MILAN: China is entering a complex set of transitions that will lay the foundations for the advanced-country status that it hopes to reach in the next 25 years. After three decades of sustained growth and a remarkably successful policy response to the recent global crisis, Chinese self-confidence is soaring. But the lessons that the government may draw from the crisis may not be the best guides for the long term. China faces several parallel and related challenges that are crucial for its internal development as well as its global economic relations. Among these are: ? A major microeconomic restructuring of the economy to anchor the country's emerging middle income country status; ? A macroeconomic shift to a higher level of household income and consumption and a more rapid expansion of the middle class; ? A reversal of the country's now rising income inequality; lowering the very high savings level relative to investment and thus reducing the current-account surplus; ? Reducing the energy and carbon intensity of future growth; ? Assuming greater global responsibilities. Indeed, China has arrived at a point where its impact on the global economy is systemically important. But it has reached this point at a much lower level of per capita income than any systemically important predecessor. The reason is that China is, by far, the most populous country to have sustained very rapid growth for 30 years. So reckoning with the country's global impact has been added to an already complex policy agenda, at a point when most countries have the luxury of maintaining a largely domestic focus. China needs to balance these domestic and international priorities, but it has very little historical experience to guide it. (India will take on this problem in about a decade, as it continues on its rapid-growth path.) With a per capita income of around $4,000 (more with purchasing power adjustments), important parts of China's economy are already, or are now entering, middle-income status. This is a difficult transition, during which many countries have lost momentum as structural transformations stall. For example, China's labor-intensive export sectors are losing their competitive edge. They must be allowed to decline or move inland (and eventually decline). They will be replaced by sectors that rely more on technology and human capital. In this transition, services will undoubtedly grow. Higher value-added sectors and functions that are upstream and downstream from processing industries will also need to flourish. Global brands should start to appear, and government ownership of enterprises will continue to diminish. Public-sector investment will shift toward education and R&D. Global and domestic markets, rather than China's government, will increasingly drive this transition. Targeting of sectors will decline. The domestic market and a growing middle class will assume greater prominence. Urbanization will accelerate with supporting public-sector investment. Household disposable income is about 60 percent of national income in China, and the household savings rate is close to 30 percent of disposable income. These numbers are low and high, respectively, compared to other countries. For China, this puts consumption in the range of 40-45 percent of GDP. To empower the domestic market to drive income growth, and to accelerate the growth of the middle class, these numbers need to shift. Household income must rise, and, with more ample provision of social security, insurance, and services, precautionary savings should fall. Both will support the middle-income transition by expanding the domestic market as a driver of growth, and will help sustain growth in the face of prospectively weaker global demand. But, most important, rapid growth of the domestic market, especially the service sector, needs to largely replace the export sector as the employment engine pulling the rural population into the modern economy. As the export sector moves into higher value-added sectors, it will no longer serve this function as effectively as it did in the past. China's corporate sector has financed much of its investment out of retained earnings without having to raise capital from the household sector. The government continues to own more than 50 percent of remaining state-owned enterprises, but does not need or use the income. A big portion of these two income streams (corporate and government) needs to be redirected to the household sector. High growth and urbanization have caused rapid rises in incomes in urban areas, with smaller increases in the rural areas. A large group of migrant workers and families (on the order of 150 to 200 million people) are formally still rural, but in fact are marginal urban residents with constrained rights and access to services. The resulting rise in social tensions is being addressed through expanded provision of rural services, investment in urban infrastructure and service provision, and regularization of migrants' status. China has faced daunting challenges in the past - and has generally outperformed the forecasts of skeptics. But now China must face global pressures and responsibilities as well. These partly reflect China's sheer size and impact. But China also faces an external environment that is occasionally hostile to the country's form of government; that sometimes overlooks or undervalues the rapid rise of millions of Chinese from poverty; that tends to view the global economy as a zero-sum game; and that mistakenly attributes China's economic success to non-cooperative policies in areas like exchange-rate management. China must confront the challenge of domestic restructuring to sustain growth, while asserting the right to develop without being penalized because of its size. But it must also assume greater responsibility for global imbalances, economic and financial stability, and governance, as well as represent the interests of less powerful developing countries. The rest of the world has a huge stake in the outcome of this complex balancing act. Michael Spenceis the 2001 Nobel Laureate in Economics, and Professor Emeritus, Stanford University. He chairs the Commission on Growth and Development. This commentary is published by DAILY NEWS EGYPT in collaboration with Project Syndicate (www.project-syndicate.org).
