On China’s Rise

Ernesto Zedillo, director of the Yale Center for the Study of Globalization and former president of Mexico, recently visited China, where he attended a regionally important Asian economic conference. In this column in Forbes Magazine, he pens his impressions of China's economic development, gathered from public and private meetings with Chinese government officials during his trip. Zedillo says he was surprised when Chinese officials did not merely relay statistics of China's brilliant economic performance – with a 9.4% average annual growth for the past 25 years, and total trade reaching $851 billion in 2003, China is the world's third largest market and its sixth largest economy. Instead, notes Zedillo, President Hu Jintao and other officials emphasized the challenges posed to China by its economic growth, which despite being phenomenal is also highly uneven. China's per capita GDP still ranks lower than 100th in the world. Zedillo also notes that China realizes the many potential problems in other areas of its economy, especially its banking sector. Stressing the challenges before achievements is "atypical" of all governments, developed or developing, and "is certainly a strong factor in favor of China's development strategy," says Zedillo. In conclusion, he notes that perhaps his own region, Latin America, could learn from China's refusal to be complacent with its economic growth and push even harder to fully liberalize its markets. – YaleGlobal

On China's Rise

Ernesto Zedillo
Tuesday, May 18, 2004

I recently spent ten days in China, where I attended, among other meetings, the Boao Forum, China's quite new, but already regionally important, annual Asian economic conference. I listened--both in public and in private meetings--to numerous Chinese government officials, including President Hu Jintao. I began this trip expecting to hear and prepared to accept a significant amount of boasting from Chinese leaders about China's economic growth compared with other developing countries'. After all, China's leaders are, as are officials in any other country, in the business of promoting their nation. And China's record of economic improvement is indeed striking, by any measure.

For the past 25 years China's economy has grown an average of 9.4% annually, making it the world's sixth-largest economy. Over the same period real per capita income--both in cities and in rural areas--has multiplied more than five times. And the average real wage has doubled during the last decade alone. Thanks to its fast economic growth, China has lifted 400 million of its people out of absolute poverty since 1981. Regarding trade, China has become a major player, with total trade reaching $851 billion last year, at which point it surpassed Japan as the world's third-largest market. Unlike Japan, China does not run a significant overall trade surplus; in fact, judging by current trends, China may end 2004 with a modest trade deficit. However, it did manage to accumulate foreign exchange reserves of $450 billion by the end of 2003.

Challenges More Than Achievements

Yes, I heard some of those impressive figures from China's leaders, but to my surprise, their main topics invariably were not China's achievements but the challenges and serious problems China must confront if it is to continue making progress. President Hu was particularly blunt in referring to China's "weak economic foundation, underdeveloped productivity and highly uneven development." He emphasized that, in spite of its fast growth, China's per capita GDP still ranks lower than 100th in the world. And the other Chinese officials I met during my trip didn't shy away from discussing such thorny issues as the overheating economy, prospects for further privatization of state-owned enterprises, financial liberalization, restructuring of the banking sector, exchange-rate policy and the protection of intellectual property rights.

For example, when I mentioned that in order for China's GDP to grow 9.1% last year, it had to invest a staggering 47% of its GDP--a circumstance that strongly suggests gross inefficiencies in the country's mechanisms in allocating capital--I was met with frank admissions of a serious problem and descriptions of ongoing strategies to overcome it. Although it is not yet a safe bet that China will avoid a major dislocation in its banking sector--which suffers from bad loans and has required massive injections of government resources for continued expansion--it is somewhat reassuring to know that Chinese officials recognize the nature and magnitude of the problem and seem to be focused on finding a solution.

I don't know what makes the Chinese put far more emphasis on challenges than on achievements--it probably has to do with culture and history--but I do know that this behavior is atypical of most governments in the developing world (and in the developed one, for that matter) and is certainly a strong factor in favor of China's development strategy. The Chinese know that the changes Deng Xiaoping began in 1978 are still unfinished and that a complacency resulting from present achievements will make it hard, if not impossible, to call for the big efforts needed if China is to triple its per capita GDP between 2000 and 2020, as it has pledged. Officials constantly speak of pressing ahead with market reforms and of opening up the economy further. They seem genuinely committed to this. Perseverance is the name of the game in China.

Irresistible Comparisons

It is inevitable that I compare China's attitude, approach and consequent results with those of other developing regions--in particular, my own, Latin America. In sharp contrast with China, Latin America has had an average annual GDP growth of only 2.3% since 1980 and has failed to significantly reduce the proportion of its population living in poverty. There are exceptions in the region, but not of sufficient importance to affect the overall picture. True, since the mid-1980s there have been some reforms in practically every Latin American country, which have had undeniably positive outcomes. But the reform process has been sporadic and incomplete.

Latin American economies have gone through cycles in which a crisis triggers reforms that deliver good immediate results, but sooner rather than later the positive results lead to complacency, which eventually leads to another crisis. As I've argued in this space before, Latin American politicians prefer to blame reforms--not the lack of them--for the region's economic ills. They also enjoy blaming outsiders for the consequences of their own sluggishness. Nowadays, for example, China is portrayed as an unfair competitor in countries that have lost market share to it. A terrible mistake! China's success should be seen as a great economic opportunity--considering the sheer size of its present and future markets. And, yes, China should also be seen as strong proof that perseverance in reform does pay.

Ernesto Zedillo is director of the Yale Center for the Study of Globalization and former president of Mexico.

© 2004 Forbes.com Inc.