
When I spoke in favour of privatization of SOEs, some would question quoting countries like China where the government has developed its SOEs to become multinational corporations operating globally. I would say: “Why not? We can also ask our government to do it and show the result.”
Change in the world
China reforms and opening up programme did not change China alone; it also changed the world. Chinese economic transformation has contributed to the growth of Asia which has become the fastest growing region in the world. It has also challenged the economic supremacy of the developed world.
Chinese economic transformation continues to be instrumental in changing the world economy which is yet to be seen within next 40 years.
(The writer is a Professor of Economics at the University of Colombo. He can be reached at sirimal@econ.cmb.ac.lk)