Does China provide a feasible framework for developing countries to follow?

In the past 40 years, China’s Gross Domestic Product (PPP) has increased from $2 trillion to over $11 trillion. It’s current growth rate is 6.9% per annum (World Bank, 2016). This development success has been driven by China’s unique economic framework. This framework incorporates many different economic policies, making it challenging to analyse in its entirety. Therefore, this essay will discuss only China’s economic growth framework, with specific focus on the development of manufacturing and exports. There are aspects of China’s growth framework which could be feasible for emerging economies. However, replicating its framework in full would be unfeasible for two reasons. Firstly, there are specific conditions that China has experienced that have supported and accelerated its growth which mean that its framework would not be applicable to other emerging economies with different conditions. Secondly, there are certain drawbacks to China’s economic framework, namely an over reliance on exports and Foreign Direct Investment. This has been destructive to China’s progress and would generate similar instability if replicated in emerging economies.

What is China’s economic growth framework? ​China’s economic growth framework is difficult to characterise. There are aspects of China’s framework that reflect the institutional model of a ‘developmental state’, as identified by economist Robert Wade. The key factors characterising the developmental state model with respect to economic growth are: 1) manufacturing focused on exports, 2) a tightly regulated exchange rate as a means of ensuring export competitiveness on the global market, and 3) extensive capital controls (Wade, 2014, pp.3-5). China evidently relies on the export of manufactured goods – in 2013, manufacturing accounted for 30% of its GDP and 94% of merchandise exports (World Bank, 2013). There is also evidence that China has been manipulating the value of the RMB against the US dollar since 1994 (Morrison and Labonte, 2013, p.2). Additionally, it has been suggested that China has some of the “most restrictive controls” when compared to global approaches to capital (Xiao and Kimball, 2005, p.1). However, China’s economic framework does not fully align with the developmental state model due to China’s reliance on Foreign Direct Investment - this is not included as a key aspect of the model. In 2016 China received $170 billion in FDI from overseas (World Bank, 2016). FDI has enabled China to innovate industrial manufacturing techniques, ensuring its exports reflect the most advanced global technologies. What is unique about China and therefore could not be replicated in other countries? There are several conditions that give China a global advantage which do not exist in other emerging economies. China had a population of 1.3 billion at the end of 2016 with a workforce of 800 million (World Bank, 2016). This workforce, combined with the fourth largest land area means that China has unrivalled factors of production. An example of the effect of these extensive factors of production is represented in the scale of China’s steel industry. China now accounts for 50% (World Steel Figures in 2016, p.15) of the global production of steel and employs 12 million workers (The Guardian, 2016). Five provinces each produce more steel per annum than Germany, which itself is ranked 7th in the world (Xinchuang, 2015, p.3). An emerging economy would have to consider the size of its population and the availability of land before emulating China’s growth framework. Size alone is not the only condition contributing to China’s economic success in the past four decades. China, with its export focused development framework, has benefitted from its proximity to Hong Kong, a major trade hub. Hong Kong had already gone through decades of industrialisation by the time China had started its economic reforms in the late 1970’s, giving China access to global trade routes and the means to export its manufactured goods to other countries. China has been fortunate that its vast population, significant land area and proximity to Hong Kong have supported its export and manufacturing led growth framework. Therefore, China’s framework would not be feasible for many emerging economies and could not be fully replicated because they do not benefit from these specific conditions. Would China’s framework work in other emerging economies? ​Certain aspects of China’s economic framework might have the potential to stimulate development in emerging economies. Justin Yifu Lin (2011) argues that African countries are in the perfect position to develop their manufacturing industries and follow a similar export focused growth framework. Makhtar Diop (2015) has expressed similar views to Lin on the potential for African nations to replicate the Chinese economic growth framework. Nevertheless, he suggests that there are key areas that African countries must invest in before they can replicate the industrial and export successes of China over the past 40 years. Firstly, there needs to be significant investment in education. In 1950, both Chinese and African students aged 15 would spend an average of 1.5 years in school. Today, students in China spend 7.5 years compared to only 5 in Africa. Diop argues that without high quality human capital, Africa will not have efficient industrial production, and will not be able to export high quality products which can compete on the global market. Secondly, Diop finds the disparity between the relative level of physical capital between China and Africa equally alarming, claiming that “power consumption per capita in China is more than twenty times higher than in Nigeria or Kenya” to give an example. In other words, many African countries do not have the infrastructure required to replicate China’s economic growth framework. Diop relates the disparity in physical and human capital to the difference in economic performance between China and Africa. Therefore, China’s framework has the potential to be feasible for African countries, but with the significant caveat that they must first invest in developing the quality of their human and physical capital. ​An additional caveat for China’s framework to be feasible for emerging economies is that there must be strict capital controls in place. China has managed to attract significant inward investment during its 40 years of reform whilst maintaining control and direction when it has come to achieving its economic goals. China has managed the flow of money in and out of the country using strict capital controls, making it difficult for foreign companies to transfer capital out of the country, encouraging reinvestment into China’s economy. Brazil, an emerging economy was an exemplar for its effective use of capital controls in the wake of the 2008 financial crisis (Chamon and Garcia, 2016, p.2), ensuring that capital was reinvested into the economy rather than being taken out of the country. Capital controls are effective in restricting flows of money, ensuring reinvestment to create sustainable growth, and being able to respond to shocks in the global economy. Therefore, capital controls must be introduced in order for China’s framework to be feasible for emerging economies. Which parts of China’s framework are potentially destructive to China and therefore to emerging economies if replicated there? To approach the question from a different perspective, one might consider the extent to which China’s framework is a ‘feasible’ framework for its own development, let alone the development of other emerging economies. Certain aspects of China’s framework have arguably damaged its own growth. Therefore, these aspects might cause similar problems were they to be implemented in other emerging economies. China’s exports currently account for 20% of its GDP (World Bank, 2016). However, in 2009 shortly after the global financial crisis, China’s exports dropped by over 17% (Li, Willett and Zhang, 2012). This was one of the main causes of the decrease in China’s GDP growth rate from 14.2% to 9.6% pre- and post-crisis. China’s exports make up a large proportion of its aggregate demand meaning the economy is highly susceptible to shocks in the global economy. An emerging economy looking to replicate China’s growth framework would have to stimulate other areas of aggregate demand such as consumption rather than focusing solely on exports – thus avoiding the same instability China has experienced in the past ten years since the financial crisis. This shows that due to China’s reliance on exports, replicating China’s framework in emerging economies would not be feasible and would create instability. Part of China’s growth framework has relied on significant amounts of Foreign Direct Investment (FDI) from overseas, as well as allowing large Multi-National Corporations (MNCs) to set up factories or outlets to sell their products. This means that a large proportion of China’s GDP is made up of FDI and revenues from MNCs which raises two problems: firstly, changes in FDI have significant impacts on China’s economic performance. Secondly, early stage domestic firms find it difficult to compete with well-established MNCs, meaning that much valuable intellectual property comes from outside the country, somewhat restricting the potential for further economic growth. The heavy reliance on foreign investment and substantial involvement of foreign companies is damaging the Chinese economy in multiple ways and should be avoided by emerging economies looking to adopt a similar framework. Conclusion There are aspects of China’s economic framework that would be feasible for emerging economies to follow. However, China has benefitted from several unique conditions - its unrivalled factors of production and proximity to Hong Kong. Furthermore, parts of China’s framework would be destructive to an emerging economy looking to adopt the framework. Therefore, an emerging economy would not only be unable to fully replicate China’s growth framework, but it would also be unwise and unsustainable to do so. 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