adminDr Bongani Ngwenya
PRIOR to the trajectory of economic reforms and trade liberalisation, which is barely 36 years ago, China had maintained policies that kept its economy very poor, stagnant, centrally-controlled, severely inefficient, and relatively isolated from the international community and global economy.
Since the decision to open up to foreign trade and investment and implementation of free market reforms in 1979, China has become the world’s fastest-growing economy, with real annual Gross Domestic Product (GDP) growth averaging about 10 percent through 2014. China is a living testimony that economic reforms do work, notwithstanding the importance of the context they must be applied. It is true that it cannot be a one-size-fits-all scenario. However, appropriate benchmark for Africa.
Preamble
Up to 1978 for example, nearly three-fourths of industrial production was produced by centrally controlled, State-Owned Enterprises (SOEs), according to centrally planned output targets. Private enterprises and foreign-invested firms were generally barred. A central goal of the Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was generally limited to obtaining those goods that could not be made or obtained in China (in cases where China did not have any comparative advantage). Such policies created distortions in the economy. Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced (since they were mainly focused on production goals set by the government).
The Chinese government in 1978 (shortly after the death of Chairman Mao in 1976) decided to break with its Soviet-style economic policies by gradually reforming the economy according to free market principles and opening up trade and investment with the West, in the hope that this would significantly increase economic growth and raise living standards. As Chinese leader Deng Xiaoping, the architect of China’s economic reforms, put it, “Black cat, white cat, does it matter what colour the cat is, as long as it catches mice?” From 1950 to 1978, China’s per capita GDP on a purchasing power parity (PPP) basis, a common measurement of a country’s living standards, doubled. However, from 1958-1962, Chinese livings standards fell by 20,3 percent, and from 1966-1968, they dropped by 9,6 percent. In addition, the growth in Chinese living standards paled in comparison to those in the West, such as Japan and the USA.
China’s Economic Reforms that Africa can draw a leaf from
Beginning in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. In addition, the government established four Special Economic Zones (SEZs) along the coast for the purpose of attracting foreign investment, boosting exports, and importing high technology products into China. Additional reforms, which followed in stages, sought to decentralise economic policymaking in several sectors, especially in trade. Economic control of various enterprises was given to provincial and local governments (decentralisation), which were generally allowed to operate and compete on free market principles, rather than under the direction and guidance of state planning. In addition, citizens were encouraged to start their own businesses (private enterprising). Additional coastal regions and cities were designated as open cities and development zones, to leverage the SEZs strategy which allowed them to experiment with free market reforms and to offer tax and trade incentives to attract foreign investment.
In addition, state price controls on a wide range of products were gradually eliminated. Trade liberalisation was also a major key to China’s economic success. Removing trade barriers encouraged greater competition and attracted more FDI inflows.
China’s gradual implementation of economic reforms sought to identify which policies produced favourable economic outcomes (and which did not) so that they could be implemented in other parts of the country, a process Deng Xiaoping reportedly referred to as “crossing the river by touching the stones”.
Since the introduction of economic reforms, China’s economy has grown substantially faster than during the pre-reform period, and, for the most part, has avoided major economic disruptions. From 1979 to 2014, China’s annual real GDP averaged nearly 10 percent. This has meant that, on average, China has been able to double the size of its economy in real terms every eight years. Economic reforms, which included the decentralisation of economic production, led to substantial growth in Chinese household savings as well as corporate savings (this leveraged domestic investment). As a result, China’s gross savings as a percentage of GDP is now the highest among major economies. The large level of savings has enabled China to substantially boost domestic investment. In fact, China’s gross domestic savings levels far exceed its domestic investment levels, which have made China a large net global lender from surplus reserves.
However, as China’s technological development begins to approach that of major developed countries, such as Japan (i.e. through its adoption of foreign technology), its level of productivity gains, and thus, real GDP growth, could slow down significantly from its historic levels unless China becomes a major center for domestic new technology and innovation and, or implements new comprehensive economic reforms. Several developing economies (notably several in Asia and Latin America) experienced rapid economic development and growth during the 1960s and 1970s by implementing some of the same policies that China has utilised to date to develop its economy, such as measures to boost exports and to promote and protect certain industries. However, at some point in their development, some of these countries began to experience economic stagnation (or much slower growth compared to previous levels) over a sustained period of time, a phenomenon described by economists as the “middle-income trap.” This means that several developing (low-income) economies were able to see a transition to a middle income economy, but because they were unable to sustain high levels of productivity gains (in part because they could not address structural inefficiencies in the economy), they were unable to see the transition to a high-income economy. China may be at a similar crossroads now.
The Economist Intelligence Unit (EIU) projects that China’s real GDP growth will slow considerably in the years ahead, averaging 5,4 percent from 2015 to 2024, 3,1 percent from 2025 to 2034, and 2,0 percent from 2035 to 2044. Eventually, according to the EIU, Chinese real GDP growth rates will be similar to US levels. The Chinese government has indicated its desire to move away from its current economic model of fast growth at any cost to more “smart” economic growth, which seeks to reduce reliance on energy-intensive and high-polluting industries and rely more on high technology, green energy, and services. China also has indicated it wants to obtain more balanced economic growth.
In conclusion may I suggest that the ability of the Chinese government to implement such reforms will likely determine whether China can continue to maintain relatively rapid economic growth rates, or will instead begin to experience significantly lower growth rates. Economic reforms do work. They have worked for China, and the most critical factor here is the ability to appreciate and understand the African Continent’s weaknesses or problems and the willingness to address them, especially corruption.
Dr Bongani Ngwenya is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business. He can be contacted on mailto:[email protected]; [email protected]
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