Will China be the next economic miracle?

Friday, 9 January 2015 04:29 -     - {{hitsCtrl.values.hits}}

What will be the next economic miracle? Some believe China and India will re-emerge as the most dominant global powers by 2050 since this had been the case in the 17th century, when China alone is said to have enjoyed a fourth of world GDP. Some even predict Nigeria will be one of top 10 economies by 2050. By 2050 anything could happen in this rapidly-changing environment.                   According to OECD, by 2016 the world’s largest economy will be China, that is by the time President Obama ends his second term. However, other forecasts suggest that the same miracle will take place by 2020. The irony is that even the five-year forecast may not reflect the real situation and therefore cannot be counted on. If we consider the growth pattern of the Chinese economy for the period starting from 1978 to 1998, the growth it enjoyed was anywhere from 4 to 12% a year. However, since 1998 to date it has managed to maintain an unbroken run of growth between 7 to 8%.     Some analysts extrapolate the same level of growth momentum towards the future; however, there are some factors which may hinder China from reaching its preferred destination.   Middle income trap The middle income trap is a theorised economic development situation where a county which attains a certain income (due to given advantages) will be stuck at that level. According to the World Bank, once a country hit a per capita income level of $ 4,000, it then loses growth momentum. This will lead to slow down the economies which may have enjoyed double digit growth levels to single digit level.   According to Breakout Nations by Ruchir Sharma, Japan, the third largest powerhouse, hit this wall in 1970 and Taiwan and South Korea hit this in subsequent decades; however, when it comes to China, it met this target in 2010. In Sri Lanka, we are about to hit this wall and predicting per capita income to be US$ 7,000 by 2020. The irony is with ever-growing per capita, income may lead to lose its competitive advantage over its rivals as the labour component is growing fast. No longer can China enjoy cheap labour advantages as according to recent estimates China’s labour component is a fifth that of the US. And no longer can it enjoy a bottomless pool of cheap labour as it has started incurring labour shortages and the labourers have started demanding higher wages.     In order to avoid the middle income trap, the country will have to adopt new processes with technological advancements to enjoy extreme efficiency and at the same time ensuring there is no room for waste. Further, it can make use of growing middle class i.e. domestic consumption as well and can find new export markets to avoid any decline in export growth.     Rising debt as a proportion of GDP and illusion of $ 2.5 t foreign currency reserve China is sitting on a colossal foreign reserve of $ 2.5 trillion and it is the major creditor to the US. This is a well-known fact. However, Breakout Nations unearths the real illusion behind this and we all may have probably been misdirected. As per official Government debt, this comes to around 30% out of the country’s GDP, which is a more comfortable level. Surprisingly, the debt of companies (mostly owned by Government) and households combined amounts to a staggering 130% of GDP and among the highest in the emerging markets. Further this book argues the real number may be far higher as this does not include shadow banking lending, which is the bedrock of Chinese SMEs. If we incorporate the effect of shadow banking, then the author predicts this ratio will be raised to over 200%.   One-child policy Three decades back, Chinese authorities imposed a one-child policy for its country as at that time they believed the high growth in population would impede economic growth and would be a big burden by way of social benefits to the Government. Therefore, whoever who did not comply with this policy suffered forced abortions and forced sterilisation. According to Health Ministry statistics, doctors have performed 336 million abortions, 196 million sterilisations and inserted 403 million ultra-uterine devises since 1971. From this initiative, according to statistics, authorities managed to reduce the population by around 400 million.     Even though they managed to achieve the above reduction in population, they may have failed to realise how it would affect the long-term growth of the country. With the appointment of the new President Xi Jinping, the new regime eased the stringent compliance by allowing raising of two children if one parent is an only child and planning to abolish the one-child policy completely by 2025 – since China will get old before it gets rich! In 2020 the average age of a Chinese national will be 37, in India the average age will be 29 and in Japan, 48. This shows countries’ energy and future potential for growth. In that case India takes the front seat. (The writer can be reached via [email protected])

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