Patterns in China’s Economic Development

\'four tigers\'

The emergence of the Chinese economy has many similarities with the past emergence of the Japan and the ‘four Asian Tigers’ Taiwan, Hong Kong, Singapore, and the Republic of Korea. Even though there are major differences in the economical climate for these tigers they have all gone through a certain development pattern in order to sustain their growth. Private domestic investment, combined with rapidly growing human capital, were the principal engines for growth.

Chronologically their development pattern looked something like this:

  • Lure in foreign investments with low-wage assembly work
  • Attract multinational investments and slowly start to build up some white collar services
  • Stimulate and attract multinational high-tech investments
  • Knowledge transfer, for example through the acquirement of foreign companies
  • Start developing and branding own products in order to sustain economic growth

Learning about how the four tigers achieved sustainable growth and how the government has stimulated companies in the past will give me more insight in China’s current development. Elements that are relevant for my thesis are: the market conditions, policy interventions and strategic choices by the Chinese government.

The World Bank

In a 1994 World Bank’s study ‘The East Asian Miracle: Economic Growth and Public Policy’ an attempt was made to understand the miraculous growth of Japan, the four tigers, and the three newly industrializing economies of Southeast Asia, Indonesia, Malaysia, and Thailand. In the report that is mainly focussed on policy interventions, the secret of the economic succes of these eight so called High Potential Asian Economies (HPAEs) is unraveled.

Rapid Growth

HPAEs differed from other developing economies in several ways. High rates of investment, exceeding 20% of GDP on average during 1960-90, rapid growth in domestic savings, and high endowments for education, are three key factors of the economical growth. Also the total factor productivity (TFP) performance of most of the HPAEs exceeded that of most other economies during 1960-90. The main components of the TFP were technology growth and efficiency. To summarize: the success of the eight HPAEs was a result of a combination of allocating capital to high-yielding investments, education, and at catching up technologically to the advanced economies.

Public Policies

What about the influence of public policy on economic growth? What interventions were made to allocate resources to high-yielding investments? According to the World Bank study most of the HPAEs have created what they call “contests”. The key feature of these contests was that the government has distributed rewards to well performing companies. Rewards could exist of access to credit or foreign exchange. Also acquisition of technologies through an open policy to direct foreign investments and licensing is mentioned as an important element for growth.

Export Growth

China Shipping LineLow inflation, a result of good macroeconomic management and policies, encouraged long-term planning and investment and may also have been responsible for exceptional saving rates. Many of the policies that were primarely aimed at fostering stability also contributed to rapid export growth. High savings in Japan and Taiwan allowed them to enjoy extended periods of exchange rate protection which kept them competitive in the export market. This can be compared to the current situation China is in.

Economic development and cooperation

A very relevant element of sustainable economic growth for China has to do with the support of the society Rich and Poor Divide in Chinaat large. How did the HPAEs cope with legitimacy of their often authoritarian or paternalistic leaders? According to the World Bank study explicit mechanisms were used to demonstrate the intend that all would have a share of future wealth. This is definitely going to be a challenge for the Chinese leaders because of the size of the population and especially because of current income differences between the coastal and rural areas. According to Andrew Ross in Fast Boat to China, China is currently in a unique situation: ‘From the lowest assembly platform work to the upper reaches of industry and services.’ How are China’s leaders currently demonstrating to less developed rural areas that the government intended for all to share the benefits of growth? Paul Denlinger wrote an interesting post on the importance of Social Stability in China on The China Vortex.

Human Capital

Education in ChinaLevels of human capital were higher in the HPAEs in the 60-ies than in any other low and middle-income economies. This not only resulted in widely available primary and secondary education, but also in an improvement in the quality of schooling. Also tertiary education in HPAEs tended to be more focussed on technical skills. The World Bank report states: ‘Overall, educational investments seem particularly well focussed on the acquisition and mastery of technology.’

Comparing Economic Development in the HPAEs to China’s

I have picked out only a few of the long list of elements that contributed to succesfull sustainable economical growth in the HPAEs dicussed in the World Bank study. At first sight it appears that there are many similarities between the past development of the HPAEs and the current development of China, but there are also considerable differences. Therefore the World Bank concludes with a relevant note: ‘Recently China, particularly southern China, has recorded remarkably high growth rates using policies that in some ways resemble the HPAEs. This very significant development is beyond the scope of our study mainly because China’s ownership structure, methods of corporate and civil governance and reliance on markets is so different from the HPAEs, and in such rapid flux, that cross-economy comparison is problematic.’

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2 Responses to “Patterns in China’s Economic Development”

  1. Olli Junna Says:

    Good analysis, I’ve also read/heard/thought similar things regarding China’s economic development compared to other Asian countries. In addition, one interesting aspect comes to mind (I’m not sure if this was in your list of elements): All the “four tigers” started as a low-cost manufacturing base for foreign companies (e.g. “Made in Hong Kong”), and as the economy grew the actual production was further outsourced to nearby cheaper countries. For example, Japan grew as a manufacturing base through investments from the US. Once they were developed enough, they in turn outsourced manufacturing to South Korea. Furthermore, as S-Korea gained power they moved production elsewhere.

    Now that China is opening up, they’re the next logical step. The question is, where does China outsource production once it becomes feasible (and they have to do this at some point in order to sustain the growth)? One strength of China in this sense is their huge size, and huge economic differences between geographical areas (namely the rich east and the poor west). Thus, it is likely that in the future the “manufacturing frontier” will move towards the west as the eastern parts get richer and the local economies shift from production to services.

    The problems with this are of course substantial, especially from an outsider perspective. For example, the eastern parts such as Beijing and Shanghai are becoming very transparent to the western world and this necessarily improves the political and environmental conditions. But influence of the west is far lower in the rural areas, and I’m a little afraid that they will remain that way for quite a long time (and this is what the communist party would probably want as well)…

    Anyway, these are just some things that I’ve been thinking about. Good or bad, China is one darn interesting place…

    – Olli

  2. Pieter-Paul Walraven Says:

    Indeed at some point China has to start outsourcing in order to sustain economic growth. And indeed their strength is the sheer size of the country and population, so for now a good solution is outsourcing production to more western located developing provinces such as Hunan. The strength of the huge size does create a challenge for the Chinese government and might become a weakness though; hence for how long will western Chinese citizens accept the income gap?

    I have also read about outsourcing to other developing markets countries such as Vietnam and Malaysia since provinces are sometimes competing with each other. Interesting to keep an eye on! By the way, I happen to remember that you are a Marquez fan, so I suggest you to read ‘Big Breasts & Wide Hips’ by Mo Yan!

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