Thrust issues

PUBLISHED : Monday, 20 February, 2012, 12:00am
UPDATED : Monday, 20 February, 2012, 12:00am


In the past 20 years, China has powered ahead economically, as if it propelled by some experimental jet engine. Yet it has achieved this without being especially experimental and without the government losing much control. While other developing countries have watched their plans misfire, lurching forwards for a while and then stalling, China has mostly cruised ahead, outperforming them all. What has it got right, where has it been lucky, and how has it achieved this feat of economic engineering?

In 1990, India and China were the same size, economically. They each had a gross domestic product of US$400 billion, and each accounted for 2 per cent of the world's economic might. But since then, the world economy trebled in size, to just over US$60 trillion. India, which generated well-above average rates of economic growth throughout the two decades, became 41/2 times bigger, with a GDP of US$1.8 trillion. It increased its share of the world economy by half, to almost 3 per cent. At the same time, China grew by almost 15 times. It overtook Japan as the largest economy in Asia and the second largest in the world. With a GDP of almost US$6 trillion in 2010, it grew to more than three times the size of India, and controlled almost 10 per cent of the world's economic power.

Moreover, China achieved this without massive mineral reserves, without becoming a democracy and without fully adopting the free-market model of economic progress. It achieved what Western economists and political theorists said was impossible. The economies of the US and Europe had grown much more slowly, despite their claims of having a superior model of social development.

So what did China get right and where was it fortunate?

First, scale. With 1.3 billion people, China was a magnet for those seeking new markets for everything from cars to software. But India and Indonesia had hundreds of millions of potential customers, too, so this alone was not enough.

Second, its system of governance. While India likes to boast of being the world's largest democracy, it is likely that this is, in fact, a disadvantage at its stage of economic development.

In China, the strong arm of the state has made the passing of laws that promote growth at the expense of the environment, foreign firms or those who are politically out of favour much easier. It has allowed Beijing not just to direct the development of primary industries but also to engineer their success. And it has made the suppression of any opposition much easier. The approach has also meant China has been able to avoid much of the free-market's follies. Most of its big corporations have not had to generate ever-rising quarterly profits or dividends. Bubbles, and the ups and downs of natural economic cycles, have been controlled.

Third, trade barriers. The use of trade regulations has been part of the secret. China could never have established scale in critical industries if it had not protected and nurtured them. It could not have helped them secure global footprints without opening the barriers a little, when necessary.

While Western economists like to say openness to trade is essential for any country to develop, this policy only defends the strong. China saw that business seedlings need protection for a while if they are to grow into larger economic forests.

Fourth, lots of foreign direct investment. Funding the growth has been easier than for many other developing countries, with much of it coming from overseas. China often receives 10 times the level of FDI given to India. China was also lucky here. It emerged from the Deng Xiaoping years at a time when there was a trend towards outsourcing, and management had a mindset of lean supply networks. It took advantage of the inflow of funds that these ideas created and the technology that came with them. China offered what Western investors wanted at the right time.

Fifth, decent infrastructure. Unlike India, Africa, Indonesia or even much of Latin America, China invested quickly and heavily in infrastructure. It built ports and motorways and installed high-speed telecom networks. It established decent hotels for foreigners, built a number of high-profile showpieces, and then ensured that most of them ran efficiently most of the time.

Sixth, single-mindedness. It was able to do this because it had a plan. It set out to achieve this rate of growth and this sort of economic development. It planned which industries would receive investment and when. It said who the national champions would become.

It forced foreign firms to work with local ones so that they could learn. It promoted entrepreneurial activity in the sectors where it made the most sense, unleashing the inherent 'Chinese gambling' sense of the market, and retained absolute control in the sectors it deemed strategic. It helped its champions move overseas and ensured access to the raw materials they needed by knowing far in advance what the country's requirements would be.

Seventh, a sense of injustice. This sense of single-mindedness came partly from China's cultural history and partly from a sense of having been wronged in the past - from a Han-dominated belief that the existing injustice had stretched back centuries and had fuelled a unified response to new opportunity.

There was a 'let's pull together' nationalism that sought to restore the status China had enjoyed in the past 1,000 years. That is the secret of China's success, and it would be hard to replicate elsewhere.

Graeme Maxton is the author of The End of Progress, How Modern Economics Has Failed Us, which was nominated for the Financial Times/Goldman Sachs Best Book About Business Award last year