Thursday, October 20, 2005

China in Perspective

The impending economic hegemony of China has been widely predicted, and Secretary John Snow has been working hard to convince China to revalue its currency in an effort to stem the US/China trade deficit. Indeed, as The Economist reports, China has made large strides in the past 10 years, solving many of the problems of transition to markets that, for instance, Russia, has not.

The number of state firms has tumbled from over 300,000 to 150,000 in the past decade.

This has been offset by rapid growth in the private sector. The OECD estimates that in 2003 private companies accounted for 63% of China's business-sector output (which in turn accounts for 94% of GDP). This compares with 54% in 1998 and virtually nothing in the 1970s. If you add in “collective” enterprises, which are officially controlled by local government but in practice operate more like private firms, the private sector's share was 71% in 2003 (see chart). By now it is probably close to three-quarters. Nevertheless, that still leaves state enterprises' share of output well above that in OECD countries.

That being said, at the start of the 1990s China's central planning authorities regulated the distribution of aobut 600 commodities, while the Soviet Union regulated over 100 times that number, so the scale of central planning was much less in China to begin with.

China's 2004 GDP was about $1.6 trillion, compared with the US's $11.7 trillion. The US growth rate was 4.4% last year, compared with China's 8.5% average annual real GDP growth in the past 4 years. These figures make it sound like the US economy is really falling behind China. But here are a few reasons to temper predictions of America's eclipse by China:

-Another way of comparing US and Chinese economies is to note that 10 years ago China's GDP was one tenth of the US GDP, and last year it was one seventh--hardly an economic realignment.

-China's economy is about the same size as Brazil's ($1.5 trillion with a 5.1% growth rate).

-Economists generally agree that the bilateral trade deficit (the difference between what two specific countries export to each other) is much less important than a given country's total trade deficit. What matters is if a country is net positive or negative for foreign capital, and this is determined much more by domestic savings rates than by presence or lack of protectionist policies.

-Time Asia reports that "62% of the [China's] export growth over the past decade came from Chinese subsidiaries of multinationals headquartered elsewhere in the world—in Asia, Europe, and America."

-Other "Asian Tiger" economies like Japan and Taiwan seemed indomitable during the 1970s and 1980s, but faltered in the 1990s, largely due to reliance on easily-withdrawn foreign investment and loose credit policies from their central banks--somewhat similar conditions exist in China now, with government capital readily available to multiple inefficient state firms.

Clearly China is a growing player in the global economic scene, but harmful policies (i.e. protectionist tariffs and regulation) will result if we allow ourselves to get carried away with economic alarmism and facile ideas about 'giant sucking sounds' to the East, rather than carefully considering trade policy.


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