China - Case Study I

Key Questions:

·         Is growth increasing incomes on the average Chinese?

·         Is growth lifting people out of poverty?

·         Is minimum wage industrialisation the best way to achieve growth?

QUALITY of growth matters

·         Average income for a Chinese worker is (USD)$8000

·         By 2020, it is estimated that average Chinese wages would have risen to (US) $14,000. This level is considered to be the upper income level that moved countries such as Singapore, South Korea, Greece and Portugal, to ‘rich’ country stats - the level that moved these countries past the boundary

Five year plan

·         China’s growth has been, on average, 9.6% over the past 30 years

·         The five year plan is the government’s 12th five-year plan used to set the future growth agenda for China

·         Renewed in 2011, the priorities for this plan are sustainable growth, industrial upgrading and the promotion of domestic consumption

·         Criticism: there is no implementation plan

See kpmg report:

·         Half of china’s growth comes from adding capital. Bear in mind that growth quality is now becoming the most important thing to think about rather than growth quantity

Total Factor Productivity (TFP) is measured by innovation, allocative efficiency (re-allocation of factors, e.g. rural to urban, state owned to private) and human capital. TFP is the contribution of all factors of production to growth. When TFP increases, the growth rate increases. This means that one or more of the factors of production has been changed.

Innovation - micro level data shows that ⅔ technology comes from imitation, most developing countries imitate first to gain enough wealth to then invest it into R&D for new product development. Imitation leads to innovation - creating an increase in growth.

Human capital - China’s investment in human capital is geographical unevenly distributed. Rural parts of China are under-invested in. If China invests in human capital all round, it has a better chance competing with other economies. Human capital is beneficial because:

·         Skill levels increase. E.g. they will be more qualified to perform tasks and will do so quicker

·         Creates a flexible economy - workers have a greater capacity to adapt to changes in the economy, i.e. seize new opportunities for wealth creation

·         Increases occupational mobility of labour and geographical mobility of labour as because of the previous point

·         High levels of education can increase a worker’s ability to use foreign technology, their ability to absorb new information and acquire technical skills

Middle Income Trap

China needs to avoid the middle income trap. The middle income trap is the trap that developing countries fall into when trying to make their transition from a developing country to a developed country. They are not low income by definition, i.e. they experience high growth rates and make money, but they are not high income countries because they do not have technological advantages. China’s wages are starting to increase, as shown here, demonstrating that what was once the most popular destination for cheap manufacturing, is now losing to countries such as Bangladesh and Singapore.

Key points:

·         Wages are increasing

·         Poverty is slowing decreasing

·         Innovation is creeping up

·         Chinese firms are expanding globally

·         Without the prospect for cheap labour, firms will be deterred from investing in China

·         Only urban members of the workforce are educated, also potentially deterring firms

·         The Chinese economy is still imitating

These points suggest that China is heading for the middle income trap, a limbo between the rich and poor, unable to progress. There are criticisms of the middle income trap, read the Economist article here to gain other perspectives, which will help you build your argument in your exam. Remember that providing alternative views are brownie points. Read the sources at the bottom as well.

The Future

·         Focus on overcoming the middle income trap

·         Increase own market reliance, e.g. US consumers are increasingly buying domestically produced goods

·         Increase domestic demand by lowering exports. E.g. exports are only a fraction in the US - China needs to get to that

·         Privatise. State owned companies are not as productive. They distort the allocation of lending and bank credit. State owned enterprises account for 30% industrial output and ¼ of urban jobs

·         Increase innovation

·         Increase opening - more Chinese firms should go global.

o        We have seen Chinese investment in African natural resources, which is a start. They are building infrastructure in poor African countries and providing jobs (however a negative is that they are competing with local firms and undercutting them, making it difficult for locals to make a living)

o        China should focus on moving up the value chain by producing things that is most competitive

o        The government should push to create Chinese multinationals

o        At the moment, Europe in particular can benefit from the additional investment that Chinese firms can offer

·         Services are important - increase job creation, create a high skilled labour force and help China rebalance

·         Raise consumption as a share of GDP, not rising it in absolute terms

·         Restructure the economy: more services, quality of growth needs to increase

·         Productivity and innovation: compete to produce the best products in the world. Join the ranks of rich countries, e.g. Samsung (South Korea) competing with Apple (US)

·         Political reforms are required to sustain a prosperous middle class