China launches 13th five-year plan to overcome 'sandwich trap'
Window of opportunity for Sri Lanka:
By Vishvanathan Subramaniam
China's rapid development has been well documented. Since the
initiation of market reforms in 1978, China's GDP growth has averaged
10% per annum; an unparalleled feat amongst developing nations. Such
brisk growth rates have been instrumental in developing large swathes of
the nation and in lifting a significant portion of the population from
poverty.
However, growth rates have dipped over the past few years - between
2012 and 2015, the Chinese economy grew at an average of 7.4% per annum.
Whilst this plunge corresponded to a global downturn, some argue that
China's languid growth rates paint a deeper picture, one that shows an
economy overheating amidst supply side inadequacies.
This concern has been echoed by Finance Minister Lou Jiwei who said
last year that there was a 50% chance of China sliding into the Middle
Income Trap in the next five to ten years.
The Middle Income Trap
The Middle-Income Trap is often generalized as a developmental trap,
a predicament associated with diminishing rates of productivity in
economies that have been experiencing rapid growth.
China's rapid growth was spurred by the manufacturing sector, as
firms utilized the low wage structure to produce goods that were price
competitive in the global market. The strategy has borne sizeable
dividends - China has been successful in alleviating more than 800
million citizens above the poverty threshold. However, such successes
now act as an impediment to the continuous use of a similar strategy.
China's burgeoning middle class has now caused a wage spiral that has
reduced the comparative advantage of manufacturing in China. Firms are
incentivized to invest in Bangladesh, Thailand, Indonesia and Mexico
(rather than China) as their labour costs are considerably lower.
This predicament is further exacerbated when one examines the gap in
productivity and innovation between China and high income nations.
Lapses in such fields act as a hindrance in development endeavours; it
creates a scenario wherein China lacks the resources to integrate into
the higher end of the value-added market.
Thus, this condition - especially in regard to China - has been
identified as a 'sandwich trap', where the country is trapped between
cheap labour competition from below, and exclusion from higher
value-added markets from above.
It is in this conjuncture that China has unveiled its 13th Five Year
Plan. This broad, ambitious proposal aims to double China's income per
capita by 2020, compared to 2010 levels.
Development
China's development policies are closely aligned to its socialist
roots; reforms are orchestrated as per the 'five year plans' proposed by
the Central Committee (CC) of the Communist Party of China (CPC).
The five year plans are thus important precursors for growth as they
delineate the policy reforms and development endeavours that would be
implemented in the medium to long term. In such a scenario, the recently
ratified (by the National People's Congress) '13th Five Year Plan'
becomes even more important.
The 13th Five Year Plan is molded upon Secretary General Xi Jinping's
call for China to adapt to a 'New Normal'. Under this concept, China's
development objectives will shift from expanding 'product volume' and
'capacity' to upgrading 'product quality' and 'production innovation'.
The new plan calls for a shift from high speed to medium-to-high
speed growth. Growth will, therefore, be maintained at around the 6-6.5%
mark, a shift from the target of 7.5% set by previous plans.
The 13th Five Year Plan, being a document comprising 20 sections and
80 chapters,details several areas of focus. Some examples are:
Supply Side Reform: Over the next decade, the State will deepen the
reform initiatives in regard to State Owned Enterprises, reorient public
capital flow and reevaluate the existence of certain monopoly
industries. Tax reforms will be launched and incentives for private
entrepreneurship will be strengthened. China's primary goal in
undertaking such large scale endeavors is to absorb excessive production
and phase out excessive production capacity.
Such reform is essential to fulfill China's ambition of realigning
its economy as a quality-oriented and innovation hub.
Innovative Development: This is a prerequisite for any potential
foray into the high value market. While China is the second largest
contributor to global R&D investment, the per capita breakdown is far
from ideal. The 13th Five Year Plan aims to create a domestic field more
conducive for investments in innovation.
The state will provide incentives for indigenous innovation and in
addition, will procure international patents where necessary to ensure
that innovative practices are not hindered.
Regional Development: Domestically, the state intends to continue its
policy of integrated development especially between the Beijing, Tianjin,
Hebei Districts and Municipalities. Furthermore, plans to create a 'Yangzte
River Economic Belt' will be commenced. On an international scale, China
will continue to support the 'One Belt One Road' initiative to promote
cooperation between Asian nations.
Open Development: Under the new Five Year Plan, China will continue
to invest in 'Special Economic Zones' as a means to promote
international production capacity,global trade and investment.
Opportunities for Sri Lanka
China's efforts to limit its excess production capacity under the new
plan will create a window of opportunity for developing nations to
obtain vital Foreign Direct Investment (FDI).
The close ties between Sri Lanka and China, coupled with the island
nation's proximity to international trade routes, make it an ideal
destination for investments being reallocated.
The close diplomatic ties provide scope for bilateral ventures that
accelerate the transfer of capacity to Sri Lanka. Sino-Lankan
cooperation is already evident in this field - high level negotiations
are already under way to a construct a 'Special Investment Zone in
Hambantota'.
China has shown interest in partnering with the government in
developing special economic zones in other regions of the island as
well. In a recent trade discussion, the Chinese Ambassador to Sri Lanka,
Yi Xianliang, has said that his nation is prepared "to commit over $5
billion in FDI over the medium to long term for special economic zones".
Such investments will help improve the labour force by creating
employment opportunities and will provide an impetus to maximize
productivity potential. Furthermore, the creation of similar
manufacturing enclaves will set an ideal foundation for Sri Lanka to
integrate into global supply chains in the future.
The regional focus of the 13th Five Year Plan is inextricably linked
with China's One Belt One Road (OBOR) initiative. Sri Lanka, being a
strategic partner of the 'Maritime Silk Road', has the potential to
position itself as an Asian growth hub in the heart of the Indian Ocean.
For instance, Sri Lanka can analyze China's success story in
positioning Shanghai as a centre for international trade and investment.
Using Shanghai's experiences as a base, Colombo (coincidentally a sister
city of Shanghai) can perhaps be revamped as a Special Economic Zone
catering towards the Indian subcontinent. Foreign investment is no
panacea for development. The authorities have to ensure that the inward
foreign investment is favorable to Sri Lanka's future aspirations, and
is not undertaken with the intention of inflaming regional power
politics.
The Asian Century
The initial decades of the new millennium have often been tagged as
the 'Asian Century' - a projected shift of power back to the continent
after its deep slumber in the socio-economic hinterlands.
As the curtains rise on this rejuvenated stage, the limelight shines
bright on China. Its plans for the future have ramifications for all
Asian nations, Sri Lanka included. Only time will tell if such plans and
policies usher in a shift in the global paradigm.
Vishvanathan Subramaniam is a Research Assistant Institute of Policy
Studies of Sri Lanka (IPS). |