Grzegorz Witold Kolodko, Former Vice Prime Minister of Poland; Professor of Political Economy, Kozminski University.[Photo/China.com.cn]

Name:

Grzegorz Witold Kolodko, Former Vice Prime Minister of Poland; Professor of Political Economy, Kozminski University

Abstract:

No "hard landing" for the Chinese economy

In the development economics there is a popular term of "hard landing". It is contrasted with the "soft landing" defined as descending gradually and softly from high output growth levels, especially when the growth is related to an overheated economy. Hard landing means facing different realities as a result of going drastically down, just like when a plane is touching down at an unpleasantly sharp angle. For economic growth this isn't necessarily a descent to a ground or zero level, but sharply below the previous one. During the last crisis a lot of Western countries experienced the shock caused by hard landing. This calamity particularly affected first the United States, then Spain, Greece, Ireland, Portugal, Slovenia, and recently basically the entire Eurozone, whose economy from a decent GDP level of 2 percent in 2010 ended up in a meager growth of 0.5 percent in 2012 and a recession of 0.3 percent in 2013.

Wrong forecasts

For over a decade we have been continually hearing of the imminent "hard landing" of the Chinese economy. As yet the reality has been giving the lie to most black forecasts. For ten years in a row, from 2001 until 2010, GDP growth exceeded the International Monetary Fund's forecasts announced at the organization's spring summits. By the way, this is not an isolated case. Others are also wrong in their forecasts. The gross domestic product of the four largest developing economies: Brazil, Russia, India and China in 2008 was 75 percent higher than the eminent US investment bank Goldman Sachs forecasted just five years earlier, when it used the term BRIC for the first time, a constantly overused acronym formed by the first letters of those countries' names. Such a miscalculation came from clearly underestimating the growth dynamics of China, as well as that of India, another Asian colossus.

What is "hard" and what "soft" is not determined by mathematics or physics but rather by the methodological convention. You can say that a hard landing was experienced by Polish economy, when it descended in a short period of only two years from a high growth rate of 7.4 percent in the 1st quarter of 2007 to a trace level of 0.8 percent in the 1st quarter of 2009. What other than a "hard landing" do we call losing as much as 6.6 percentage point of the previous output growth?

Experts of the International Monetary Fund made a simulation, assuming that a "soft landing" would mean investment growth rate in China declining by 2 percentage points, while a "hard" one by 3.9. If such a hypothetical situation had occurred in 2012, of all the major trade partners South Korea would have been the most affected one. Instead of the 3.6 percent GDP growth predicted for it by the IMF in the event of China's "soft landing", the rate would have dropped to 2.3, and in the event of the hard "one" as much as three times, down to 1.2 percent. The response of two other major regional partners, Japan and Australia, would have been slightly less stronger, that of Brazil even less so, though still considerable (instead of a 3 percent growth, 2.8 and 2.6 respectively in each variant) and that of Germany (instead of 0.6, 0.4 and 0.2 respectively). All this with investment level reduced by only 2 or nearly 4 percentage points. And yet, accumulation and investments are much more susceptible to the growth fluctuations and changes in the absolute level than the gross product is, because they are often treated as a buffer to protect against too drastic consumption changes.

China's expansion as the world economy engine

A significant question presents itself: are we really in for a "hard landing" of the Chinese economy and what consequences would it have? What should the rest of the world, especially its rich regions in Asia, Europe and America, wish for? Would it be good if the Chinese boom continued as it keeps the economy up in other countries or maybe it would be better if China slowed down its long march as it threatens the dominant position of others and, on top of that, makes it hard to keep the world economy in balance?

The answer is clear: for several more years or even for more than a decade, the highest possible output growth rate is in the best interest of both China and the rest of the world. There are, however, certain conditions to be met by China, especially a more environmentally friendly path must be adopted and income disparity reduced. This will contribute to improved living conditions of hundreds of millions of people in China and give additional growth impulses in other places in the world. It's enough to realize that every additional billion dollars of Chinese imports from Central and Eastern Europe means a noticeably higher employment rate in Poland, higher incomes in Ukraine, growing profits in Czech Republic; each additional billion dollars spent by Chinese tourists in Greece, Italy, Spain, Portugal is, under present circumstances, little short of "foreign aid".

How to avoid the hard landing

China's "hard landing" cannot be ruled out; its problems and challenges abound. In the long term the most serious of them are the social and economic consequences of aging population. Half a century ago state system pension of every Chinese person was funded from contributions of five people in working age; at present it is funded by three people. Presently there is one elderly person, no longer fit to work and earn money, per five employees; very soon, already in 2035, there will be one such person per two employees.

It is beyond any doubt that China's absolute position – economic and, consequently, as is always the case for a large country, political and military one – as well as its impact on what is going on in the world are growing and they will continue to grow in the foreseeable future. This process cannot be stopped, or even less so reversed using peaceful methods. And other methods are out of the question. Everybody else must acknowledge this, regardless of their own interests and subjective affinities. We need to take a leap forward again and try and find the right place for ourselves in the changing world of the future.

This should be all the easier as we can clearly notice processes running in the opposite direction to those taking place for the last decade or so. Instead of attracting manufacturing activities, China, on the one hand, is placing some of its own abroad and, on the other hand, direct investment from richer countries go to other economies with lower salaries. The beneficiaries of this situation include India, Pakistan and Bangladesh as well as Vietnam, Cambodia and Myanmar. This process overlaps with the effects of the continuing appreciation of the Chinese currency. It is gaining in strength so for a salary of, say, 3000 renminbi a month you need to earmark ca. 480 dollars. Only several years ago, at the exchange rate of 8.2, 183 dollars were enough for a nominal salary of 1500 renminbi. In other words, back then 3000 renminbi were worth only 366 dollars while now as many as 480. With the increase in manufacturing labor costs, which have been rising by as much as 20 percent a year, and with the currency appreciation, China is no longer as competitive as it used to be. This is the same process that was experienced in the past by Japan, South Korea and Taiwan, one after another.

Outsourcing and competition

Furthermore, even in the United States and in other highly advanced economies of the West we can observe a decline in the tendency to outsource and offshore business activities. It happens in cases where low costs of labor play a relatively minor role in the overall manufacturing and sales costs for a given product. It is interesting to read estimates showing that for a 16GB iPad by Apple, which was sold in 2010 on the US market for USD 499, Chinese labor costs accounted for only 8 dollars, or 1.6 percent of the price . In this situation, and in the light of the political pressure to stop "exporting jobs to communist China", a manufacturer may come to the conclusion that it is economically viable to pay even five times as much for this part of costs. Assuming that the additional cost of labor is entirely passed on to the price, iPad, now one entirely made in USA, would cost 531 dollars but the manufacturer will no longer have to explain himself about outsourcing and offshoring, because the product is assembled on the San Francisco Bay rather than on the Yellow Sea.

Problems with low efficiency of some state-owned companies are mounting; supply structure not matching the demand are becoming apparent; many companies are in excessive debt and lose liquidity or already face bankruptcy; corruption is rampant, especially at the intersections of private business and government. This is not the kind of public and private partnership we aspire to. The greatest opportunities for corruption can be found in the public procurement system; consequently, the rate at which new kilometers of modern roads and fast trains are completed and the rate at which corruptible officials, sometimes those of the high level, are multiplying, are racing each other. Despite the unquestionable achievements in environmental protection, for example afforestation, placing waste treatment plants in urban agglomerations and the use of solar energy, the view is depressing. It is estimated that 16 out of the world's 20 most polluted cities are situated in China.

All this comes as no surprise and the economic policy attempts to address the mounting problems, for example by means of further management decentralization, changes in the fiscal system, continued labor market deregulation. It will be a cliché to say that we need to do more, also when it comes to ensuring more effective public control over economic policy. In the West we keep hearing that it's too little, too late, that a loss of momentum is coming, but it hasn't happened yet.

Can China double GDP over next ten years?

China is in for at least a couple of years, and most likely over a decade, of fast growth (some believe that even several decades of it, but this is an erroneous view), over twice as high as the global average and three times as high as the average for wealthy countries. It will not be back, except for potential extraordinary years, to a two digit growth rate, but it will be still capable of quickly increasing its national income. For how long? By how much?

It's a wider problem, as China is not the only country to develop fast. For many years the "Asian economic miracle" was discussed, with reference both to the impressive growth rate in the one-of-its-kind Singapore, Hong Kong and Taiwan and in much larger countries such as Indonesia, South Korea, Thailand, Malaysia, and recently also Vietnam. Growth rate is also high in a particularly important country, in the very populous India. Let's assume that these countries commit no strategic error that would bring their growth down to a low level.

In this case until when can a fast growth of Asian economies continue, one that greatly exceeds the indices of other countries and regions? Undoubtedly, the great project One Belt, One Road, initiated by Chinese President Xi Jinping, will give an important boost not only for long-term growth and expansion of the Chinese economy, but also will support the growth of several Asian countries.

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