Delaying reform stores up problems for future global giant

Source:Global Times Published: 2012-12-5 14:20:00

Illustration: Liu Rui
Illustration: Liu Rui

When I titled my book, When China Rules The World, of course I didn't literally mean China will rule the world because no country ever has. I referred to a situation where China is the most powerful and influential country in the world. I have no reason to change my view.

I finished writing in 2008, and everything since then has only confirmed my argument and accelerated the process. China is going to become the largest economy in the world.

It will be far from being the most developed economy, and still relatively primitive compared to the US economy, but by 2030, it stands a good chance of being much bigger than the US economy.

However, the present model is still largely based on a very labor-intensive economy which is very dependent on exports. Although China is steadily moving up the value chain and the economy is becoming more research-based, that process needs to be encouraged and accelerated, and that will require some serious economic reforms.

The next stage of development is going to require a different kind of model. But I don't think it needs shock therapy or that reform needs to be introduced extraordinarily quickly. That's not the Chinese way anyway.

I think it will be a gradual process, but it will have to be done. The more it is delayed, the more China stores up problems for itself.

The priorities in the next period is to shift the economy from being extensive to intensive, move up the value chain, encourage those companies which are of that ilk.

One step is to probably allow more gentle appreciation of the yuan which would encourage that process, because doing so would discourage the very labor-intensive cheap export-driven production. 

The decision to make the yuan an international currency was a sensible one, but there's no need to rush to it being a fully convertible currency, because in doing so China would lose an important lever.

The other thing that China has to pay attention to is income disparity, and not just for economic reasons. If income disparity gets very acute, it can be a powerful source of social instability, and potentially political unrest. And a society which is highly unequal becomes something different. It loses its sense of cohesion and identity.

Some of the inequalities are very intractable issues. The difference is between the rural areas and the industrial areas. That's a classic feature of all economic take-offs.

China is going through its economic take-off, and the structural inequality comes with that. It is impossible to avoid. You have to provide subsidies or raise taxes to deal with the problem, as happened in the UK during the industrial revolution of the 19th century.

Economic dynamism is not, in any sense, to be taken for granted. Take the US, where in real terms median incomes have been falling now for quite a long time, at least since the late 1970s, and income disparities are also increasing.

There is a lot of distress and a feeling of things not being right because of what's happening to living standards there. 

The US is losing power and authority globally, and I think there is no question about it if you compare it with 20 years ago, it is no longer able to deliver in the way that used to be able to deliver globally. Its authority is declining.

The reason for this is because its relative economic position is declining because of the rise of China, but not only because of the rise of China. Americans sense of who they are, what they are, and why they matter in the world has been greatly enhanced by this sense of being the big global power.

But if they begin to lose that, that's a problem. After the Iraqi war failure, and the Afghanistan failure, it seems that they haven't achieved anything for a long time. This could sap the morale of Americans.

So I've got a feeling about the US, I am not saying it is inevitable, but it is definitely a possibility that the country faces very difficult prospects and a sort of unhappy situation where its great days are really behind it, which I think it is probably the case.

Political polarization is another problem. You have two political parties in Washington which are trapped in deadlock, and in a system so deeply split, it's very hard to achieve anything. This may not continue forever, but it raises the specter of a society that becomes even more deeply divided.

China also needs reforms, but I don't think Western-style political reforms are likely at the moment. I think the priority, apart from the economic reforms, is to increase transparency and improve the flow of information. These reforms are very important, but need to be very focused.

The article was compiled by Global Times reporter Wei Lai based on an interview with Martin Jacques, senior researcher at the London School of Economics and Political Science.

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