China At Cross Road: What Can Be Learned From Previous Successful Examples

Written by Yajing Tu, GEI Associate

As the global economy has come into the sixth year after the 2008 crisis, the US and other advanced economies are gradually gaining more momentum to more balanced and normal (of a sorts) status. However, the emerging markets, such as China, are beginning to slow down the pace of development and upgrading their economies due to various reasons. Under such circumstances, successful stories of the “Four Asian Dragons” can shed some lights on what other countries’ governments and firms can do to stay competitive in the global market.

After two-decades of economic development, the four East Asian countries, Korea, Singapore, Taiwan and Hong Kong, achieved relatively similar levels in both GDP growth and per capita GPD growth. However, they adopted two different development philosophies to implement economic transformations. Hong Kong and Taiwan, both located in crucial areas controlling global ocean shipping which connects East Asia with the rest of the world, took a more laissez faire approach at the firm and individual level (micro level).

Put another way, the invisible hand was the dominate strategy. Government agencies focused on constantly lowering requirements of market entrance of the key sectors and strictly enforcing private property laws.  As a result, the cost of people and firms conducting transactions became lower and lower, the number of normal people owning small businesses increased remarkably. In addition, thanks to globalization and division of international production, these two small island countries were able to gear their domestic production and output towards the whole world demand, which in return, injected capital and human resources from overseas.

On the other hand, Singapore and Korea, which had more complex political and economic structure, drove their economic vehicles through strong government intervention.  Both viewed Japan as a role model. Although slightly different, Taiwan and Korea adopted various industrial policies to promote the “advantage sector”.  Ad hoc government industrial policies gave large state owned enterprises and banks easier access to cheap labor and capital.  The transaction costs among private firms were high due to high tax rates and monopolistic market powers. Nevertheless, corporations heavily subsidized by the state in these two countries did acquire competitive advantages in the global market and a few of them even dominate some western markets.

Many have explained the reasons behind these success stories and more even tried to copy the successful experience of “Four Dragon” economic miracles. But what are the things that can be applied to today’s emerging markets, especially China, to solve the economic development and upgrade dilemma is still not that clear. Although both China and the “Four Little Dragons” began their economic take off by taking the advantage of lower labor costs and international trade, they are still very different.

The reason that Hong Kong, Taiwan, Korean and Singapore could continuously develop and upgrade their economy is that they had a relative smooth transition from a manufacturing oriented economy to ones where the service industry weighed most in the GDP. Such movement not only formulated a large group of middle class that could in turn boost the economy through consumption but also provided high quality labor for corporations to hire and these transitions are achieved with low government interventions.

On the other hand, China still somehow stuck in the illusion of the “world factory” and the government prioritized the speed rather than the quality of economic development. The “four trillion stimulus package” that the government injected into the economy after the 2008 crisis is an example of such misleading theory. What is worse is that such great amount of capital went to industries with low productivity and low profitability. As a result, such similar transition might be more painful in China.

Such comparison may not be that contradistinctive but it is good enough for other countries to consider when choosing their own path. Fiscal conservatism might be a better option to consider. According to the World Bank’s 2014 Economic Prospects, the projected China’s GDP growth rated is 7.5%, compared with over 10% at the beginning of last decade. To further energize long-run China’s economy development, Hong Kong and Taiwan’s approaches are viable, because people and firms are losing interests in investing in new technology and hiring more people due to government manipulated market oligopoly. Therefore, reinvesting resources on service industries and lowering transaction costs are key policies that need to be adopted.

Work Cited:

• World Bank Global Economic Prospects2014 http://www.worldbank.org/en/publication/global-economic-prospects/regional-outlooks/eap