Dr. Wolassa Kumo
Introduction

As many economists had expected, China overtook Japan as the world’s second largest economy during the second quarter of 2010. The Chinese nominal Q2 GDP was $1.335 trillion surpassing that of Japan, $1.286, by $0.049 trillion for the same quarter. Japan had retained this position since it overtook West Germany as the world’s second largest economy at the end of 1960s.

However, the Japanese economy began to stagnate since the early 1990s following the asset price bubbles of the late 1980s and had grown well below trend for the past 20 years. The Japanese economic growth was further dampened by the 2008-2009 global financial and economic crises. On the other hand, since a landmark economic reform in 1978, the Chinese economy recorded double digit annual average economic growth.

For instance, while Japanese economy grew only by 1.1 per cent during the fourth quarter of 2009, the Chinese economy grew 10.7 percent during the same quarter and 8.7 percent during the year. In 1980 the Chinese GDP of $188 billion was less than 20% of Japanese GDP of $1.05 trillion. However, due to rapid economic growth in China compared to sluggish, below trend growth during the same period in Japan, the GDP of both countries converged at the end of 2009 as the Chinese GDP of $4.91 trillion was only slightly below Japanese GDP of $5.1 trillion in 2009. China and Japan offer a typical proof of the economic convergence hypothesis.

As a result of accelerated and sustained economic growth, poverty in China fell by 80% during the past 30 years. China’s economic success is miraculous not only because of the pace at which it was able to catch up the advanced economies but also because it was based on a unique development model of Socialist Market Economy. The Chinese leadership ingenuously applied market principles in socialist state owned enterprises while it also allowed the private enterprise to gradually develop and contribute to the economic progress of the nation.

China is the only country in the world to achieve rapid and sustained economic progress based on a mixed socialist and market economic model of development that defied the basic principles of free market that was regarded as the foundation of economic prosperity since Adam Smith’s 1776 famous phrase of the “invisible hand”. Wen Jiabao, the current Chinese premier, was once quoted as saying: ” Both visible and invisible hands should regulate market forces.” And that is what worked for China. China is now undisputed world economic superpower surpassed only by the United States of America although it overtook USA as the largest auto market.

Key determinants of the accelerated growth of socialist market economy

Different authors emphasize different factors as key determinants of Chinese fast economic growth. Some argue that the three most important factors in Chinese fast economic growth are: private enterprise, investment on education and openness while others emphasize export, investment and domestic consumption as the three key components that propelled China’s economy.

Between the late 1940s and 1978, China followed a repressive and closed policy of communist economic development with tight state control of production, exchange and distribution. However, beginning in 1978 the Chinese leadership embarked in a landmark policy shift that not only opened up the economy to international trade and foreign direct investment, but also encouraged private sector development and gradual privatization of the state owned enterprises. These reforms and opening up the economy coupled with ingenious use of market forces led to unprecedented economic growth for the past three decades.

The adoption of market principles in state owned enterprises were made possible through series of reforms that separated the functions of government from those of state enterprises and those aimed at revitalizing the private sector. In addition to this, China carefully adjusted its economic structural imbalances by developing massive labour intensive industries with comparative advantage, focusing primarily on export markets.

The Chinese economic success therefore is primarily driven by state entrepreneurship. The Chinese leadership had a clear vision about their country and they delivered on their promises. The Chinese leadership was not only committed to the development of their nation but was also highly capable and no- nonsense leadership. They always prove their words with actions; a critical leadership quality that many leaders of the developing world and especially those in Africa lack. The critics of the Chinese leadership may disagree with me. But let us be realistic; transforming a country from poor agrarian society into the world economic superpower in 30 years cannot come without costs. I request the critics of the Chinese leadership to do a Cost-Benefit analysis of the Chinese economic miracle and show us the evidence.

The socialist market economy ensured high investment and saving

Immediately after opening up the economy, investment in China accelerated reaching 43.5% of GDP in 1993. The other critical components of GDP, domestic consumption and export were also increasing at the same time. China’s domestic market of 1.3 billion people is undoubtedly one of the major drivers of economic success. Although investment slowed down since mid 1990s due to surging inflation, it rose sharply again beginning in 2000 through a combination of massive government infrastructure spending and both foreign and domestic investment in manufacturing. As investment in factories and other construction as well as roads and other infrastructure reached unprecedented levels, gross capital formation rose from 36% in 2000 to 43% in 2003 ensuring GDP growth of over 9% per year from 1995[1]. During the 2008-2009 global economic and financial crises, China’s economic growth was spurred by a $586 billion stimulus package mostly directed towards massive infrastructure investment projects.

The extraordinary investment growth in China was supported by two central government policy instruments [1]. First, key input prices such as land, electricity, and other utilities, including water, were kept low through subsidies and controlled pricing. Land was mostly allocated for development for free and electricity for foreign direct investment was sold at half price. Second, cheap finance was channeled into industry, particularly to SOEs and other large companies, often effectively at zero cost which was made possible by the high savings rate, which averaged 40% of GDP for most of the 1990s and has recently grown to close to 50%[1]. In addition to the above China offered large tax incentives to foreign direct investors. What would African countries which charge more than 50% of the total investment cost for urban land lease learn from China?

Since China opened up its economy and implemented reform programmes to revitalize the private sector, the share of the state sector in GDP declined to only one-third. Foreign direct investment was important but only about 5% of the total investment.

China also maintained export competitiveness through currency depreciation. The yuan gradually depreciated from 3 yuan per US dollar in 1985 to 5.76 in 1994 and approximately 8.28 between the late 1990s to 2005. Currently, the yuan trades at about 7.8 per US dollar.

The socialist market economy improved efficiency of investment

In China an investment of 3.7% of GDP generates 1% of GDP growth and this efficiency of investment, from the point of view of GDP growth, is almost twice that of the US[2]. Another indicator of improved efficiency is growth in total factor productivity (TFP) which reflects a country’s ability to use a broad range of skills, including its public policies and infrastructural development. TFP grew by about 1.98 percent per year on average in China, and 0.87 percent in India for the period 1982- 2008 and by over 4 percent in Russia for the period 1995 ? 2008 as compared to 0.35 percent and 0.18 percent for United States and Japan for the period 1982-2008 respectively. The growth in TFP represents the effect of technological change, efficiency improvements, and our inability to measure the contribution of all other inputs and is a key determinant of long term economic growth.

Enormous investment on education

Improved productive efficiency in China is a result of enormous investment on education. High school and college enrollments are rising sharply in China. In 1998 just 3.4 million students were enrolled in China’s colleges and universities; but over the next four years enrollment in higher education increased 165 percent and the number of Chinese studying abroad rose 152 percent while between 2000 and 2004, university enrollment continued to rise steeply, by about 50 percent [3]. Studies indicate that skilled workers with college education are more than three times more productive than those with less than high school education.

China’s innovative Township ?Village enterprises

The communally owned township-village enterprises which were initially set up during the pre-1978 period to serve the rural areas and which were restricted to the production of non agricultural output such as iron, steel, cement, chemical fertilizer, hydroelectric power, and farm tools were later revitalized and became an engine of rural transformation and economic growth. The development of town and village enterprises transferred more than 120 million people (the total population of Ethiopian and Tanzania combined) out of agriculture by early 1990s.

The township and village enterprises are found to be much more efficient than comparable state-owned enterprises and are competitive in the international markets. Their management, which responds to market forces and their outward-orientation have contributed to their productive efficiency. It is argued that efficient management, which successfully exploits the endowments and resources of the country rather than the nature of ownership of production entities, is crucial to the success of manufacturing firms [4]. It is often argued that openness, not ownership, is the key in economic development. This offers critical lessons to most African countries where over 80 percent of the population survives on subsistence rural agriculture with massive redundant labour, and dismal labour productivity.

The rural sector will continue to play a significant role in China’s economic growth. It is estimated that in 2009,about 55 percent of China’s population, or 700 million people, still lived in the countryside. That large rural sector is responsible for about a third of Chinese economic growth today and will continue to anchor the future growth [3].

Concluding remarks

China’s economic success is a miracle. A country transformed itself from poor agrarian economy in as recently as 1970s to a world economic superpower within 30 years. China is not particularly endowed with vast natural resources as in Africa. But it is endowed with committed, capable and visionary political leaders that put the interest of their people and their country before anything else.

The unique socialist market model of economic development pursued by these leaders defied the main stream economic thinking of laissez faire capitalism as the only way for sustained prosperity. China provides a unique model of economic development to the developing world where it is not the nature of ownership of the means of production that really matters in economic development but it is the degree of openness, management and productive efficiencies that are the key to success. This is not to undermine the importance of a vibrant private sector, both domestic and foreign, in economic development; but rather to emphasize the fact that open, efficient and competitive state and communally owned enterprises complemented by equally vibrant private sector can do economic wonders as in China.

References

[1] Zheng, J, Bigsten, A. and Hu, A. Can China’s Growth be sustained? A Productivity Perspective. Special Issue on Law, Finance, and Economic Growth in China,World Development, 2007

[2] John Ross, Key Determinants Of The Different GDP Growth Rates In India And China, Sunday, May 02, 2010

[3] Robert Fogel, January /February 2010. $123,000,000,000,000. China’s estimated economy by 2010. Be warned.

[4] Fu X. , and Balasubramanyam, V.N. 2003. The Township and Village enterprise in China, Journal of Development Studies, Vol. 39, No.4, 2003.

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