Headlines about China's advance have been coming thick
and fast this past week. The economy is 17 percent bigger than
previously estimated. It is about to surpass every country in Europe
except Germany and still growing at 9 percent. China's information
technology exports have surpassed those of the United States. It now
exports more cars than it imports. Beijing seems almost embarrassed
by all this good news and published a document emphasizing that its
"peaceful rise" is no threat to anyone.
But before we all get
overwhelmed by China's great leaps forward, let's put them in
First, big upward
revisions of the official economic estimates are hardly surprising
given that in terms of "purchasing power parity," an alternative way
of measuring economies, China's per capita gross domestic product
was already about $5,700, or more than four times the more often
cited 2004 level of $1,230.
On both measures China's
GDP is roughly double India's. As China (and India) develop, one can
expect the official GDP to grow very rapidly but the gap between it
and the purchasing power parity estimate to narrow. There will also
be rapid growth because there still seems to be undercounting of
China's services sector, which at 33 percent of the total is very
low by any standard, suggesting that statistical methods have not
yet caught up with the changes in the economic and social structure.
The bigger GDP numbers
have both good and bad implications for China. On the positive side,
investment and foreign trade are both relatively smaller. The level
of overinvestment may not be quite as massive as the investment
ratio of 45 percent of GDP in previous data suggested. Nor is the
nation as vulnerable to setbacks in foreign trade, which are quite
possible because of resentment at China's surpluses.
On the negative side,
the new numbers, taken in conjunction with the purchasing power
parity ones, suggest that income distribution is even worse than
already assumed. The already advanced cities and regions with their
industrial and export bases are now seeing the growth of high
valued-added services. The divides are increasing both between rural
and urban areas and between regions. China's income distribution is
now more akin to the wealth divides in Latin America, which continue
to stifle that region's growth, than its East Asian neighbors, which
vie with Scandinavia for income equality.
The implication is that
China is going to have to focus far more resources, through tax and
spending policies, on reducing those gaps in the interests of social
harmony and reversing the environmental damage done by years of
growth at any price.
As for the export
successes, they should not be as troubling for China's developed
country rivals as the raw numbers imply. The IT exports are largely
the output of foreign companies, particularly from Taiwan, Japan and
South Korea. Indeed, China's willingness to attract foreign
investment to catch up with its neighbors may be effective in the
short run but hinder the development of local know-how. When Japan
and South Korea were at a similar stage, they bought foreign
technology but mostly kept foreign companies at arm's length.
The car exports success
seems to owe more to excess capacity at home, plus the implicit
subsidies of low-cost credit to state-owned companies through the
banking system, than to any very obvious comparative advantage or
superior manufacturing technology. They are mostly low-quality
vehicles sold into low-end markets.
This is not to disparage
China's achievements, merely to emphasize that it remains unclear
whether it really is following the path of Japan and South Korea -
or is heading down the Stalinist road of massive but low
productivity investment-led growth and excessive military spending,
which crowds out consumption.
The other possibility is
the past Brazilian example where investment-led growth spearheaded
by the state was inefficient and income distribution too skewed to
spur growth led by mass consumption. The Soviet Union and Brazil
were both successful for many years in achieving high growth and
narrowing the gap with the most developed nations of Western Europe
and North America but never managed the breakthrough to advanced
So the jury will remain
out for some time as to whether China can get to the top table
economically, as Japan and South Korea have done. The rise may
indeed be peaceful, and full of bumps.
The military issue is of
a different caliber. As with the Soviet Union, size matters,
particularly when you are also the sole East Asian possessor of
nuclear weapons and long-range ballistic missiles. It is no wonder
that Japan is worried, particularly at a time when America's global
position is being eroded.
concern is reflected in its recently announced willingness to spend
upward of $1 billion on joining the U.S. missile shield. But that
makes Prime Minister Junichiro Koizumi's diplomatically disastrous
visits to the Yasukuni Shrine all the less defensible.