The Chinese model is not sustainable in the long run – and the global community must do all it can to help China rise again
There is no question that China's growth has been anything short of exceptional. However, that success may have run its course. China will have to rise again in order to rebalance growth while reducing inequality and environmental degradation. The plight of 1.6 billion people depends on it, and the entire world economy. The global community should do all it can to help China succeed.
Like Japan, South Korea, and others before, China has deployed a hybrid mix of state and market-led forces to globalise its economy over the past 30 years. Like its East Asian predecessors the Chinese miracle has been built on exports to the west. The results have been unprecedented, with a growth rate of approximately 10% that has lifted 566 billion people over the $1.08 "extreme poverty" threshold set by the World Bank.
Yet the Chinese model is not sustainable in the long run. It has created severe inequalities and environmental degradation and has contributed to the global imbalances that were at the root of the financial crisis. There is an across the board consensus that China needs to diversify demand toward its domestic market.
Yilmaz Akyuz, chief economist of the South Centre, estimates that close to 60% of China's imports are used in the export sector and only 15% of imports are for domestic consumption. China's share of both private consumption and wages to GDP has been falling since the 1990s. Indeed, exports may have contributed to 50% of China's pre-crisis growth.
Some signs are encouraging. Of course, China recently put its exchange rate back on a gradual course of appreciation. In response to mass strikes across the country, during the past month many of China's manufacturing centres have raised the minimum wage, some by up to 48%. Also this month China initiated a green car subsidy programme whereby auto companies get a subsidy for producing cleaner cars for the domestic market – a programme that not only will help domestic demand and help China move up the value chain but will help mitigate its environmental ills that cost the Chinese economy 8-10% per year of GDP and accentuate global climate change.
The US and others continue to complain that China isn't appreciating their currency or ripping open its capital markets fast enough. Foreign investors are warning that China's wage hikes may cause an investment exodus although such an overblown frenzy could disrupt markets and China's ability to stay the course. Foreign firms also decry China's "indigenous innovation" programme that will help China eventually move away from low-wage export labour and toward value added domestic consumption and consumption for balanced growth. Finally, developed countries insist on making China pay for more expensive green technologies without offering a financing mechanism.
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