Is China on the Right Development Path?


In order to determine whether China is on the right development path, we have to look at both the chosen development path and the time it takes for full development to occur. China is actually following the general development model used by Western countries.

China is now at the stage called "Drive to Maturity." The problems it is now encountering are similar to those encountered by Western countries at that stage.

The classical theory that still applies today is Rostow's Stages of Growth, formulated by the pioneer of development economics Walt Whitman Rostow in 1960.

The first stage, Traditional Society, refers to a society without modern science and technology.

The second stage, Preconditions for Takeoff, occurs when the society has modern science and technology, social acceptance of the necessity of economic progress, compulsory education, risk-tolerant entrepreneurs, commercial expansion, and modern manufacturing industries.

The third stage, Take-off, sees a decline in the number of peasants, an increase in the rate of investment in industry, and development in several important manufacturing sectors. The political, social, and institutional structures start to change, pushing economic growth forward. China entered the Take-off stage in 1952.

The fourth stage, Drive to Maturity, sees the rate of investment in industry at 10% to 20%. The society uses new technologies. Fundamental changes are seen in the structure, techniques, and wages in real terms of the labor force. The society adjusts its values and institutions to conform to the new economic environment.

The fifth stage, Age of High Mass Consumption, features a highly advanced industry, the shift of leading sectors of economy towards the manufacture of consumer durables, the popularity of large durable goods, a significant increase in the proportion of skilled workers and urban population, as well as a gradual enrichment of social welfare and social security resources.

The last stage occurs when a society is dominated by the service industry and works for environmental modification in order to maintain quality of life.

A COMMON DEVELOPMENT PATH

Rostow used to be a consultant of the Kennedy and Johnson administrations. After studying the economic development of the Soviet Union, he concluded that there were no essential differences between the development paths of
socialism and capitalism.

Rostow's theory summarizes the economic development in Western countries and contains useful comprehensive data (such as industrial levels and consumption levels). In the first four stages, there are two principal figures - the proportion of the labor force and the investment rate - that may be examined separately.

Rostow observed that the work force in agriculture in Western countries accounted for 75% of the total labor force before the Takeoff stage, dropped to 40% by the end of this stage, and ended up at 20% at the start of the Drive to Maturity stage. Western countries, in other words, shifted their social orientation from agriculture or fishery to industry and services. The decline in the agricultural population laid the foundation for political and social pressure, which in turn fostered reforms.

Statistics from the National Bureau of Statistics of China show that the share of agricultural employment in China remained at 50% until 2003, when it started to decrease. By 2007, the share had dropped to 40.8%. The employment rate in the agriculture sector was further reduced to 36.7% in 2010, despite there being no major natural disaster occurring in the countryside and the agricultural tax being cancelled in 2005. Therefore, we can say that the large-scale migration of labor forces from rural areas to urban areas marked the end of the Take-off stage in 2007.

Rostow also observed that, in Western countries, investment in industry accounted for 5% of the national revenue before the Takeoff stage, increased to more than 10% during the Take-off stage, and hovered between 10% to 20% in the Drive to Maturity stage. After comparing volume of production with average population, Rostow concluded that investment had to reach at least 10% before it could neutralize the effects of population growth.

Rostow argued that foreign capital investment in industries is a necessary but not a sufficient condition for the Take-off stage to occur. Japan and the U.S. had their foreign capital enter the Take-off stage, but Argentina and other South American countries, even though they attracted foreign capital for a long period of time, did not.

Rostow concluded that foreign investment must go hand in hand with the "ability to mobilize domestic savings and to steer them into productive industries". If we include figures from Hong Kong, Macau, and Taiwan, when China entered the Take-off stage, foreign capital accounted for 30% of all capital. The proportion of industrial output of joint-equity enterprises among all enterprises soared from 19.7% in 2003 to 45.8% in 2006, demonstrating China's ability to mobilize domestic savings and to steer them into productive industries.

China has experienced three peaks of investment since 1949, namely, the Great Leap Forward period from 1958-1960, the Seventh Five-Year Plan period in 1985, and the current period since 2003. The first two periods failed to maintain the investment rate between 10% to 20%. It was only in 2003 when China's proportion of fixed-asset investment in the manufacturing industry rose from 4.8% to 10.8% of the GDP; it has since enjoyed doubledigit annual increases. Therefore, 2003 marked the watershed in China towards Drive to Maturity.

THE DEVELOPMENT SEQUENCE

The Take-off stage in China ended in 2007, but the Drive to Maturity stage started in 2003. China entered the Drive to Maturity stage before it left the Take-off stage.

From a macro view, the five-year gap may be ignored. After all, the situation is not unique to China. Canada and Australia both entered the Age of High Mass Consumption stage before leaving the Drive to Maturity stage.

For China, however, the five-year gap is significant. Because it exceeded the rate of industrial investment without first having acquired a sufficient labor force, China has been experiencing a labor shortage since 2004. Aiming high and going too fast inevitably caused issues such as product quality. Fortunately, unlike India, which embraced the service industry too early, or Australia, which bogged down in primary industries, China has been following the development of Western countries.

China entered the Take-off stage in 1952 and the Drive to Maturity stage in 2003, taking only a relatively short 51 years to accomplish what took the United Kingdom 67 years, the U.S. 57 years, Germany 60 years, France 80 years, and Japan 62 years to achieve.

Rostow believed that, "As a society approaches or achieves the stage of Drive to Maturity, the main focus shifts from supply to demand, from the issue of production to the issue of consumption and welfare in its most general form." If we look at China's society today, it is clear that China's development path shows no significant differences from that of the Western world. Human beings have fundamental needs. It is impossible for China to differentiate itself from the world completely.

The current social conflicts challenging governance and triggering crises were once faced by each and every developed Western country. If we take a wider and longer view, we will see that China will surmount these challenges and continue on the right development path.

LEE Yim
LEE Yim is an officer of China Energy Fund Committee

China Eye, Issue3, January 2013

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