In the race of history used to judge the largest and most powerful of nations, growth has always been a key statistic. And as this decade comes to a close, China is racing ahead of the competition.
News reports from last weekend suggest that China, which only in 2008 overtook Germany to become the world’s third largest economy, may well have beaten Japan to take second place. For China, this takes into account both a recent upward revision of its 2008 gross domestic product (GDP) growth from 9% to 9.6%—bringing its 2008 nominal GDP to $4.6 trillion —and a government estimate that the economy will grow by 8% in 2009. For Japan, whose GDP at the end of 2008 stood at $4.9 trillion, this takes into account an estimated 6.6% contraction for 2009.
Illustration: Jayachandran / Mint
Yet, it was only 30 years ago that Deng Xiaoping ushered in economic reforms. This rapid ascendance gives much fodder for thought to the world economy.
China makes economists ask that perennial question again: What causes growth? Some of the factors that stimulated China’s growth were textbook ones: high savings, a large labour build-up, and massive capital allocations. Yet, perhaps the key factor is one relatively unseen in the Asian Tigers’ growth post-World War II: a large jump in productivity. As far as the growth “rule book” was set by the rise of, say, Korea, China’s boom, stimulated by more than capital investment, has gone against the grain of traditional models.
China forces even those averse to state intervention to reconsider the extent of it. After all, China’s policymaking has been far from convention for market economies—whatever the world may think of it. Sometimes, this is simple mercantilism in the form of subsidies. But, at other times, it’s a game-changing policy—the creation, for instance, of special economic zones around coastal areas: low-tax, low regulatory environments where industries quickly thrived in the 1980s.
Such a rise may also alter how nations now compete for scarce resources. China suddenly finds itself in a dominant position few share, one that is self-reinforcing: This position makes it easier for Beijing, rather than New Delhi, to gain access to, say, oil.
Unconventional policies, combined with new resources, could give China a booster engine in this race. Consider that the 2003 Goldman Sachs “Dreaming with BRICs” report suggested that China would overtake Japan only in 2015. That prediction was off by five years. So now, the US economy, whose dominance China was supposed to end only after 2040, had better start watching out.
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