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May 18, 2005
A Closer Look at China's Economy
The drumbeat, from both the right and the left has been relentless: China's monstrous economy threatens the well being of Americans everywhere. But is the Chinese economy really all that menacing? In a fascinating article appearing in the July/August 2004 issue of Foreign Affairs (see article here), George Gilboy offers an illuminating analysis of the true state of the Chinese economy, and reveals it to be something far different from the dragon that will consume the West, as so many have claimed. Clearly addressing issues such as the perception of Chinese manufacturing superiority and imminent domination of high-tech industries, Gilboy patiently makes the case that China is a rather ordinary (albeit extraordinarily large) developing economy, and one that does not present significant economic danger to Western countries.
It has been beat into our collective heads that China is an exporting powerhouse, but this article provides key information that gives a better picture of the nature of China’s exporting power. In China, foreign-funded enterprises account for 55 percent of all exports, and 85 percent of exports for high-tech industries. In contrast with that 55 percent figure, foreign-funded enterprises in South Korea, Taiwan and Thailand during the modernization periods of those countries (1970s and 1980s) accounted for 18-25 percent of exports. Additionally, these foreign-funded enterprises have increased their domestic market share of high-tech sales to 45 percent, surpassing the 42 percent share of China’s state-owned enterprises. Even in China, Chinese technology is increasingly being shunned.
Not only are Chinese firms not selling a large amount of high-tech goods and services, they are doing a remarkably bad job at developing or even understanding them. Gilboy reveals that Chinese R&D has been miniscule, remaining below one percent for the last decade. After informing readers that: “Industrial firms in those countries (South Korea and Japan) spent between two and three times the purchase price of foreign equipment on absorbing and indigenizing the technology embodied in the hardware (during the 1970s and 1980s).” Gilboy goes on to note that: “Over the last decade, large and medium-sized Chinese industrial firms have spent less than 10 percent of the total cost of imported equipment on indigenizing technology.” These are not, by any stretch of the imagination, behavior patterns characteristic of a rising technology power.
China is an enormous market, and it will at some point later in this century most likely become the world’s largest economy. But it is not now, and is demonstrably not yet on the path to being, comparable in quality to the U.S. economy. We should all note the wisdom of this statement by Tom Nugent: “the ignorance of the politician in matters that impact economic policy can cause a lot more damage than the surgeon’s knife or the accountant’s calculator.”
Posted by Audi Partem Alteram at May 18, 2005 11:08 AM
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