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China rising: from a command economy to a market juggernaut and a factory to the world
Friday, August 01, 2008
By Kaleem Omar
In 1805, Napoleon said, Let China sleep, because when it wakes up the whole world will be sorry. Well, of course, it has woken up. It is now the worlds third biggest economy, after the United States and Japan having overtaken Germany for third place in 2007. It is expected to overtake the Japanese economy in the next seven years and the US economy in the next 22 years to become the worlds biggest economy by 2020. It has also become a major military power and is currently engaged in a massive programme to modernise its armed forces.
Back in the late 1990s, before the bursting of the dotcom bubble, the western media used to be full of stories about the wonders of the information highway and the revolution it was bringing about in the way business was conducted and the way the world was run. Now the western media has switched tack and is full of stories about the economic phenomenon that has come to be called China Rising.
Pakistans great neighbour to the north, and this countrys best friend, is now known as the Factory to the World
Many commentators make a strong argument for the interrelationship between freedom and economic development. A United Nations Development Programme study published in the mid-1990s revealed a high correlation between human freedom and human development countries that rank high on the freedom index also rank high on the developmental scale. The theory is that potential freedom unleashes the creative energies of people, resulting in higher levels of income and progress.
This, however, does not always work in practice. The classic example is post-communist Russia. Although there is more human freedom in todays Russia than there was in the former Soviet Union, the Russian economy is much weaker than the Soviet economy was.
Through much of the 1990s the Russian economy shrank by 20 per cent a year. Although it has picked up since then (due mainly to high oil export earnings), it is still only a shadow of its former self. The reason for this decline was mismanagement, a problem compounded by Russias fumbling attempts to replace command-economy political institutions by market-economy political institutions.
The Chinese did not make the mistake that the Russians did. China adopted a market-economy strategy but retained its socialist political system. This helped China to make a much more orderly transition from a command economy to a market economy. As a result, the Chinese economy has been the fastest growing in the world for the last twenty-five years.
Its phenomenal rate of growth (an average of 9 per cent or more a year since 1980) shows no sign of slowing down. Indeed, in the first two quarters of 2008, it grew by a scorching 11 per cent.
In 2004 Chinas GDP grew by 9.4 per cent, nearly three times as fast as the USs GDP. Over the next three years it grew even faster, confounding western analysts who in 2004 had said that said that the Chinese economy was overheating and had predicted that 2005 would see it slowing down. As we now know, that prediction had turned out to be way off the mark.
Japans GDP, after adjusting for delation, grew by only 2.4 per cent in 2003. It did somewhat better in subsequent years, led by strong exports, especially to China which has a booming demand for everything from digital electronic components to steel.
The rise of the Chinese economic juggernaut is likely to have profound consequences for the rest of the developing world, including countries like Pakistan.
In this context, consider the case of garment exports, for instance, a sector of particular interest to Pakistani manufacturers. The Made in China label could be on half the worlds garments by 2007 with the ending of textile qoutas on January 1, 2005, boosting Chinese manufacturers and global retailers at the expense of smaller exporters.
China made 17 per cent of the worlds textiles and clothes in 2003. The World Trade Organisation sees that market share rocketing past 50 per cent within three years. In the United States alone, clothing orders worth some $ 42 billion went Chinas in 2006.
In the first quarter of 2005 Chinese exports of some categories of apparel surged by as much as 600 per cent, prompting the Bush administration to impose import restrictions on items. Wal Mart, the worlds biggest retailer, imported $ 18 billion worth of goods from China in 2004. Eighty per cent of Wal Marts 6,000 suppliers are now in China.
US retailers like Wal-Mart, Gap Inc., Hennes and Mauritz, Giordano, Inditex and Esprit are now buying more cheap Chinese textiles, reducing costs by sourcing from fewer suppliers. They have also stopped paying for scarce quotas, which, under the old Multi-Fibre Agreement regime, accounted for between 5 and 38 per cent of the cost of a garment once it had been loaded on a ship.
Chinas gain is being channeled to its textile makers including Texwinca, Fountain Set and Victory City, which have already ramped up capacity by 15-60 per cent in anticipation, according to brokerage CLSA.
Fabric makers such as Texwinca and Fountain Set on the upstream of the chain would be safer bets than garment manufacturers, which will face greater competition if quotas are eliminated, said Martin Lau, fund manager at First State Investments in Hong Kong.
US consumers are also expected to benefit, with retail prices tipped to fall by 10-20 per cent in the post-quota era.
India, another large-scale low-cost producer, is also seen winning market share, while the losers will be the textile industries of smaller countries such as Bangladesh, Cambodia and Mexico. In the first two months of 2005 Bangladeshs garment exports fell by 30 per cent over the corresponding period in 2004.
According to the American Textile Manufacturers Institute, US apparel imports soared from 16 per cent in 2003 to 71 per cent in 2006, translating into $ 42 billion in orders redirected to China.
In the immediate post-quota era (which began on January 1, 2005), the picture is still somewhat murky, however, because WTO members can file anti-surge proceedings against textile imports that prove disruptive to their domestic industries. Many importers are expected to hedge their near-term bets by maintaining sourcing relationships with several countries.
Analysts point to Japan and Australia as evidence of Chinas export power. Both countries allow unfettered access to Chinese clothing imports, which account for 70 per cent of their respective apparel markets.
The United States, too, has had a foretaste of Chinas export power. In 2002 WTO quotas were removed on 29 made-in-China garment categories, including infants wear and bras. Within 18 months Chinas share of the US market for those items soared to 63 per cent, up from 9 per cent previously.
The pace of Chinas gain will be determined by how much the United States and Europe seek anti-surge protection. All WTO members can impose anti-surge quotas on Chinese apparel products until the end of 2008. The can also deploy product specific safeguards on all Chinese imports, including apparel, until 2013.
A delegation of Chinese textile manufacturers visited Pakistan in March 2004. The minister heading the delegation said China recognised that Pakistan was a major player in textile exports and did not want to compete against it.
We would much rather set up joint ventures here with Pakistani manufacturers for the mutual benefit of both countries, the minister said.
The Chinese offer is a welcome move, and the Pakistan government should do everthing it can to facilitate the establishment of such joint ventures to enable Pakistani manufacturers to take better advantage of expanded access to US and EU markets in the post-quota era.
In their study The Marketing of Nations, co-authors Philip Kotler, Somkid Jatuspripitak and Suvit Maesincee argue that, although a good economy, a good society, and a good political process are all desirable, they are difficult to achieve. In fact, they are in a trade-off relationship with each other in many cases, the authors of the study argue.
Economic development is not a problem that belongs only to economists to model; social, cultural and political factors must be taken into account in arriving at a full picture of a nations opportunity potential.
The key to economic development is to build the nations vision and macro-policies on a firm understanding of how organisations and individuals initiate behaviour and respond to stimuli.
The assumption that businesses are pure profit maximisers and consumers are pure utility maximisers can carry the analysis only so far. Indeed, these assumptions can distort the analysis by precluding major cultural and political differences that shape how firms and citizens respond to economic development initiatives.
Friday, August 01, 2008
By Kaleem Omar
In 1805, Napoleon said, Let China sleep, because when it wakes up the whole world will be sorry. Well, of course, it has woken up. It is now the worlds third biggest economy, after the United States and Japan having overtaken Germany for third place in 2007. It is expected to overtake the Japanese economy in the next seven years and the US economy in the next 22 years to become the worlds biggest economy by 2020. It has also become a major military power and is currently engaged in a massive programme to modernise its armed forces.
Back in the late 1990s, before the bursting of the dotcom bubble, the western media used to be full of stories about the wonders of the information highway and the revolution it was bringing about in the way business was conducted and the way the world was run. Now the western media has switched tack and is full of stories about the economic phenomenon that has come to be called China Rising.
Pakistans great neighbour to the north, and this countrys best friend, is now known as the Factory to the World
Many commentators make a strong argument for the interrelationship between freedom and economic development. A United Nations Development Programme study published in the mid-1990s revealed a high correlation between human freedom and human development countries that rank high on the freedom index also rank high on the developmental scale. The theory is that potential freedom unleashes the creative energies of people, resulting in higher levels of income and progress.
This, however, does not always work in practice. The classic example is post-communist Russia. Although there is more human freedom in todays Russia than there was in the former Soviet Union, the Russian economy is much weaker than the Soviet economy was.
Through much of the 1990s the Russian economy shrank by 20 per cent a year. Although it has picked up since then (due mainly to high oil export earnings), it is still only a shadow of its former self. The reason for this decline was mismanagement, a problem compounded by Russias fumbling attempts to replace command-economy political institutions by market-economy political institutions.
The Chinese did not make the mistake that the Russians did. China adopted a market-economy strategy but retained its socialist political system. This helped China to make a much more orderly transition from a command economy to a market economy. As a result, the Chinese economy has been the fastest growing in the world for the last twenty-five years.
Its phenomenal rate of growth (an average of 9 per cent or more a year since 1980) shows no sign of slowing down. Indeed, in the first two quarters of 2008, it grew by a scorching 11 per cent.
In 2004 Chinas GDP grew by 9.4 per cent, nearly three times as fast as the USs GDP. Over the next three years it grew even faster, confounding western analysts who in 2004 had said that said that the Chinese economy was overheating and had predicted that 2005 would see it slowing down. As we now know, that prediction had turned out to be way off the mark.
Japans GDP, after adjusting for delation, grew by only 2.4 per cent in 2003. It did somewhat better in subsequent years, led by strong exports, especially to China which has a booming demand for everything from digital electronic components to steel.
The rise of the Chinese economic juggernaut is likely to have profound consequences for the rest of the developing world, including countries like Pakistan.
In this context, consider the case of garment exports, for instance, a sector of particular interest to Pakistani manufacturers. The Made in China label could be on half the worlds garments by 2007 with the ending of textile qoutas on January 1, 2005, boosting Chinese manufacturers and global retailers at the expense of smaller exporters.
China made 17 per cent of the worlds textiles and clothes in 2003. The World Trade Organisation sees that market share rocketing past 50 per cent within three years. In the United States alone, clothing orders worth some $ 42 billion went Chinas in 2006.
In the first quarter of 2005 Chinese exports of some categories of apparel surged by as much as 600 per cent, prompting the Bush administration to impose import restrictions on items. Wal Mart, the worlds biggest retailer, imported $ 18 billion worth of goods from China in 2004. Eighty per cent of Wal Marts 6,000 suppliers are now in China.
US retailers like Wal-Mart, Gap Inc., Hennes and Mauritz, Giordano, Inditex and Esprit are now buying more cheap Chinese textiles, reducing costs by sourcing from fewer suppliers. They have also stopped paying for scarce quotas, which, under the old Multi-Fibre Agreement regime, accounted for between 5 and 38 per cent of the cost of a garment once it had been loaded on a ship.
Chinas gain is being channeled to its textile makers including Texwinca, Fountain Set and Victory City, which have already ramped up capacity by 15-60 per cent in anticipation, according to brokerage CLSA.
Fabric makers such as Texwinca and Fountain Set on the upstream of the chain would be safer bets than garment manufacturers, which will face greater competition if quotas are eliminated, said Martin Lau, fund manager at First State Investments in Hong Kong.
US consumers are also expected to benefit, with retail prices tipped to fall by 10-20 per cent in the post-quota era.
India, another large-scale low-cost producer, is also seen winning market share, while the losers will be the textile industries of smaller countries such as Bangladesh, Cambodia and Mexico. In the first two months of 2005 Bangladeshs garment exports fell by 30 per cent over the corresponding period in 2004.
According to the American Textile Manufacturers Institute, US apparel imports soared from 16 per cent in 2003 to 71 per cent in 2006, translating into $ 42 billion in orders redirected to China.
In the immediate post-quota era (which began on January 1, 2005), the picture is still somewhat murky, however, because WTO members can file anti-surge proceedings against textile imports that prove disruptive to their domestic industries. Many importers are expected to hedge their near-term bets by maintaining sourcing relationships with several countries.
Analysts point to Japan and Australia as evidence of Chinas export power. Both countries allow unfettered access to Chinese clothing imports, which account for 70 per cent of their respective apparel markets.
The United States, too, has had a foretaste of Chinas export power. In 2002 WTO quotas were removed on 29 made-in-China garment categories, including infants wear and bras. Within 18 months Chinas share of the US market for those items soared to 63 per cent, up from 9 per cent previously.
The pace of Chinas gain will be determined by how much the United States and Europe seek anti-surge protection. All WTO members can impose anti-surge quotas on Chinese apparel products until the end of 2008. The can also deploy product specific safeguards on all Chinese imports, including apparel, until 2013.
A delegation of Chinese textile manufacturers visited Pakistan in March 2004. The minister heading the delegation said China recognised that Pakistan was a major player in textile exports and did not want to compete against it.
We would much rather set up joint ventures here with Pakistani manufacturers for the mutual benefit of both countries, the minister said.
The Chinese offer is a welcome move, and the Pakistan government should do everthing it can to facilitate the establishment of such joint ventures to enable Pakistani manufacturers to take better advantage of expanded access to US and EU markets in the post-quota era.
In their study The Marketing of Nations, co-authors Philip Kotler, Somkid Jatuspripitak and Suvit Maesincee argue that, although a good economy, a good society, and a good political process are all desirable, they are difficult to achieve. In fact, they are in a trade-off relationship with each other in many cases, the authors of the study argue.
Economic development is not a problem that belongs only to economists to model; social, cultural and political factors must be taken into account in arriving at a full picture of a nations opportunity potential.
The key to economic development is to build the nations vision and macro-policies on a firm understanding of how organisations and individuals initiate behaviour and respond to stimuli.
The assumption that businesses are pure profit maximisers and consumers are pure utility maximisers can carry the analysis only so far. Indeed, these assumptions can distort the analysis by precluding major cultural and political differences that shape how firms and citizens respond to economic development initiatives.
