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| Golden Resources Mall, China ( Image source- Wikimedia Commons / Author- Frank Yu) |
Source- Want China Times
Whenever any negative figures have been in seen in China's economic performance in recent years, all sides rush to provide extensive analysis as to just how hard the country's economic landing will be. A look back to the experience of Japan in the 1960s and the Asian Tigers in the 1970s reveals that slowing economic growth after a period of extremely rapid development is not necessarily such a terrible thing.
Japan and the four Asian Tigers of Taiwan, Hong Kong, Singapore and South Korea have used the model of "manufacturing plus exports" to achieve dynamic growth but they also have encountered inevitable economic transformation brought about by the moving offshore of their labor-intensive manufacturing industries due to the rising domestic labor costs caused by their own success. Japan's average annual economic growth rate slowed from 10% in the 1960s about 8% in the 1970s and about 6% in the 1980s. The average economic growth in Taiwan, South Korea, Hong Kong and Singapore slowed to 3.87%, 4.1%, 3.9%, and 5.63%, respectively, during the 2001-2013 period from much higher levels in the preceding 20 years, demonstrating that slowing economic growth is natural for a maturing economy.
After entering the period of slower growth, Japan and the Tigers with their relatively stable political systems, solid infrastructure and quality human resources, did not only avoid a hard landing but also managed to maintain 20 years of mid- to high levels of economic growth and have gradually joined the ranks of developed countries. China, which has copied the successful model, also possesses the means to cushion downward economic pressure and transform its economy. Pessimistic forecasts should therefore only apply if China fails to carry out its structural transformation in the right way.
Some variables may certainly affect this process. The country has a huge and aging population and as its demographic dividend decreases, the working class is not yet well enough off to be comfortable as it grows older. The workforce peaked in 2010 and has been in decline since then.
Second, China's economy previously relied excessively on an investment model, which carries with it massive debt risks. Debt accounted for 130% of GDP in 2007 and this rose to 220% of GDP in 2014. To resolve the issue, the State Council has strengthened monitoring to rein in the growth of shadow banking, but this makes it hard for local governments to find the money for the construction projects that keep their GDP figures up.
Third, though it has grown rapidly, China's urbanization rate is only 54%, lower than the average of 80% for developed countries and 70% for the Asian Tigers, indicating that China still has room for continuing development of its labor-intensive industries. The problem is that China's promotion of urbanization has resulted in overinvestment and has created quite more than a few "ghost towns" of empty commercial and residential buildings. In drafting economic policy, the government should not only consider what should be the focus for its industrial transformation but also should make more effective arrangements for its industry structures.
Due to the aforementioned factors, it will not be as easy for China to undergo its necessary transformation as it has been for Japan and the Tigers. It needs not only to maintain growth in domestic demand but also to achieve a higher degree of marketization to allow resources to be used effectively. The government should therefore not only play the role of a "coach" for leading economic transformation but also the "referee" to maintain market order.
Of course as a big country, China possesses more favorable conditions in the process of its economic transformation, with considerable domestic demand to maintain its current industrial development but also with the huge market to support competitive, innovative industries. Unlike Japan and the Tigers, China can skip a stage by developing its own new life and industry style and it has a higher chance of helping specific industries get to the forefront of international markets.
The first priority for the government is to stabilize the slowing economy, quickly push for and maintain domestic demand and diversify its industrial structure. It must also establish a stronger and wider social safety net to cope with the country's aging population.
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