Quality vis-à-vis Velocity of Economic Growth

By HU JIANGYUN

SINCE China embarked on reform and opening-up in the late 1970s, and especially since its entry into the market economy in the 1990s, the country has considered the magnitude and extent of GDP growth as main parameters of its economic development.

In macroeconomic terms, gross GDP and GDP growth are of great national significance, especially to a developing country. A large, briskly expanding GDP means more jobs, higher incomes and better livelihoods for all. Once a state's economy surpasses subsistence level, however, its people expect to enjoy a better quality of life, more wholesome environment and sustainable development.

At the stage where the demand for quality, quantity, variety and function of commodities has been met, the population turns its attention to certain factors of products and production. For instance, consumers now expect manufacturers to produce goods using materials, components and procedures that pose no threats either to the natural environment or human health; moreover to abide by international standards with respect to labor rights. There is also a growing call for efficient use and recycling of resources and energy during the course of production – expectations that spring from a desire for sustained development. But as the conventional approach to GDP does not take into account such issues as economic structure and environmental health, it fails to reflect the innate quality of economic growth.

Between 1979 and 2010, the Chinese economy grew an average 9.9 percent year-on-year (at fixed prices) according to the National Bureau of Statistics. The rate over the period 1991 to 2010 was 10.5 percent. The Chinese economy also showed sound gains of 7.8 percent in 1998 and 7.6 percent in 1999 – years that marked the utmost depths of the Asian financial crisis. And amid the worst recession in several decades China again reported outstanding growth – 9.6 percent in 2008, 9.2 percent in 2009 and 10.4 percent in 2010 – levels head and shoulders above that of most countries, and which hoisted its economic boom to new heights.

Although the current economic crisis has yet to end and there are still uncertainties in the world economic situation, recovery is on the horizon and looks likely to hold fast. It is in this context that China now aims to balance the quality and quantity, speed and efficacy of its economic growth. While sticking to a proactive fiscal policy and prudent monetary policy, China has broadened its focus by lowering target GDP growth rate, so providing space for healthier development.

The Chinese government declared in the 11th Five-year Plan period of 2006 to 2010 the goal of transforming growth patterns, upgrading industrial structure and promoting circular economy. The global financial crisis of 2008, however, obstructed these efforts. To absorb the shockwaves the crisis inflicted on the domestic economy and increase liquidity, China modified its financial policies by shifting to a proactive fiscal policy and moderately easing its monetary policy. The literal approach that China's financial institutions took to carrying out this eased monetary policy led to a steep rise in the money multiplier – measure of the extent to which the creation of money in the banking system causes growth in the money supply to exceed that of the monetary base.

Over the past years China has fine-tuned its economic policies according to close observation of changes in the global and domestic economy. As the world economy advances towards recovery (although the euro zone has yet to see a complete turnaround) the time has come for China to get back on track in its efforts to transform growth patterns and optimize its economic structure.

As the world's second largest economy, China acknowledges more than ever the imperative to realize both rapid and sound development. Over the past decades the Chinese economy has expanded at break-neck speed. Last year, both China's GDP within the global economy and cargo trade within the global trade exceeded 10 percent. At such magnitude, world reserves of resources, energy and other production elements could hardly support the Chinese economy – along with that of other major economies like the U.S. – in its former growth mode. Moreover, now that the three basic necessities of shelter, food and clothing have been met, Chinese people are focusing their attention on the universal issues of wholesome living and a salutary environment.

Slowing down GDP growth can ease stress in both domestic and international markets. The aftermath of the financial crisis brought sharp hikes to prices of staple commodities on the world market, particularly natural resources like oil. No country escaped the ensuing inflation. In its immediate wake the U.S. hence introduced the quantitative easing (QE) policy, and other major economies resorted to similar measures.

Problems like uneven economic development among China's provinces have also plagued the nation. Areas in the west have long lagged behind eastern coastal regions in this respect. There are persistent imbalances in industrial sectors, apparent in strong manufacturing but a lame service industry. Levels of marketization vary across the nation, and economic anomalies, such as monopolies in certain industries, and parochialism, evident in market barriers in certain regions, still exist. There are also glaring rural-urban gaps in standards of education, social security and employment. The government has yet to improve its management of national economy, as apparent in interference in certain sectors that stifles competition instead of allowing market forces to do their part.

Alleviated from the need to pursue urgent growth, China now has the latitude necessary to deepen reform and tackle latent threats, smoldering for years but yet to explode, and to deal with the problems that crop up in the course of economic and social development.

Hu Jiangyun is a researcher at the Development Research Center of the State Council.