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16 August 2005 Should We Fear China? According to Martin Wolf in his
acclaimed book, Why Globalization Works, "The fall of
the Soviet empire and the shift of China and India from socialism
and self-sufficiency to liberalization and international exchange
were the most important events of the last two decades of the twentieth
century for the world economy." Although China and India are still
classified as "mostly unfree" countries, both have moved
up in the Fraser Institute's indexes of economic freedom - from
a score of 3.8 out of 10 in China's case in 1980 to 5.7 in 2002,
and from 4.9 to 6.3 in the case of India. Predictably, their economic
performance has improved; annual economic growth in the last 10
years averaged 8% in China and 6% in India. As is often the case with structural
shifts in the world economy, these developments have been met with
a mix of excitement and fear in the rest of the world. Are they
threats to jobs and industries or do they present opportunities?
A simple way to rephrase the question
is to ask: 'Will the rest of the world be better off if China grows
rich or if it stays poor?' The answer is obvious. From an economic
perspective, and probably from other perspectives as well, the rest
of the world stands to benefit from the rise of China, just as it
benefited from the rise of the United States in the nineteenth century.
The proviso is that governments keep their economies open and flexible
and do not resist necessary structural changes. From the point of view of world
consumers, having a workforce of 750 million hard-working Chinese
adding to world output of quality products at low prices is an enormous
overall benefit. Their rising incomes are also adding
to the demand for non-Chinese products. The combination of lower
prices for manufactures and higher prices for the food, energy and
raw materials that Chinese consumers and industries need has led
to favourable movements in the terms of trade of many countries,
including New Zealand. To reap maximum advantage from
China's growth, other economies will need to continuously adapt.
Countries with rigid labour markets, big welfare states and high
levels of taxation may struggle to attract investment and grow.
Likewise the adoption of ill-justified environmental regulation,
such as the Kyoto Protocol requirements, will disadvantage countries
in the face of competition from China and India, whose immediate
priorities are greater prosperity for their people. New Zealand is well placed to benefit
from the arrival of these countries on the world economic stage.
It has substantially liberalised its economy, including its labour
markets, and is now close to eliminating remaining low tariffs.
The government is negotiating a free trade agreement with China.
If it eventuates it may be the first of its kind for China, and
it would not require major additional adjustments for New Zealand
industries. Nevertheless, New Zealand will need to work hard to
reduce taxes, improve education standards and abandon foolish policies
like Kyoto if it is to maximise the new opportunities in the dynamic
Asia-Pacific region. China's development and integration
into the world economy may not be without tensions. One major issue for Western firms
is violation of copyrights and other intellectual property. China
has taken steps to give constitutional status to property rights,
but enforcement remains weak. It must overcome this problem in its
own interests: no country has prospered with insecure property rights
for its own investors or foreigners. China's allegedly 'under-valued'
currency has been an issue for the United States and other governments.
This concern is largely misplaced: no country can permanently alter
its real exchange rate. With the fixed peg been the yuan and the
US dollar, China was effectively 'outsourcing' its monetary policy
to the Federal Reserve and accepting the US inflation rate. It has
now implemented a small revaluation and swapped this peg for a link
to a trade-weighted basket of currencies and thus a 'world' inflation
rate - not a major change. China's reluctance to liberalise
its capital markets faster given current weaknesses in its banking
system is understandable. Along with India, it faces many additional
challenges, including environmental pollution, the scourge of corruption
and an inevitable transition to political freedom and democracy
at some stage. There are grounds for believing
that both China and India will meet the challenges that face them.
Capitalism, democracy and freedom are spreading around the world.
Neither country looks like becoming a big-government welfare state
- trends are in the opposite direction. The ultimate resource for world prosperity is people. The increasingly educated and sophisticated citizens of the world's two most populous countries seem set to add hugely to the world's stock of knowledge, scientific breakthroughs and technological innovation. This could be their greatest contribution to living standards around the world in coming decades. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |