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Daunting challenges for economy
By Michael Spence |
January 27, 2010, Wednesday
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Print Edition
Print Edition
AFTER three decades of sustained growth and a remarkably successful policy response to the recent global crisis, Chinese self-confidence is soaring.
But the lessons that the government may draw from the crisis may not be the best guides for the long term. China faces several parallel and related challenges that are crucial for its internal development as well as its global economic relations. Among these are:
1. A major micro-economic restructuring of the economy to anchor the country's emerging middle-income country status;
2. A macro-economic shift to a higher level of household income and consumption and a more rapid expansion of the middle class;
3. A reversal of the country's now rising income inequality; lowering the very high savings level relative to investment and thus reducing the current-account surplus;
4. Reducing the energy and carbon intensity of future growth;
With a per capita income of around US$4,000 (more with purchasing power adjustments), important parts of China's economy are already, or are now entering, middle-income status.
This is a difficult transition, during which many countries have lost momentum as structural transformations stall. For example, China's labor-intensive export sectors are losing their competitive edge. They must be allowed to decline or move inland (and eventually decline). They will be replaced by sectors that rely more on technology and human capital.
Household disposable income is about 60 percent of national income in China, and the household savings rate is close to 30 percent of disposable income.
These numbers are low and high, respectively, compared to other countries. For China, this puts consumption in the range of 40-45 percent of GDP. To empower the domestic market to drive income growth, and to accelerate the growth of the middle class, these numbers need to shift.
Household income must rise, and, with more ample provision of social security, insurance, and services, precautionary savings should fall. Both will support the middle-income transition by expanding the domestic market as a driver of growth, and will help sustain growth in the face of prospectively weaker global demand.
Most important, rapid growth of the domestic market needs to largely replace the export sector as the employment engine pulling the rural population into the modern economy.
High growth and urbanization have caused rapid rises in incomes in urban areas, with smaller increases in the rural areas. A large group of migrant workers and families (on the order of 150 to 200 million people) are formally still rural, but in fact are marginal urban residents with constrained access to services.
China has faced daunting challenges in the past - and has generally outperformed the forecasts of skeptics. But now China must face global pressures and responsibilities as well.
These partly reflect China's sheer size and impact. But China also faces an external environment that sometimes overlooks or undervalues the rapid rise of millions of Chinese from poverty; that tends to view the global economy as a zero-sum game; and that mistakenly attributes China's economic success to non-cooperative policies in areas like exchange-rate management.
China must confront the challenge of domestic restructuring to sustain growth, while asserting the right to develop without being penalized because of its size.
But it must also assume greater responsibility for global economic and financial stability, as well as represent the interests of less powerful developing countries.
(Michael Spence is the 2001 Nobel Laureate in Economics, and professor eritus, Stanford University. The views expressed are his own. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
But the lessons that the government may draw from the crisis may not be the best guides for the long term. China faces several parallel and related challenges that are crucial for its internal development as well as its global economic relations. Among these are:
1. A major micro-economic restructuring of the economy to anchor the country's emerging middle-income country status;
2. A macro-economic shift to a higher level of household income and consumption and a more rapid expansion of the middle class;
3. A reversal of the country's now rising income inequality; lowering the very high savings level relative to investment and thus reducing the current-account surplus;
4. Reducing the energy and carbon intensity of future growth;
With a per capita income of around US$4,000 (more with purchasing power adjustments), important parts of China's economy are already, or are now entering, middle-income status.
This is a difficult transition, during which many countries have lost momentum as structural transformations stall. For example, China's labor-intensive export sectors are losing their competitive edge. They must be allowed to decline or move inland (and eventually decline). They will be replaced by sectors that rely more on technology and human capital.
Household disposable income is about 60 percent of national income in China, and the household savings rate is close to 30 percent of disposable income.
These numbers are low and high, respectively, compared to other countries. For China, this puts consumption in the range of 40-45 percent of GDP. To empower the domestic market to drive income growth, and to accelerate the growth of the middle class, these numbers need to shift.
Household income must rise, and, with more ample provision of social security, insurance, and services, precautionary savings should fall. Both will support the middle-income transition by expanding the domestic market as a driver of growth, and will help sustain growth in the face of prospectively weaker global demand.
Most important, rapid growth of the domestic market needs to largely replace the export sector as the employment engine pulling the rural population into the modern economy.
High growth and urbanization have caused rapid rises in incomes in urban areas, with smaller increases in the rural areas. A large group of migrant workers and families (on the order of 150 to 200 million people) are formally still rural, but in fact are marginal urban residents with constrained access to services.
China has faced daunting challenges in the past - and has generally outperformed the forecasts of skeptics. But now China must face global pressures and responsibilities as well.
These partly reflect China's sheer size and impact. But China also faces an external environment that sometimes overlooks or undervalues the rapid rise of millions of Chinese from poverty; that tends to view the global economy as a zero-sum game; and that mistakenly attributes China's economic success to non-cooperative policies in areas like exchange-rate management.
China must confront the challenge of domestic restructuring to sustain growth, while asserting the right to develop without being penalized because of its size.
But it must also assume greater responsibility for global economic and financial stability, as well as represent the interests of less powerful developing countries.
(Michael Spence is the 2001 Nobel Laureate in Economics, and professor eritus, Stanford University. The views expressed are his own. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
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