People's Democracy

The Chinese Growth Miracle

  Jayati Ghosh

CHINA is widely regarded as one of the “success stories” of globalisation, emerging into a giant economy of the 21st century. The successes that have been identified are in terms of high and sustained rates of growth of aggregate and per capita national income; the absence of major financial crises that have characterised a number of other emerging markets; substantial reduction in income poverty. These results in turn are viewed as the consequences of a combination of “prudent” yet extensive programme of global economic integration and domestic deregulation, as well as sound macroeconomic management.

This experience is then used to argue the case for globalisation and to indicate the potential benefits that other developing countries can reap, as long as they also follow “sensible” macroeconomic policies. But there are very specific features of the Chinese experience which have allowed such rates of growth to be sustained, that are rarely mentioned in the discussion. This is why Chinese economic growth warrants a closer look.

China recorded an annual trend rate of growth of real GDP of 9.8 per cent during the quarter century ending in 2003. This truly remarkable pace of growth for a period of over two decades has been punctuated with concern about bouts of deflation or overheating. Macroeconomic management in China appears to have more to do with dealing with these cycles around a relatively high trend rate of growth, rather than with realising and/or sustaining that trend itself.

VERY HIGH INVESTMENT RATES

China’s exceptional growth performance over the past three decades is most fundamentally a reflection of the high investment rates that have characterised the economy over this period. Capital formation as a share of GDP has been very high by international standards over the past thirty years, varying between 32 per cent and 44 per cent of GDP. There has also been substantial volatility in this indicator, around an increasing trend. As shown in Chart 1 and Table 1, rates of growth of GDP have been strongly associated with investment rates, which is only to be expected. The cyclical pattern of aggregate income growth around a high trend rate therefore appears to a result of the pattern of investment growth over this period.

Chart 1

Table 1

The question then becomes, what explains this pattern of volatile but generally high rates of investment? It is evident that the stop-go cycles that characterise investment reflect the broader macroeconomic policy of adjusting domestic investment (and indeed consumption demand) to price changes. Macroeconomic policy generally – and therefore aggregate investment, which continued to be substantially influenced by government decisions given the nature of the economy - appears to have been strongly responsive to the inflation rate. Higher investment rates have caused high inflation in the subsequent period, thereby leading to cutbacks in investment.

Despite the volatility, the investment rate of the economy increased from 34.5 per cent of GDP for the three year period at the start of the “economic reforms” (1979-81) to 39.8 per cent for the three year period 2001-03. Most recent data indicate that the investment rate in China is around 45 per cent currently.

HIGH RATES OF SAVINGS

These imply rates of domestic saving which are exceptional not only by international standards, but more particularly for an economy at China’s level of per capita GDP. Such high rates of domestic saving in turn imply a suppression of domestic consumption which is only possible with high and/or growing income inequality, which allows a substantial proportion of incremental income to be saved. If this argument is accepted, then growing inequality is not simply an adverse fallout of the pattern of growth in China thus far, but an important factor behind such growth, enabling the sustained increase in investment rates which is the most obvious engine of economic expansion.

It may be argued that domestic savings has been less significant than foreign savings, and in particular FDI, in allowing for such high rates of investment. This is particularly so because of the emergence of China as the second largest recipient (and the largest in the developing world) of FDI, which has increased from near zero in the early 1980s, to more than $50 billion in recent years on average. However, in fact China’s dependence upon external capital for financing investment has been relatively low, especially when compared to other developing countries. The ratio of foreign capital inflow to GDP rose to reach 8 per cent in 1994, and thereafter has hovered around 5 per cent. Furthermore, the large inflows of the past two years have not contributed to domestic investment, macro-economically speaking, since they have been associated with even higher domestic savings rates and the consequent build-up of foreign exchange reserves. 

GROWING INEQUALITY AND THE HIGH RATE OF GROWTH 

Therefore, the role of high investment – itself related to the overall development and macroeconomic stance of the government, which extends well beyond purely budgetary expenditures to its control over off-budget investments etc., has been critical in achieving the extraordinary growth of the past decades. And this has been permitted by the pattern of growth which has allowed incremental incomes to be concentrated in certain regions and among certain groups, thus enabling high savings rates to be continue and even increase over time. There is evidence of high and growing inequality in China in recent years, which has had mainly spatial dimensions, in terms of growing income and consumption inequality between rural and urban areas as well as across regions (between the more rapidly growing Eastern region, and the central and western regions).

But the implicit dependence upon increasing inequality is not the only reason why other developing countries should be careful when trying to emulate the Chinese performance. There is a basic difference in economic structure between the Chinese economy and other capitalist developing economies. Even throughout the period being considered, the basic elements of a command economy have been much in evidence in China. Even after the quite sweeping economic reforms that have taken place since 1979, state control over macroeconomic balances remains substantial.

Furthermore, because of the significance of state-owned enterprises and TVEs in total production, the ability to influence aggregate demand does not depend only upon fiscal policy in terms of purely budgetary measures, since many “off-budget” expenditures can be increased or reduced. Further, monetary policy as is generally understood in capitalist economies has very little meaning in China where private financial activity is limited and state-owned banks still dominate overwhelmingly in the provision of credit. This means that for most of the period under discussion, macroeconomic policies in China were necessarily very different and had very dissimilar implications, from those in capitalist developing economies. It also makes the Chinese experience one which is only easily replicated by other countries.