Updated date:

Explaining China's Remarkable Economic Growth

Author:

SG is a business consultant specialising, inter alia, in the area of foreign investment and development finance .

how-to-explain-chinas-economic-development

Introduction

Since opening its economy in 1978, China has recorded a phenomenal economic growth with an average annual growth in GDP of more than 9.5% (World Bank, 2018). This remarkable growth is worthy of the consideration of both developing and developed economies, as the factors contributing to China's growth could serve as a reference for these economies.

Factors Contributing to China's Economic Growth

how-to-explain-chinas-economic-development

The benefits reaped from opening its markets were invested by the Chinese government in infrastructure and industries, and this facilitated the country to industrialise at a fast-pace.

However, the most influential factor in China’s growth has been its large and cheap labour supply. This has been a major source of attraction for foreign investment into the country, which resulted in a wave of manufacturing process outsourcing to China.

The other factors that have contributed to China’s growth include; geography (locating manufacturing in China’s vast coastal areas gives easy access to sea transport and reduce intermediate transportation), culture (the attitude of the people towards work) and to a controversial extent the philosophy of the government.

Government and the Economy

how-to-explain-chinas-economic-development

What role has political institutions and the law played in China’s development? The western block of developed countries has always questioned the existence of rule of law in China. In analysing this claim, first, it is important to understand what rule of law achieves in a society. The application of a uniform set of rules to the members of a society, gives predictability and consistency to the functioning of that society.

In this context, has China’s political system failed to provide predictability to society? China’s political system has received the legitimacy of the people, however it is legitimacy based on substance as opposed to legitimacy based on procedure, which is embodied in the democratic model of governance. Despite the absence of democracy in China’s political system, it has received the acceptance of its people and given predictability to the people.

Development Theories

how-to-explain-chinas-economic-development

Modernisation Theory - it is worth considering whether China’s development is supported by any of the existing development theory. China has relied on open market conditions for its growth; however, it is far from a free market system that allocates resources through private ownership as advocated by the modernisation theory of development. China’s government has a strong hand in its economy and allocation of resources. The large state owned enterprises contribute to more than 40% of the GDP.

Dependency Theory - As open market principles have underpinned China's growth, it cannot be categorised under the dependency theory of development, which repudiate integration with the global economy and the marked based distributive mechanism.

Many economists argue that the degree of state intervention in China, distorts resource allocation in the economy and lead to inefficiencies. However, China’s economic performance questions the validity of this argument. An important basis on which state intervention could be justified is during economic crisis or slowdown. For instance, in 2009, as the effects of the global financial crisis started to dawn on China, the government was able to swiftly diffuse a 4 trillion yuan stimulus package in the economy and increase bank credits through the large state owned banks. This helped China minimise the impact of the crisis.

Washington Consensus - This model of development (the set of economic policy reforms agreed in Washington for developing countries), inter alia, propose the following policy prescriptions; fiscal disciple, prioritisation of public expenditure, competitive exchange rate, trade liberalisation, privatisation, and deregulation.

How does China rate in these policies? China’s fiscal discipline and public expenditure has been lax throughout the history of its growth. However, this policy has worked well for China. As stated above, China was able to minimise the impact of the global financial crisis because of the fiscal stimulus provided by its government. China’s exchange rate policy has always been a moot point. The US and other developed countries have accused China of deliberately undervaluing its currency in order to keep the price of its exports competitive. The government also adopt protectionist policies against imports. As mentioned above, state owned enterprises account for more than one third of China’s output. Thus, the policies implemented by China contradict those promoted by the Washington consensus.


Beijing Model

how-to-explain-chinas-economic-development

In the above context where existing development frameworks fail to provide an explanation for the development achieved by China, a new development model, coined the Beijing model, has been promoted by the Chinese based on their experience. However, the model prescriptions are vague, lack consensus even among its promoters and used to support a multitude of policies. Therefore, the practical worth of this model remains to be seen.

Conclusion

There is no cookie cutter approach or one size fits all approach for achieving economic growth. Instead, economic policies should be based on each county’s circumstances or context. Each country may have different factors constraining their economic growth. Economic policy should be implemented targeting these binding constraints. China overcame the lack of investment in its economy through the government investing heavily in infrastructure and industry, which resulted in the rapid industrialisation led growth. If China blindly imported policies for fiscal discipline, it could not have achieved this growth.

It is important that a county experiment with policies and practice gradualism in implementing policies; rather than comprehensive policy reform. China provides good examples of this approach of gradual and experimental policy reform. China did not embrace a comprehensive open market policy, instead it gradually opened its economy. China constantly experiments with its fiscal and financial policies to stimulate economic activity.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 SG

Related Articles