As Malaysia redefines its growth strategy, the question of which sector to promote has been a subject of ongoing debate. Some have argued that the strategy should emphasize manufacturing – and preferably high-tech manufacturing – as innovation activity is most forthcoming in this sector. Others have countered that services are key, as the typical economic structure of an advanced economy is oriented towards services. Tradable services are also fast becoming an engine of growth.
Getting a clear view on where China’s economy is heading is not easy at the moment, as evidenced by large variations in GDP growth forecasts. One of the confusing developments is that while exports have continued to do badly recently, the domestic economy has exceeded most observers’ expectations by a wide margin.
Working in recent weeks on the World Bank’s new China Quarterly Update, released today, we have been trying to determine how the economy has been doing on balance, what the prospects are, and what this means for economic policy. In this blog, I will summarize our understanding of recent developments and prospects, leaving the upshot for economic policies for a later discussion (keep reading after the jump).
This somewhat provocative question was the title of a conference hosted by Oxford and Standard Charter this week in London. My answer was: "No, not tomorrow; but yes, eventually – especially if China continues to vigorously pursue economic reform."
The reason that China cannot be the engine of global growth tomorrow is straight-forward. For the last decade an awful lot of the final demand in the world has come from the U.S. That era is over for the time being as U.S. households now concentrate on rebuilding their savings. No one country can fill the gap left by the slowdown in U.S. consumption: Japan, Germany, and China together have less consumption than the U.S., so no one of them can replace the U.S. as the major source of demand in the world. It's not realistic to expect China to play that role. But we are probably moving into a more multi-polar period in which there is more balanced growth in all of the major economies.
In case you weren't able to join World Bank economists and regular bloggers David Dollar and Louis Kuijs earlier today in a live online chat, a transcript from the in-depth discussion is available here.
With the release last week of its latest quarterly assessment of the Chinese economy, the World Bank lowered its projection for China's GDP growth to 6.5 percent in 2009, yet remained optimistic that the country's economy has started to show signs of stabilizing amid global financial turmoil.
|Click chart to see larger version.|
We launched our China Quarterly report today with our take on how to reconcile the conflicting data. Clearly, the global economy is in very poor shape. Global GDP declined at an annualized rate of 5% in the fourth quarter of 2008, and global industrial production declined at a 20% rate. These are shocking numbers that those of us born after the 1930s have never seen. Naturally this has had a large effect on China, which is an open, export-oriented economy. China's seasonally adjusted monthly exports peaked at around $120 billion last fall, and then fell off a cliff – dropping by about one-third (see chart).
|The Hebei province produces one-quarter of China's steel, and has felt sharply the country's slowdown in investment during the financial crisis.|