Lessons from the Chinese Development Path

Development requires continuous learning. This is because achieving inclusive and sustainable development is a complex and comprehensive process. That’s why nations have to learn from the experiences of other countries that have achieved better records of development. Though China is facing economic challenges related to its strategic transition, its development experience can still provide a number of important lessons for other countries.
The Chinese successful development experience –double-digit economic growth for nearly thirty years and its position as one of the most powerful economic powers in the world – are important development outcomes that developing countries should note.Indeed, some countries are already looking towards the Chinese model – known as the Beijing Consensus, a set of ideas that focus on high growth and a reduction of absolute poverty — instead of the Washington Consensus promoted by the International Monetary Fund (IMF), World Bank, and other Western bilateral donors.
In 1978, China introduced market-based reforms that produced remarkable economic success. According to the World Bank, gross domestic product growth has averaged about 10Pct a year; and per capita gross national income reached USD4,930 in 2011, categorising China as an upper-middle-income country. Additionally, more than 600 million people were lifted out of poverty as China’s poverty rate fell from 84Pct in 1981 to 13Pct in 2008.
This remarkable growth has significantly increased Chinese productive capacity, particularly in the manufacturing area, making the Middle Kingdom the world’s largest exporter. Not only that, its increased growth rate helped millions make fortunes, which contributed to a significant surge in demand. That made China the second largest importer.
Before the reform, agricultural productivity remained sluggish and below the rate of population growth. Agricultural reform brought a dramatic increase of production. Land tenure reform also encouraged farmers to invest in their land because the policy effectively addressed their ownership insecurity. In addition to the agricultural market liberalisation, the government expanded agricultural extension and research programmes with integrated rural development packages. As a result, the agricultural sector registered a 10Pct annual growth rate over the last three decades. Non-farm rural employment opportunities also increased. This laid the foundation for industrialisation and encouraged Chinese leaders to continue with market-oriented reform programmes.
The Open Door Policy since 1978 encouraged China to engage in external trade and foreign direct investment. The government also decentralised decision-making regarding exports and imports to local governments and regional foreign trade corporations. A series of special economic zones and coastal open cities were designated for the purpose of stimulating exports and attracting foreign investment.
Special treatment in the form of access to bank loans and flexibility in managing their profit and loss encouraged newly established enterprises to boost export. Foreign firms were encouraged to establish factories in the special economic zones (SEZ), independently or jointly with Chinese firms, to process imported or locally produced materials for export. In the SEZs, infrastructures were sufficiently built. Foreign investors could set up factories in the zones easily to take advantage of the cheap and skilled labour and pay them at wage rates different from the rates in other parts of China. No import duties were levied on materials processed for exports; instead, they received special tax breaks. State price setting was gradually eliminated. As a result, this policy intensified job creation, technology transfer and generation of foreign currency.
According to a report from the Organisation for Economic Cooperation for Development, since China launched the economic reforms, the country has received a large part of global direct investment flows. It has also become the second largest FDI recipient in the world.
The Chinese government took important policy measures to expand infrastructure throughout the country. From 1998-2006, the energy sector grew by 10Pct annually. A total of 10,000kms of rail were constructed. As a result, the productive capacity of China was developed.
The government maintained control of the banking and financial sectors. State ownership of the banking sector created much-needed finance to implement massive infrastructural programmes.
Most importantly, the right combination of open door policies put China on the right track to fast economic growth and transformation. The policies were market oriented. At the same time, the Chinese state, under the leadership of the Communist Party, played an active role. Therefore, it could be strongly argued that the Chinese government was and has continued to be a developmental state,
China’s growth is an inspiration and developing countries could learn from the experience. Economic development would be unattainable without a committed political leadership that puts poverty reduction and prosperity as the overriding principle. The Chinese leadership put the economic modernisation of the country at the centre of its development agenda. Not only the policy pronouncements but also the existing and newly created institutions were made to fully reflect these policy commitments and work towards their implementation. Performance and merit were emphasised as principal methods of following and evaluating the newly introduced reform programmes. Decentralising decision making to local authorities created incentives and boosted competition based on market forces.
At the same time, this development-oriented leadership requires a high-quality public management system to effectively regulate market forces and make them work for the overall development objectives. According to a World Bank report, the most outstanding lesson to be drawn from the Chinese experience is how critical committed and pragmatic leadership is “to try new ideas, evaluate results and then expand the ones that work.”
The other lesson is the importance of reforming and investing in agriculture. China’s success in poverty reduction demonstrates the importance of revitalising agriculture in the early stages of growth and to support this through direct public policies as well as creating market incentives.
As part of its pragmatic approach, Chinese leadership implemented market-oriented policies that reflected the specific realities of the country. China restrained itself from implementing some of the market fundamentalist prescriptions of the IMF and the World Bank. A gradual approach was followed to open the economy to foreign trade and investment. Many countries that liberalised much quicker have worse records of sustaining economic growth and combating poverty.
China opened its economy at its own pace by cautiously evaluating its gains. Reform was based on the right policy of incentives and comparative advantage. The government created the right policy frameworks to incentivise the peasants and the private sector. The lesson is that liberalisation of trade and foreign direct investment by itself will not contribute to economic growth if they are not based on specific comparative advantages of a country.
According to the 10-year poverty reduction report of the United Nations, Ethiopia is now recognised as having one of the fastest growing economies in the world. This rapid growth has been inclusive and job-rich. As the report indicates, “Ethiopia’s structural transformation process is being driven by a strong developmental state with a long-term, inclusive and unifying national vision centred on income growth and poverty reduction.” This good news should bring a more vigorous interest to learn from China’s miraculous development path.
As a developmental state, the Ethiopian government should continue to learn from other successful models. While acknowledging the economic results, it may be important to highlight that the Chinese path reaffirms that structural transformation and diversification could not happen without comprehensive rural economic development. Continuous increase in agricultural productivity and production and ensuring household food security, would, inter alia, make raw materials and labour available to encourage a successful industrialisation process.
To effectively lead the manufacturing sector, the government should get the incentives right, as the Chinese did, to create and foster a national private sector that engages in value addition industrial business as well as to attract foreign companies that contribute for job creation, and transfer of knowledge and skill.
The other important lesson for Ethiopia could be the necessity of building an efficient and effective civil service. According to a report by the UN Economic Commission for Africa, if leadership commitment, state autonomy and right policies are considered software, developmental bureaucracy is its hardware. Ethiopia should take important lessons from China and other developmental states, particularly Singapore, to build a high-quality public management sector. This is key to consolidate development.
Finally, exercising policy autonomy without sufficient fiscal space will be difficult. As the Chinese case demonstrates, one of the reliable means to finance development is promoting export by identifying specific roles and tasks in the global value chain. In this regard, the sluggish performance of the Ethiopian export sector does not serve the vision of the country. The sector must improve its weak performance to contribute to finance the ambitious development projects.
The development path of any country is unique, as each one has its own distinct political, economic and social contexts. That’s why the Chinese development experience may not be repeated entirely in any other country. Developing countries should not copy China or any other model. What is more practical for developing countries is to draw a lesson and adapt to their own particular circumstances.