Contemporary

Models of
Economic
Development and
Underdevelopment

Case 3: Understanding
a Development
Miracle: China
Name: Vanessa Canoog Date: 12/05/2023
Year and Section: BSMA 3 Schedule: TTHS 7:30 – 8:30 pm

CASE 3: UNDERSTANDING A DEVELOPMENT MIRACLE: CHINA

I. Facts of the Case

China
Land Area Approximately 9.6 million sq km
Population Over 1.4 billion
GDP $16 trillion USD
GNI $14 trillion USD
Per Capita $10,000 USD
Religion Officially atheist; diverse beliefs
Literacy Rate Over 95%
Birth Rate Around 11 births per 1,000 people
Mortality Rate About 7 deaths per 1,000 people
Poverty Level Officially declared eradication of extreme
poverty in rural areas in 2020, though
challenges persist.

• China's success challenges conventional development theories, as it combines

elements of market-oriented policies with weak institutional rankings.
• Market incentives and globalization played a role in China's growth, but the
country also employed activist industrial policies and achieved high agricultural
productivity.
• Contrary to the free-market model, China's limited privatization of state-owned
enterprises and unique economic structure contributed to its success.
• The influence of regional "demonstration" models, such as Japan, Hong Kong,
and Taiwan, played a crucial role in shaping China's development strategy,
especially in export-oriented industrialization.
• By the late 1980s, China became a focal point for investors attracted by its
potential market of over 1.3 billion consumers.
• The Chinese government facilitated investments by demanding technology
transfer, business partnerships, and concessions, leading to the establishment of
special economic zones.
• Early investments in China led to agglomeration benefits, creating a self-
reinforcing cycle of economic activity.
• As wages increased, production expanded westward, fueled by China's vast
population of low-income farmers.
• Despite doubts following the Tiananmen Square protests in 1989, a visit by Deng
Xiaoping in 1991 helped coordinate expectations and led to a burst of investment,
growth, and policy reforms.
• The Chinese government used centralized authority to coordinate investments
across industries and negotiate favorable deals.
• Despite initial failures in central planning, China's emphasis on basic health and
education, combined with fertility reduction policies, set the stage for later
growth.
• Investments in education and health contributed to a skilled workforce, giving
China a competitive edge.
• Debates surround whether China's growth is due to capital accumulation or
productivity gains.
• Research suggests that productivity growth surpassed investment as the primary
source of China's economic expansion, with a focus on adopting foreign
technology and improving institutions.
• Concerns exist about a potential investment bubble, particularly in real estate and
certain sectors.
• Recent research suggests that productivity growth, especially in the non-
agricultural, non-state-owned sector, remains a critical driver of China's rapid
development.
• In contrast to the conventional approach of developing inclusive institutions,
China's economic success is notable despite weak property rights, contract
enforcement, and checks on executive authority.
• Deng Xiaoping's metaphor of "crossing the river by feeling the stones" reflects
China's gradual and step-by-step approach to economic reforms.
• China introduced market incentives gradually, implementing reforms on the
margin instead of a sudden comprehensive change.
• The "dual-track" system allowed for coexistence of new and old institutions,
preserving some aspects of central planning while simulating the efficiency of a
competitive market.
• State-owned enterprises (SOEs) remained in government hands for an extended
period, with a focus on internal reform. Privatization occurred gradually, allowing
a new, more efficient sector to emerge.
• China's transitional institutions aimed to improve efficiency while compensating
potential losers, preserving legitimacy and reducing the risk of political backlash.
• The "take off the red hat" strategy symbolized the shift from vague local-
government ownership of enterprises to private ownership, benefiting from
reforms while protecting against potential government hostility.
• Fiscal and financial reforms maintained a balance between efficiency and local
government responsibilities, with anonymous banking accounts providing
protection against arbitrary taxation.
• Land reforms in rural areas supported agriculture and entrepreneurship,
contributing to poverty reduction and income growth.
• Remittances from migrant workers fueled a service-sector boom in some rural
areas, and rising prices benefited farmers, particularly near urban areas.
• Despite remarkable economic growth, challenges loom, and China's successes
need to be kept in perspective.
• China's high rate of domestic saving, associated with a trade surplus, raises
concerns about the sustainability of such rates and the pivot toward local
consumption.
• Acknowledging the inevitability of slowing growth, policymakers are preparing
for the challenges associated with reaching developed country status.
• Social challenges include rising inequality, official corruption, reports of land
grabs, increasing local taxes, and minimal improvements in technology or skills.
• The environmental crisis in China, marked by severe pollution and health
problems, is a growing concern. Many of the world's most polluted cities are
located in China, impacting life expectancy and causing serious health issues.
• China faces looming water shortages that could impact industries, coal
production, and agriculture.
• Environmental challenges are not solely attributed to global climate change but
also to poor national management.
• China, despite producing one-tenth of global output, consumes nearly one-fifth of
the world's energy, with coal being a major contributor to electricity production
and greenhouse gas emissions.
• Since 2007, China has faced challenges related to the safety of food, drugs, and
consumer products, damaging the international reputation of Chinese-made
goods.
• Product safety standards are low, and regulatory institutions need to catch up with
other aspects of economic development.
• China is concerned about the "middle-income trap" and recognizes the need for
innovation to avoid being stuck in resource-based activities.
• The IMF predicts a slower growth rate for China in the medium term, and the
challenge is to maintain sustainable growth of around 6.5% over the next three
decades.
• Structural imbalances include a high savings rate, large export surplus, and
unsustainable investment that may lead to economic crises.
• Concerns arise from the huge indebtedness of the state-owned enterprise (SOE)
sector and public debt, potentially leading to a significant financial crisis.
• Analysts have warned about the risk of "bubbles" in financial and housing
markets due to high rates of debt-financed investment.
• The adjustment from investment-led to consumption-led growth is essential but
challenging.
• There are political weaknesses in China, with some advocating for urgent political
reforms.
 • Rising inequality may undermine political stability and future growth
opportunities.
• Institutional reforms are crucial, and challenges may arise due to China's existing
political system.
• China is undergoing the largest migration in human history, with urbanization
reaching unprecedented levels.
• The demographic challenges include an aging population, a need for a modern
pension system, and responding to a shrinking workforce.
• The one-child policy has accelerated the demographic transition, leading to
concerns about an imbalanced male-to-female ratio.
• China's success may not be entirely replicable due to its unique characteristics,
such as homogeneity and a lack of political freedoms.
• Other developing countries may struggle to implement centrally designed policies
if democratic freedoms are present or if there is greater ethnic diversity.
• Natural resource abundance, often seen as an advantage, can lead to political
conflicts, while manufacturing success is more critical when a country lacks
natural resources.

II. Problem(s) of the Case

1. How to enhance poor product safety standards and worker safety concerns in
China?
2. How to address rapid urbanization, an aging population, and demographic
imbalances in China?
3. How to strengthen the political aspect, the need for political reforms and reduce
inequality?
4. How to reduce environmental crises, shortages of water and severe air pollution in
China?
5. How to manage high levels of debt, potential bubbles in financial and housing
markets, and imbalances in savings and investment in China?
6. How to avoid falling into the middle-income trap, unsustainable high growth
rates, and structural imbalances.
III. Solutions to the Problems
Problem 1
• Solution 1: To enhance poor product safety standards and worker safety
concerns, China should strengthen regulatory agencies and increase
penalties for companies violating safety standards.
• Solution 2: To enhance poor product safety standards and worker safety
concerns, China should implement regular safety training programs for
workers and encourage a culture of safety within industries.

Problem 2

• Solution 1: To address rapid urbanization, an aging population, and

demographic imbalances, China should develop sustainable urban
planning strategies to address challenges related to rapid urbanization.
• Solution 2: Implement policies that support family planning and provide
social security measures for the aging population.

Problem 3

• Solution 1: To strengthen the political aspect, the need for political

reforms and reduce inequality, China should initiate political reforms to
increase transparency, accountability, and citizen participation in decision-
making.
• Solution 2: To strengthen the political aspect, the need for political
reforms and reduce inequality, China should implement social policies
aimed at reducing income inequality, ensuring more equitable wealth
distribution.

Problem 4

• Solution 1: To reduce environmental crises, shortages of water and severe

air pollution, China should Invest in renewable energy sources and enforce
stricter environmental regulations to reduce pollution.
 • Solution 2: To reduce environmental crises, shortages of water and severe
air pollution, China should implement water conservation measures,
including efficient irrigation practices and the development of alternative
water sources.

Problem 5

• Solution 1: To manage high levels of debt, potential bubbles in financial

and housing markets, and imbalances in savings and investment, China
should implement measures to control and reduce the overall debt burden,
emphasizing responsible lending practices.
• Solution 2: To manage high levels of debt, potential bubbles in financial
and housing markets, and imbalances in savings and investment, China
should introduce targeted policies to address housing market imbalances
and prevent the formation of speculative bubbles.

Problem 6

• Solution 1: To avoid falling into the middle-income trap, unsustainable

high growth rates, and structural imbalances, China should foster
innovation through increased investment in research and development.
• Solution 2: To avoid falling into the middle-income trap, unsustainable
high growth rates, and structural imbalances, China should gradually
transition from an investment-driven to a consumption-driven economy,
promoting a more balanced economic structure.

IV. Recommendations
One particularly impactful solution among the identified strategies is the promotion
of innovation through increased investment in research and development (R&D).
Fostering innovation is critical for China's sustained economic growth and overcoming
the challenges associated with the middle-income trap. By allocating resources to
R&D, China can enhance its technological capabilities, leading to the development of
new products, services, and industries. Innovation not only drives productivity
 improvements but also allows the country to move up the value chain, reducing
dependence on low-cost manufacturing. This strategy addresses the need for economic
restructuring and can contribute to a more balanced and sustainable growth model.
Moreover, investing in innovation helps China stay competitive globally, attracting
foreign investment and fostering a culture of entrepreneurship. Ultimately, a
commitment to innovation not only positions China as a leader in emerging industries
but also ensures long-term economic resilience and adaptability to evolving global
trends.

V. Conclusions
The case examines China's economic development, highlighting its remarkable
growth since the late 1970s and the challenges it faces in sustaining this trajectory.
China's unique approach to economic reforms, characterized by gradual institutional
changes and a dual-track system, has contributed to significant economic expansion.
However, several problems have emerged, including environmental crises, high
savings rates, demographic challenges, and political weaknesses. The case underscores
the need for China to navigate these challenges effectively to avoid a middle-income
trap and achieve sustained, innovative growth. Solutions include addressing
environmental issues, rebalancing the economy, implementing effective social policies,
and particularly, prioritizing innovation through increased investment in research and
development. Successfully embracing innovation is crucial for China's economic
future, fostering technological advancements, global competitiveness, and long-term
resilience.
The case delves into several theories related to poverty, inequality, and development
in the context of China's economic evolution. One prominent theory focuses on the
positive impact of economic reforms in the late 1970s and 1980s on poverty reduction,
particularly in rural areas. Another theory emphasizes the shift in policy priorities in
the mid-1990s towards urban development, contributing to rising inequality. The
discussion also alludes to the idea that successful institutional reforms, particularly
transitional institutions tailored to specific contexts, play a crucial role in managing
economic challenges and compensating those adversely affected by reforms. Moreover,
the case touches on the concept that addressing poverty and inequality requires not just
economic measures but also institutional and political reforms to ensure sustainable
and inclusive development. The evolving nature of China's economic policies and their
consequences underscores the multifaceted nature of theories related to poverty,
inequality, and development.