September 17, 2004
Plugging Into the Growth of China
“To get rich is glorious.” Twenty-three years ago, those words, attributed to Chinese leader Deng Xiaoping, were the catalyst for a series of sweeping reforms that unleashed the forces of capitalism in the world’s most populous country. The results are being felt around the globe today.
When the history of this period is written, there won’t be any ink wasted on the fine print of thirty year old military records of middle-aged American politicians. But it is sure to highlight the stunning development of China as a major player on the world economic stage.
When it comes to growth, you quickly run out of superlatives to describe the Chinese economy. Two years ago, China replaced the United States as the number one recipient of foreign direct investment. Since the reforms took place, its foreign trade has increased 26.4 fold, and its Gross Domestic Product has grown at an annual rate of 9.4 percent. The economy of China today is four times as large as it was in 1980.
The meteoric growth has produced strain as well as success. Living standards have dramatically increased in the large coastal cities, where a booming middle class now drives cars, owns private homes and surfs the internet. For the 900 million people who live in less developed villages and in the countryside, progress has been much more moderate. And the nation continues to struggle with the surplus of labor that is a legacy of its Communist past.
While long-term projections are subject to error, most scholars expect the Chinese economy to overtake U.S. GDP by the year 2020. On a per capita basis, its economy would still lag the industrialized West and Japan by a significant margin. But its projected 1.5 billion consumers would still be a force to be reckoned with in the marketplace.
For businesses and communities in Indiana, developments in China are both a threat and an opportunity. China is a customer for many local businesses, both for final goods, and for intermediate and raw materials. It is also a producer of many goods that businesses and consumers buy. Its businesses are competitors, and sometimes collaborators, with Indiana businesses in the global marketplace. And it is also an investment opportunity that Indiana businesses and individuals are taking up in growing numbers.
With labor costing only 1/8 as much as South Korea, 1/10 as much as Taiwan, and 1/14 as much as Hong Kong, the country has captured market share – at the expense of its competitors – in a broad spectrum of industrial and consumer goods. Consumers have benefited from the lower prices enormously, but many Indiana businesses have benefited as well, from the lower prices they pay for intermediate goods.
But too little attention has been paid to the other side of the trade equation, namely, the export market. Currently Indiana exports only about $235 million of goods to China annually, a paltry 0.8 percent share of all U.S. exports. Our state is a leader in the production of industrial machinery, yet only 1.7 percent the $4.6 billion worth of machinery we export to China comes from Indiana.
Indirectly, Indiana businesses still benefit from Chinese demand, through the higher prices for products like steel and soybeans the Asian demand supports. But is that the best we can do? The size and the dynamism of the Chinese economy – both now and into the future – is an opportunity that our state should be paying more attention to.
About the Author
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