Completing the Transition to a Modern Industrial Society
by Liu Shijin; From: English Edition of Qiushi Journal; Vol.3 No.4 October1,2011 Original Article
A developing country is a country with a low level of social and economic development and relatively low standards of living. Developing countries are yet to complete the transition from a traditional agricultural society to a modern industrial society. Since the launch of the reform and opening up drive, China’s economy has grown at an average rate of almost 10%, and the country has made incredible achievements in economic and social development.|
Despite this, however, China is still a developing country, as indicated by both its per capita economic indices and its economic and social structure. Though this is a fundamental truth, it has been questioned by certain organizations and individuals in the international arena over recent years.
When judging a country’s level of development, it is important to take into account not just its size of the economy, but also its per capita output. Although China’s GDP totaled nearly US$ 5.9 trillion in 2010, making it the second largest economy in the world, if we divide China’s GDP by its population of 1.3 billion, the huge developmental gap between China and developed countries becomes immediately apparent.
From this perspective, China embodies the key characteristics of a developing country.
According to statistics from the World Bank, China’s GDP per capita for 2009 was only US$ 3,744, less than half of the world average of US$ 8,594, and not even 1/10 of that of the United States or Japan. Moreover, China’s per capita consumption for the same year was US$ 1,306, less than one third of the world average of US$ 5,093, and only 4.0% of that of the US and 5.5% of that of Japan.
Second, some people believe that due to the Earth’s limited resources and environmental constraints, people in developing countries like China should not and will not be able to enjoy the same standards of living as people in developed countries. They divide the people of the world into two types: the first kind is those living in developed countries. These people are entitled to affluent standards of living brought about by modern industrial civilization, and live lavish lifestyles characterized by high consumption.|
The second kind is those living in developing countries, such as China. The per capita income and consumption of these people remain low. Even though they have the ability to raise their standards of living through development, they should refrain from doing this, as such a pursuit would only lead to “human tragedy and disaster.” The people that hold to such a belief have absolutely no regard for the rights of people in China and other developing countries to share the fruits of human development.
It is a proven fact that through advances in technology, institutional innovations, and development strategies that suit national conditions, emerging countries are perfectly capable of joining industrialized countries among the ranks of high-income economies. The key problem that needs to be addressed is the equality of people in developing countries such as China, who should be equally entitled to enjoy the fruits of human development and pursue happiness as people in developed countries.
While China needs to transform its pattern of economic development, developed countries also need to address their excessive and even wasteful life-styles and modes of growth. In this regard, the principle of equality must also apply to the division of global responsibilities.
The gap between China and developed countries lies not in large cities and urban areas, but in rural areas. The per capita disposable income and consumption levels of rural residents in China are less than one third of that of urban residents. The ratio of rural residents covered by pension insurance is less than one third of that of urban participants. Per capita medical insurance expenditure for rural residents is less than one sixth of that for urban residents.
Development between different regions is seriously imbalanced in China. For example, the retail sale of consumer goods per capita in eastern regions of China is 2.3 times greater than that in western regions. Considerable development disparities even exist among different regions of the same province. For example, in terms of per capita gross regional product, local government spending, and retail sale of consumer goods, there is 2-4 fold difference between the Pearl River Delta and the northern part of Guangdong Province, as well as between the southern and northern parts of Jiangsu province.
Although consumption of luxury goods in China has grown rapidly in recent years, this does not indicate that China is a wealthy country. On the contrary, the rapid growth of luxury consumption is proof that the gap between rich and poor is widening in China. According to China’s poverty line, the number of Chinese people living in poverty in the year 2009 was 36 million. When calculated according to the United Nations’ poverty line, this figure swells to 150 million, and if we were to apply the criteria used by developed countries, it would be much higher still.
China’s unbalanced regional development has been the cause of some misunderstanding over China’s level of development. Most foreign people that come to China are short-term visitors that tend to stay in large cities or developed regions of the country. At the same time, they are also confronted with a language barrier and limitations to the scope of what they see, which can make it very difficult for them to gain a clear picture of China’s conditions and development level. As a result, they are much more likely to misunderstand China’s level of development.
In the past, the major exporters of manufactured goods were developed economies. Thus, when China became the world’s largest exporter, some people began to exaggerate China’s position in the international division of labor, clearly unaware of the changes that have taken place in the international industrial division of labor. One of the main reasons why China has been able to become the world’s largest exporter so rapidly is its active participation in the global and East Asian manufacturing network.
Although the finished products that China exports are high in value, a significant proportion of this value comes from imported components. In fact, the domestic value added represents only a small proportion of the total value of China’s exports. In addition, China’s export volume per capita falls significantly short of developed countries. In 2009, China’s manufacturing value added per capita was just US$ 1,550, far lower than the US$ 8,272 of Japan, US$ 6,926 of Germany and US$ 5,667 of the United States.
The commodity structure of China’s foreign trade can also be misleading. Of China’s export products, 95% are manufactured goods, and over 30% are hi-tech products, proportions which are similar to those seen in developed countries such as the United States and Germany. However, the value that is added to these manufactured goods in China is mainly achieved through labor intensive and low value added activities such as processing and assembly, and this is especially the case for hi-tech products. On the contrary, developed countries are able to achieve high value added by mainly carrying out technology and knowledge-intensive activities.
Western consumers can easily feel the effect that goods labeled “Made in China” have had on their daily lives, but may be unaware of China’s disadvantages on a less tangible front: the service trade. In its global trading, China’s exports are mainly products with high labor content and low profit, while its imports are mostly products with high technology content and high profit. In contrast to its huge trade surplus in terms of goods, China’s trade deficit in services is increasing on a constant basis. In 2009, China’s trade deficit in services reached US$ 29.4 billion, coming in sharp contrast to the143.3 billion dollar service trade surplus of the United States.
The cost of China’s export products has been kept artificially low due to the price distortion of factors of production, which has caused many people to overestimate the competitiveness of Chinese goods. China has long relied on the low price of its export products to increase its market shares. This has been achieved through rational factors, such as China’s low labor costs, but also through irrational factors, such as forcing down the price of resources, environmental costs, and labor income. Although in the short term this appears to lower the costs of export products, in reality it undermines the efficiency of resource allocation and the development of human resources. In turn, this will hamper the competitiveness of Chinese industries and hinder the transformation of China’s development pattern.
Huge foreign exchange reserves are often associated with developed economies. At present, China’s foreign exchange reserves have exceeded US$ 3 trillion, ranking as the largest in the world for consecutive years. However, the means by which China accumulates foreign exchange reserves differs greatly from that of developed economies.
Contrary to the opinions of some, China’s official foreign exchange reserves cannot be regarded as national wealth or fiscal revenue. China’s foreign reserves are created when the central bank purchases foreign exchange from commercial banks and other sources in Renminbi. Although they appear as assets on the central bank’s balance sheet, their purchase unavoidably increases the Renminbi liabilities of the central bank, leading to the creation of yuan funds outstanding for foreign exchange. Therefore, this enormous volume of assets cannot be regarded as national wealth, nor can it be used for the purpose of financial expenditure.
Compared with developed countries, China’s foreign exchange reserves per capita are still low, totaling at US$ 2,140 in 2010, about a quarter that of Japan. Moreover, foreign exchange is able to exist in the form of private capital in some developed countries. In fact, for the US and Britain, both issuers of international currencies, foreign exchange reserves are not an indicator of their national wealth.
The scale of China’s foreign exchange reserves has distracted people from the major limitations that the country faces in outward investment, which is a major characteristic of a developing country. By the end of 2009, China’s outbound foreign direct investment valued at US$ 245.75 billion, only 1.3% of the world’s total. However, foreign direct investment in China during the same period was over one trillion dollars, which added to the country’s foreign reserves. Unlike developed countries, which are able to gain high returns from large-scale outward investments, China uses its reserves mainly for the purchase of low-return foreign national debts, a result of its limited capacity for outward investment.
A considerable proportion of China’s foreign exchange reserves are attributable to foreign-funded enterprises. This means that part of the country’s foreign exchange reserves must be prepared for the payment of contingent foreign liabilities. Over 40% of China’s current account surplus comes from the net exports of foreign-funded enterprises. These enterprises have maintained a high level of profitability in China. In 2009, the profits of foreign-funded enterprises in China amounted to 751.15 billion yuan, or about US$ 110 billion. Of these profits, 63.2 billion dollars were repatriated, while nearly 50 billion dollars were retained in China. Therefore, if these profits were also to be repatriated, the balance of China’s foreign exchange reserves would decrease accordingly.
In recent years, China has carried out a number of major projects that have caught the attention of the world. These projects were difficult to organize, required a high level of funding, and relied greatly on technology. Some of these projects would have been a difficult feat even for developed countries, but China managed to complete them in the space of just years. Therefore, some people have questioned whether China is still a developing country or not.
In fact, China’s achievements in this regard are mostly due to its huge population, its large size of resources, and the capacity of its government to organize and mobilize the people. For example, China was able to focus the energies of the entire nation behind the rescue effort following the Wenchuan Earthquake. The central government demanded that each county heavily inflicted by the disaster should be aided by a particular province, and organized for provinces and municipalities around the country to provide dedicated support to disaster stricken areas.
This way, China was able to essentially complete the three-year reconstruction task in the space of just two years. Some foreign people are unfamiliar with the mechanism that China employs to concentrate resources behind major undertakings, misconstruing these projects as evidence that China is a developed nation.
Some local governments have an affinity for grand plazas and other extravagant projects that showcase their localities, even though they are lacking in economic strength. As a result, these cities are majestic during the day and shine with glory at night, giving people the impression that these places are prosperous and highly developed. In fact, these local governments have little money to spare, and some even rely on national subsidies and income from the sale of land.
These showcase projects represent poor investments, failing to bring about long-term or social benefits. They can also have a negative impact on the long-term development of the local economy, and may cause fiscal and financial risks that are difficult to control and disperse.