Chinese growth, Future prospects and less developed countries
Technology progress in china
The impact of technology progress and innovation has been treated as a part of Solow residual and hence a key contributing factor to economic progress and long-term convergence (wu, 2010). Liberalization not only helped to accumulate capital but also to introduce new technology and modern managerial experience. Enterprises in china started to learn from foreign enterprises while watching aside. But at the same time it introduced competition and from foreign enterprises and inspired the local to enhance their competition capacity and production efficiency (Qiang, Xiaobo, Xihe, 2010). Total Factor Productivity which accounted for only 11% of the economic growth in 1978 moved to 40% after the free market policy was operated (Featherstone, 2012). Now to sustain the economic growth it is essential for china to invest in Research & Development.
Figure 2
The figure above depicts that china is the third largest investor in R&D in 2006 which in growing and expected to surpass U.S by 2022.
Future of Chinese growth
From the Solow model analysis above we can conclude now that china embarked in this journey and succeeded with two major tools, capital accumulation ( both internal and FDI) and labor-intensive manufacturing activities which led them towards export oriented growth. But as the world is going through financial hardships export based growth cannot be sustainable. One child policy also might affect the labor force that china had after 1980. Pulliam (2012) interestingly predicts the future prospects of Chinese growth using Solow model’s diminishing rate of return and ultimately reaching steady state concept by comparing the investment with water and economy as bathtub. He says if more water (investment) flows in the bathtub (economy), water rises but an investment depreciates as well. Even a quality investment depreciates at 10% per year. So if we want to increase the water level of bathtub that has 100 gallons of water then we will have to put more than 10 gallons to offset that depreciation. Bigger tub will have more depreciation so, growth will eventually become 0. He further claims grow via investments tend to experience severe downturns. Now only way to sustain the growth is technology progress and transform the nation into knowledge-intensive and less dependent to external markets (Wu, 2010). This requires huge investment in R&D and public education to enhance better technology and capable human capital.
Chinese growth and less developed countries
Chinese experiences can also be replicated in other less developed countries provided they are ready do some bold policy departures and build proper institutions. The biggest lesson that less developed countries can learn from china if they want to replicate this in their country is how market liberalization can change any country’s fate. Enhancing internal competition and building proper institutions to attract FDI is also something that could be learned from china’s experience. Underdeveloped countries seem to dwell upon unnecessary nationalist issues and try to stop FDI to enter their countries which can only backfire. How china invested in the public education to create a high quality human capital also could be a good lesson. Market oriented reforms to promote rural enterprises and small businesses could also help. For countries whose population is underemployed in agriculture could use Chinese example to encourage rural enterprises rather exclusively focusing on urban industrial sector and move workers off farms into factories without creating an urban crisis (Hu & Khan, 1997).
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