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The secret of China's success

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The secret of China's success


October 13, 2005


The Organisation for Economic Cooperation and Development, based in Paris, is often considered the "rich nations' club".

Itwas founded in 1960 following the successful reconstruction of Europeunder the Marshall Plan, to help co-ordinate economic and socialpolicies among the core affluent countries of North America, Europe,and the Pacific, to facilitate their growth and to devise commonpolicies toward the other blocs of that age, namely the communistcountries and the developing world.

Over the last couple ofdecades, and particularly after the end of the cold war, some of thericher emerging markets, such as Mexico, Poland and Turkey have alsobecome members. Today the membership comprises 30 affluent democracies,the bulk of which are located in Europe.

To be accepted into theOECD is one mark of having "arrived" on the global economic andpolitical stage. The search is currently under way for a newSecretary-General to succeed Donald Johnston (a Canadian), and there issome expectation that the appointment will go to an Asian, even thoughcurrently the only two Asian members are Japan and South Korea.

TheOECD has also been expanding its links with important non-membercountries such as Brazil, Russia and China. Notwithstandingconsiderable interest on the part of the OECD, and despite our prouddemocratic tradition, India has so far been lukewarm in availing itselfof these opportunities, perhaps fearing rich country criticism of someof our economic policies.

As against this, despite its politicalvulnerability, and in anticipation of its economic superpower status,China has confidently availed itself of the considerable expertise incomparative analysis of the OECD staff.

The most recentexpression of this collaboration is the first OECD Economic Survey ofChina, which was published in September (OECD Economic Surveys: China.OECD Publishing, September 2005. Paris. www.oecd.org).  As iscustomary, the published version follows upon a review of the draft bythe OECD members in the presence of the country being studied.

Whilethere is an enormous outpouring of economic analysis on China fromother official bodies such as the World Bank and the IMF, the OECDChina report is nonetheless a valuable addition. This is so for threereasons.

First, the report deploys the considerable expertise ofOECD staff in analysing issues of growth, productivity and technicalchange. Second, the report is admirably compact, and allows a rapidtour d'horizon of a large number of policy and analytic issues in anaccessible way.

Third, the description of Chinese reforms is inlanguage that is analytic and transparent, rather than the usual turgiddescriptions of responsibility systems and Party Congresses.

Oneweakness is that the report does not contain its own statisticalappendix, leaving the reader entirely dependent on the materialpresented in text tables and charts.

A reading of the reportprovokes a number of reflections on the links between reform andgrowth. As the OECD's Chief Economist, Jean-Philippe Cotis, notes inhis preface, extremely bold changes have been introduced in the lastfive years.

He remarks: "[F]ew OECD member governments haveembarked on reforms that have restructured or closed hundreds of stateenterprises every month over a five-year period … or have endedlife-time employment practices and, in the process, stimulated anation-wide reallocation of resources."

He adds: "Structuralreforms in China have triggered a durable process of economicdevelopment, at a time when there are many signs that … this process ofeconomic convergence has stalled or even backtracked in many OECDcountries."

In contrasting our steady progress with China's evenmore spectacular performance, we sometimes take comfort in the factthat the Chinese reform effort is a decade older than ours.  The reportmakes clear that the basis for the high and sustained growth China isnow enjoying is essentially the product of policy decisions earlier inthe decade, i.e. at about the same time as India's reform, from astarting point that was considerably more distorted than ours. Thethree great reforms have been liberalising domestic prices, embracinginternational trade and welcoming foreign investment.

Theoutcomes are well-known: the value of Chinese exports of goods andservices is now exceeded only by Germany and the United States (andalready exceeds that of Japan). By the beginning of the next decade theOECD projects that China will outstrip even the US in the value of itstotal trade.

The OECD report also provides information on theownership of consumer durables, which provides an interesting benchmarkagainst which India can be compared. Thus, the ownership of householdrefrigerators is 46 units per 100 households; NCAER projections suggestthat by the end of this decade the figure in India would still only beabout half that, or around 22.5.

Similarly in 2003, the Chineseownership of colour TVs was almost as high as in the developedcountries at around 94 units per 100 households. Our projections forIndia for the end of the decade are about two-thirds of that, at around64.

Our projections are, admittedly, based on relativelyconservative assumptions of growth, at around 7 per cent; if we wereactually to attain Chinese growth rates the gap would of course beclosed more rapidly.

China is far from being a paragon of reform;in particular there remain major issues connected with the financialsector and corporate governance, and their record, for example, ofcapital market development and integrity is less successful that ours.

Thegrowth accounting analysis presented in the report does confirm theenormous contribution made by capital accumulation to Chinese growth.But this has been accompanied by a significant contribution fromeducation and general productivity, which in turn is related tocompetitive pressure coming from, among other things, foreign directinvestment.

What can one conclude from the report about India'spast and India's future? With respect to the past we clearly have beenguilty of considerable complacency. The initial conditions of India andChina at the beginning of the 1990s were not all that different.

Evenallowing for the different shares of investment more assertive policiesof international integration could have helped boost our growth ratemuch earlier. For the future, it is likely that the demographic factorsthat have so favoured China are about to peak, while India's still havea way to go.

A commitment to greater competition in the domesticeconomy stimulated by low trade and FDI barriers could well help.Perhaps so could a review by the OECD!

The author is Director-General, NCAER. The views expressed here are personal.