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FEATURE STORY: How China’s Growth Model is Different from Other Models
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How China’s Growth Model is Different from Other Models
By Morgan Brady

BT 201902 feature 01中国的增长模式与其他模式的区别


强大的工业和制造能力以及联系紧密的金融体系支撑着西方世界的增长。 出于这个原因,拥有强大工业基础和强大生产系统的德国等国家在2008年对全球金融危机表现出相当大的抵抗力。具有讽刺意味的是,受到美国禁运的国家如叙利亚在当时的危机中几乎没有受到任何影响。

It is often said that the growth in western economies began with the industrial revolution ushered by the advent of the steam engine. Some researchers have pointed out that an agricultural revolution preceded the industrial one. Additionally, a scientific revolution preceded both. After all, our ability to add value as humans depends on how well we use natural resources. This ability enables organizations and economies at large to achieve economic growth. But despite the universality of this rule (that efficiency is the main growth driver), there are many different growth models and stark contrasts between each. The western growth model as well as some eastern growth models, such as that of Japan, are highly driven by exports. However, internally, the capabilities and capacities that enabled those economies to achieve impressive growth are strikingly different in different countries. This makes different models, including that of China, unique in nature.

BT 201902 feature 02Western growth models
Analysis show that the Chinese growth model is different from both the eastern and the western models, albeit that it is closer to the former than the latter. When looking at the bigger picture, we find that the western growth models are more homogenous than the eastern growth models. A strong industrial and manufacturing capacity and a very-well connected financial system underpin growth in the western world. For this reason, countries like Germany, which has a strong industrial base and robust production systems, managed to show considerable resistance to the global financial crisis in 2008, and countries not connected to that financial system, such as in the Middle East, were little impacted by the crisis. Ironically, countries under embargo from the US, such as Syria, saw little to no impact from the crisis back then.

BT 201902 feature 03Eastern growth models
Eastern economies used different advantages to achieve their remarkable growth. Singapore, for example, leveraged its strategic location and became a maritime trade hub, as 40% of global maritime trade passes through its Malacca Strait. The country also managed to attract foreign trade and investment. Japan, on the other hand, built its wealth from having skilled labor, efficient systems, and wise management philosophies, as well as inventions (Japan has a high ranking globally in the number of patents that are registered by its nationals each year). China, our third example, built its success on many factors, among which are its productive labor force, its ability to meet global demand very cost-effectively, and its good structural policy making. Research shows that the structural policies and reforms in agriculture, industry, trade and the financial sector have had a positive effect on economic growth.

Components of the Chinese growth model
Unlike western models that may rely on bubbles sometimes to fuel growth, China’s growth has been fueled by productivity. A very large population, production efficiency and intensity, and capital were the three crucial factors behind such growth. In other words, total factor productivity has enabled growth.

Between 2000 and 2012, over half of China’s growth can be attributed to physical capital stock. In earlier periods, the size of the labor force was crucial. And later on, when the gigantic population met with industrialization, it was a great recipe for growth. The labor force was vital in different stages as the economy moved from focusing on agriculture to manufacturing and now technology. And as the transition went on, investment in human capital intensified in China.

BT 201902 feature 012Many elements appear when analyzing the Chinese growth model. First, the country has become an exports powerhouse with an increasing presence in global supply and value chains. Second, the country has relied on investments to a large extent to fuel its growth, especially in physical capital. Third, higher productivity enabled more people to earn more income and the middle class has grown significantly. This has enabled the country to reach the brink of entirely eradicating poverty.

The first two elements pose some challenges. The third one offers relief. Excessive reliance on exports can render the country vulnerable in the face of global shocks, much like the western world. Luckily, the tariffs imposed by the US on Chinese goods may prompt the country to consider another path, and, indeed, the Chinese government is already doing that. Excessive reliance on investments can also be risky, as investment flows can fluctuate, which can disrupt the growth momentum. On the other hand, increased productivity and higher wages could usher growth in domestic demand, which can fuel sustainable growth. China is recently becoming a more business friendly place with the removal of more restrictions. Additionally, the belt road initiative, which involves building projects and a shipping path that crosses through more than 60 countries may prove to be a solid initiative to reinforce China’s position globally.

Together, those factors have been driving China’s growth, which is expected to continue over the medium and long terms. The efforts seem to be paying off. As the economy moved up on the ladder of development, the contribution of the services sector to GDP increased, and that of the agricultural sector decreased. The contribution of the industry sector remained somewhat stable.

BT 201902 feature 04China is already the world’s largest economy
Contrary to public convention, which posits that the US economy is the biggest in the world, the Chinese economy is already the biggest economy in the world in real terms. The media, which is mostly financed by the west, like to believe otherwise, as they support their claims about the US economy with nominal GDP figures, which are not adjusted for differences in purchasing power (or exchange rate). When this necessary adjustment is made, China emerges to be the biggest economy when using GDP figures in terms of purchasing power parity (PPP). While those figures are not perfect, they do offer a more adequate representation of reality.

The Chinese people and the Chinese government have shown dedication to becoming the world’s largest economy. China’s growth model is unique in some ways and is similar to other models in others. It contains elements that can protect the country’s growth path in case of potential shocks and is well diversified. More importantly, it is driven by high productivity and innovation, which are cornerstones of growth. Although growth may slow down, it remains sustainable, at least in the short and medium runs, especially as domestic demand contributes more and more to growth.

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