1. CHINA’S RISING ECONOMIC POWER
Tomas Vaclavicek, SID: 40078080
Essay for Economic Transformation of China
INTRODUCTION
On 2014, newspaper titles around the World announced that in terms of GDP in
purchasing power parity, People’s Republic of China (henceforth abbreviated as China) became
the largest economy in the world. The event came earlier than estimated by most analysts, with
The Economist expecting this event in 2016 in its 2011 infographic. When we look at a number of
other indicators, it seems that this only illustrates a broader trend of China as a rising economic
power – a trend that began around 1978.
The hypothesis of this essay states that China has made remarkable progress in its
economic development over the last 37 years and that this development cannot be explained
purely by state interventions in the economy or “Chinese characteristics” presented under the
flagship of Beijing consensus. To evaluate this hypothesis, the essay briefly describes the
economic progress made by China between 1978 and 2015 and analyzes different viewpoints
explaining why we can observe such a dramatic change in living conditions. Further, it names
some of the key risks to the Chinese model of development1 today and briefly interprets
suggested policy responses based on the framework discussed above.
KEY DEVELOPMENTS IN CHINESE ECONOMY
Even before 2014, signs of catching up with the US economy were numerous. As soon as
2004, the contribution of Chinese economy to World economic growth surpassed that of the USA
(Huang, 2011), as the fast growth rate of the economy paired up with an ever higher economic
base. In 2010, China overtook USA in terms of value added by the manufacturing sector. (KKR,
2012) Coupled with China’s rise to the role of World’s leading exporter, FDI recipient and net
lender (Morrison, 2015), the global rise of China’s economic importance in undeniable. Therefore,
the following paragraphs will focus more the economic situation of the people of China, to see
whether it confirms this story.
Just in 8 years between 2002 and 2010, hourly wages in manufacturing in China have risen
by stunning 231%, compared to only 26% in the US, leading to a major improvement in living
1
Some authors claim that there is no single Chinese development model. For simplicity, this debate is omitted
here. Further discussion of this issue may be found in M. Pearson’s essay Variety within and without in Kennedy, S.
(2011). Beyond the Middle Kingdom. Stanford, Calif.: Stanford University Press.

2. standards. (KKR, 2012) This in turn also means that Chinese labor costs are on the rise and that
for China to sustain its growth, it cannot hope to compete only in terms of “cheap labor”.
The poor people whose conditions have improved are strengthening the middle class,
which is reported to be strongly rising as a percentage of the population. McKinsey (2013) defines
the middle class as people earning between 9 000 and 34 000 USD per year and reports that as of
2012, full 68% of urban households belong to this income band, up from only 4% just 12 years
before. (McKinsey, 2013) This is accompanied by a large growth of private consumption,
averaging 8.9% p.a. between 2005 and 2014. (Morrison, 2015)
Since economic conditions in China have favored urban residents, it might be useful to
look also on the poor people, concentrated mainly in rural areas of China. As a result of the
reforms, China has also achieved an enormous success in lifting as much as 679 million people
out of extreme poverty. (Morrison, 2015) Even in rural areas, poverty rate has decreased
significantly. In 1985, 12% of rural population were below poverty line, while in 2003 this
percentage shrinked to 3.5%. (Chow, 2010)
On the other hand, one economic factor in which China has underperformed other
“Miracle economies” of the past such as Japan or South Korea is the global competitiveness of its
companies, which Kroeber (2011) interprets as a result of the government efforts to keep control
of large corporation in the hand of the state, which probably resulted in the loss of economic
potential.
Some economists say that Chinese statistical data provide a largely mistake picture of the
Chinese economy, either due to significant mistakes with collecting data or as a result of
deliberate falsification. If true, that would mean that we could not rely on the official statistics
presented above to evaluate China’s economic progress in last decades. While Gregory Chow
(2010) acknowledges possible mistakes in collection of data, he largely refutes the idea that the
average growth rate of Chinese economy over the last decades could be overestimated by
analyzing a rival theory in depth and showing how large and visible consequences would a slightly
lower growth rate have when accumulated over time. Therefore, it looks like the evaluation of
key trends based on official data suffices for this essay and overall, these data show a very
convincing support for calling the economic development of China a successful growth story.
THEORIES EXPLAINING CHINESE GROWTH
What policies have led to this impressive improvement in economic conditions? In
economic literature, there are two major streams of literature on Chinese economic
transformation. One approach is the traditional economic viewpoint of Washington consensus,
associated with free markets and favoring flexible exchange rates. The rival approach is so-called
Beijing consensus, a view promoted by Ramo which gained a large following in China.

3. Washington consensus views Chinese growth as a result of liberalization, decline of state
influence and interventions in the economy and the rise of private sector. (Huang, 2011) The
Beijing consensus instead claims that state-led industrial upgrading towards the most advanced
technologies is critical for a developing country and suggests that this is the major reason for
China’s fast pace of development along with a different, home-made globalization. (Ramo, 2004)
A comparison of qualitative factors influencing growth of China and India in a text by Wolf
(2011) seems to support the idea that China has been growing despite, rather than thanks to the
private sector, as it has weaker property rights and institutions. This might look even more
convincing when paired with data from the Index of Economic freedom, which shows that both
China and India have been placed consistently below the world average, with China currently
occupying 139th place out of 178. (Heritage Foundation, 2015) So perhaps one might feel tempted
to close the case, claiming that the Beijing consensus can better explain the Chinese economic
miracle. But is it so clear indeed?
First of all, we must distinguish a particular state – such as a present standing of China in
terms of economic freedom – from a process of transition, in which the country evolved from an
initial state towards a different constellation. From the point of view of the “state” variables, we
can indeed see that China does not yet embrace private property rights to the level corresponding
to the policies promoted by the Washington consensus and that in a number of ways if differs
from a model of market economy. On the other hand, if we look at the “flow”, the process through
which China is developing, we can see a gradual liberalization of the economy and evaluate its
pace, drivers and to what degree this liberalization has been a driver of economic progress.
Some authors identify distinct phases of the economic liberalization. Huang (2011) states
that while China embraced policies related to the Washington Consensus in the first years after
Deng Xiaoping took power, it moved towards a more statist model in 1990s. While this
classification provides an important insight, it might not be so simple, as data show that the share
of SOEs has been further decreasing in terms of number of companies, assets or value added.
(The Economist, 2011) Another classical measure of the level of state interventions in the
economy, Government consumption as percentage of GDP, suggests an almost unchanged level
with its hardly noticeable decline from 15% in 1981 to 13.6% in 2013 with no major trends up or
down. (World Bank, 2015) This measure however may not reflect government intervention in the
economy fully, as it would mean that the Chinese government plays a lower role in its economy
than its counterparts in the USA or UK. The overall level and trend in state interventions in the
economy in the last decades is hard to judge, as it seems to depend largely on which indicator we
use.
What can be explored more closely are counter-arguments against the Beijing consensus.
Fo instance, many authors mention township and village enterprises (TVEs) as an example of a

4. highly efficient production organized outside of the private sector and use this example to defend
the hypothesis that the state sector, rather than the private sector, has been the main growth
engine for China. In defence of the Washington consensus viewpoint, Huang (2011) demonstrates
that the majority of largely efficient TVEs have actually been owned privately and that privately
owned TVEs have been much more profitable. He supports these statements by micro-data on
TVEs. (Huang, 2011, p. 5)
Global Innovation Index also seems to speak against Ramo’s viewpoint, as he mentiones
state-led innovation as a key engine of the economy. But China is nowhere near the top in this
metric according to the data. (GII, 2015)
Further, Chow (2010) mentions that the decrese of rural poverty happened mainly due to
the introduction of household responsibility system and that their situation was further improved
when taxes on farmers were abolished and governance at local level was improved. All of these
features are typically associated rather with the Washington consensus approach and thus
support the idea that China has grown mostly due to gradual liberalization. Further, by my own
assessment, Ramo’s theory seems inadequately suported by micro-level data, while
counterarguments by his critics such as Huang go far to present convincing local-level
information.
Kennedy (2010) also attempts to refute the Beijing consensus, stating that it fails to
account for similarities of the Chinese model to growth models of other countries. While no
country can be considered as going exactly the same path as China, which countries might be the
most comparable? Political scientists interpret China’s progress most commonly in terms of
„Developmental state“ or „Patrimonialist state“ and their features. For instance, Kroeber (2011)
provides quite a comprehensive comparison of China with the developmental state model of 20th
century Japan or Korea. He finds a number of similarities, but also points out important
differences in policies and conditions, such as the rivalry with USA or much larger role of foreign
investments. (Kroeber, 2011) Together, this evidence suggests that it is hard to interpret China
purely through the lens of either developmental states or the Beijing consensus.
While there is disagreement on the policies that have driven the transformation, both
strings of literature agree that China has greatly risen its economic power since 1978 and that the
people of China have mostly benefited from this process. This clearly supports the first part of the
hypothesis and shows that evidence also generally supports its second part.
Also, since the developmental states of the 20th century often centred their efforts on a
creation of a strong private sector, there might be more common points between the two streams
of literature than the proponents of either are willing to admit. This way, it seems possible that
China has developed rapidly in the last decades due to a creation of a dynamic private sector with

5. the assistance of the state and amids a very gradual liberalization, which enabled the
entrepreneurial spirit of Chinese people to find ventures where it can flourish without opening
the economy too fast to a wide range of economic and political risks. Headey, Kanbur and Zhang
(2008) also perceive both explanations as intertwinned, mentioning that incentives, comparative
advantage, investment in human capital and other classiacal explanations play a role in China’s
economic development, but that both occured in the context of a strong state.
RISKS FOR THE FUTURE?
Between June and August 2015, Shanghai stock market has fallen by 43%, bringing
attention to growing risks in the Chinese economy. (Morrison, 2015) Chinese companies are
certainly not as dependent on capital market as their US counterparts, but since the importance
of capital markets has been rising in the last years (OECD, 2012) and since some of the problems
are connected to the banking sector, policy makers must take these signs seriously.
Huang (2011) points out that Chinese financial system has been overly supporting loss-
making state-owned enterprises instead of private companies, which could drive growth more.
Total debt in China has also grown dramatically in the years following the Global financial crisis,
reaching 282% of GDP in 2014, which is much higher than the average for developing countries.
(MGI, 2015) Only a handful of countries have witnessed such a fast rise in debt levels since 2007.
This probably helped to spur growth in the last decase, but now it can be viewed rather as a risky
development for the future. The reason would be that a resulting misallocation of resources can
bring about bad investments and bank losses. OECD (2012) highlights the trade linkages with
other countries which also make China more vulnerable to external development, even though
the rebalancing efforts happening since then can also decrease this dependence. At the same
time, as we could see in late summer 2015, concerns about Chinese growth sustainability can
have impacts around the globe.
Since there is a widely reported imbalance between investments and consumption, the
Chinese government is trying to implement policies aiming at closing this gap. But KKR (2012)
suggests that there is a trade-off between consumption level and GDP growth in China, which
would mean that the rebalancing can be very costly. From the economic perspective, this could
be explained by the Solow model of economic growth, under the assumption that savings rate is
still suboptimal. But given the extraordinarily large share of savings in China, I find this explanation
quite hard to believe. Therefore, the findings by KKR reflect the need for further research in the
topic, which could shed more light on the costs of rebalancing and provide useful policy guidance.
New policy responses have been announced very recently, in late November 2015. In
short, more liberalization measures are planned. The measures should include removal of internal
berriers to foreign and domestic trade, reform of the Hukou system and steps to improve market

6. access. (Shanghai Daily, 2015) Evaluating the reform plan based solely on the viewpoints
discussed in this essay such as the conclusions made by Huang (2011), this policy response seems
like a step in the right direction.
CONCLUSIONS
This short essay shows that China has evolved dramatically since 1978 and that its growing
economic power has also been reflected in growing incomes, living standards and economic
conditions. Since the impressive growth levels achieved in the last decades are not likely to be
sustainable in the future, some key risks to the Chinese model of economic development which
have appeared earlier this year are discussed as well.
The main viewpoints on the causes of the rise are discussed and compared with one
another, showing that there is strong evidence against the Beijing consensus paradigm which has
been popular among Chinese researchers since 2004. Private sector in China has played an
important role in its rapid economic development; a fact which some authors seem to
underestimate. One reason for this might be a false perception of township and village
enterprises (TVEs), which is reveled by Huang’s seminal work. This does not have to be with odds
with some other theories explored by economists and political scientists alike, as developmental
states of the 20th century also centred their bureaucratic efforts on the creation of a strong
private sector. Some features, such as the large role of SOEs after 37 years of economic transition,
can be considered uniquely Chinese, but there is vast evidence that what some would call
„Chinese economic miracle“ cannot be explained purely by such characteristics.

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