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October 15, 2007
China and intangible economy
China is clearly seen as the manufacturer to the world. But it is also clear that China is moving toward the intangible economy. For example, we know that Chinese companies are moving into high-tech products. China is also ramping up its investments in science and technology (see also the presentation at the Athena Alliance co-hosted Dragon and Elephant conference by Dr. Mu Rongping of the Chinese Academy of Sciences).
But S&T is not the only area where the Chinese are investing. Three Chinese universities are now among the world's top design schools -- two more are in Taiwan. In addition, the World Bank is recommending that China move more aggressively into services (see A workers' manifesto for China - Economist.com). The basis for this advice is macroeconomic and political stability - as the Economist points out:
The implication of all this is that if China is to shift the mix of growth towards consumption, urging households to spend more of their income will not be enough; the government will also need to increase the share of national income going to households. Mr Kuijs [of the World Bank] argues that this will require a shift in the composition of growth from capital-intensive manufacturing towards labour-intensive services. He recommends a package of reforms which include: financial liberalisation to lift the cost of capital; scrapping distortions in the tax system which favour manufacturing over services; increasing the prices of industrial inputs such as energy; removing restrictions on the development of labour-intensive services by, for example, tackling monopolies; and a stronger exchange rate to stimulate production in domestic service industries. Increased government spending on health care, education and a social safety net would also encourage households to save less and spend more.
More labour-intensive growth would boost household income and consumption as a share of GDP and so help to reduce the trade surplus. But, perhaps more importantly, by allowing workers to enjoy more of the rewards of rapid growth it could also help to prevent future social unrest, and it would reduce pollution as the economy became less dependent on energy-guzzling industries.
In other words, these changes are necessary to turn China into a normal developed economy.
The implication of this is shift will be as profound as the previous rise of China as a manufacturing giant. Will it create a new competitor to the US in innovation? Or will the shift to more consumption mean larger markets for US goods and services?
I don't pretend to know the answer to that question. Probably both. But I do know that as the Chinese economy shifts, the nature of our economic relationship will also shift -- and the nature of our economy will shift as well as we move deeper into the I-Cubed Economy.
I also know that our competitive advantage in the I-Cubed Economy is nothing we should take for granted. Our economy vision and policies need to recognize that fact -- sooner rather than latter, because latter will be too late.
(For more of the possible shift in the Chinese economy, see Mr. Kuijs' papers:
China’s Pattern Of Growth: Moving To Sustainability And Reducing Inequality,
Rebalancing China’s Economy—Modeling A Policy Package, and
How Will China’s Saving-Investment Balance Evolve?)
Posted by Ken Jarboe at October 15, 2007 9:21 AM
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