THE BLOG
09/04/2014 03:47 pm ET Updated Nov 04, 2014

China's Innovative Paradigm -- Sharing Global Prosperity Through Connectivity of the Silk Route Countries

In sharp contrast to the 20th century hegemonic intrigue of the Western military superpowers resulting in wars, militarism and conquest, the emergence of China as an economic super-power in the 21th century ostensibly is emerging to recreate global trade and connectivity between Southeast Asia, Europe, and Africa. The idea is the brain child of China's leader Xi Jinping, whose vision is to revive the centuries-old sea routes piled by Admiral Zheng in the 15th century and the ancient caravan trade route moving from Europe to Central Asia and the Far East. The approach has the added advantage of uplifting the economies of the low and middle income countries in the Silk Road route through trade, commerce, connectivity, synergy and ripple effect.

China has decided to allocate several trillion Yuan for project construction including 10 billion Yuan specifically for port development toward economic catch-up of the silk route countries at concessionary rate. Given China's unprecedented economic growth rate of the last three decades and the experience of economic growth it has gained, it is most qualified to undertake such a huge undertaking. In addition to infusion of substantial monetary resources China has a solid track record of extraordinary economic catch-up since 1980 which augurs well for implementation of such a project.

The following attributes highlights China's ability to catch up that would be instructive for the Silk Road countries.

1) Leadership
The economic innovation in China started in the early eighties beginning with Deng Xiaoping through Hu Jintao implementing innovative economic policies which lifted China's sluggish economy by introducing private ownership, market economy, less governmental control contributing to robust economic performance. A succession of leadership in China including president Hu Jinping and follow-up by the current president Xi Jinping's flexible and innovative economic policy took advantage of globalization, export orientation, attracting foreign investment, and maintaining a sound monetary and fiscal policy. China became a member of the World Trade Organization (WTO) and hosted a very successful International Olympic Games.

2) International Trade Orientation
Beginning in early 1980s China shifted its economic strategy from self-sufficiency to export orientation. The shift was pivotal to the growth rate of China's GNP. Concurrently, China is building its domestic consumer sector so that in the future it will have a strong and well developed domestic market. The multi-billion dollar natural gas contract with Russia in May of 2014 will be a major plus for China's energy demand. China's drive for the development of non -fossil fuel under its 12th five year plan could make it a world leader in energy exports and offer unmatchable prices on alternative energy in the world market contributing to convergence of per capita income of the silk rout countries.

3) Growth Rate Performance
The process of China's remaining catch-up time of per capita income to that of the first world is estimated to take place in approximately two decades. It follows that China's catch up time with the first world would take place in five decades starting in 1980 while it took the first world nearly 50 decades to reach its current level of per capita income. Part of the explanation is the diminishing return to capital in the first world since it is saturated with capital and return to capital has dropped. And the law of accumulation of capital due to growth rates differential between the first world's average of 2 percent annual growth and those of China with an annual growth range of 7-10 percent. The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. And its growth rate for the next couple decades may be somewhat lower than 2 percent. This means that there may exist 4-6 percent percentage point differential in growth rates that has contributed to the rising trend of annual growth rate of China. This phenomena will continue until China's per capita income reaches within 70 percent level of the first world. Then its annual growth rate will conform to the first world's annual growth rate of approximately 2 percent per year.

4) Macroeconomic Management
China's sound macroeconomic management was demonstrated during the Great Recession of (2007-2009) when its export dropped 15-18 percent causing 23 million unemployed but 98 percent found jobs as the economy readily bounced back and the unemployment rate dropped to 4 percent. This performance is in sharp contrast to a number of countries where the recession is still lingering in 2014. It is most notable that China escaped three global financial meltdowns since 1990 including the Japanese severe credit implosion, the Asian economies foreign reserve meltdown caused by capital flight due to rigidity of fixed exchange rate. The great recession (2007-2009) which engulfed the world economy was contagious and China was subject to the turbulence and transmittable global meltdown but ironically China escaped. China's experience has drawn re-examination of the Western neoclassical paradigm concerning macroeconomic stability, and efficacy of countercyclical measures via mini manipulation of the supply of money by the Federal Reserve Board. A better alternative for all nation states is to establish social indicator targets.

5) Renewable Energy
China's 12th Five Year Plan has placed specific emphasis upon the targeted development of renewable energy to satisfy 15 percent of China's energy needs by the year 2025. This policy will contribute to clean air in China and prevent environmental degradation as the use of fossil fuel is substituted by renewable energy.

6) Ports
China is already the world's biggest merchant marine operator according to U.N. data. Container port data compiled by the United Nations shows. Customs administration figures show around 40,000 ships entered and left Chinese ports in the first half of 2014.

7) Population Policy
China's one child policy and its recent modification has been optimal given the absolute number and the possibility of population trap. Successful control of fertility rate (number of children per women) is the hall mark of optimal population and determinant of China's long term growth potential and carrying capacity. China's prosperity is closely connected to its population policy although the age distribution of the population may pose some problems concerning productivity in the future. Its population is expected to peak to 1.5 billion by 2040 reaching zero growth rate and avoiding the population trap dilemma. No doubt, it is known that population policy in Europe in the 14th century led to the Industrial Revolution in the 18th century. Technology of industrialization from 18th century to the present created the high level of per capita income in the first world. Clearly, demographic policy affects economic development in all low and middle income countries.

8) Poverty Reduction
Since 1978, China' has uplifted millions of peasants out of poverty and it has been the most successful country in the world in poverty reduction. China will deserve very high marks for its social indicator and distributional objectives.

Other favorable political economy policies that have made poverty reduction feasible include annexation of Hong Kong -- a model of one country in which two system is adopted granting Hong Kong market autonomy. Three-fifth of China's foreign direct investment are financed through Hong Kong and billions of dollars of China' assets are in Hong Kong's financial institutions. Development of Growth Zones such as Shanghai to attract foreign investment and investment in human capital including all levels of education through college are among the hallmarks of growth policies in China. The above factors have given a major impetus of high growth to China since 1980 ranging in annual growth rate of 7 to 10 percent. This is an unprecedented growth rate in the experience of world economy with the exception of Germany in the 20s largely due to military buildup.

9) Anti-Corruption Campaign
Unfortunately corruption is a universal problem and once it takes roots it becomes institutionalized and penetrates the culture. Thus it becomes difficult to undo corruption. It is keenly prevalent in low and middle income countries. China is no exception in this regard, however, a concerted effort has been launched to bring corruption under control beginning with the effort of former president Hu Jintao and follow-up by the current president Xi Jinping. Beginning in 2012 reportedly imposing punishment upon 182,000 government officials at all ranks through 2014. Several high level party members have been removed, legal cases of anti-corruption of high officials in China has been reported in the Western Press with due process. Perhaps China will succeed to clean-up corruption completely. The anti-corruption drive in China is serious and admirable. It is certainly instructive for other countries to adopt a policy of transparency and uproot such criminal activities.

10) Unique Features of China's Society and Polity
Altruism, social cognition, equity, equality, egalitarian motives, public service and economic growth are the hallmark of China's leadership pronouncements. The duel system of one political party and free competitive market economy characterize China's unique socio-economic-political system. The political system is not monolithic, or colossal, it has worked under seven member Politburo Standing Committee of party congress. Political leadership is elected every five years. Last year 10,000 small protests were tolerated. Currently over half of China's GDP is produced by private enterprises. China's government has not been shut down due to internal political dissent of multi-party feuds. More than 250 million people have been lifted out of poverty, this is approximately 20 percent of the total population.

11) The Ancient Silk Road
In June of 2014, China's 2,400 year-old Grand Canal, which historically linked sections of the Silk Road, was awarded UNESCO heritage status, as were large portions of the ancient overland Silk Road. The 11,179 kilometer Yunxinou International Railway linking Chongqing and Xinjiang with Europe and commonly referred to as the "New Silk Road," runs alongside many of these ancient caravan tracts.

The foregoing are indicative that China is embarking in a distinctly alternative approach of inter-governmental collaboration and connectivity to promote economic catch-up of low and middle income countries that are located in the path of silk road.

Nake M. Kamrany is professor of economics at the University of Southern California. Frank Jiang is a research member of the USC Global Income Convergence Group and a senior in Economics at USC.