Catch-up time for dynamic nations

By Shahid Javed Burki
Monday, 01 Mar, 2010

THERE have been catch-up periods before in world economic history when a country that had lagged behind caught up with the leader, sometimes even overtaking it. This is exactly what we are seeing in East Asia.

There is a consensus among the experts who keep track of the relative economic performance of states across the globe that sometime soon – perhaps very soon – the Chinese economy, when measured at the prevailing rate of exchange, will overtake that of Japan and thus become the second largest in the world.

What will be the implication of this for the rest of Asia in particular for the countries that border on China?

In this context three things are worthy of note. The speed with which China has caught up with Japan was without historical precedence. It could happen given the large differences in the structural rates of growth of the two countries

What quickened the pace was Beijing’s response to the economic slowdown produced by what the economists now call the Great Recession of 2007-09. Beijing decided to invest huge amounts of public and bank money in the economy to stop it from slumping. The state provided $585 billion from the budget and encouraged the banks it controls to loosen the purse strings. The banks consequently gave $1,200 billon loans to industries, state and municipal governments and to consumers for purchasing cars and appliances. The result was that the economy bounced back growing at 8.7 per cent in 2009. A double digit rate of growth is expected in 2010.

Second, a significant amount of investment was made in improving physical infrastructure, in particular in the areas that were distant from the east coasts. In other words, the Chinese were using the opportunity created by the need to stimulate the economy to bring about more balanced growth in the country.

Third, from the perspective of a country such as Pakistan that borders on China, a considerable amount of public money went into improving physical connections between it and the neighboring countries. While investments are being made to improve the Karakoram Highway ( KKH), and improve China’s access to the port of Gwadar, the Chinese for the moment are focusing on improving their links with Southeast Asia.

For instance, the construction of a bridge has completed a road link between Kunming, the capital of Yunan province in the south, with Bangkok in Thailand. Another bridge linking Yunan with northern Vietnam is nearly complete. The airport at Kunming is being upgraded with an investment of $3.4 billion. All this activity is one province; other border province, including Xinxiang that is next to Pakistan is also receiving considerable attention.

What this demonstrates is that the authorities in Beijing are not simply throwing stimulus money where it can be absorbed easily and wherever jobs can be created – the Americans call this the “shovel” ready approach. In fact they are turning the need to stimulate into a geo-political opportunity. This is the major difference between their approach and the one followed by Japan. Largely because of the destruction the Japanese brought upon themselves as a result of the activist path pursued in the period leading up to the Second World War, Tokyo has very deliberately followed an insular approach.

A defeated nation tends to become passive and that is what happened to Japan once it signed the armistice treaty with the United States. Also, the Japanese were much more interested in creating markets for their products in the West, in particular in the United States. If the penetration of the western markets produced problems and it appeared that retaliatory action may be taken, Tokyo encouraged the private sector to locate factories where the markets were located. Japan thus became a major automobile manufacturer in the United States.

The Japanese kept an arms-length relationship with the developing world, including the countries in East Asia. The only way they engaged with developing countries was providing aid – an area in which they were more generous than most of the western states. Even here they let the lead to be taken by western aid givers.

When I looked after the World Bank’s China operations in 1987-94, they were happy to leave a great deal of policy advice to us. Also the Japanese were not interested in financing flashy projects with which the country’s name would be associated in the minds of the recipients. China, on the other hand, is happy to be identified with high profile projects. It is well known in Pakistan, for instance, that the Chasma nuclear plant was financed and built by China. China was also deeply involved in the construction of the port at Gwadar and the KKH. One of its companies has won the tender to build the extension of the motorway system to Multan.

In China, we have a very different player arriving at the scene. Having reached the international scene as a victor, it has vigorously pursued its regional and global interests. Some of what it is likely to do and has begun to do to is irking the United States and other western powers but Beijing is not likely to relent. That said, the Chinese are more likely to accommodate the interests of other countries than was sometimes the case with the United States and other major nations when western powers held unchallenged sway.

As China continues to grow its economy at very high rates, it is also restructuring it. Some of what is being done will have great meaning for a country such as Pakistan with which it has had warm and uninterrupted relations for over half a century.

The country is now engaged in a process of managed urbanisation that has no precedence in human history. It is planning to move hundreds of millions of people from the countryside to towns and cities. A large number of these will go to the already crowded urban belt that stretches from Dalian in the country’s north to Guangzhou in the south. They will live and work in high rise building. Since China is short of livable space it makes sense to go vertical. This is something that Singapore has done with great success.

People work in high rise buildings assembling imported components into finished products for export to foreign markets. The suppliers of these parts are all over Asia, particularly in the continent’s eastern part. This is where a country such as Pakistan has an opportunity. It could develop strategic alliances with manufacturers in China, supplying the parts and components they need. Even in the rapidly expanding automobile industry – last year the largest number of cars was sold in China – while the factories cannot go vertical, the manufacturers will rely on foreign suppliers for the parts that need a lot of space to produce.

China is also moving rapidly towards developing a knowledge-based economy, moving its workers from manual labour to the kind of labour that needs highly developed skills. However, this is being done by pursuing a strategy that is different from the one the Indians followed. The Indians went for the low hanging fruit concentrating on meeting the West’s need for back-office support. The Chinese on the other hand are moving simultaneously in developing and linking software development with the manufacture of hardware. This is one other area where a rising China could help Pakistan in developing a sector in which the country has the potential but has ignored it until recently.