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| Why China is different |
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We are living in times that are unprecedented in world history. In decades to come, don't be surprised if your grandchildren ask you: "What was it like when China did not rule the world?" Of course, I'm exaggerating a little. But the rise and rise of China in recent years is perhaps the single greatest economic event since World War II. We've all heard about how strong the Chinese economy is growing. So far this millennium, it has posted average annual growth of 8.5 per cent. But that should be no surprise, even given its moderate market-opening reforms in recent years and its recent entry into the World Trade Organisation. After all, China is still a poor and backward economy, and economic theory tells us there's a great deal of economic catch-up or "growth potential" for poor countries that do the right things with regards to international trade, education and technology. In this sense, China is simply treading a well-worn path most recently traversed by other emerging economies of Asia, such as Taiwan and South Korea. Japan and West Germany – with the assistance of the United States – followed the same path in the 1950s and 60s. And most recently, the countries of Eastern Europe – such as Hungary, Poland and the Czech Republic – have headed down the same path after breaking the shackles of communist rule. But China is different. What is still not fully understood by many is the sheer size of the Chinese economy as it embarks upon its growth catch-up. China is still so relatively poor as it begins its catch-up phase that its spurt of relatively strong economic growth could last much longer than that of other countries. Consider the evidence. When Japan and West Germany began their growth take-off around 1950, their populations were about one-half and one-third respectively of the US. In 2000, when we might mark the beginning of China's growth spurt, China's 1.2 billion population was four times that of the US. All up, China's economy is beginning its growth take-off when it is already almost 60 per cent the size of the US economy. In 1950, Japan's economy was only one-tenth America's size and West Germany only one-fifth. ANZ chief economist Saul Eslake recently delivered a presentation to an Australia-Japan dinner that detailed some of the dramatic effects the rise of China is having on demand for commodities and raw materials. Mr Eslake notes that, in the past five years, China uniformly contributed to the increased global demand for major commodities including oil (38 per cent contribution), coal (70 per cent), iron ore (85 per cent), copper (75 per cent) and nickel (55 per cent of the increase in global nickel demand). Little wonder oil prices have surged to almost US$70 a barrel so far this year and, over the past four years, the prices of copper, nickel and lead have more than doubled. And as Mr Eslake notes, unlike in the 1970s, one of the reasons these strong increases in commodity prices have not translated into higher global inflation and interest rates is because China is using these inputs to pump out cheap manufactured goods, which are helping to contain the goods' prices on world markets. China is also affecting global interest rates and asset prices. Its role as capital exporter rather than importer is contributing to an apparent "savings glut" on world markets, which has depressed long-term interest rates and helped drive up the prices of shares and property across the globe. But China faces its own risks. For a poor country, it is already relatively old, because of its one-child policy, with a median population age of 33. So it will soon face the same challenge of an aging population as developed countries, but without the social resources. The challenges of helping the often difficult transition from inefficient to efficient enterprises within a state-controlled system will probably only mount as the economy matures and becomes more complex. And to the extent even this difficult task is managed, China still faces the challenges of democracy. Source: www.stuff.co.nz Aug 24, 05 |
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