(By Panos Mourdoukoutas)
“If the magnitude of a domestic market of a country is measured by the size of her population, China is a large resource (labor) and product (consumer) market. Yet a large population alone is not sufficient to propel the country’s economic development, and China’s experience attests to that. China already had a large population at the beginning of the fourteenth century, in the middle of the 19thcentury, and the early 1950s, but it missed all three opportunities to rise to world economic leadership.“
The 19th century was the British century. The 20th century was the American century. Will the 21st Century be China’s century?
Most likely not, as China misses four conditions that make economic growth sustainable.
First, China doesn’t have an “infinite” world market frontier for its manufacturing products, as its genuine expansion to world markets comes at a time when capitalism is already approaching its last frontier, having conquered almost every market around the world.
This means that China is pushing against capitalism’s last frontier, and, therefore, it has little room to maneuver before clashing with other world market players that are already well positioned in the global market.
But what about China’s domestic frontier?
If the magnitude of a domestic market of a country is measured by the size of her population, China is a large resource (labor) and product (consumer) market. Yet a large population alone is not sufficient to propel the country’s economic development, and China’s experience attests to that. China already had a large population at the beginning of the fourteenth century, in the middle of the 19thcentury, and the early 1950s, but it missed all three opportunities to rise to world economic leadership.
But aren’t things different today?
Certainly they are, as evidenced by the country’s robust growth, which has turned her into the world’s second largest economy at a record time. The trouble, however, is that low per capita income, persistent income inequalities, low population density, high illiteracy rates, and fragmented administrative structure make China’s domestic market a collection of separate local markets rather than a single integrated market.
The second missing condition is an indigenous resource –entrepreneurship – which China has yet to nurture and nourish.
To be fair, entrepreneurship flourishes in rural areas of China, where farmers are turning into entrepreneurs and wages are determined by market forces. Entrepreneurship is also flourishing in southeast coastal regions, where individuals have amassed fortunes by exporting low-cost Chinese-made products. Companies such as Panda Electronics, Huawei Technologies Haier Group, Little Swan, and Lenovo are developing new products — becoming the next Cisco, IBM IBM+1.13%, and Apple aapl+1.85%.
Unfortunately for China, these companies are the exception rather than the rule. In the Chinese economy today, entrepreneurship is about producing, marketing and merchandising standard products invented and innovated elsewhere.
That’s why China has yet to develop blockbuster products like the iPhone and the iPad and create sustainable competitive advantages in the global economy.
The third condition? The right cocktail of markets and government, which deploys each system in areas of the economy where it excels, rather than the areas where each fails — as is the case currently in China. The government is absent from the “common” areas of the economy, where markets either fail or are inadequate –like the environmental protection and occupational safety, patrolling of streets and highways, and protection of citizens from financial fraud.
At the same time, the government is present in the state–owned enterprises and town-village enterprises as owner, entrepreneur, and manager, producing goods as varied as steel, laundry powder, and aluminum. The government is present in “privatized” enterprises and owns sufficient shares to control their management. The government is also present in the banking industry, controlling almost every major bank rationing credit by political fiat rather than by market forces.
Finally, China requires a new business mind-set that places the consumer rather than the government bureaucrat at the center of the economic universe; lets entrepreneurs make choices as to how economic resources will be deployed; and allows professional managers to implement these choices.
The bottom line: A large population, a large labor force, and a dose of markets may be the necessary condition for leading the global economy. The sufficient condition is an open market frontier, genuine entrepreneurship, the right cocktail of markets and government, and a new business mindset — all of which China seems to lack at this point.
“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”