Jan 10 2019

3 Reasons For China’s Rapid Economic Development and Future Predictions

On June 23, 1989, the Wall Street Journal released a publication outlining what the global economy would look like in 25 years’ time.

The publication selected countries that were thought to be growth leaders and another list of countries that would-be growth lagging nations.

China, was on the latter list. WSJ claimed China would fail to release “the stultifying bureaucracy of hardline communism.”

So, what happened in between that changed the economic landscape of China?

Here are three key factors that helped China defy the skeptics:

1. Creation of Special Economic Zones

This allowed foreign countries to set up factories that imported inputs and exported final outputs, free from the interference of government action.

As Chinese reformers took more action the number of SEZ’s increased from 20 in 1991 to 150 in 2010.

FDI surged from 0.7% of GDP in the 1980s surged to 4.2% in the 1990s and 2010s.

2. China’s manufacturing “comparative advantage

What do economists mean by comparative advantage? A general definition could be, “a country that is producing more of a good in terms of another good, relative to another country.”

What this meant, was that China could produce manufactured goods at a cheaper rate, because of the magnitude of its manufacturing “factory” prowess.

The reason for China’s manufacturing prowess? You could largely owe this to the abundant supply of Labour relative to the rest of the world. The massive increase in China’s industrial Labour force – resulting from the reduced collectivization of agriculture, closing of inefficient state owned enterprises, and finally the migration of 250 million workers from farms to cities.

What this means in basic terms- China is demanding raw materials, increasing production in manufacturing, and then consequently producing masses of goods and services to the rest of the world.

3. Introduction to the World Trade Organisation

WTO membership forced China to idle many of the state-owned manufacturing enterprises, moving toward compliance of WTO provisions that sanction state subsidies for domestic industries. Capital and labor – key components in a nation’s economic growth, were allocated from less productive state enterprises, to the more efficient privately owned manufacturing plants.

China’s manufacturing value increased from 4.1% in 1991 to 24 % in 2012. Over 1990 to 2013, China’s manufacturing sector averaged 88% of China’s merchandise exports. This large concentration represented a large net global supply shock for manufacturing and a large net positive demand shock for raw materials.

So how can China keep up their rapid economic development?

The economic landscape is quickly changing. For China to keep up with the rest of the world they need to watch out for the following future insights:

  • China may need to innovate more heavily as the world enters greater automation expectations into the future, human Labor will become less significant in the future.
  • The world is quickly becoming services orientated. As such its necessary to attack the key components surrounding things that machines cannot do. Artificial intelligence is one of the areas that are quickly becoming more important in the global economy. China needs to work more around the emotional side of things, so they can complement the work machines are expected to do.
  • Cyber security will be a bigger worry, and protecting data may be a key to protecting private and sensitive data. China must adapt to such threats.
  • Understanding data, as we are living in a data rich period. Human insights will be key to knowing the ways to adapt in an ever-changing world

The economist, John Maynard Keynes once said, “We are all dead in the long run.” Lets see how China survives in the long run… Only time will tell.

Henry Yu, is a guest blogger and current China Universities intern, and an economist at Monash University

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