The rich neighbour
View(s):
Imagine one of our neighbours doing well in his business and becoming rich day by day. The way he continues to progress, surely in the years to come he is going to be one of the world’s richest persons. If we get to sit and discuss for half an hour with him over a cup of tea, I wonder what kind of things we would ask him. I am sure many would eye his money thinking that giving away some money to a friend is not a big deal from a rich person. Some may think of borrowing some money, but never think seriously of how to pay it back.
I feel that, however, not even a few would be interested in learning from him “how he became rich”. Even if he reveals some of his strategies, many would find excuses to say that such strategies cannot be applied to them or why such strategies don’t work for them.
China – a distant neighbour
I am thinking of China as the rich neighbor, although our “rich neighbours” are not limited to China alone. China initiated its policy reforms towards an “open economy” in 1978, a year after Sri Lanka took this course. Since then, China has been growing to be the biggest economy in the world. It is already the world’s second largest economy producing 15 per cent of the world GDP. Twenty years ago, in 2000, having produced only 4 per cent of world GDP, China was behind the US, Japan, Germany, the UK and France. But now, China has surpassed them all except the US which still produces 25 per cent of the world GDP.
The Chinese path to prosperity is entirely a different story which inspired me to talk about China. I thought of elaborating on few of the salient features of its development, if we have any idea to learn from its strategies. Some of these strategies are not only interesting, but also surprising because they are unconventional. A closer look at them reveals that, perhaps, our conventional ideologies are quite outdated now.
China has sustained an exceptionally high rate of economic growth – as high as 10 per cent per annum on average over a long period of time, and an investment ratio as high as 40 – 45 per cent of GDP. What made it possible for China to be a high performing economy in the world? It was China’s ability to conquer the global market with exports. At the time of initiating policy reforms in 1978, China’s exports amounted to US$10 billion only, which has now increased to $2,500 billion.
China is too small
There are important characteristics of China’s export growth, which are interesting to consider. In spite of having the world’s largest population of 1.4 billion people, the domestic market was too small to China. It always focused on the global market. As some would argue, domestic demand was even ignored and was put aside by China in order to consider later.
Exports were generated not only by domestic investment, but also by foreign investment which started to flow in massive amounts. Before policy reforms in 1978, there was no reported foreign investment in China. It started with just $50 million in 1980 and increased constantly reaching $50 billion by 2002. Over the past 10 years, China’s foreign investment continued to remain well above $100 billion a year.
Passengers in a subway train in Beijing on August 26, 2020. (Photo by WANG ZHAO / AFP)
China never thought that foreign investors were going to exploit its resources or going to pull out more than what they brought in. On the contrary, with foreign investment China was able to overcome the domestic savings shortage for investment, to conquer the global markets which were already in the hands of foreign investors, and to acquire foreign technology, labour training and management practices into growing Chinese production as well.
Some of the foreign investment was only for “assembly” activities for exports so that actually China became an “assembly centre of Asia”. But China didn’t cry foul about lower domestic value addition of such products or lack of their backward and forward linkages. As the assembly activities in China required parts and components to be imported from other countries in the region where they are produced, the Chinese supply chain networks triggered trade expansion and economic growth in other countries as well.
Future growth, guaranteed
China has to ensure its future expansion in line with its global vision which was incorporated into its Belt and Road Initiative (BRI) – the modern silk route, connecting China to Europe via East Asia, Southeast Asia, South Asia, West Asia and, finally Africa. The modern silk route of China connects over 65 countries with two-third of world population and one-third of world GDP. On the part of China, this modern silk route ensures continuous supply of inputs to sustain the future economic growth of China on the one hand, and an open window to global markets for its output sales on the other hand.
An access to global markets through the silk route for input supply and output sales is not enough. China needs to attract even more investment and businesses and, should facilitate existing businesses to progress more. Apart from the “unilateral” policy reforms, China is now making another initiative to establish a “special economic zone” in Hainan province. The term special economic zone is used to designate a “free trade and investment area” which is not subject to the normal regulatory mechanism and tax system of the country. Hainan is an island – an industrialised area with an international port, similar to half of the size of Sri Lanka with about 10 million population – an ideal location for a special economic zone with a free port, as China has already already announced.
Leaving rural villages
With economic development in any country, people are leaving the rural agriculture sector to take up modern jobs in the urban sector. Therefore, the rural population should decline and the urban population should increase, although sometimes we are not comfortable with accepting that change. However, this process would further enhance economic development and improves people’s living environments.
China has, however, found that this rural-urban population composition and economic structure has not changed adequately. Besides, China already has a vast rural sector with unsustainable remote villages with small-scale agriculture and resulting poverty and hardship of rural people. What is the Chinese way of solving the problem?
The solution was embodied in China’s New-type Urbanisation Plan (NUP) 2014-2020 which put the people at the centre of an urban plan in order to transfer 100 million rural people to urban cities. Later the plan was extended to cover 250 million rural people to accommodate in the cities by 2026. China knows that this plan would enhance even rural agriculture productivity, ensure labour supply for modern industry and service sector, and reduce poverty of rural people, even though some of us wish to look at the other side of the plan – the problems of dislocation.
Disciplined citizens
One of the most radical initiatives of the Chinese government to build a “disciplined nation” was the Social Credit System launched in 2014 to evaluate disciplinary standards and trustworthiness of citizens and to reward and punish them accordingly. People’s activities such as disorderly behaviour, reckless driving, smoking in non-smoking areas, delay in bill payments, and many more related to daily affairs, all are under surveillance and recording in order to assign credits under the Social Credit System.
The punishments are often the denial of rights that average citizens enjoy. These punishments include such things as refusal of issuing tickets to planes or trains, rejection of university admissions or better schools for children, rejection from banking services, and the requirement to pay higher charges for services. And we should also know that all these punishments also carry social condemnation as well. Some may consider it a violation of fundamental rights, but it is also important to note that “fundamental rights” are not always absolute as “national interests” may precede them.
All these examples show the sacrifice that China has made in its effort towards becoming a world economic power. Some may perceive only the wealth of China which is the outcome of that sacrifice, but hardly see the country’s harsh journey to prosperity.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).