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Dr Gift Mugano
This week is a historic week as Zimbabwe hosted the Chinese President, His Excellency Xi Jinping. This is a welcome development which makes us excited.The Look East policy is bearing fruits! What is clear is that everyday Zimbabwe China relations are going on a higher gear. Naturally, if two individuals are in a relationship, they end up copying each other’s traits and practices. This week’s discussion focuses on the growth process of China. I must admit that there is no way this article nor a book can exhaust the Chinese growth process. I will focus on matters which are closer to us.

The most remarkable aspect of this transformation has been the role of the private sector in achieving such a high rate of growth.

Nonetheless, as can be expected following such a substantial re-orientation of what was once a state dominated economy, there are challenges ahead. The pace of economic change in China has been extremely rapid since the start of economic reforms.

According to official statistics, economic growth has averaged 10 percent over the past three decades. National income has been doubling every eight years. Such an increase in output represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years.

The size of the economy, when adjusted for differences in purchasing power, is already larger than all but one or two Organisation for Economic Co-operation and Development (OECD) economies, depending on the purchasing power parity used for comparison.

While average incomes are still below those in other middle income countries, there are large parts of the country that resemble developed East Asian countries just one generation ago and are proceeding along a similar rapid catch-up path.

Many industries have become completely integrated into the world supply chain and, based on current trends, China could become the largest exporter in the world by the beginning of the next decade, with as much as 10 percent of global trade compared with 6 percent at present.

This extraordinary economic performance has been driven by changes in Government economic policy that have progressively given greater rein to market forces. The transformation started in the agricultural sector more than two decades ago and was extended gradually to industry and large parts of the service sector, so that price regulation was essentially dismantled by 2000 outside the energy sector.

During this period, the Government introduced a pioneering company law that for the first time permitted private individuals to own limited liability corporations.

The Government also rigorously enforced a number of competition laws in order to unify the internal market, while sharpening the business environment by allowing foreign direct investment in the country, reducing tariffs, abolishing the state export trading monopoly and ending multiple exchange rates.

The momentum towards a freer economy has continued this decade with membership of the World Trade Organisation leading to the reform of a large number of China’s laws and regulations and the prospect of further tariff reductions.

In 2005, regulations that prevented privately-owned companies from entering a number of sectors of the economy, such as infrastructure, public utilities and financial services were abolished.

Overall, these changes have permitted the emergence of a powerful private sector in the economy. But that is not all. The Government has also introduced wide ranging reforms into the state-owned sector that dominated the economy in the early 1990s. State-owned enterprises have been transformed into corporations and many have been listed on stock exchanges.

Since 1998, a policy of “letting small enterprises go” through privatisation and closure on the one hand, and restructuring large companies on the other, has proved successful.

The number of state-controlled industrial enterprises fell by over one half in the following five years and their payroll dropped by over 14 million, thanks in part to the introduction of more flexible employment contracts.

This process was helped by the creation of unemployment and welfare programmes.

These and other reforms have improved the framework for mobilising the resources generated by one of the highest rates of savings in any economy — the gross saving rate approaches half of Gross Domestic Product (GDP) — generating a particularly rapid increase in the capital stock, although such growth estimates can only be approximate.

Investment has also led to an increasingly urban society — a movement that has gone in step with a flow of people from the land into the service and manufacturing sectors of the economy. Since workers in agriculture have low productivity, this movement has given a sharp boost to growth.

Moreover, the Government has pursued a policy of raising the educational qualifications of young people.

It launched a programme to give all children nine years’ education, moved to ensure that all rural areas achieve this goal by 2006.

Higher education has also been transformed. The wages for educated staff have been pushed up by the growing influence of a market economy.

Still, the high level of investment should not obscure the need for much better allocation of capital.

To be sure, Government debt has been stabilised at only one-third of that seen in the OECD area.

But banks have not been lending on a commercial basis and so bad loans are equivalent to 30 percent of GDP and this was financed by the Government. A start has been made on re-organising the major banks.

A considerable effort was put in place to ensure that the whole of the banking system acts in a commercial manner.

Moreover, capital markets were reformed: the state-owned shares of listed companies were traded to private companies both on stock and bond markets.

Better commercial laws were put in place, notably concerning both the start-up and closure of companies.

For example, a new company law aimed at lowering barriers to the formation of new enterprises, while a bankruptcy law was put in place to formalise the rights of secured creditors.

This made it easy for private companies to obtain credit. Such moves consolidated the role of the private sector whose upsurge has been one of the most remarkable developments in China’s boom.

According to OECD, though precise measurement is difficult, a definition which considers as private all companies that are controlled neither by state nor collective shareholders suggests that the private sector was responsible for as much as 57 percent of the value-added produced by the non-farm business sector in 2003.

As a result of these reforms, the Chinese economy extraordinarily grew by an average rate of 10 percent for 30 years which has never happened in any country in history.

There are numerous positive outcomes which were noted as a result which this article cannot exhaust. For convenience purpose, this discussion will focus on increase in foreign reserves.

At the start of the reform era at the end of 1978, China’s foreign exchange reserves were minimal, but enough to cover the requirements of a country with a very small import (http://www.chinability.com/Trade.htm) bill.

In the early 1980s, export growth contributed to an initial rise in reserves to a peak of US$17,4 billion by 1984. However, high trade deficits in 1985 and 1986 (http://www.chinability.com/Trade.htm) eroded the reserves in those years.

In 1987 the surplus on trade in services slightly exceeded the merchandise trade deficit, producing a small current-account surplus, and a comfortable net capital inflow helped push up reserves to US$16,3 billion.

The reserves were held above this level for another two years.

The economic slowdown of 1989-91 (http://www.chinability.com/GDP.htm) produced a sharp fall in imports in 1990, while exports continued to rise, producing a merchandise trade surplus for that year of US$9,2 billion, which was gradually eroded in the next three years as imports rose faster than exports.

By 1993 the trade and current accounts were in deficit, but the acceleration in inward FDI flows (http://www.chinability.com/FDI.htm) kept foreign exchange reserves rising for most of the rest of the decade.

Joining the World Trade Organisation (WTO) in 2001 contributed to rapid growth in imports, but exports also expanded at a fast pace, while FDI inflows exceeded US$60 billion a year by 2004-2006.

In October 2006, China’s foreign exchange reserves exceeded US$1 trillion for the first time. By the end of September 2008, the reserves topped US$ 1,9 trillion, equal to nearly US$1500 per head for the entire population of China. It remained around this level until the end of 2008 as trade growth slowed and foreign investment inflows declined.

The onward march resumed in 2009 and by September 2011 foreign-exchange reserves had reached US$3,2 trillion, where they remained for the rest of the year and until 2014, when the reserves fluctuated during the year not far below the US$4 trillion levels.

Lessons we can draw from this discussion particularly for Zimbabwe are that private sector is key to economic development. As noted in this discussion, the Chinese Government put reforms aimed at creating an enabling environment for business growth. Quite interestingly as well, the Government privatised a number of parastatals. This is a good take away for Zimbabwe considering the fact that our parastatals have become a curse on the economy.

The approach by Government of Zimbabwe to continue carry ailing parastatals by taking over debt is not going to help us.

Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University & Visiting Lecturer at the University of Zimbabwe’s Graduate School of Management. Feedback: +263 772 541 209 or [email protected]