Experience to Be Learned from China's Development

Using the World Bank’s $1 per day income measure, the number of poor people in China is estimated to have dropped from about 490 million to 88 million from 1981 to 2016, a decline in poverty incidence from 49 percent to 6.9 percent. This large-scale poverty reduction has been achieved mainly through rapid economic growth. Official statistics show that real GDP grew an average 9.4 percent a year in 1979-2003, exceeding 10 percent in the first halves of the 1980s and 1990s. When we look back on this period of history, we will likely identify China’s reform and opening to the global economy as the single most important event. China’s reform has propelled the country from a poor, backward status to a rank as one of the largest and most important economies in the world. Economic growth has, in general, benefited the majority of the population including the poor and become the major force for poverty reduction in the past twenty years. Since the start of far-reaching economic reforms in the late 1970s, the growth has fueled a remarkable increase in per capita income helping to lift more people out of poverty than anywhere else in the world.

Etsub Birhanu, Senior Cooperation Expert of Bilateral Cooperation Directorate,  Ethiopian Ministry of Finance and Economic Cooperation

Fast economic growth in China has been realized through continuous reform and structural changes as well as opening up to international trade and knowledge transfer. Structural transformations included shifts from central planning to markets, from agriculture to manufacturing and services, and from a closed to a globally-integrated economy.

As poverty was widely dispersed across China’s rural areas in the early years of post-1979 reforms, growth in rural areas (along with rural-urban migration, which however has been limited) has been most important to reducing poverty. Arguably, there were some important but relatively easy gains by simply undoing failed policies, notably by de-collectivizing agriculture. It has been proved that household responsibility system delivered remarkable results in terms of poverty reduction as well as agricultural production and rural industries. Growth in the primary sector (largely agriculture) did much more to reduce poverty and inequality than growth in either the secondary or tertiary sectors. China’s experience holds the lesson that promoting agricultural and rural development is crucial to pro-poor growth in most low-income developing countries.

China’s achievements in rural poverty reduction have contributed greatly to the world poverty reduction efforts and have become the determinant factor in the effort to fulfill the Millennium Development Goals (MDGs). China’s prospects remain bright even in the midst of this global economic turbulence, and can offer lessons for other developing countries. Of course, China’s experience cannot simply be transferred to other countries. Each country’s situation is different. Still, countries can learn from each other, and right now there is more interest in China than in any other developing country.

There are many potential lessons from China’s success, I’ll focus on following three points in particular:

Suitable Reform Idea

The first lesson from China is not about what it did, but about how it went about the reform. People sometimes characterize China’s reform as“gradual,”but I don’t think that is accurate, given how much change has actually occurred in a relatively short period of time.“Pragmatic”is a better description. China really has followed the notion of“crossing the river by touching the stones”.

In many areas of reform, new ideas were first tested on a pilot basis, and things that worked scaled up rapidly. The household responsibility system began as local experimentation and then became national policy. One of the best examples is the opening to trade and foreign investment first in four special zones. Good results led quickly to an expansion of the opening to coastal cities, and then to the Pearl River and Yangtze River deltas, and finally the whole country.

Another good example of pragmatic reform is the power sector. In the early period China had serious power shortages. A State Council decree in 1985 allowed in new sources of financing–foreign and domestic, state and private–and pricing of this“new power”at a high tariff that allowed a good return to the investment. At the same time, the price of the“old power”from existing plants was kept low.

Economists argue that this kind of dual pricing causes distortions, but in China’s case it was a pragmatic compromise that allowed expansion of power generation without upsetting all the existing firms dependent on a low price of power. Within a relatively short time the“new power”expanded rapidly, while old power plants were gradually retired.

Open to Globalization

A second powerful lesson from China is the way in which the country has embraced globalization and shown that it can accelerate development.

Beginning in the mid-1980s, China has consistently been more open to imports and direct foreign investment than other developing countries at its per capita income.

When China’s import tariffs were still up in the 40 percent range around 1990, those of India, Pakistan, and many other large developing countries were in the 80-100 percent range. As China has liberalized and joined the WTO, it has brought tariffs down below 10 percent while many other developing countries keep theirs at 20 percent or above.

China has also been more open to direct foreign investment, and has become the largest recipient in the world. The direct investment brought new technology, management, training, and connection to global supply networks. It is one factor behind China’s steady record of productivity growth in manufacturing.

China has pioneered a unique model of openness that is worth studying. It welcomed imports and direct investment, but resisted portfolio flows of capital– “hot money”that can flow in and out easily. Many other developing countries did the opposite–they borrowed on international capital markets while restricting direct investment by multinationals.

The Chinese path also looks particularly smart right now during this global financial crisis. Some countries that opened to capital flows are now in difficulty, having trouble refinancing their debts. China, on the other hand, is in good fiscal and financial condition. The international firms that made direct investments here are not taking money out during the crisis.

Favorable Investment Climate

Being open to imports and direct investment will not have much effect on the economy unless there is a good investment climate. It is striking that China has many cities–especially on the coast, but also some inland now–that have very good investment climates in terms of infrastructure, logistics, and regulation. It is relatively easy to set up firms, move goods through ports and customs, get access to power and telecom. When we compare measures such as reliability of power supply, days to move goods through customs, and transportation time and costs, China’s coastal cities compare well to cities in other developing countries.

How did these good investment climates develop? Partly it is a natural response to the powerful incentives coming from connection to the global market. But also the competition among cities has been a healthy thing in China. China has a very decentralized fiscal system. This has some disadvantages in that it can allow a high degree of inequality to develop. But it also has the advantage that it provides local government strong incentives to create a good investment climate. Cities that succeed in attracting investment and labor grow extremely rapidly. Other cities are then inspired to learn from the leaders.

No other developing country can just copy what China did and get the same great results. But other countries can learn from China’s experience. Most useful is the“pragmatic”approach to reform. Try out policies where possible on a smaller scale, and then scale up ones that work. Second is to take advantage of globalization. Trade liberalization creates a competitive market that is good for innovation and enables successful firms to export and grow to a scale that is not possible in a small, closed market. Use foreign capital, but more for its technology, management, and networks than for the money. Be careful of the“hot money”flows that have been so destabilizing in the developing world. Furthermore, create incentives for your cities to compete to provide the best service in terms of infrastructure, logistics, and regulatory environment. These are lessons that any country–developing or developed–would be wise to absorb and adapt.

Etsub Birhanu is a Senior Cooperation Expert of Bilateral Cooperation Directorate,  Ethiopian Ministry of Finance and Economic Cooperation.

Opinion articles reflect the views of their authors only, not necessarily those of China.org.cn/Chinagate.cn.