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ArchiveJune 8 2003

Health scare will not stop China’s progress

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As Chinese authorities report rising numbers of SARS cases and rumours abound that an epidemic is set to erupt in rural areas, some have begun to argue that this could be the moment that China’s great economic miracle will suffer a serious setback.

But China’s fantastic economic progress since Deng Xiaoping opened up its industry to foreign investment and launched the private sector in the early 1990s is not going to be stopped just by a health scare.

China has only a 4% share of the world’s merchandise trade, but it is now contributing close to 25% of the annual growth in world exports. And national output is rising at a rate of nearly 10%, while the developed G7 economies languish with 1%-2% growth.

This success is partly founded on China’s huge reserves of cheap labour, with an industrial workforce more than three times larger than in the OECD countries combined. The attraction of limitless cheap labour has enabled China to snare foreign capital.

It is also a product of China’s unique socio-economic structure. Being half a command economy and a political dictatorship, the laws of comparative advantage do not apply to China. Sure, it can take over the low-cost end of world manufacturing. But it can also choose to invest hugely in the higher value-added tech sectors, where it is also gaining market share. Labour will stay dirt cheap, but the skill set will improve sharply. China has more science, technology and engineering students than any G7 country including the US.

Win, win situation for China

Cheap Chinese exports are exerting a massive deflationary pressure on world goods prices, but in reality have simply unleashed China’s ability to become a hyper-productive platform for a whole range of overpriced and uncompetitive goods hitherto made in the West. This empowers the Western buyer by making his money go further. But it threatens the cosseted jobs of highly-paid labour forces throughout the OECD at the same time. It’s a fine balance as to whether the rich countries are winners and losers but it’s win, win all the way for China.

After years of tortuous negotiations, China finally agreed to join the World Trade Organisation (WTO). The West may have thought this would allow them to control China by seizing its economy by the tail. Well, they will have to think again.

China joined to continue to attract foreign investment – but on its terms. Ironically, hardly any foreign companies that have set up in China to sell to the Chinese have made a significant profit. But no matter, the potential of 1.2 billion consumers is too much of a lure.

Political power

If China’s miracle is to end, it won’t be through economics. It’s the politics. The rest of Asia lives in fear of its economic competition and its military manpower. So the region looks to the US and Japan in response. And this is a US administration not afraid to take things head on. China was driven to the sidelines in the debate leading up to the Iraq war – an irrelevance. Now Kim Il Jong in North Korea has belligerently taken on the US, and China again seems impotent in its attempts to get Mr Kim to compromise.

The most important contradiction in China’s economic model has yet to unravel. There have been hints of it in the SARS story which highlights how things have moved on from the days of Tiananmen Square. The authorities quickly had to admit their evasions. The people are not meekly accepting what their leaders tell them, and are taking their own actions to quarantine areas by vigilante groups.

That shows how China’s increased prosperity will create conditions for a civic and legal society to replace the absolute rule of the Communists. As China’s peasants migrate in their millions to cities, they improve their educational levels and skills as well as their living standards. They no longer suffer rural ignorance. And a middle-class is developing that will grow in confidence and independence. It is years away, but that will eventually topple China’s political dictatorship off its economic foundation.

David Roche is president of Independent Strategy

The Bracken column feature is named after Brendan Bracken, the founding editor of The Banker in 1926 and chairman of the modern-day Financial Times from 1945 to 1958. This column reflects his enormous contribution to the open discussion and understanding of international finance and banking. It focuses on providing views and perspectives on how to improve the global financial system.

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