China is not one yet, explained economist, broadcaster, and author Linda Yueh, but it has the makings of an economic superpower.
Since 1979 China has implemented a number of reforms as part of a process of what Yueh made a point of describing as "marketization" and not "capitalization." Yueh noted that China had chosen to implement these reforms gradually. "Gradual liberalization and marketization minimizes implementation costs but leads to harder reforms later," said Yueh. She went on to note that dismantling state-owned enterprises was one of the "harder reforms" that China had delayed.
Yueh explained that the factors that were responsible for China's "impressive" 9.6% average GDP growth were capital/labor (60-70%) and Total Factor Productivity (30-40%). "TFP is not all innovation and productivity," she said. She went on to note that capital accumulation is responsible for half of China's growth. As Yueh pointed out, what China has accomplished to date is impressive. It is also not unusual for developing countries to grow quickly. It is unrealistic, however, to expect that China will be able to continue to achieve such dramatic growth going forward.
Yueh noted that China will face a number of challenges as it seeks to overcome the "middle income country trap" - a trap that very few middle income countries have been able to overcome. "If China succeeds," said Yueh, "it will transform the global economy." To do so, Yueh said, China will have to rely more on its own market and less on exports; raise consumption at home and reduce inefficient savings; grow the private sector, especially in banking, and reduce the state-owned sector; increase innovation and limit imitation; and continue opening up to the world and encouraging more Chinese firms to go global.
Yueh said that up to two-thirds of China's innovation to date can be attributed to imitation. "This is not unusual for developing countries," she said. "Japan went from being an imitator to being an inventor. Can China," she asked, "do the same?"
Looking ahead, Yueh said that China should focus on restructuring the economy in the 2020s; on productivity and innovation as growth drivers in the 2030s; and on developing stable and strong institutional foundations in the 2040s.
"China has the makings of an economic superpower," she concluded, "but the path ahead is really challenging."
Yueh made her remarks during a day-long conference at the School of Public Policy at Central European University on March 21, China's New Normal: Transitions at Home and Abroad. They were based on her remarks on her recent book, China's Growth: The Making of an Economic Superpower (Oxford University Press 2013).