Jun 01 2009

The wrong economic agent

by at 1:51 am under Uncategorized

Most of the literature on development economy we have read so far agrees on the success of China’s export industry development in the last two decades. It is believed that the business model of export has made efficient use of domestic intellectual, natural and labor resources, and China’s economic structure is taking full advantage of globalization.   However, the unsustainability of China’s economy has been exposed and tested in this financial storm.  Also China’s financial system has not been badly damaged, China’s GDP growth that depends on export is badly hurt by the decline of westerners’ consuming ability. About 10 million of low-skilled workers who emigrated from rural China to urban cities have lost their jobs, about 6 million college graduates can not find a job, and the value of China’s holding of 2 trillion dollars deposition is dropping every minute. As a development strategist, I think there are three crucial factors we need to take into account to design a sustainable policy.  




First, exporting industry as the major economic agent is the basic problem of China’s economic structure. Its dependence on foreign market has lost the development autonomy and opportunities to increase domestic consuming ability. In the global competition of exporting, China wins by its unfair use of cheap labors. Same as Henderson’s analysis of the case of Malaysia, the lack of legal protection of low-skilled labor in China has allowed firms to rely on cheap, unskilled labour and thus missed the chance to move up to higher value-added production chain. 


Second, China’s domestic environment has been hospital to foreign investment but the opposite to its own investors. Critics have pointed out that there has been no Bill Gates or Google in China where most of world-class engineers and scientists were born. The government has no policy to encourage self-made entrepreneurship.   It is almost impossible for geniuses in China to get investment for their innovation or ideas. For example, Baidu known as China’s google and Sohu known as China’s Yahoo both got their initial investment from Silicon Valley and Wall Street. Once they have settled in China, they are subject to the the local government corruption and political constrains. Private firms of small and medium size can hardly survive in China for the lack of financial support and legal protection. The most ridiculous development policy in China is perhaps the tax on value   Therefore, enhancing domestic investment environment is crucial to solve the high rate unemployment. 


Third, China’s telecommunication system has not yet privatized, the lack of competition results in a high cost of business transaction. An international call I made in the States is cheaper than a long-distance call I made in China.  This has restrained development of network economy at inner China and stopped expansion of urban wealth to rural areas. Chinese people have not yet used wireless Internet connection, the low flexibility of network in China has also contributed to the inequality in development. However, all the above are based on an ideal process of democratization in China.

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