cover story-nov-dec2010

INFOCUS | CHINA ECONOMY | COVER STORY

China Contrast

|32| India-China Chronicle  November-December 2010

November-December 2010  India-China Chronicle |33|

INFOCUS | CHINA ECONOMY | COVER STORY

With great power comes great responsibility. China is the second largest economy in the world. While the West wants China to be part of the developed world, China is fighting shy. Why?

Mohammed Saqib is Fellow, Rajiv Gandhi Institute of Contemporary Studies, Rajiv Gandhi Foundation

Developed or Developing? he world has between 189 to 195 countries, depending upon what source you use. China’s current Gross Domestic Product (GDP) is $3,000 US per person . . . placing it 104th in the world. That’s not even in the top half of the world. So is China developing or developed?

China has achieved rapid economic development in the past 20 years and has been playing an increasingly significant role in the world. This has sparked off the debate. Some people in the West claim China has already become the engine pulling the world economy out of the mire of economic crisis. The reason why some people in the West try to cite China as a developed country is that they want China to shoulder a greater responsibility in coping with global issues, such as global warming.

China faces a host of lurking problems and obstacles in its economic and social development. Those claiming China to be a developed country evade crucial points and only dwell on what are favourable to their own argument, and their motive is to load heavier responsibilities on China’s shoulders so as to retard its development.

Sure, Beijing and Shanghai look sparkly and pretty. However, the eastern seaboard is more the exception than the rule. The media plays up the advancement of these mega-cities, but plays down the lesser developed parts of the same country. There are those in these cities too who are completely unaware that the whole country doesn’t have the same lifestyle that they do.

China’s rural-urban wealth gap was the widest last year since the nation launched its economic transformation three decades ago.

Urban per capita income stood at 17,175 yuan (US$2,500) in 2009, compared to 5,153 yuan in the countryside, a ratio of 3.33 to 1. The disparity, arising from rapid economic development in coastal areas and cities, while the vast interior has lagged behind, has become a key concern of China’s leaders as they seek to maintain social stability and prevent unrest.

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Second largest Economy August 16 was a landmark for the People’s Republic of China 2010. For on that day, China went past Japan to become the second largest economy of the world, in terms of nominal |34| India-China Chronicle  November-December 2010

GDP. The second quarter output in China came in at $1.337 trillion against Japan’s $1.288 trillion and America’s $3.522 trillion. Earlier in February 2010, China had zipped past Germany as the world’s largest exporter with exports of USD 1.2 billion against Germany’s USD 1.12 billion in 2009. It heralded the arrival of the New China. China today also has the world’s largest foreign exchange reserves pegged at USD 2.45 trillion and is the world’s most attractive FDI destination with a more than 20 per cent year-on-year increase for the first seven months of this year, to $58.3 billion.

This year, although growth has begun to moderate a bit, China’s economy is forecast to expand by about 10.5 per cent, according to the IMF, which will amount to a remarkable three-decade streak of double-digit growth.

There is little disputing that under the direction

of the Communist Party, China has begun to reshape the way the global economy functions by virtue of its growing dominance of trade, its huge hoard of foreign exchange reserves and the United States government debt and its voracious appetite for oil, coal, iron ore and other natural resources. With its meteoric growth over the last three decades, it is becoming questionable whether the country can still be considered a developing country. Many in the West would like to believe that China is part of the developed world and so must share its global responsibility. But China is not willing to fall prey to western notions aimed at slowing down the Dragon.

China is clear that it is still a developing nation and has a long way to go before it can wear the mantle of the developed.

Parameters for Developed But what are the parameters that define developed or developing? And how does China fare compared to global indices of “developed.”

According to the United Nations (UN), a developed country is one that allows all its

Source: World Development Indicators database, 2009

citizens to enjoy a free and healthy life in a safe environment. The development of a country is measured with statistical indexes such as income per capita (per person) (GDP), life expectancy, rate of literacy, etc. The UN has developed the HDI, a compound indicator of the above statistics, to gauge the level of human development for countries where data is available.

The IMF classification system considers per capita income level, export diversification and degree of integration into the global financial system, as the three factors to determine whether a country is developed or developing.

In case of WTO, members announce for themselves whether they are “developed” or “developing” countries. A developing country status in the WTO brings with it certain rights.

There are for example provisions in some WTO agreements which provide developing countries with longer transition periods before they are required to fully implement the agreement and developing countries can also receive technical assistance. WTO members have provisions to safeguard the interests of developing countries when adopting some domestic or international measures (eg. in anti-dumping, safeguards, technical barriers to trade). It also has provisions for helping developing countries (eg. to deal with commitments on animal and plant health standards, technical standards, and in strengthening their domestic telecommunications sectors).

By some measures — such as per capita income — China is still very much a developing nation. However, China’s size, power and influence exceed what most experts would attribute to a developing nation. China is already a major driver of global growth. The country’s leaders have grown more confident on the international stage and have begun to assert greater influence

China faces a host of lurking problems and obstacles in its economic and social development.

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INFOCUS | CHINA ECONOMY | COVER STORY

The large proportion of China’s rural and impoverished population means the country has not yet extricated itself from a developing nation status.

in Asia, Africa and Latin America, with things like special trade agreements and multibillion dollar resource deals.

China now has more billionaires than any other country besides the United States, according to Forbes magazine. According to Forbes, the world now has 1,011 billionaires with the biggest concentration being in the US at 403 followed by 64 in China. Although China is developing faster than any country of the world, there are huge challenges ahead. China is in the throes of urbanization and is far from developed, analysts say, meaning it has a much lower standard of living, as well as a lot more room to grow.

China has roughly the same land mass as the United States, but it is burdened with a fifth of the world’s population and insufficient resources. Its per capita income is more on par with those of impoverished nations like Algeria, El Salvador and Albania — which, along with China, are close to $3,400 — than that of the United States, where it is about $46,000. Its per capita GNI is still at the level of medium and low-income countries. A very crucial reason why China still retains its status of a developing country is the fact that China’s development has been unbalanced with growing income disparities. Its uneven distribution of wealth leaves a large part of the population without the benefits of improved standards of living implied by official statistics.

China’s Three Zones The country comprises three distinct economic regions, each of which presents a unique economic landscape for urban development.

The eastern coastal provinces are the most developed, utilizing 75.1% of foreign direct investment (FDI) in 2008. The country’s three major growth engines – the Yangtze River Delta, the Pearl River Delta and the Pan- Bohai Rim – are all located within this area. The Eastern areas comprise 11% of China’s land area, 28% of its population and 62% of its GDP. The manufacturing prowess of these provinces constitutes China’s economic engine, driving the country’s export-oriented growth model.

In contrast, central Chinese provinces such as Anhui, Henan, Hubei, Hunan, Jiangxi, Helongjiang and Shanxi comprise 15% of China’s land area and 30% of its population, but only 23% of its GDP. This region relies on an outdated industrial base made up of state-owned enterprises. Much of the infrastructure is outdated and the region is largely dependent on agriculture and other primary industries.

Finally, western provinces such as Gansu, Qinghai, Sichuan, Yunnan, Guizhou, Shaanxi,

|36| India-China Chronicle  November-December 2010

Sources: IMF, NBS Yearbook 2009

Guangxi, Xianjiang and Tibet lack an economic base due to their rugged and inhospitable geography. Together, these provinces comprise 72% of China’s land area, 28% of its population and only 15% of its GDP. The government-initiated stimulus of 2009 has allocated substantial resources to infrastructure development in the region.

The large proportion of China’s rural and impoverished population means the country has not yet extricated itself from a developing nation status. Of the country’s 1.3 billion population, 700 million, or about 58 per cent, still live in rural areas, seven percentage points higher than the world’s average level of 51 per cent.

According to the “one dollar a person a day” poverty standard set by the United Nations, China still has 150 million people living below the poverty line, unevenly distributed in 512 poor counties. Even according to the lowincome standard worked out by China in 2009 — which set an annual income of 1,067 yuan as the threshold dividing those who weren’t living in poverty from those who were — the country still has about 43 million people living in poverty, a figure equivalent to the whole population of the People’s Republic of Korea

and five times Singapore’s population.

Besides its comparatively low productivity, China’s industrial and economic structures also have some worrisome problems, with industrial and agricultural value accounting for 47 per cent and 11 per cent of its economic output, with the service sector supplying only 42 per cent. Whereas in some high-income countries it is the service sector that is creating the lion’s share of their economic output.

Urban and Rural China’s urban and rural economic development is also seriously unbalanced, with the per capita disposable income in urban areas 3.3 times that of rural areas in 2008. The Gini coefficient, an index to measure the rich-poor gap, was 0.415 in this country the same year, not only higher than that in developed countries, but also higher than that in such developing countries as Romania, India and Malaysia.

In terms of its social development process, China is still in the middle stage of modernization. In 2009, the country’s urbanization rate was 46.6 per cent, lower than the 50 per cent world average, and much lower than the average level in the US and European countries, where it was 80 per cent. The same year, the country’s Human Development Index (HDI), worked out by the United Nations Development Program, was only 0.772, which ranked it 92nd in the world. As per UNDP, China qualifies as a country of medium human development.

Country Norway Australia Japan USA Italy UK Germany Malaysia Russia Brazil China South Africa India

HDI 0.971 0.97 0.96 0.956 0.951 0.947 0.947 0.829 0.817 0.813 0.772 0.683 0.612

Ranking 1 2 10 13 18 21 22 66 71 75 92 129 134

China’s economy is too heavily dependent on exports and investment and it needs to encourage greater domestic consumption. It needs to continue to pay attention to rebalancing development.

Source: Human Development Report 2009 (2007 data)

Social Index Mao Zedong was famous for his quote, November-December 2010  India-China Chronicle |37|

INFOCUS | CHINA ECONOMY | COVER STORY

“Women hold up half the sky.” But, in modern and growing China, women today are still not regarded equally. There is huge chasm between education for men and women. Despite a remarkable progress in its economic development over the past decades, China has yet to make significant efforts to improve its education, medical care and social security infrastructure. In 2008, the country spent about 2.4 per cent of its fiscal revenues on education, compared to the 4.9 per cent world average, the 5 per cent of OECD members, and 4 per cent of middle-income countries. China’s economy is too heavily dependent on exports and investment and it needs to encourage greater domestic consumption. It needs to continue to pay attention to rebalancing development domestically in many sectors.

The rebalancing of urban and rural issues and related to that the possibility of increasing value-added production in China to support higher income and better living standards, is the need of the hour.

The country’s largely state-run banks have recently been criticized for lending far too aggressively in the last year and even engaging in financial engineering, shifting some loans off their balance sheet to disguise lending and evade rules meant to curtail lending growth.

China is also locked in a fierce debate over its currency policy, with the United States, European Union and others accusing Beijing of keeping the Chinese currency, the renminbi, artificially low to bolster exports — leading to huge trade surpluses for China but major bilateral trade deficits for the United States and the European Union. China says its currency is not

substantially undervalued and that it is moving ahead with currency reform.

Regardless, a fast-growing China suggests that it will continue to compete fiercely with the United States and Europe for natural resources but also offer big opportunities for global companies and technology firms eager to tap its market. Evaluating what China’s newfound clout means, though, is complicated. While the country’s has relatively poor per capita, it has an authoritarian government that is capable of taking decisive action — to stimulate the economy, build new projects and invest in specific industries.

As we know, what makes a country developed is not merely its GDP, its foreign exchange reserves or its total import-export volume. More important elements of a developed country come from the level of a nation’s technology, the influence of its cultural appeal, its persuasive power, and the effect of its comprehensive power including education, eco-environment and welfare systems. China should boldly draw upon all the progress of human civilization and all advanced business and managerial expertise that embody the laws governing modern social production.

China’s progression to Socialism, however, has made it lag far behind those of the developed countries. It will take a fairly long historical period before China can achieve industrialization and modernization. This can be ascribed to China’s huge population, weak economic base and development imbalances between urban and rural areas and among different regions. Its low level of productive forces have also remained basically unchanged. China is still in the primary stage of socialism and the country will still be a developing nation for a long period in the future.

Dr Barun Mitra, Director of Liberty Institute makes a valid point when he says that, “China is still a developing country, but is moving towards developed status at a pace that is unique.”

The international community has been judging China from many angles, some of which are objective and friendly, while others are clearly biased and hostile. The difference in the premise of their analyses has naturally led them to different conclusions. A biased view and a preconceived notion can never be conducive to developing relations, knowing or benefiting from each other and contributing to the integration of the world economy. As for now, China is heading in the right direction. The future is indeed promising!  Inputs by Anchit Goel and Aanchal Kumar.

(Views expressed by the writer are his personal views)

|38| India-China Chronicle  November-December 2010