Pitfalls on the road to superpower status

Despite China's splendid past 30 years, the next 30 will decide whether it can become a superpower, or be slowed in its tracks. As suggested by Deng Xiaoping, the reform architect, China's economic development needs two 30-year periods. In the first, industrialization was needed, and that is now complete.

China has become the second-largest economy and accounted for about 20 percent of world manufacturing in 2010. We are entering the second 30 years, moving toward increased productivity on the back of high technology. Successfully moving on to the second phase, then completing it, will decide China's fate as a potential superpower. The country can become either the next US or the next Latin America.

China needs to adopt an economic model more sustainable than the previous one, which was driven by the desire for high-speed growth at the expense of resources and the environment. More emphasis will need to be placed on the quality of growth rather than on the speed at which that growth is achieved. Institutional structures and productivity enhancements will be the economy's new key drivers.

China's three growth surges in recent decades have been given impetus by pulling policy levers. Favorable institutional arrangements have played an important role in China's economic development. Further institutional changes could give China the wherewithal to forestall and withstand the chilly winds of any global slowdown. Policy reforms might well have to stretch deep into monetary and fiscal fields, including forming a market mechanism that fixes interest rates, improving the tax system to promote consumption and encouraging small- and medium-sized enterprises.

In addition, productivity needs to be improved with the aid of technology. The current model of growth, which is export oriented and focused on low-cost manufacturing, is unsustainable in the long run. China's productivity has increased tremendously, with GDP at a rate of 11.1 percent a year on average in the past three decades, being more than double the growth in the US in the good years, from 1960 to 1989. By 2009, manufacturing productivity per employee in China had reached $49,800 (37,743 euros), compared with India's $68,000. The US continues its growth in productivity and broke through $150,000 in 2010, followed by Germany with $121,300 and Japan with $109,400.

The productivity of China and other export-oriented economies, East Asian ones in particular, is much lower than that of developed countries. As core technology is provided by high-tech economies, China can lay claim to only a small portion of the production chain, sticking mainly to process manufacturing. In that kind of world, unskilled workers become a drag on productivity. China needs to climb the value-added ladder with the help of technological innovation and transfer. This would help it move from a low-value-added export-oriented manufacturing realm to one driven by sustainable domestic consumption and backed by the latest technology.

China is likely to become a real superpower only if quality growth continues, supported by favorable institutional arrangements over the next 30 years. The middle-income trap is a potential pitfall. The middle-income trap refers to countries that have reached a middle income level ranging from $4,000 to $12,000 gross national income per capita, but can advance no further. The Latin American countries are frequently cited examples of this phenomenon.

The main cause of the middle-income trap is when countries are unable to move up the value chain, as their governments have not developed policies and institutions to switch to high-tech or greater value-added industries. However, as their income levels continue to rise, they may also find that they can no longer adequately compete with low-income countries in low-value added industries, thereby trapping them in a zone where they cannot adequately compete on either level.

Two signs of an approaching middle-income trap are surplus labor beginning to dry up, and wages beginning to rise. China appears to be on that path, with rising wage levels and rising rates of urbanization implying a shrinking supply of cheap migrant labor.

Furthermore, China's population is aging gradually. An aging population also reduces the pool of available labor over time, and adds pressure to wages and social safety nets. While the country has not fallen into the middle-income trap quite yet, the threat remains present unless it can move up the value chain successfully.

In the global economic environment that has seen developed countries struggle to regain growth momentum following the global financial crisis and during the European debt crisis, China has suddenly been thrust toward the forefront as a potential superpower. There has been talk of a G2 world, where the US and China are the two superpowers in the international system. The recent chain of events has accelerated China's rise in stature.

These kinds of changes have generally taken place in developed economies over hundreds of years, and in some ways it seems almost premature for China to be preparing economically, institutionally and diplomatically, to take on the role of a superpower.

Domestically, China is seeking to walk in 30 years the path that took the US a century, evolving from an industrialized, manufacturing-heavy society to a society focused on technology and labor productivity. This is the overarching goal, to be accomplished by switching from an export-led model of growth to a domestic consumption driven model. It is a daunting task, but one that must be performed to avoid the middle-income trap. Favorable institutional arrangements and productivity enhancement along with high technology development and transfer are the keys to success.

Externally, China's rise and move from different stages of development will mean that the focus for managing foreign affairs will change over time as well.

China's "no intervention" foreign policy for the past decades has increasingly appeared out of place, given its rising investments and interests overseas. Outward foreign direct investment surged from the beginning of the 21st century due to the promotion of the "go out" policy, reaching $60.2 billion in 2010, about 60 times the level at the turn of the century. The gap in FDI with the US is narrowing as China continues to invest overseas. With consistently rising foreign exchange reserves of over $3 trillion, China is seeking out investment opportunities abroad. China has special interests in commodity investment, for example, accumulated investment in Africa and Latin America reaching $13.03 billion and $43.88 billion respectively.

At varying stages of economic development, policymakers will have different agendas and views. In the course of China's rise of status, it will have both increasing interests and influence worldwide, so there are likely to be some notable shifts in foreign policy in the coming years.

The author is chief economist at Haitong International Research. The views do not necessarily reflect those of China Daily.