China Economy

One growth model won't work across China

Dan Steinbock says no single economic growth model will work across China, given that its cities are at varying stages of development. Consumption and investment are both critical

PUBLISHED : Thursday, 03 January, 2013, 12:00am
UPDATED : Thursday, 03 January, 2013, 5:10am

When China's new leadership met at the Central Economic Work Conference in mid-December, it set the tone for economic policies for the year ahead. The key tasks include efforts to boost consumer spending, expand public spending on infrastructure projects, promote urbanisation and increase its quality.

Beijing is initiating a change in its growth model, but this transition is unlikely to be abrupt and singular. That approach was tested and discredited in post-Soviet Russia in the 1990s, where it caused a drastic collapse in growth and substantial instability.

The current debate on China's growth model lacks realism. In China, the transition is likely to be gradual and dualistic - that is, requiring both consumption and investment.

Considering the mainland's continental-sized economy, any substantial change in its growth model will require time. Moreover, just as consumption is vital in the more prosperous first- and second-tier cities in coastal regions, investment is critical in third- and fourth-tier cities and rural regions.

No nation in history has been able to change its growth model overnight.

It was textile manufacturing in Manchester that unleashed the first industrial revolution. As the British city evolved into the world's first and largest industrial marketplace for cotton in the early 19th century, it was dubbed "Cottonopolis".

However, Manchester was not Britain as a whole. Nor was Britain synonymous with continental Europe - the Netherlands, Germany and France - where the industrial revolution was ignited later.

Moreover, continental Europe was not Europe as a whole. It took a century and more for industrialisation to spread from the first-tier European metropolises to the central and eastern margins of the region.

After the second world war, Romania experienced rapid industrialisation in an attempt to create a "multilaterally developed socialist society", until it was burdened by piles of growing foreign debt in the 1970s. Before the recession of 2008-09, Romania's growth was among the fastest in Europe - not least because it was still catching up with the rest of Europe.

In brief, the spread of industrial revolution from Manchester to the remotest corners of Romania did not happen overnight. Nor has it happened in a singular manner across Europe. Rather, industrialisation spread from the core to the fringes over time - over a long time.

After initial efforts, China's industrialisation fully took off only with the reforms and opening-up policies in the 1980s, which drove investment-led growth. This model was further augmented in 2001, when Beijing joined the World Trade Organisation, which accelerated export-led growth dramatically.

In Europe, the full spread of industrial revolution has taken over two centuries. In China, it has been effective for only three decades. Moreover, there is a huge difference of scale. In the 1820s, when the British industrial revolution was in full swing, the total population of Europe was barely 133 million. In the mid-1980s, China's population amounted to more than 1 billion.

What about the shift towards consumption that is today considered an urgent imperative? Let's return to the European parallel.

In the mid-19th century, Manchester did begin a gradual move towards consumption, but this was still an exception rather than the rule in the European context. Meanwhile, continental Europe, which was now coping with the dramatic changes of industrialisation, struggled with revolutionary violence, which led to the "Springtime of the Peoples" in 1848. Much of Eastern Europe was still agricultural backwaters, and Romania was dreaming of independence from the Ottoman Empire.

Certainly, it is true that, today, industrialisation can proceed much faster than two centuries ago. Nonetheless, growth models do not change overnight.

In the coming years, China has only one model - reforms - but it must be enforced in a colossal nation in which growth has been "unsteady, unbalanced, unco-ordinated and unsustainable", as Wen Jiabao said in 2007.

Starting in the 1980s, China's reform and opening up were initiated by the creation of the coastal special economic zones, most of which were in Guangdong, close to Hong Kong and Macau. Soon, the reform extended from cities such as Shenzhen and Guangzhou to other primary cities, from Beijing to Shanghai. Over the next two decades, the economic ripple initiated by the success of these megacities washed into new generations of Chinese cities.

As elsewhere, the development has not been balanced across the country. Living standards are often measured by gross domestic product per capita. In China, the difference between the wealthiest and poorest provinces is almost tenfold.

Today, US GDP per capita exceeds US$48,000, whereas that of Thailand is about US$4,900. Just as we would not advocate using similar growth models in America and Thailand, one growth model is not appropriate for many Chinas. Growth models that work in the more advanced coastal regions are not appropriate in China's poorer and less industrialised inland and west.

Different Chinese regions require different growth models. Enforcing such models requires economic reforms, which, in turn, are bound to challenge entrenched interests - as has been the case from Britain and continental Europe to India, Brazil and Russia.

While gradual transition can be accelerated, it cannot be forced. In China, a successful growth model must be tailored for regional differences.

That, in turn, translates to transition towards consumption in advanced regions and efficient investment in developing regions.

Dr Dan Steinbock is research director of international business at the India, China and America Institute (US), and a visiting fellow at the Shanghai Institutes for International Studies and at the EU Centre in Singapore