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Old Monday, August 31, 2009
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The China connection


By Shahid Javed Burki
Monday 31, August 2009


IN a long one-to-one conversation with President Asif Ali Zardari late last year I talked about Pakistan’s economic relations with China, one of the two large countries that borders Pakistan. The other, of course, is India. The president said that it was his wish to put the relations with China on firmer footings rather than on ad hoc developments of the links that marked the past.
I thought then – and continue to believe even more strongly now – that the president was on the right track. Pakistan needed to develop a strategic relationship with its large neighbour. Pakistan should see China as an opportunity not as a competitor in the global market place. However, in order to make this dream real, policymakers in Islamabad needed to develop a fuller appreciation of what was happening in China and how that would affect Pakistan.

There is conventional thinking and then there is unconventional thinking about China’s economic future and how it will influence the world. Conventional thinking accepts the fact that China’s rate of economic growth will continue to outpace by a wide margin the rate of increase in America’s gross domestic product. Inevitably, even though the size of the Chinese GDP at the end of the first decade of the 21st century is about a third of the United States’, it will equal that of the latter in about a couple of decades. If the present trend continues it will overtake the United States before the 21st century is too old, perhaps as early as 2030.

Conventional wisdom also accepts the fact that in matching the size of the US economy in the coming decades, China will have departed significantly from the well established pattern. On previous occasions the catching up was done by the economies that were not very dissimilar from the one that was in the lead. This happened when France caught up with Britain after the latter had taken off because of the industrial revolution. Germany came next and then the United States. The Soviet Union tried to catch up with the western economies in the second half of the 20th century by adopting a very different model of economic growth. It failed spectacularly. But China is likely to succeed. What makes this catching up very different from the earlier ones is that it will be done by a very populous country that will remain poor in terms of per capita income terms. The consequences of this event will be very different than those that resulted from the previous catch-up periods.

As to how China will maintain this extraordinary growth path is a question that begins to separate conventional thinking from the unconventional wisdom. The first major difference between these two points of view concerns the links between China and the western world. According to conventional wisdom, China’s growth model will keep it dependent on the markets of the developed world. If these falter for some reason, China will be unable to maintain its hectic pace of growth.

And if the rate of growth falters, China will have to deal with a slow down in the rate of growth in employment. In fact, it may have to deal with massive layoffs of workers. The current slow down has cost 20 million workers their jobs. If this trend persists there may be social unrest which the Chinese system may not be able to absorb.

Unconventional thinking suggests that the future growth of the Chinese economy will forge new relationships between China and Asia in particular and that the process may have already begun. Some recent economic data about the way the “second rise of China” is affecting the Asian economies has already begun to lend substance to the second view, the unconventional one.

I have used the phrase “China’s second rise” in some of my earlier writings to distinguish it from the one that propelled China to the front of the global economic system. China became the world’s industrial workshop, producing cheaply manufactured goods for consumption in the United States and Europe. Those links had profound influences on the western economies. Exports from China resulted in the restructuring of the international production system as firms relocated their production facilities by closing down operations in the old industrial countries and relocating them in China. Politicians began to call this process “exporting of jobs” and railed against it. It became a major issue in the contest for the American presidency in 2008.

These were well noted results of China’s first rise. By exporting cheap products to the western markets China contributed to the low rate of inflation in these countries. Interest rates also remained low which helped firms to borrow and invest in the process of restructuring in which they were engaged. By exporting much more than it was importing, the Chinese built up large foreign exchange reserves. When the current crisis began in the West, Beijing held $2.1 trillion of reserves. The crash of the western economies had the expected consequences for the Chinese economy.

The West has not fully noticed that the way the Chinese are stimulating their economy will make it less reliant on the export industries on which it relied so heavily in the past. Beijing has used both the government’s budget and the state controlled banks to pump money into the economy. While most of the public sector money has gone into building new infrastructure, the banks have lent for investing in increasing the capacity of the economy to increase production. The government is putting almost $600 billion into the construction of infrastructure while the banks have doled out more than $1 trillion in loans in the first half of this year. More will come in the second half.

There are two points about the Chinese economic effort that most analysts have missed but are of tremendous significance for the global economy. Citigroup recently increased its estimate for annual Chinese economic growth to 8.7 per cent in 2009 from 8.2 per cent, and to 9.8 per cent in 2010 from 8.8 per cent For the first time the catalyst of global economic revival is coming from China in pulling the world economy from the deepest recession since the Second World War. Second, China is pulling with it the rest of developing Asia. Exports to China from East Asian economies rose 18.7 per cent in the second quarter of 2009, according to customs data, a sharp turnaround from the 16.2 per cent drop recorded in the previous quarter. There is no doubt that the centre of gravity of the global economy has begun to shift towards China. Islamabad should begin to understand the changes taking place in China to develop a sound strategy concerning its relations with that country.
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