The rise of its vertical economy will have important consequences for its trading partners
By SHAHID JAVED BURKI 26 January 2010
For the last several decades the developing world has had a much higher rate of GDP (gross domestic product) growth than the developed world. This is particularly the case for the emerging markets of Asia. For the next few years the entire increase in global output will come from emerging economies.
It is for this reason that analysts such as Fareed Zakaria, Thomas Friedman and Kishore Mahbubani have suggested that the centre of gravity of the global economy is shifting from the Atlantic to the Pacific. The emerging world’s remarkable performance has been led by its two largest economies, China and India.
China’s remarkable economic performance has been the subject of much study by the practitioners of many disciplines. In my own work in the area, I have identified four phases in China’s emergence as an economic powerhouse. It all started with the effort launched by Mao Zedong that lasted for almost three decades - from the arrival of the Chinese communists in Beijing on Oct 1, 1949 to his death on Sept 9, 1976.
During this period, in spite of several policy missteps that resulted in the deaths of millions of people, Mao was able to transform China socially. He brought universal literacy and health care to the citizenry and introduced gender equality into the Chinese social system.
Without the human base Mao built, China’s second phase, launched by Deng Xiaoping, would not have achieved economic success. Mr. Deng set the stage for pushing back the worst aspects of communism in favour of opening the economy to private initiative.
This was Mr. Deng’s ‘communism with Chinese characteristics’. Agriculture, with massive increases in output and productivity, was the first to benefit, followed by small-scale industry and short-distance commerce. At the forefront of this effort was the town and village enterprise owned by the communities. This was a uniquely Chinese business organisation. This phase lasted for about a decade.
The third phase was also inspired by Mr. Deng who encouraged the Chinese enterprises to partner those in the West. There were three reasons this was encouraged. It brought new technologies and management practices to China, it found new markets for the rapidly increasing output of the industrial sector, and it brought China as an active participant into the global economy.
China is now entering the fourth phase with its economy about to become the second largest in the world, overtaking Japan sometime this year or in 2011. This has been an amazing trajectory to follow. Would it last?
After growing at rates close to 10 per cent average a year for the last quarter century, the Chinese economy suffered a slight setback in 2008. However, it began to recover at a pace not expected by most experts. The rate of growth in 2009 was estimated at 8.5 per cent; it is likely to increase to 9.5 per cent in 2010 and perhaps once again will reach double-digit rate of growth in 2011.
The Chinese have used the state once again as the leader and allowed it to climb on to the commanding heights of the economy. The large amount of stimulus money, close to the equivalent of US$600 billion, provided by the state went to the state-owned companies, especially those in the construction business. Much of this was spent on infrastructure.
In other words, the Chinese gave up on The Washington Consensus sets of policies they had partially adopted during the first phase of their economic take-off, but went in for a more state-directed-economy approach during their ‘second rise’.
The state has played an important role in helping to revive as well as modernise the economy. It has followed the ‘picking the winners approach’ once popularised by Japan and the miracle economy of South Korea. Like those two countries, the Chinese are also working on building their economies by focusing on a few sectors.
It is the state’s intention to turn the car industry into a leading sector of the economy. The sector was a part of the stimulation package developed by the government to revive the economy. It was also helped by the government’s directive to the banks it controls to provide consumer finance. These measures resulted in soaring sales.
Major car market
In January 2009, the government reduced by one-half the purchase taxes on small vehicles. That move prompted a buying spree that lasted throughout the year and extended beyond small cars to boost sales of vehicles of all sizes.
As a result, car sales in 2009 rose by nearly 53 per cent to 10.3 million while total vehicle sales - including buses, trucks and the small commercial vans that powered much of last year’s growth - rose 46.2 per cent to 13.6 million units.
This allowed China to go past America and become the leading global car market several years ahead of expectation. US car and light truck sales were 10.4 million.
The focus on the car industry is not the only major shift taking place in the structure of the Chinese economy. It is giving up on low-skill labour output and moving quickly towards high-skill and knowledge-intensive industries.
Short of cultivable land, China is also letting its industry go vertical, producing finished products in high-rise buildings by importing parts and components that need land-using factories to produce.
The rise of the ‘vertical economy’ in China will have important consequences for its trading partners, especially those that are land-rich as well as those - Singapore is an example - that produce sophisticated components for high value-added products.
These parts and components in Singapore and other high-tech centres in Asia are also produced in high-rise buildings. These economies have provided China the example of going vertical in organising its production processes.
Massive investments in the building of infrastructure, replacing low-wage exports in favour of knowledge-intensive products, and temporary incentives for boosting domestic consumption are some of the elements in the fourth phase of China’s economic transformation.
Will it succeed once again or are we looking at a China bumble? I will take up this question in this space a couple of weeks from now.
The writer is a senior visiting fellow at the Institute of South Asian Studies. He is former vice-president of the World Bank and served as Pakistan’s finance minister in 1996-97. He has authored and edited several books on China
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China’s four phases of growth
The rise of its vertical economy will have important consequences for its trading partners
By SHAHID JAVED BURKI
26 January 2010
For the last several decades the developing world has had a much higher rate of GDP (gross domestic product) growth than the developed world. This is particularly the case for the emerging markets of Asia. For the next few years the entire increase in global output will come from emerging economies.
It is for this reason that analysts such as Fareed Zakaria, Thomas Friedman and Kishore Mahbubani have suggested that the centre of gravity of the global economy is shifting from the Atlantic to the Pacific. The emerging world’s remarkable performance has been led by its two largest economies, China and India.
China’s remarkable economic performance has been the subject of much study by the practitioners of many disciplines. In my own work in the area, I have identified four phases in China’s emergence as an economic powerhouse. It all started with the effort launched by Mao Zedong that lasted for almost three decades - from the arrival of the Chinese communists in Beijing on Oct 1, 1949 to his death on Sept 9, 1976.
During this period, in spite of several policy missteps that resulted in the deaths of millions of people, Mao was able to transform China socially. He brought universal literacy and health care to the citizenry and introduced gender equality into the Chinese social system.
Without the human base Mao built, China’s second phase, launched by Deng Xiaoping, would not have achieved economic success. Mr. Deng set the stage for pushing back the worst aspects of communism in favour of opening the economy to private initiative.
This was Mr. Deng’s ‘communism with Chinese characteristics’. Agriculture, with massive increases in output and productivity, was the first to benefit, followed by small-scale industry and short-distance commerce. At the forefront of this effort was the town and village enterprise owned by the communities. This was a uniquely Chinese business organisation. This phase lasted for about a decade.
The third phase was also inspired by Mr. Deng who encouraged the Chinese enterprises to partner those in the West. There were three reasons this was encouraged. It brought new technologies and management practices to China, it found new markets for the rapidly increasing output of the industrial sector, and it brought China as an active participant into the global economy.
China is now entering the fourth phase with its economy about to become the second largest in the world, overtaking Japan sometime this year or in 2011. This has been an amazing trajectory to follow. Would it last?
After growing at rates close to 10 per cent average a year for the last quarter century, the Chinese economy suffered a slight setback in 2008. However, it began to recover at a pace not expected by most experts. The rate of growth in 2009 was estimated at 8.5 per cent; it is likely to increase to 9.5 per cent in 2010 and perhaps once again will reach double-digit rate of growth in 2011.
The Chinese have used the state once again as the leader and allowed it to climb on to the commanding heights of the economy. The large amount of stimulus money, close to the equivalent of US$600 billion, provided by the state went to the state-owned companies, especially those in the construction business. Much of this was spent on infrastructure.
In other words, the Chinese gave up on The Washington Consensus sets of policies they had partially adopted during the first phase of their economic take-off, but went in for a more state-directed-economy approach during their ‘second rise’.
The state has played an important role in helping to revive as well as modernise the economy. It has followed the ‘picking the winners approach’ once popularised by Japan and the miracle economy of South Korea. Like those two countries, the Chinese are also working on building their economies by focusing on a few sectors.
It is the state’s intention to turn the car industry into a leading sector of the economy. The sector was a part of the stimulation package developed by the government to revive the economy. It was also helped by the government’s directive to the banks it controls to provide consumer finance. These measures resulted in soaring sales.
Major car market
In January 2009, the government reduced by one-half the purchase taxes on small vehicles. That move prompted a buying spree that lasted throughout the year and extended beyond small cars to boost sales of vehicles of all sizes.
As a result, car sales in 2009 rose by nearly 53 per cent to 10.3 million while total vehicle sales - including buses, trucks and the small commercial vans that powered much of last year’s growth - rose 46.2 per cent to 13.6 million units.
This allowed China to go past America and become the leading global car market several years ahead of expectation. US car and light truck sales were 10.4 million.
The focus on the car industry is not the only major shift taking place in the structure of the Chinese economy. It is giving up on low-skill labour output and moving quickly towards high-skill and knowledge-intensive industries.
Short of cultivable land, China is also letting its industry go vertical, producing finished products in high-rise buildings by importing parts and components that need land-using factories to produce.
The rise of the ‘vertical economy’ in China will have important consequences for its trading partners, especially those that are land-rich as well as those - Singapore is an example - that produce sophisticated components for high value-added products.
These parts and components in Singapore and other high-tech centres in Asia are also produced in high-rise buildings. These economies have provided China the example of going vertical in organising its production processes.
Massive investments in the building of infrastructure, replacing low-wage exports in favour of knowledge-intensive products, and temporary incentives for boosting domestic consumption are some of the elements in the fourth phase of China’s economic transformation.
Will it succeed once again or are we looking at a China bumble? I will take up this question in this space a couple of weeks from now.
The writer is a senior visiting fellow at the Institute of South Asian Studies. He is former vice-president of the World Bank and served as Pakistan’s finance minister in 1996-97. He has authored and edited several books on China
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