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As the dragon slows down

By Tensing Rodrigues

The dragon is fast losing its agility. China seems to be at the end of its long bull-run that began sometime around 1978. China started like any other country as a largely agrarian economy. But again like any other country that has achieved phenomenal growth it was the Chinese agriculture that fuelled the growth in other sectors.

Prior to economic reforms in 1978, agriculture was heavily taxed by the state to subsidize urban and industrial development. In case of US a similar process happened but more out of private savings and investment. The point to note is that this sequence is inevitable for any economy to launch on a rapid growth path. Surplus production in agriculture generates savings for creating the infrastructure and industrial capital. Post 1978, and once the Chinese industrial sector picked up, the resources for further growth came largely from industry and trade. Although agriculture’s share in China’s GDP declined sharply over time, it still plays an important role in the growth of other sectors.

However China’s growth trajectory prior to 1978 was unsteady. The first two decades following the founding of the People’s Republic of China in 1949 were marked by periods of substantial growth in per capita GDP growth achieved by significantly increasing the pace and productivity of industrialization in the country. But much of what was gained was lost by sharp reversals thereafter.

The great leap forward (1958-1962), undid many of the gains by banning material incentives and restricting the markets. These hurdles to growth were slowly undone between 1962 and 1966 leading to another period of productivity increase and per capita GDP growth. Again, the events of the cultural revolution set the economy back once again. It was only after the third plenary session of the 11th Central Committee of the Communist Party in December, 1978, that China was put back on a path of sustainable development.

China liberalized the economy in its own way. Though the state ownership and control remained, private initiative was rewarded. What it did with the land is a good example. It dissolved the communes and the land was leased to individual farmers. That boosted the production, as the farmer had now an incentive to produce more. But the focus was no longer on agriculture; it shifted to manufacturing. Because, the productivity gains could be much faster in industry than in

agriculture.

It was also necessary to boost the domestic incomes, so as to boost the demand. So too the exports. China used its lower cost of labour to gain competitive advantage in global markets. When it first cracked into the global markets, the Chinese goods were disparaged as of low quality. But as years passed it managed to improve the image of ‘brand China’, till anything and everything from hairpins to PCs came to be manufactured in China.

But mere manufacturing could not sustain the rate of growth that China achieved. Both domestic consumption and the exports had their own limits. The problem was aggravated by the decline of the US and European economies. China was by now too coupled to these economies that it required a herculean effort to keep the engine fired. That is when China went on the construction

binge.

The great depression had compelled the US to find the demand engine with the inexhaustible appetite; and it had found the arms industry. From WW2 onwards US went on setting fires across the world to create the demand for its arms industry, and keep the economy going. China found a similar demand engine in the construction industry. It went on building cities. The logic was simple: Build, generate income, create demand. Produce more, generate more income, create more demand. Slowly it is reaching its limit, and China cannot see light at the end of the tunnel. China’s growth is the lowest in three decades. Trump’s tariff war could not have come at a worse

time.

Now is the time to sit back and ponder. Should India ever think of emulating China? That it cannot possibly do it is a different matter. A democratic country like India can never replicate the performance of China. When China was at its peak we did dream of becoming another China. But now having seen the other side of China’s rise, India might as well settle for what it has achieved. The growth rate that we manage to eke out through all the bottlenecks is perhaps the best for us.

*The author is an investment consultant. Readers can send their comments and queries to investment.ideas.shop@gmail.com

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