Factors Explaining the Rapid Economic Growth of China In Recent Decades

China’s rapid path to economic development is well documented and even though growth
rates appear to be slowing, there is no doubt as to the pivotal role China’s economy is
playing in the global economy.

China initially pursued an export-oriented path to industrialisation – similar to the Asian

Tigers before them – but has begun to diversify into other sectors of the economy in the last
ten years. It has done this with an unwavering determination to accelerate growth rates and
expand its economic reach. As geographers, we need to understand the factors responsible
for China’s economic success.

Labour supply

There is a plentiful supply of workers in China with a steady stream of rural-urban migrants
in search of work. This is due to the mechanisation of agriculture leading to unemployment
and under-employment in rural areas and concurrent growth in industrial work in urban
areas. It is estimated that 500,000 million people will leave the Chinese countryside in
search of work over the next two decades. Voluntary migration of the rural population has
been accompanied by aggressive re-planning schemes in which rural villages are
demolished and new manufacturing settlements built at rapid pace for former agricultural
families to move in to.

Wages and unemployment

The unemployment rate has fallen in recent years to just over 4%, but high rates in the past
drove down wages. If workers demand higher wages, there are many more who will take the
jobs available. Wages in other East Asian countries earn up to 10 times more than Chinese
workers. This has increased profit margins and attracted inward FDI (Foreign Direct
Investment) as American, European and Japanese companies open factories under licence
in China.

Female participation in the workforce

China’s workforce is characterised by a higher than average female participation in

manufacturing industry. Western cultural analyses of gender divisions in the workforce have
little relevance in Chinese economic growth. This, along with the One-Child Policy which has
meant women were involved in child-raising for a much shorter period than in many other
countries, has made a much larger workforce available.

Political system

The non-democratic and authoritarian political regime in China has meant that it has been
possible to embrace western-style free market economics while maintaining control over the
political system. In many ways, the planned economy of China (where the state controls
economic activity rather than private business) has accelerated economic growth because
the government has controlled all decision-making. Since Mao in 1953, the government has
followed a series of Five Year Plans (or Guidelines, as they are now called, to reflect China’s
transition towards a ‘socialist market economy’) which have enabled the government to
enact any reforms it feels is necessary. The country is now in its 12th Five Year Plan (2011-
2016) and policies include spending 2.2% of GDP on R&D (Research
and Development) and moving coastal regions from being ‘the world’s factory’ to being hubs
of R&D, top-end specialist manufacturing and services.
Strong leadership

Chinese politicians are said to feel a greater responsibility to the nation than to themselves.
Strong leadership from the head of state has been a major factor contributing to economic
success.

Free market economics

China first began moving away from a centrally planned economy towards a market-oriented
system in 1978. Deng Xiaoping was Mao’s successor and he sought to bring an end to
China’s relative economic isolation.

Export-led growth

This is the strategy which China initially pursued. The strategy is beginning to become
phased out in favour of Import Substitution Industrialisation by which consumer products
imported for China’s growing middle-class are increasingly being made in China, such as
cars, domestic white goods and house- and office-furniture.

Special Economic Zones and FDI

Foreign investment was encouraged in the initial phase of economic growth. They tended to
locate in one of 6 SEZs (Special Economic Zones) or 14 Open Cities in which a relaxation of
regulation and government control created a more attractive business environment. These
are designated zones where TNCs (Trans National Corporations) are offered incentives
such as reduced tax rates to set up manufacturing operations. An example is a Taiwanese
TNC, EUPA, which manufactures coffee machines in Xiamen (an Open City) and employs
25,000 workers.

Private enterprise

For many years all manufacturing in China was state owned and operated. This has
gradually been relaxed as the economy has been restructured and now up to 50% of
businesses are privately owned.

Energy supply

Since the 1990s China has been developing its energy base, with new hydroelectric and
nuclear power plants. China is also embarking upon a massive coal-fired power-station
opening programme based on its own substantial coal reserves plus imports from Australia
and Indonesia. However, serious urban air pollution together with a commitment to limiting
carbon emissions after 2030 is leading to a less rigorous expansion of this electricity source.

Investment in infrastructure

The government has built many new roads, improved the rail system and made China’s
major rivers navigable all year round. China has five of the ten largest container ports in the
world (including Shanghai and Shenzhen). Urbanisation has also been encouraged. with a
robust urban-construction programme.

Economic diversification

China has recently started to diversify into Research and Development, specialist
manufacturing and hi-tech industry. It is investing labour and capital in innovation so that it
can sustain its economic growth and reduce the risk involved in having a narrow economic
base.
Education

Literacy levels of China have risen dramatically over the past 20 years and now stand at
95%. This has underpinned the economic development of the country. As a result, China
has both large numbers of unskilled workers and a growing number of highly skilled workers.
For instance, China trains 600,000 new engineers every year.

‘Going global’

China has started to globalise economically by buying up foreign companies in North

America and Europe particularly. In fact, in 2010 China invested $56bn in in outward
Foreign Direct Investment. With inward FDI averaging some $60bn per year, China had, by
2015, converted from a net recipient to a net investor in FDI, a marker of its economic
maturity in many respects.

Location

China’s geographical location has geopolitical significance because of its proximity to

consumer markets and trading partners. South Korea, Taiwan, Japan and Hong Kong are on
major trade routes. It is no coincidence that the first SEZs were concentrated on the east
coast facing Taiwan and the Pacific, particularly around Hong Kong.

Raw materials

China has a great wealth of natural resources, having vast reserves of coal, oil and natural
gas. These are being used to fuel the industrial development of the country. However, so
large is the country’s requirement for raw materials to feed its manufacturing industries, that
it is a major importer of oil, gas, coal, iron-ore, copper and other key commodities in world
trade.

Confucian values

State and society are emphasized above the individual. There is a long history of submitting
personal ambition to that of the community and state through Confucianism. The degree of
control and authoritarian structures are more accepted in China than in most western
cultures with their emphasis on individualism.

Population growth

Rapid population growth in China, despite the One Child Policy, has resulted in very large
numbers in the economically active population, leading to rapid urbanisation.
This has fuelled further industrialisation, allowing for further population growth.

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5 reasons behind the rise of China
November 23, 2009 13:42 IST

A rising China has not only inched closer to the US, it has also developed

backward linkages - through the 'disassembly line' - with a host of other

countries, including developed ones, says Ashok K Lahiri.

Recently, China made a splash on the world stage by holding two

spectacular events: The Olympics in August 2008, and the 60th anniversary
celebration of the People's Republic on October 1, 2009.

These dramatic events in the midst of the global financial crisis changed the climate of the times. Particularly with
the western economies in trouble, these events changed the world's perception of China.

The media started talking of a world dominated not by G-7, but by G-2 consisting of the US and China. Three
economic questions that arise in this context are: What have been the major distinguishing features of this rise of
China? How durable is the rise? And, what does it portend for the rest of the world?

In the centre-periphery paradigm of international development, the post-war economic development is a story of
the US as the centre and countries in succession on the periphery. The US plays a pivotal role with an open
capital and goods market, while the countries on the periphery pursue a development strategy of undervalued
currencies, capital controls, reserve accumulation, and the use of the centre's region as a financial intermediary.
Immediately after the War, Western Europe and Japan were on the periphery.

The US lent long-term support to these countries, mostly through foreign direct investment (FDI). After their
reconstruction, in the 1970s, Western Europe and Japan graduated from the periphery to the centre. Then some
Asian countries, such as South Korea and Taiwan, joined the periphery and graduated to close-to-centre.In the
same process, the recent rise of China can be seen as a graduation of the People's Republic from the periphery
to close-to-centre.

There are five distinguishing features of this rise of China. First, the pursuit of capitalism with a communist
political system. Chinese authorities have defended this combination as "seeking truth from facts". According to
the 2009 annual Hurun Report, there were 130 known dollar-billionaires in China compared to 24 in India.

Way back in 2000, according to the Economist, socialist China had the world's brashest capitalist economy.
Starting from 1978, Deng Xiaoping liberalised the economy without changing the political system. While Soviet
leader Mikhail Gorbachev simultaneously launched Perestroika and Glasnost in the late 1980s, China's handling
of Tiananmen Square demonstrations in 1989 spoke loud and clear about how it intended to control the politics of
the country.

Second, China, like the East Asian Tigers, pursued a policy of state-sponsored capitalism in the Japanese style,
albeit in a much more accentuated form. There was a pronounced reliance on state-owned enterprises.

Third, China invested heavily in physical infrastructure. The pace of accelerated investment in physical
infrastructure is illustrated by how, relative to India, China ramped up its rail network. With only 55,000 km of
railways in 1985, China had a smaller rail network than India (62,000 km). By 2006, with 75,000 km of railways,
China had overtaken India which had 64,000 km. In 2006, as a proportion of GDP, Chinese annual investment of
14.4 per cent in infrastructure such as power, transport, drinking water, irrigation and telecom was almost three
times that of India.

Fourth, in sharp contrast to Japan, China became the factory of the world, relying mostly on FDI. After the US,
China is the second-largest FDI recipient in the world. While FDI inflows into China from 1979 to 1999 amounted
to $306 billion, annual average non-financial FDI in China was about $60 billion during 1999-2008. Much of
Chinese exports are by foreign-owned firms. In 2007, only four of China's top 25 exporters were Chinese
companies.

Fifth, for most of the post-reform period, China followed an exchange rate policy designed to promote
competitiveness. The renminbi which had been rapidly devalued from RMB 1.50 per US dollar in 1980 to RMB
8.62 per US dollar by 1994, was maintained at RMB 8.27 per US dollar from 1997 to 2005.

It moved to a managed float in July 2005, the renminbi gradually appreciated to RMB 6.82 in May 2009, and
remained more or less unchanged thereafter. China has had to intervene heavily to prevent the renminbi from
appreciating, and in the process, has accumulated over $2.2 trillion.

In a way, China's rise could be described more as redemption of its historic role. After all, the country gave the
world gunpowder, the magnetic compass and printing technology. Right up to 1820, China accounted for almost
a third of the world output.

Yet, doubts have been expressed about the durability of China's recent rise. In March 2007, Premier Wen Jiabao
at the National People's Congress declared the economy as "unstable, unbalanced, uncoordinated and
unsustainable".

The doubts are mainly on four counts: The danger of turbulence in the eventual transition to a democratic form of
government; the risk of civil conflict involving the Tibetans, the Uyghurs and cultists such as Falun Gong; the
eruption of the Taiwan question; and a growth slowdown resulting in even higher unemployment and large non-
performing loans in banks' balance sheets and a domestic financial crisis.

While the sustainability question is a valid one, many naysayers about China have had to eat their words in the
past. Serious doubts were raised during China's WTO accession in 2001.

Books came out with titles such as the Coming Collapse of China. But, China managed the WTO accession with
remarkable success.

Many experts believe that it will do the same with future challenges. Even in the difficult transition to a multi-party
democracy, many believe that China will evolve along the path of countries such as South Korea, Taiwan, Chile
and Spain.

The spectacular rise of the West in the 19th century proved to be a disaster for most of Asia. What does the rise
of China portend for the rest of the world? While the future is difficult to foretell, it appears that on the economic
front, the rise of China has already created, through what has been called the "disassembly line", quite a bit of
backward linkages with many other countries.

Foreign exporters from China, in their search for the lowest-cost place to make each component of their products,
have created a seamless connection between multiple factories in multiple countries.

Furthermore, while competition by China has worsened the employment situation in some of the developed
countries, the consumers in these countries have also benefited from the availability of cheaper goods from
China. The global implications of the rise of China, however, go far beyond pure economics, and such
implications are beyond the scope of this article.

The author is an executive director, Asian Development Bank (ADB), Manila. The views expressed here are
personal and do not reflect those of ADB.

Ashok K Lahiri

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