INSIGHT: China reforms needed to push economic growth

26 March 2013 17:56  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--To say that XI Jinping and Li Keqiang have a big job ahead of them could turn out to be one of the understatements of this century.

The National People’s Congress (NPC), China’s annual parliamentary meeting, which took place earlier this month, provided plenty of evidence about just how difficult Xi, the country’s new president and Li, its new prime minister, are likely to find their terms in office.

Delegates discussed the myriad problems China faces, including a middle class increasingly angry about chronic levels of pollution in the country’s major cities, corruption and historically high levels of income disparity between the super-rich at the top of Chinese society and everybody else.

A further big issue under discussion was how to transform China’s economic growth model from an excessive focus on investment to one where domestic consumption dominates.

The meeting gave the impression that reforms are being accelerated.  But how effective reforms will be remains the $64,000 question, given the ability of “vested  interests” to stand in the way of change.

Another theme running throughout the two-week long NPC was the need for China to be more innovative as it attempts to escape the middle-income trap and, thus, move up the Lewis Curve (see right).

China growth

Sir Arthur Lewis, a West Indian economist who devised the Lewis Curve, showed how early growth the (y-axis in the above chart), based on cheap labour, came to an end after around 20 years (the x-axis)

Once it had run out, what Lewis referred to as “free labour” had to be replaced by more value-added manufacturing

Since 1987, South Korea (red dot) has successfully followed Japan (blue dot) in moving up the curve.

Now China (green dot) has to try and follow the same path if it is to justify ever-higher labour costs, as its “free labour” runs out, by becoming a big manufacturer of globally recognised branded goods.

Bill Dodson, author of China Fast Forward: The Technologies, Green Industries and Innovations Driving The Mainland's Future*, provides a bleak analysis of China's current environment for innovation.

"As Thomas Kuhn wrote in his seminal study of the work of scientists, The Structure of Scientific Revolutions, ‘most often discoveries are resisted by peers who have vested interests, yet eventually the community of scientists adapts - typically in nonviolent ways - as the discovery becomes a fact that expands on previous understanding,’ " Dodson wrote.

"The scientific method is supposed to weed out wrong or misleading results and researchers to contribute to a base of standing knowledge upon which others may continue to build. The court systems in a civil society function similarly, with judgments passed based on a body of evidence that is indisputable in its objectivity and certainty.

"Both science and society in China are based on patronage, though. Patrons are typically political appointees with ties to the Chinese Communist Party. They are made department heads, school directors and research presidents.

"Often, political appointees have little or no experience in the fields they are charged to manage. Subsequently, patrons themselves dole out positions of responsibility to scientists, funding for projects, even living quarters for the families of researchers. Consequently, researchers learn not to 'bite the hand that feeds' if one wants to advance his or her career."

Judges on the bench were also political appointees with little training or experience in the complexities of litigation and judgment, he added.

“As a Beijing lawyer once told me, she practised ‘fake law’. For most cases, she told me, she is expected to take the judges out to dinner and treat them well. Sometimes she would have to play drinking games with the judge to decide the outcome of a case,” said Dodson

This meant that the most important systems supporting innovation in China - the scientific establishment and the judiciary - were “woefully skewed” towards serving the interests of the Communist Party, he added.

This "network of patronage" meant that China was ill-equipped to develop the innovation necessary to deal with its environmental problems, said Dodson.

China's economy has become increasingly dominated by the state-owned enterprises, which, according to Dodson, was also bad news for innovation.

"The larger the enterprise and more closely aligned with national industrial policy, the fewer degrees of freedom of research & development interests and commercial viability the entity has," he added.

Yigong Shi and Yi Rao, deans of Life Sciences at Tsinghua and Peking Universities said in an editorial in Sciences Magazine, which Dodson quotes in his book: "It is an open secret that doing good research is not as important as schmoozing with powerful bureaucrats and their favourite experts. China's current research culture wastes resources, corrupts the spirit, and stymies innovation."

The Chinese themselves, according to a survey by the design agency, frog, think it will take some time for their country to catch-up on innovation.

"Companies like Apple, Microsoft, Google and Samsung were regarded as more innovative than local businesses such as HTC, Huawei, Tencent and ZTE," wrote the marketing news and analysis service, Warc, in a 12 March report on the frog study.

"A third of respondents thought it would take more than 10 years for Chinese companies to become as innovative as those in the west, while a further 25% felt it would take between six and 10 years."

Is it, though, just a question of time?

* Excerpted with permission from “China Fast Forward: The Technologies, Green Industries and Innovations Driving the Mainland’s Future” (John Wiley & Sons, 2013) by Bill Dodson

By: John Richardson
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