TWN Info Service on WTO and Trade Issues
Geneva, 30 Jun (Kanaga Raja) -- China and other East Asian developing countries will require changes in economic policies and strategies that rely less on exports to the developed world, as their old growth strategies will no longer be able to serve them as before in light of the evolving global economic crisis.
This is the main conclusion
of a new research paper by the South Centre titled "Export Dependence
and Sustainability of Growth in
The paper is by Mr Yilmaz Akyuz, the Centre's Special Economic Advisor and Chief Economist.
According to the paper,
the global crisis has exposed the high dependence of
Using new methods of
calculation, the paper finds that
If its exports expand at the moderate rate of 10% a year (instead of the 24-30% in 2002-2006), its growth may barely reach 7%. Returning to a path of 10% growth requires raising domestic consumption much faster, says the paper, noting that in recent years, the share of consumption in GDP has gone down from 55% in late 1990s to 36% in 2008.
The paper makes several
suggestions as to the way forward for
There should also be greater public spending on social infrastructure in health, housing and education. These can be financed by dividend payments by state-owned enterprises.
A shift from export-led to consumption-led growth would also require significant industrial restructuring. An important part of Chinese exports are specific to foreign markets with little domestic demand. Adjustment in the production structure would depend primarily on reallocation of new investment and skills towards areas that need to expand to meet higher domestic consumption. In this process, state guidance of investment could no doubt play an important role.
The paper argues that
the slowdown in global growth may impact other East Asian developing
countries more seriously than
According to the paper,
a key issue raised by the global economic crisis is the degree of dependence
of growth in East Asian developing and emerging economies (DEEs) on
exports, particularly to the
The principal channel
of transmission of the adverse impact of the crisis to Asian DEEs has
been trade. As contraction started to take root in advanced economies,
According to the paper, the sharp drop in exports and growth in Asia has raised questions over whether China and other DEEs linked to the East Asian production network could go back to rapid and sustained export-led growth as the world economy recovers from the crisis. The evidence suggests that in recent years the average import content of Chinese exports has been between 40% and 50%; that is, domestic value-added generated by exports is less than 60% of their gross value. In value-added terms, the share of exports in GDP is in the order of 20%.
The paper also finds
that the import content of consumption in
Despite high import
content of exports, one-third of growth of income in
These figures are significantly higher than the estimates of some 15% produced by conventional accounting based on net exports. It is estimated that a 10 percentage-point decline in the growth rate of exports would reduce Chinese GDP growth by at least 2 percentage points, including spillovers to domestic consumption, and by 2.5 percentage points including spillovers to both domestic consumption and investment.
A return by
"If, on the other hand, China cuts growth of its exports to a more acceptable level, then, without a fundamental change in the pace and pattern of domestic demand, it may grow by no more than 7% - and even less if growth slowdown gives rise to increased financial difficulties and asset deflation," adds the paper.
When investment grows
faster than consumption, firms would need to expand rapidly in foreign
markets in order to fully utilize the production capacity thus created
and maintain strong growth.
The paper finds that
According to the paper,
export dependence in most other DEEs participating in the Sino-centric
East Asian production network is no less than that in
exports are much more import intensive than its domestic consumption,
a shift by
According to the South
In 2002, the foreign
value-added content of exports to the
As a result, while
in gross value terms, the bilateral trade surplus of China with the
US was estimated to be some $172 billion in 2005, in value-added terms
(what is earned by the respective countries after deducting the import
content of their exports), this figure comes down to less than $40 billion.
In other words,
The paper stresses
that a relatively important part of the domestic value-added generated
by Chinese exports accrue to foreign firms. This is particularly the
case for processing exports where foreign firms are dominant. It is
estimated that of the total domestic value-added generated by Chinese
exports in 2002 to the
About 60% of these
exports were by foreign firms, including firms from the
Can China go back to export-led growth over the medium term as the world economy recovers from the current crisis, the paper asks, noting that a return to trend growth of some 10% per annum based on exports would mean continued increases in its penetration of markets abroad and its share in world trade. If growth in advanced economies which constitute the main markets of China remain sluggish, as suggested by most medium-term projections, the required increase in China's share in world markets will be even greater.
"A return to 'business as usual' with the US continuing to consume beyond its means and absorbing Chinese exports by issuing growing amounts of dollar liabilities is not a sustainable option - it is a recipe for deeper international monetary and financial instability."
An aggressive export
A solution to this dilemma could be to lower the foreign content of exports so as to enhance their contribution to growth. This would require technological upgrading and substitution of high-tech imported parts and components with domestic production and a shift from processing to non-processing exports. Such a transformation has been taking place in recent years, but there has been no significant decline in the average import content of exports, possibly because of increased vertical specialization in non-processing exports.
If the aim is to maintain pre-crisis growth rates of 10% or more, the solution is naturally to raise domestic consumption much faster than has been the case so far. The estimates suggest that for every 10 percentage points decline in export growth, private consumption would need to expand by at least an additional 5 percentage points in order to keep growth unchanged.
According to the paper,
the East Asian DEEs in the Sino-centric production network are more
vulnerable to a sustained slowdown in exports than
The indirect exposure
of East Asian DEEs through
Since processing exports constitute a very large share of Chinese exports to the US (close to 80%), and parts and components account for a large share of total exports of East Asian DEEs to China, a slowdown of Chinese exports to the US and EU can have a strong impact on East Asian DEEs, says the paper.
The DEEs in the Sino-centric
East Asian production network are more vulnerable to a sustained slowdown
of Asian exports to the
Consequently, a shift
"In other words,
at its current pattern of domestic spending, the Chinese market is not
a good substitute for the
To become a regional
locomotive, the paper concludes,