The secret of China's success

The Organisation for Economic Cooperation and Development, based in Paris, is often considered the "rich nations' club".

It was founded in 1960 following the successful reconstruction of Europe under the Marshall Plan, to help co-ordinate economic and social policies among the core affluent countries of North America, Europe, and the Pacific, to facilitate their growth and to devise common policies toward the other blocs of that age, namely the communist countries and the developing world.

Over the last couple of decades, and particularly after the end of the cold war, some of the richer emerging markets, such as Mexico, Poland and Turkey have also become members. Today the membership comprises 30 affluent democracies, the bulk of which are located in Europe.

To be accepted into the OECD is one mark of having "arrived" on the global economic and political stage. The search is currently under way for a new Secretary-General to succeed Donald Johnston (a Canadian), and there is some expectation that the appointment will go to an Asian, even though currently the only two Asian members are Japan and South Korea.

The OECD has also been expanding its links with important non-member countries such as Brazil, Russia and China. Notwithstanding considerable interest on the part of the OECD, and despite our proud democratic tradition, India has so far been lukewarm in availing itself of these opportunities, perhaps fearing rich country criticism of some of our economic policies.

As against this, despite its political vulnerability, and in anticipation of its economic superpower status, China has confidently availed itself of the considerable expertise in comparative analysis of the OECD staff.

The most recent expression of this collaboration is the first OECD Economic Survey of China, which was published in September (OECD Economic Surveys: China. OECD Publishing, September 2005. Paris. www.oecd.org).  As is customary, the published version follows upon a review of the draft by the OECD members in the presence of the country being studied.

While there is an enormous outpouring of economic analysis on China from other official bodies such as the World Bank and the IMF, the OECD China report is nonetheless a valuable addition. This is so for three reasons.

First, the report deploys the considerable expertise of OECD staff in analysing issues of growth, productivity and technical change. Second, the report is admirably compact, and allows a rapid tour d'horizon of a large number of policy and analytic issues in an accessible way.

Third, the description of Chinese reforms is in language that is analytic and transparent, rather than the usual turgid descriptions of responsibility systems and Party Congresses.

One weakness is that the report does not contain its own statistical appendix, leaving the reader entirely dependent on the material presented in text tables and charts.

A reading of the report provokes a number of reflections on the links between reform and growth. As the OECD's Chief Economist, Jean-Philippe Cotis, notes in his preface, extremely bold changes have been introduced in the last five years.

He remarks: "[F]ew OECD member governments have embarked on reforms that have restructured or closed hundreds of state enterprises every month over a five-year period … or have ended life-time employment practices and, in the process, stimulated a nation-wide reallocation of resources."

He adds: "Structural reforms in China have triggered a durable process of economic development, at a time when there are many signs that … this process of economic convergence has stalled or even backtracked in many OECD countries."

In contrasting our steady progress with China's even more spectacular performance, we sometimes take comfort in the fact that the Chinese reform effort is a decade older than ours.  The report makes clear that the basis for the high and sustained growth China is now enjoying is essentially the product of policy decisions earlier in the decade, i.e. at about the same time as India's reform, from a starting point that was considerably more distorted than ours. The three great reforms have been liberalising domestic prices, embracing international trade and welcoming foreign investment.

The outcomes are well-known: the value of Chinese exports of goods and services is now exceeded only by Germany and the United States (and already exceeds that of Japan). By the beginning of the next decade the OECD projects that China will outstrip even the US in the value of its total trade.

The OECD report also provides information on the ownership of consumer durables, which provides an interesting benchmark against which India can be compared. Thus, the ownership of household refrigerators is 46 units per 100 households; NCAER projections suggest that by the end of this decade the figure in India would still only be about half that, or around 22.5.

Similarly in 2003, the Chinese ownership of colour TVs was almost as high as in the developed countries at around 94 units per 100 households. Our projections for India for the end of the decade are about two-thirds of that, at around 64.

Our projections are, admittedly, based on relatively conservative assumptions of growth, at around 7 per cent; if we were actually to attain Chinese growth rates the gap would of course be closed more rapidly.

China is far from being a paragon of reform; in particular there remain major issues connected with the financial sector and corporate governance, and their record, for example, of capital market development and integrity is less successful that ours.

The growth accounting analysis presented in the report does confirm the enormous contribution made by capital accumulation to Chinese growth. But this has been accompanied by a significant contribution from education and general productivity, which in turn is related to competitive pressure coming from, among other things, foreign direct investment.

What can one conclude from the report about India's past and India's future? With respect to the past we clearly have been guilty of considerable complacency. The initial conditions of India and China at the beginning of the 1990s were not all that different.

Even allowing for the different shares of investment more assertive policies of international integration could have helped boost our growth rate much earlier. For the future, it is likely that the demographic factors that have so favoured China are about to peak, while India's still have a way to go.

A commitment to greater competition in the domestic economy stimulated by low trade and FDI barriers could well help. Perhaps so could a review by the OECD!