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The Transfer of Growth Pattern: What Should We Change?


Liu Shijin

I. How to Evaluate the Current Pattern of Growth

In general, the achievements in economic development since China started its reform have been positively evaluated domestically and internationally. But views are different regarding the pattern of economic growth of China. [1] "Extensive" and "low efficiency" are the words often used by the critics. It is indeed perplexing to have such diversified assessments over the "efficiency" and "pattern" of China's economic development.

Quite a few figures could be cited to back up the evaluation over China's growth pattern. Here we can do a simple logical deduction. In recent years, China has topped the world in attracting FDI, which is a fact. If China's growth pattern was merely "extensive" and "low efficiency", why would foreign investment not stay in the "intensive" and "high efficiency" growth patterns of other countries? Pursuing profit is the nature of capital. It would be hard to explain why foreign investors had flocked to China if the country had not displayed higher efficiency than other countries. Of course, a vast market is a strong reason. But how could one explain why China became the third largest foreign trade economy in the world, and the more than half of the exports were produced by foreign-invested enterprises? [2] It shows that China has the advantages not only in consumption, but also in production. It also excels in the combination and use of production factors.

"Extensive" and "low efficiency" are indeed the problems existing in China's pattern of economic growth. But it certainly is not the complete picture. We need to have a complete, objective and unbiased understanding over China's growth pattern. Following points need to be stressed.

First, China has rare advantages in combination of factors. China has a vast market and rich labors. These are all based on the largest population in the world. The large population was basically regarded as a burden. After the industrialization entered its mid-term stage, population has brought about what economists call "population bonus". In addition, relatively complete industrial system and fine traditions of thriftiness, diligence and self-discipline are the favorable factors for the country's development. Internationally, there are quite a few economies that possess one or two of these factors. But few have all these factors. In a certain sense, China has a unique combination of all these conditions, because it has the world's largest population.

Second, the reform and opening-up have turned the above-mentioned factors into realistic competition advantages. Traditional comparative advantage theory cannot explain why there is a development gap between the countries with similar factor endowments. The question is that only having certain factors cannot necessarily convert into competition advantages. Many regions abundant in natural resources are "begging with a golden bowl" while other areas lack of resources grow rapidly. The key is to have a system that well combine and use the factors. In this sense, China's reform has been creating such as a system. The same enterprise or region with the same factors could appear completely different. The direct role of the opening-up is to promote the flow of factors. From other countries, we could introduce funds, technology, supply chain and marketing channels, which we lacked before so that the combination of factors would be more diversified and efficient. Opening-up is also a kind of reform. While these factors are introduced, a new corporate system and management mode have also been brought in. In short, the reform has solved two basic questions, first, promoting the flow of factors in a larger scope and even globally; second, changing the way of combination and use of factors and raising the efficiency. The result is that the comparative advantages of factor combination would turn into realistic competitive advantages. As China's competitive advantages are seen obviously in the low cost of such factors as laborers, the growth pattern of China at this stage could be simply summarized as one of "low-cost competition".

Third, as the "dual structure" exists in terms of system and efficiency, "low-efficiency competition" is not enough to cover the whole picture of the country's economy. The sectors that have low-cost advantages are those in which market competition is fully practiced, and which are mainly composed of non-state enterprises and state-owned enterprises that have successfully be restructured. In the sectors where administrative monopoly is dominant and state-owned enterprises are in numbers but have not been substantially restructured, the low-cost advantages are not evident, and even become disadvantages. For example, compared with a large foreign petrochemical enterprise, a large Chinese enterprise's average salary is much lower. But the Chinese enterprise employs several times as many employees, its unit-output-value wage cost is even higher than that of foreign enterprise. [3] Therefore, when we speak of "low-cost" competitive advantages, we must be clearly aware that this is the characteristic of a part of the economy. But in other parts of the economy, "extensive" and "low-efficiency" problems not only exist, but also are very prominent.

Fourth, with the rise of per capita income and costs in factors, competitive advantages in low costs are being weakened. New competitive advantages should be formed through technological progress so as to transfer the competitive advantages dynamically. The environmental pressure is increasing. The rise of the costs of such factors as laborers and land are rising. With the adopting of scientific view of development, the underestimated prices of factors are corrected. The protectionism in international trade is also gaining ground. All these factors will pose a challenge to the low-cost competitive advantages. The country's low-cost advantages cannot certainly disappear overnight. But it is inevitable that these advantages are being weakened. This could be seen in coastal and southeast region. As this region has had the largest input-output ratio and strongest economic vitality, the weakening of low-cost advantages should not be underestimated. The transfer of competitive advantages does not only happen in China. It was a repetition of the stories of the United States, Europe, Japan, South Korea and Chinese Taiwan Province in the Chinese mainland (first in the developed coastal area). The answer to this challenge is to foster new competitive advantages on the basis of technological progress. Technological progress or self-innovation is not a new issue. But it has never been as urgent as it is now. It is of vital importance whether China can sustain its economic growth in the future 10 or 20 years and continue to keep its competitive edge.


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[1]Pattern of growth is a concept that has been used for a long time. It mainly refers to the degree of efficiency and consumption. The author is using the concept of growth pattern, which is more inclusive — not only including the above-mentioned ideas, but also the ideas of factor combination and competition advantages. In a word, "pattern of growth" includes the "way of growth" and relevant meanings.

[2]According to the "2005 White Paper" of American Chamber of Commerce, more than 60% of the exports from China to the United States came from foreign-invested enterprises.

[3]According to the list of the world's top 500 enterprises in 2004 published by the Fortune magazine, the per capita business volume of Sinopec was only 3.5% of that of BP, and per capita profit was only 1.3%. The per capita business volume of the Industrial and Commercial Bank of China was only 16.6% of Citibank while the per capita profit was only 1.2% of the bank.