The Great Leap Upward: The Chinese Economy's Take-Off Has Been Little Short of Vertical, but Does It Represent an Industrial Revolution Based More on Low-Cost Labour Than on Technological Advancement? Ron Matthews and Zhang Yan Chart Beijing's Economic Liberalisation Agenda and Investigate the Effects of Foreign Direct Investment in the Country

By Matthews, Ron; Yan, Zhang | Financial Management (UK), October 2004 | Go to article overview
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The Great Leap Upward: The Chinese Economy's Take-Off Has Been Little Short of Vertical, but Does It Represent an Industrial Revolution Based More on Low-Cost Labour Than on Technological Advancement? Ron Matthews and Zhang Yan Chart Beijing's Economic Liberalisation Agenda and Investigate the Effects of Foreign Direct Investment in the Country


Matthews, Ron, Yan, Zhang, Financial Management (UK)


China's current economic transformation is without doubt the greatest industrial revolution the world has seen. From nowhere, the nation's economy has become enormous, now accounting for about 12 per cent of global gross domestic product. In dollar terms its GDP is the sixth-biggest in the world--only slightly smaller than that of France and likely to overtake the UK's by 2006. After adjusting for price differences between economies, its GDP is second only to that of the US.

This phenomenal expansion raises several questions: what impact has it had on the world economy? Have economic liberalisation and foreign direct investment (FDI) been the main reasons for it? If so, what are the characteristics of the governments FDI policy? Has FDI been aimed at particular sectors? Lastly, and perhaps most importantly, has FDI improved Chinas industrial capability, or is it simply a veneer masking the country's continuing technological dependency on more advanced nations?

The country's increasing economic strength is inevitably affecting world trading patterns. It is now the fourth-largest exporter, with overseas sales recording a stellar 50 per cent rise in 2002-03, reaching $480 billion. Trade with the US accounted for well over 60 per cent of this, making China the largest exporter of goods to the States. Its growth surge is also affecting the import side of the international trade equation. China will soon become the world's third-largest importer after the US and Germany. This has helped to rekindle Japan's ailing economy and, more generally, acted as a locomotive for pan-Asian growth.

There are many factors that account for this remarkable boom, but three stand out as arguably the most influential. First, Chinas huge population has proved to be a powerful driver for change. The economy's successful growth profile has reversed traditional thinking on the demographics of economic development. Big populations are now seen as a boon rather than a bane.

From the demand perspective, China's middle class of 400 million constitutes a huge repository of purchasing power. Supply-side benefits also derive from big populations: the total population of 1.3 billion has unsurprisingly had the Malthusian effect of squeezing labour costs, with unskilled workers earning as little as 50 cents an hour. Improvements in productivity and the incessant expansion of the labour supply have recently led manufacturing costs to decline by 1 per cent a year, providing a strong lure for foreign companies.

The second key factor has been Beijing's economic liberalisation agenda. Here again Chinas development path has veered from the traditional route. It is unique in that communism and capitalism coexist. Although the government has encouraged a profit-driven culture, key facets of the command economy apparatus still work in tandem with it. Despite China's huge swathe of moribund state-owned enterprises, protected by the highly interventionist policies of the central planning regime, this hybrid has led to explosive growth. Although Chinas growth last year fell to 9 per cent, it was still more than four times better than that of the UK, Europe's top-performing economy in 2003.

The third key factor underpinning China's economic success is FDI. In 1990 it received $5.5 billion in foreign investment. By 2003 this figure had grown to $57 billion, making China the biggest FDI recipient in the world. Research suggests that foreign capital brings forth benefits through exposure to modern manufacturing methods, leading to increases in capital intensity and labour productivity. This in turn acts as a catalyst for industrialisation. Of course, FDI has its disadvantages, conventionally embodied in what's known as dependencia theory. This argues that foreign enterprise exploits the host economy's markets, promoting little in the way of skilled labour, subcontractor links and added value. In China, both the authorities and foreign companies have carefully measured the net effect of FDI and they seem to agree that the benefits outweigh the costs.

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The Great Leap Upward: The Chinese Economy's Take-Off Has Been Little Short of Vertical, but Does It Represent an Industrial Revolution Based More on Low-Cost Labour Than on Technological Advancement? Ron Matthews and Zhang Yan Chart Beijing's Economic Liberalisation Agenda and Investigate the Effects of Foreign Direct Investment in the Country
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