December 13, 2005
China’s New Growth—What Canada Can Learn
New skyscrapers are going up all over China’s major cities. China is booming, with 8 percent growth, versus about 3 percent in Canada. Canada is now beginning to feel China’s growth through sales of trade, energy, and resources – growth that stems mostly from favourable economic policies that can teach us something.
The boom has unexpectedly brought 10 million private cars to China, from virtually none in the late 1980’s. So it’s less surprising that oil has exceeded $US60 per barrel and that Canadian SUV owners are balking at gas costing a dollar a litre. China’s economy has jumped to $US7.2 trillion in purchasing power, compared with $US11.75 trillion for the United States. Today China’s big and growing economy is backed by a population of 1.3 billion, 20 percent of the world’s 6 billion, compared to only 32 million for Canada.
About 80 percent of the world’s building cranes are now working in Asia, and 80 percent of those are working in China. With a flexible market, no rent controls and little red tape, real estate in China is booming. Modern 40-story high-rise condos can shoot up in a year – a much better situation than the inadequate housing policies on many aboriginal reserves in Canada today.
Millions of rural Chinese are flocking to the booming cities each year. Hangzhou, a thriving Southeast city of over three million, is larger than Vancouver, which is Canada’s third largest city at two million. Yet many Canadians have never heard of Hangzhou or other cities like it.
Average purchasing power income in China is $US5,600 per capita, compared to $US31,000 for Canada. This is a huge reversal from earlier days when China needed foreign aid. Today, the country is donating food to North Korea, and starving North Koreans now attempt to wade across the shallow Tumen River into a prosperous China. With a reformed and market-oriented agricultural economy, China’s food production makes the 1960 famine, where an estimated 20 million Chinese died of starvation, a distant memory.
China is now Canada’s second-largest trading partner, after the U.S. Now that China has been granted WTO membership, Canada-China trade is likely to grow even more. Alberta-based Enbridge is considering building a $4 billion pipeline to the B.C. coast, from which three-quarters of the pipeline’s 400,000 barrels per day of oil may go to China. Recently Chinese companies have been attempting to buy Canadian-based energy companies Nelson Resources and Petro Kazakhstan, after being blocked in the U.S. from buying U.S. energy giant Unocal. Earlier a Chinese firm attempted to buy mining giant Noranda. Given that the Alberta oil sands will need about $100 billion in investment capital from 2000-2020, there is little doubt China will be a partner.
What can Canada learn from China’s growth? The first lesson comes from the late Deng Xiaoping, who in 1978 began to free up the state-run economy. This stands in contrast to Canada, which is less free than in 1978 and often more interventionist than China in terms of economic freedom. China’s lower taxes, long tax holidays for foreign investors and a flexible work force make it more market-oriented than Canada. Clearly, China’s official “socialist market economy” has recently attracted far more foreign investment attention than Canada.
Secondly, China also invested heavily in higher education and technology, along with rigorous academic testing in schools and for university entrance. Numerous engineers and scientists are being turned out every year. Canada could learn from China’s technology, value-added and innovative approach to growth. China takes lower-priced raw resources from Canada and turns them into higher-valued products like appliances, cell phones, computers, DVD players, clothing and toys – and then exports them back to Canada at higher prices.
Yet Canada continues to focus on exporting raw resources such as oil, coal, lumber, minerals and grain, which account for about half of its exports. Policies encouraging this outdated “hewer of wood and drawer of water” approach have helped drop Canada’s productivity. Canada’s productivity has fallen to 17th out of 24 nations today, compared to 3rd out of 23 nations in 1960, according to the OECD. Low productivity makes it hard to compete against rising nations like China.
Thirdly, China has low tax rates. The corporate tax rate is stated at 33 percent but is effectively about 20 percent, and most individuals have about a 20-25 percent income tax rate. In contrast, Canadians must work to June 26, almost half the year to pay their taxes, according to the Fraser Institute’s calculations for Tax Freedom Day, a policy which provides little incentive for workers to increase their outputs.
Fourthly, China’s medical system is more market-oriented than Canada, and so has few lineups. MRI’s, CAT scans, and other diagnostic tests can be done within a day or two in major Chinese cities. In contrast, in Canada it is faster to get a cat treated for cancer than a person. Chinese citizens do not have to travel to other neighbouring countries to avoid long waiting lists. China’s life expectancy at 73 is only seven years shorter than Canada’s, which stands at 80. Given the far higher percentage of smokers and much less money spent on medical care in China, this is an impressive achievement.
Chinese languages are the second most spoken in Western Canada, after English. Though not much Chinese is taught in schools now, this may change. Most foreign students at Canadian universities are now from China. In his best-selling book, Winning, Jack Welch, the former CEO of General Electric, advises today’s students to “learn everything they can about China because it will permeate every aspect of business in their lifetimes.”
Admittedly China’s economic boom may bring some overinvestment, excessive building activity, real estate bubbles, poor quality bank loans, and an economic downturn. However, whatever short-term difficulties China faces, its long-term growth is likely to continue as long as growth-oriented policies are in place.
Milton Boyd is an economist and professor at the University of Manitoba whose areas of research and teaching are agricultural economics, commodity and derivative markets, and risk management. His research interests also include market-oriented solutions for policies regarding agriculture, resources, and economic development. He holds a Doctorate Degree in Agricultural Economics from Purdue University (USA) and a Bachelors Degree in Finance from Seattle Pacific University. He has received two awards from the University of Manitoba for academic performance and outreach, and is also a Fellow of Seattle Pacific University. He has lectured and consulted in many countries, and served as a consultant for international organizations such as United Nations. He has written over 150 articles for business and academics, and has travelled to over 70 countries. He is an advisor to the Rural Renaissance Project at the Frontier Centre for Public Policy in Winnipeg.