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What makes China tick?
Anil K Joseph
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February 14, 2007 15:09 IST
The World Bank on Wednesday cited four key factors, including reforms, better economic management, recovery in government revenues, higher labour and capital productivity as the prime reasons for China's sustained economic miracle.

In 2006 China's GDP growth exceeded 10 per, fourth year in a row. "Although this is not much different from the average during 1978-2005, what is impressive about the recent growth is that it has been stable at a very high level for a sustained period of time," the latest China Quarterly Update issued by the World Bank said in Beijing.

China's economy may still enjoy favourable prospects in the near time, with a possible high growth rate of 9.6 per cent in 2007, the bank forecast.

What explains this performance?

First, economic reforms continued to make China's labour and capital more productive, the bank said.

China's accession to the World Trade Organisation in 2001, with its increased entry and competition on domestic markets and improved access to foreign markets, has provided a particular boost for trade, investment, and competition, factors that are associated with productivity increases around the world.

This decade China also reaped the full benefits of the State Owned Enterprises reforms initiated in the mid-1990s. While restructuring may have moderated growth in the 1990s, the reallocation of labour and capital increased productivity in the economy as a whole, and also boosted the performance of SOEs in this decade, the bank said.

Second, increased profitability and a recovery in government revenues boosted already high savings and investment.

Enterprise savings increased on the back of enterprise reforms, a shift towards more industrial activity and a more private economy, and gains in productivity and profitability more generally.

Government savings increased after the 1994 fiscal reforms resulted in higher revenues of which a significant part was used to finance investment rather than current spending. China's high saving and investment allowed more capital deepening and infrastructure construction, which in turn increased labour productivity and potential GDP.

Third, better macroeconomic management has reduced economic volatility and risk. Actual GDP growth has remained much closer to potential GDP growth in this decade than in the decades before.

More macroeconomic stability, desirable in its own right, also promotes growth by lengthening horizons of investors and reducing the probability of misallocation of investment.

Fourth, the global environment has been very favourable to China' s growth, the bank said. Global growth and trade have been high and there has been far less financial turmoil than in the 1990s.  Global growth in the last five years has been remarkably resilient, and averaged around four per cent, levels not seen since the late 1980s.

World trade led the way, and created a very benevolent environment for China's exports, which grew on average with almost 30 per cent per year, the bank pointed out.
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