Global Crisis/Global Innovation

Are Exports Really China’s Growth Engine?  A Response to McKinsey

By Shlomo Maital

    Writing in McKinsey Quarterly, Sept. 2010, *   three experts in McKinsey’s strategy practice argue that if you measure China’s NET exports (exports minus imports of components used to reassembly), you find that domestic value-added exports account for only a third of China’s economic growth, not two-thirds as previously believed.   The point is simple.  Like Singapore, China imports components from other countries. This important demand is of huge importance to other Asian nations, who form part of China’s export ecosystem.  But imports reduce China’s GDP, not increase it. So if you measure exports as ‘net’, not ‘gross’, you get a far different picture.

   I would like to refute this argument.  Exports still account for MORE than two-thirds of China’s growth.  This is why China must cling to its undervalued currency and export subsidies fiercely in future, because they are the foundations of its economic growth.

   Here is why.  GDP is an ecosystem.  Picture a flow chart.  Capital formation (investment) is driven by exports, because much of investment goes either to infrastructure, to support export industries, or to investment, to build new plants and expand existing ones.  Also, personal consumption is largely driven by exports, because export demand creates millions of jobs, high wages and enables the consumption spending that in turn drives GDP growth.  So, if you take into account indirect contributions of exports to growth, using a systems dynamics approach, you find, again, that exports are the key to China’s continuing rapid growth.  Take away exports, and you slash investment and consumption. 

     Don’t expect China to easily give up its export-driven model.  The true picture shows that our original assumption, that China’s growth is principally driven by its export engine, is still valid. 

* John Horn, Vivien Singer, Jonathan Woetzel, “a truer picture of China’s export machine”, McKinsey Quarterly Sept. 2010.