The Westward Potential of the Chinese Economy

The Westward Potential of the Chinese Economy L.R. Klein Statement of the Issues There is no doubt that the impressive economic development of China, since the reform processes were put into place, as early as 1978, has evolved along certain lines of concentration. The population concentration in 1998 is shown in Table 1. Table 1 Population and Land Area China, 1998 Population(million) East China Central China West China 507,160 440,330 285,100 Land Area (sq.km) 129.89 285.35 544.84 It is evident that population numbers in the East are dominant over those in the West, leaving the Central area population in between East and West. land area has an opposite directional distribution. smallest. Consider economic activity in table 2, where aggregates and averages are reported for the three main regions Table 2 GDP by Region, China 1998 Per Capita GDP (yuan) 9521.43 5252.02 4029.20 On the other hand, the The West is largest and the East is Total GDP (100 million yuan) East China Central China West China 48310.8 23126.2 11487.25 While the West is rich in many resources and land area, it accounts for the smallest share of production. The ordering along production lines is preserved when the The figures are reported on a per capita basis in the second column of Table 2. services of what the Eastern citizen has. the poorest economic situation. 1 average Western citizen has, in a sense, less than one-half the annual flow of goods and There are significant inequalities, and it makes sense to seek introduction of policies that will raise the relative status of those in The issue, simply put, is how to bring more geographical or regional equality into China’s ongoing economic expansion. in the East. Shanghai, Guangzhou, Dalian, and Tianjin. There is concentration along the seacoast Major coastal centers are in There are also other coastal cities that In all, these 14 major cities have Beijing is Eastern but not strictly coastal. have special significance in Qinhuangdoa, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Winzhou, Fuzhou, Zhanjiang, and Beihai. became open to the outside world.1 The special policies for construction, land acquisition, trade-tax concessions all contributed to the rapid industrial commercial, and financial development of these coastal areas. They are not at the final stages of their development; there is still much to be done, but they have gone a long way in successful economic expansion; now is an excellent time to reconsider where the areas of the interior should go in terms of economic development in order to achieve better balance. Parallel with the establishment of the special coastal areas and Beijing, in the East, Chongqing City in Sichuan Province was upgraded to municipality status in 1997. It is the largest of the four main municipalities, with a population in excess of 30 million people, and serves as a focal point for inward and westward development. Although it is not a seaport it is a very important inland water port on the Yangtze. provides an excellent starting point for our consideration of Westward movement. In many respects the deliberate policy of fostering development away from the coastal areas can stand by itself as a major analytical case. the west in the United States during the 19 th Century. th special areas, many of which were designated as Special Economic Zones (SEZs) that Its It per capita GDP is much smaller than those in Beijing, Shanghai, and Tianjin. There are, for a starting point, many interesting analogies with the westward economic and social movement to I personally experienced the culmination of these factors during most of the 20 Century, having been born and raised in the Middle West of the United States in Nebraska and having worked in a very large inland metropolitan center in Chicago. There are many river port cities in The main the United States, that can be compared with Chongqing on the Yangtze. difference between the Chinese and US westward movements is that if people went far enough westward in the United States, they came to seaport cities again in the far west areas bordering the Pacific Ocean. 1 See, e.g., Special Economic Zones and the Economic Transition in China, by Ge Wei, (Singapore: World Scientific, 1999) 116. 2 Within the Middle West area of the United States and considering the Western areas of the Rocky Mountains, we find similar prospects for river transport, agriculture, and some heavy manufacturing (steel, autos, machinery, others). Except for unusual extremes in the financial sector and possibly in the newest technologies, the industrial and agricultural Middle West of the United States can serve as a target for economic development of Western China. While it is an historical fact that the opening of the West in the United States took more than a century of extreme toil, some of it coming from Chinese immigrant workers who helped build our transcontinental railway infrastructure. The supportive infra-structure of the twentieth century went a step further in the creation of a transcontinental interstate highway system, connecting North and South, as well as East and West. These infrastructrural achievements, supplemented by systems of communication, sanitation, water supply and other essential aspects for economic progress are key factors in the opening of an economy like ours, in the United States, but they do not, by themselves, guarantee that good economic performance will follow. They are necessary, but not sufficient. There must be an accompanying spirit of entrepreneurship and general economic creativity. In visiting and studying the economy of the PRC for more than twenty years, I am confident that the added ingredients that make the whole system work and develop are present in ample amount, but are we thinking about China’s economic development in centuries or in decades? So much time has elapsed between the first stages of the industrial revolution with its factory system, mechanized agriculture, and swift transportation that many things have changed. The whole economic environment has changed, and China does It will be possible for China to break into the unfolding not have to re-trace the development of the United States or of any other individual economy in all its detail. year 2000. Every step did not work well in the economic development of the United States, and China need not consider many of the things that did not work well. We were confronted with several difficult military episodes (Revolutionary War, Civil War, World War I, World War II), and each of these set back our plans or hopes for smooth, peaceful economic expansion, China, on the other hand can “leap-frog” over failed 3 chain of events and adapt only those steps or parts that are presently relevant in this byways and go as directly as possible to best practice. For example, westward expansion in China does not have to depend on ordinary wires of communication, for the age of wireless communication opens many possibilities of conveying information over much less cumbersome systems of communication, using only relay stations and satellite platforms. We struggled through long periods of doing business without Even within the range of significant computer assistance; that is no longer essential. available computer facilities, as such, the new-comer nations can go right to fast, inexpensive devices and not rely on older forms of communication. The New Technologies Food and water are absolutely essential for economic development at any stage. On the occasion of the opening of China’s reforms in 1979, the team of economists that I chaired in visits around the country, it was felt that food would not be a bottleneck problem if China’s agriculture could expand at 4% or more, year-after-year, on average. It was a wise decision to free up entrepreneurial choice in agriculture, and output expanded much faster than 4%. There is not a visible agricultural food shortfall at the There is a need present time; there was on occasion during the early reform period. for manufacturing – heavy and light – for electricity, other infrastructural activities, construction and some other lines of economic activity, but something very new is now within reach, namely the expansion of the service sector of the economy, especially of the knowledge branch of services. In connection with the primary reason for our participating in this impressive conference at this significant location, I want to emphasize the growing importance of the service sector and the knowledge component of the newest services. Services, alone, are not necessarily demanding of knowledge, but the services of communication, computing, information technology, and biotechnology are the new and fascinating services that are shaping the modern economy. A feature of the coastal zones and the special economic centers of activity that have been set up in these zones, is that inexpensive and convenient shipping play key roles. Manufactured goods can be readily taken to awaiting containers and ships that This is an essential characteristic quickly and inexpensively deliver them worldwide. of the SEZs, and they have still not exhausted their potential, but now we find something quite new, an economic sector that needs no special locational roots; it can 4 thrive practically anywhere. That is a key to our present considerations about future economic development in Chongqing and surrounding western centers. In the United States, seemingly disadvantaged locations that have no seashore, maybe only flat plains, and not spectacular mountain scenery are excellent host areas for data processing, financial balancing (clearing), medical research laboratories, academic institutions and all other surroundings that are quite hospitable to the growing knowledge sectors of the economy. many other attributes. In fact, they are superior locations because the air may be clean, qualities of life abundant, much living space for family rearing, and If there seems to be a shortage of water, that deficiency can It readily be made abundantly adequate. From time to time there are rankings of US cities as desirable places to live. live. often happens that cities of the interior (often “West”) rank very high as good places to These cities would not be chosen at these ranks if they were not able to provide They good working conditions as well as pure non-economic physical conditions. developed into good working areas partly because they could attract good businesses to locate there, and that is due, in many cases, to the advances of the new service sector technologies. In fact, the new technologies are extremely adaptive. They can serve the economy from almost anywhere and even absorb people so that the areas that were previously overcrowded now can fit in a more balanced pattern with the system as a whole. The way of the future, is to put those infrastructural, or institutional facilities that are needed, into place and allow development to take its own course from that point forward. What are some of the needs for fresh distributions of centers where the new technologies can be located in order to serve the whole society well? In the first place, since the new technologies, from the creative designers of the hardware and its incorporation into integrated systems to the field applications to specific issues (the software) are created in knowledge centers; it makes sense to place the industrialcommercial centers near the academic, knowledge based centers. It is no accident that the new technologies have thrived in the United States near the academic institutions of the Boston area (MIT, Harvard, Boston University, Boston College, and Tufts) or on the West Coast near (Stanford, University of California – various campuses). 5 These two localities are not in the center of the country, but they do not depend for their uniqueness of contribution on either sea coast, Atlantic or Pacific; they depend on proximity to major academic centers. The message for China is to establish high-class universities near Western inland areas and put enough resources into such universities to bring them up to worldclass levels. This is the most important piece of architecture for the infrastructure that Supplementary to great university academic Once the institutions are in gives rise to superior human capital. centers, there should be training programs for technicians. place, there is nothing to restrain research development in the new technologies, and it can be placed anywhere in the nation, subject mainly to the enthusiasm with which the public authorities support the high education levels of employed technicians. There is no compelling reason for these technical centers to avoid having women as well as men in the new knowledge center. It is only that there must be a national commitment to the building and locating of enhanced academia. But another pair of reasons why the new technologies are Traditional thriving in the United States is that venture financial capital is available. lines of bank credit and joint ventures with financial specialists are highly desirable, but it is possible, in the US case, to attract financial investment capital directly from equity investors. The United States have gone far in bringing powerful investment banks Financial into the acts of supplying seed-money in the many new corporate ventures. appearance on the Chinese scene, preferably in the Western regions. for seaboard locations, although that is not bad in itself. At discussions of the new economy concept, it is often remarked that success of the new knowledge-based sectors can take place only in an economic environment of the United States. That is certainly too sweeping for large countries. When the communication lines are ready, and that is already happening, there is a great deal of room for expansion and new success, and it is already possible to see this branch of activity taking root in economies where there is high educational attainment – Israel, India, Republic of Korea. A transformation is not likely to occur immediately, but it should come within one or two decades, if there is an earnest effort dedicated to this line of economic develop-ment. out. In the United States, stories of the potential for the new technologies Using leap-frog tactics, China began to be discussed at the same time that “rust-belt” manufacturing began to phase The late1970s can be cited as a benchmark. 6 credit, entre-preneurial spirit, technical knowledge must all be blended together for There is no need would be able to re-locate, re-orient, and develop the new technologies in the Western area in a decade or two. Now is an ideal time to act. These activities, however, do not constitute the The traditional service sector These, The new technologies require an unusually strong input from knowledge-based institutions and much special training. whole of the service sector, in prospect or in actuality. includes public administration, finance, insurance, tourism, personal services, cultural entertainment and other activities that are less demanding in technical training. services that are closely associated with the new technologies. Tabulations below show 1997 percentages of employment and production in primary, secondary, and tertiary sectors. Table 3 Regional Distribution of Economic Sectors Value-added (GDP) by Region (%) Primary East China Central China West China 44.30 53.45 63.73 Secondary 27.98 20.64 14.67 Tertiary 27.78 25.91 21.61 too, should expand in line with growth in the total economy but not as fast as those Central and West regions dominate primary activity, to a large extent in agriculture, but they are underrepresented in the tertiary sector. This is where the shift could come, if there is a concerted effort to expand the knowledge-based new technologies. Beijing, Shanghai, and Tianjin all have very large percentages of value added in the tertiary sector, but administration, finance, and cultural affairs must be responsible for those high percentages. In the process of spurring westward development, it is not simply a case of substitution or shift between agriculture and services. construction. Employment by sectors does not show a fundamentally different distribution from value-added, but a feature of the new technologies is that they eventually become labor-saving. That has happened on a large scale in the United States A balanced westward movement would also entail industrial sector gains in manufacturing and in Table 4 Regional Distribution of Employment Persons by Region (%) Primary 7 Secondary Tertiary East China Central China West China 44.30 53.45 63.73 27.95 20.64 14.67 27.78 25.91 21.61 The economic sequencing of the regional shifts should be first to train people in the region, or to be attracted to the region and then allow their acquired skills to result in downsizing, because the new technologies are fundamentally intended to be cost saving, especially labor-cost saving. China has had excellent experience in step-bystep economic transition since the reform process got underway in 1978, and these economic planning skills will be required again. That means that China must maintain strong growth trends, above 7% annually, in the regions concerned so that people who may become downsized by the transformation of industry will find alternative placement elsewhere in the economy. This is the pattern that has worked so well in the United States, where victims of corporate downsizing quickly found alternative employment. simultaneously, gains in economic efficiency and low unemployment. targets. After the first steps in the sectors of training and education, in both regular and advanced studies, there can be another round of gains for improving efficiency. In the United States, this round has been less noticed until recently; it is the business-tobusiness flow of services and goods involving the output of the software and computer services sector which become inputs for using sectors. and is proving to be important for the United States. This is called “B2B” activity It is visible in the temporal The US had, It will not be easy for China to duplicate that pattern, but it does set some interesting and challenging sequencing of input-output tables, where it has been found that “B2B” deliveries for the periods 1987-1992 and 1992-1996 are shown in US tables to have expanded by as much as 12-13% annually between the respective input-output tabulations.2 2 See Sumije Okubo, Ana M. Lawson and Mark Planting, “Annual Input-Output Accounts of the US economy, 1996”, Survey of Current Business, January, 2000 (Washington, DC: Department of Commerce), p. 37. See also Martin Brookes and Zaki Wakhay, “The Shocking Effect of B2B”, Global Economics Paper No. 37, 3 February 2000, and Gavyn Davies, Martin Brookes, and Neil Williams, “Technology, the Internet, and the New Global Economy”, Global Economics Paper No. 39, 17 March, 2000, Goldman Sachs & Co. London. 8 A promising feature of the new technologies is that they can contribute to export activity without being near the seacoast. containers. exports. Table 5 Export Shares by Region, 1998 (percent distribution) East China Central China West China 0.90 0.07 0.03 The services produced by software and In internet transmission do not need ocean going vessels, piers, loading equipment, or They are transmitted with the speed of electronic signals worldwide. conventional terms exports from East China account for almost all the country’s A thriving information sector can reap the benefits of selling services to other sectors of the Chinese economy, but also to other countries. India’s recent thrust into the new technology sectors. significantly. Not only can the Western and Central regions of China realize gains in expanding into the new technologies but also by accelerating internal reforms. (SOEs), which have been singled out as inefficient. investment, and employees. A national effort has already been announced for reforming the state-owned-enterprises The proportion of investment in SOEs is quite large in Central and West China, in terms of gross industry output, This is a major feature of India’s service exports gain Table 6 SOE Ratios by Region (1997) (percentage shares) SOE share of: Regional Gross Regional Regional Output Investment Employment East China Central China West China 20.24 31.26 47.34 46.41 56.21 63.14 68.33 76.13 81.24 9 It is evident from Table 6 that SOE activity is very important in Central and West China – more so than in East China. dominant role of SOEs. economic per-formance. In the quest for a more efficient economy, the Central and Western regions have much potential and a great deal to contribute to the total effort, but, as always, China’s economic progress needs balance. A large effort should be made for the knowledgebased sector, but at the same time more traditional economic sectors must be urged to reform by doing their jobs more efficiently. The possibility exists, not only of building up new technology companies in Central and West China but also of changing the This should contribute in an overall sense to more efficient Maintaining China’s Lead in Asian Economics It would be naive to think or assume that one country, in this case China, can really duplicate the Westward economic expansion of the United States. American experience as one possible route that China can follow. expected to work out in every implementation as it did in the United States. I cite the Also, the America introduction of new technologies, such as the information technologies cannot be has been extremely successful in downsizing employment at the same time that new information technologies are being introduced – but with a special feature, namely that unemployment did not rise significantly. In fact, it has fallen. This is so because the United States remained economically vigorous and found new job openings for employees who were displaced by the new technologies. It is by no means certain that Western Europe, for example, could accomplish the same feat because the Euroland economies chose to be restrictive in order to introduce their new currency system. When the United States downsized in earnest by cutting back on the military establishment after the end of the Cold War and Gulf War, we combined fiscal with monetary policy in a manner that brought down long-term interest rates and stimulated private capital formation. It appears that a different policy option with similar macroeconomic supporting stimuli for China would be to build up the infrastructure of Western China in such a way as to maintain a high level of employment. stimulative effects. American studies of productivity show that expenditure on infrastructure capital can have both demand and supply side The demand side shows up by putting people to work, with 10 adequate pay, to construct the infrastructure. The supply side effects come through This double stimulus the route of making noninfrastructural capital more efficient. westward. should be put into place in China as part of a concerted drive to move economic activity There are many needs for infrastructure in the establishment of facilities for the new information technologies and equally well for such things as biotechnology and even for the infrastructure that goes with the more conventional technologies, such as motor transportation, other forms of transportation, sanitation, water, electricity, gas, public health and education. demand. It should be pointed out that every economy has some unique characteristics. It is therefore not possible to transfer experience directly from one economy to another without some special consideration of unusual features. To a large extent, this presentation suggests that US experience in westward movement or in absorbing the technical changes brought about by changes in the information and other new economic activities elsewhere can readily be advantageous in the economic study of China, for the future. When Japan achieved unusually good economic success from the operation of trading companies that served both export and import markets, it was thought that similar success could be transplanted to the US market. It turned out, however, that In many respects, the introduction of US trading companies was not particularly successful, and this kind of economic institution is no longer being promoted for the USA. the new practices of globalization sides-steps the work of trading companies. Some other Japanese economic techniques have, however, been successfully introduced in the USA, namely the use of “just-in-time” inventory controls. This Japanese technique of managing stocks of goods efficiently blended very well with the new devices and systems that have been generated in the new information technologies. Just-in-time inventory control does fit nicely with the elements of the “new economy”; so some transfers of knowledge are, indeed, possible between economic systems. The arguments of this presentation that China should move westward in economic development by using the locational advantages of the new technologies thus has an excellent chance for success, even though it cannot be certain at this stage of development. 11 These are important areas where China needs infrastructural development for enhancing supply and for maintaining aggregate