Academic journal article The McKinsey Quarterly

China's High Road to Economic Development

Academic journal article The McKinsey Quarterly

China's High Road to Economic Development

Article excerpt

An excerpt from China: The Next Economic Superpower

THE CHINESE ECONOMIC STRATEGY emphasizes an explosion of production and jobs outside the state enterprise sector. The fruits of rising productivity are then used to manage the problems of debt, state enterprise deficits, security threats, unemployment, infrastructure scarcity, and discontent over unequal degrees of progress by different sectors of society. This emphasis on construction produces more rapid growth, less inflation, and a greater sense of common interest than the Eastern European approach, which gives priority to destruction of the institutions of socialism rather than to construction of a productive market economy. The absence of a plan is not the same thing as the existence of a market.

The differences between Chinese and Soviet performance derive from profoundly different economic and political strategies. Much of the West long believed a myth that China was an impoverished version of the Soviet Union which must inexorably follow the latter's failures -- because, after all, both were communist countries. On the contrary, China has been following a model of development more similar to South Korea than to its formerly communist bedfellows.

Based on analysis of neighboring Asian countries, including most notably South Korea, Taiwan, Hong Kong, and Singapore, China's strategy of development has been distinctively Asian. For the Western shopper, there is very straightforward evidence. In major department stores the shoes, shirts, sweaters, and toys that once carried labels saying "Made in Korea" or "Made in Taiwan" now mostly say "Made in China." Virtually none say "Made in Russia."

From the lessons of the neighboring small countries, then, Deng Xiaoping and his colleagues derived superior strategies in four areas: economics, politics, administration, and financial markets.

Economics

Following the examples of the newly industrializing economies (NIEs), China gave priority to industries and sectors where limited government investments would produce rapid growth. First, they gave the farms back to the farmers, generating huge increases in productivity, income, and output with negligible state investment; the state's role was largely limited to issuing a legal ruling and using the existing administrative apparatus to enforce its decisions. Second, China was very encouraging to foreign investment. Although the incentives and rules governing foreign investment have required continual refinement, they were sufficiently generous to attract hugo amounts. This produced enormous gains in both output and exports at negligible cost to the government.

Finally, China gave priority to light and medium industry, where limited initial investment quickly yields a surge of output. Just as Taiwan and Hong Kong had flooded world markets with textiles, garments, shoes, toys, and consumer electronics in the 1960s and 1970s, China quickly became a global force in these same products for the 1980s and 1990s. As in the smaller Asian economic takeoffs, these policies caused an explosion of growth, consumer goods production, personal income, experts, and foreign exchange earnings.

In contrast, the Soviet Union neglected agriculture, was so ambivalent about foreign investment that it attracted very little, and devoted excessive attention to heavy industry. Gorbachev's early programs emphasized massive equipment imports, building more machines, intensified use of machine tools, organization of industry under super-ministries, improvement of the petroleum industry, and reorganization of the automobile and high-technology sectors -- all of which were capital-intensive industries. The later debate over privatization also focused excessive attention on industries with huge capital requirements and long lead-times, rather than the sectors of low costs and quick payoffs.(1)

Theories of development

These priorities pervade Soviet history and Marxist theory. …

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