Exploring the Impact of Economic Change in ChinaPublished: February 11, 2004 in Knowledge@Emory
Where Is China Today?
Over the last 20 years of economic reform, China’s transition from a centrally planned to a partially privatized economy with as yet incomplete social reforms has driven both social and economic changes. In contrast to the "shock-therapy" model undertaken by post-Communist Russia and other eastern European countries, in which state assets were rapidly privatized, China has pursued change much more slowly. Individual freedoms, a new middle class, and opportunity are gradually expanding and businesses, both state-owned and private, are becoming more focused on achieving business goals such as profitability, as opposed to simply providing employment in the town of a politically connected government official.
China is working hard to improve its international reputation for business practices. Many investors burned by corruption in the 1970s and 1980s are now cautiously re-examining entry back into China. Beijing’s hosting of the 2008 Olympics as well as China’s accession to the World Trade Organization (WTO) has put China in the world’s spotlight.
Many Mainland Chinese are in favor of greater integration into the global economy, most recently via accession to the WTO. According to Richard Gore, Goizueta ‘02MBA, who has both lived and worked in China, "entering the WTO will expose major sectors of the economy such as banking to real competition for the first time." For example, "foreign banks like HSBC have been authorized to offer accounts in the local Chinese currency (Renminbi) in major cities like Shanghai, and local banks are being gradually freed to make loans on a pure commercial basis rather than political influence" says Gore. Former Premier Zhu Rongji’s decision to stop the creation of new state owned enterprises in favor of joint ventures and private Chinese or foreign owned enterprises will not only reduce risk for the government, but should also allow private enterprise to run their businesses more efficiently with profitability.
Furthermore, former president Jiang Zemin set forth a policy of cooperation with the U.S. in both geopolitics and economics, which should aid the growing Chinese-American social and cultural relations.
While China’s recent economic performance has indeed been impressive, there are concerns as to whether its performance is sustainable.
In groundbreaking research first published in 1994, economist Paul Krugman noted that much of China’s output gains may have been the result of mobilizing capital and labor as opposed to actually increasing productivity or using existing capital and labor more efficiently. If Krugman is correct, this could have serious long-term implications because it means China may have difficulty maintaining its growth path. While some have disputed the magnitude of Krugman’s assertions, "even the most optimistic characterizations of East Asian growth indicate that at least half of the [Chinese] economic miracle is attributable to sheer accumulation of physical and human capital, as opposed to increased productivity," observes L. G. Thomas, a professor of organization and management at Goizueta.
Current economic indicators seem to support Krugman’s thesis. According to the Asian Development Bank, Chinese GDP has increased more than 1000% from 1985 to 2002. While some sectors of China’s economy have become more efficient, this is largely confined to companies outside of the state sector, such as Sina.com, China Telecom, The Haier Group Company and China Life. Because of this, the state’s share of output has dropped substantially and its share of employment has fallen by a much smaller amount, demonstrating a collapse in productivity and a failure to shift resources to the private sector.
Another red flag is the continued accumulation of goods in inventories. China’s inventory accumulation statistics, the percentage by which inventories are increasing or decreasing, persistently remain above 5% of GDP, ranging as high as 10%. This indicates China is producing many low quality goods that simply aren’t selling.
Susan Gilbert, a professor of economics and finance at Goizueta, believes that "China’s high (unsold) inventory of these products has persisted through global recession and the slow economic recovery. It is unlikely that sales of low quality goods will improve in an improving economy. So the economic upturn, which we seem to have entered, could actually be bad news for some of China’s manufactured goods."
Turning the Corner
Many Chinese and international investors acknowledge the issue of productivity but believe the enormous import and export opportunities that lay ahead will offset the productivity concerns. This is evidenced by the number of multilingual Western-educated Mainland Chinese returning to China to take up important positions in government, finance, and professional service firms. According to Patrick Chen, Goizueta ‘05MBA, "For many of us, the opportunity lies not only in trade but also in applying what we have learned in the U.S. to the Chinese market. We can take advantage of our knowledge to either create our own business or fast-track our career to senior management." This influx of knowledge of both Western business practices as well as the local Asian markets is critical to China’s development. "Most companies are in desperate need of professionals with modern management skills in marketing, finance and general management. The Chinese are facing a common challenge — to increase productivity and quality when the market becomes more and more crowded," notes Chen.
The ripple effect of change
Undoubtedly, China will make use of its size, growth potential, low cost producer status, and world influence to exert competitive pressure on the world markets and heavily influence trade – especially in manufacturing. As China develops its domestic market, infrastructure, institutions, and further pushes out reforms, it will gain momentum and could hit super-power status in the next 50 years. However, should China fail to improve its current disappointing total factory productivity performance or TFP, its recent impressive economic performance could likely stall. The kinds of reforms that China needs to implement are not easy, according to Goizueta’s Thomas: "Productivity improvements imply politically risky change. Innovation is a political act, and means tearing down old ways of doing things."
Indeed, some in China want a freer political environment with less corruption and more transparency. Those who consider these freedoms important are risking their personal safety to get their voices heard. Nancy Roth Remington, executive director of International Programs at Goizueta, has had several conversations with younger Chinese professionals (most of them working in prominent Western companies), and notes the protests for more freedom come from a significant, but exceptionally small, proportion of Chinese. "The majority, I believe, are quite scared about the chaos that might ensue from ‘unfettered’ democracy," says Remington. The students suggest that, "Democracy in China needs to be different from democracy in the West. We don't want what's happened in Russia, we still need controls here."