Is China Really So Different?

GG 2020 - 15th August 2010

By Rajeev Sibal

I couldn’t help but write about China in my blog post.  Having recently returned from our GG2020 Shanghai session, I have an entirely new impression of the country.  In some ways my expectations were exceeded but in other ways, my stereotypes were confirmed.  As a political economist interested in questions of developmental economics, I found the country to be intellectually challenging.  Many contradictions exist in China, and while contradictions are endemic to developing countries, those in China are in many ways more profound. 

The global imbalances debate is a great place to start because of the breadth of issues that it uncovers.  On the one hand, you have Americans accusing the Chinese of currency manipulation, or maintaining an undervalued currency, depending on how politically correct you are.  On the other hand, the Chinese identify the lack of a savings culture and the credit binge that plagues the American economy as sources of the imbalance.  These two perspectives generally dominate discourse, but a third perspective exists.  Perhaps best epitomized by Dooley, Folkarts-Landau, and Garber (DFLG), the argument views the imbalances as a sustainable characteristic of the international political economy.  DFLG posit that the world is divided into a core and a periphery, that the core acts like a bank for the periphery to develop, and that the arrangement is not only mutually beneficial but is also sustainable.  How you perceive the effects of the imbalances and deciding who to blame is often a function of where you are from, how you are affected, and/or your opinions about how supply and demand drives economies. 

In terms of the global imbalance debate, I am not specifically advocating one explanation in this blog.  I did make a bit of a more concerted argument on this topic in my first blog post.  My interest here is really China. 

I reference the DFLG argument (which I personally think conflates themes of development with macroeconomic stability – see Eichengreen for a reaction to the article) because it highlights a key developmental theme that is often overlooked.  Somebody familiar with development strategies would look at the DFLG argument with much less surprise than many.  Why?  Well, because China is simply executing a time-tested development strategy, where the periphery trades its way into the core.  After WWII, major imbalances resulted when Europe re-emerged as a key trading entity in the global economy.   A few years later Japan joined the club of prosperity through exports.  Export-oriented models have been at the centre of development policy for a long time.  So, in effect, China’s currency policy could be considered a way to execute an export-oriented model in a global economy that has mostly converted to floating exchange rates. 

What I am interested to see is how China attempts to move up the value chain (i.e. move into the core) now that it has achieved so much prosperity from labor-based export-oriented economic growth.  How are the Chinese authorities going to handle the efforts of itinerant laborers trying to climb higher on the value chain?  As labor becomes more expensive and wage demands become more frequent, the sustainability of an export-oriented model is undermined.  Where the Chinese case begins to be different is in the way the authorities handle the interests of domestic labor. 

The Chinese leadership has the unfortunate task of figuring out how to stimulate domestic demand before GDP growth slows to a rate that is below the “threshold of tolerance” of the Chinese populace.  If economic growth slows, the Chinese government may find itself trying to explain the merits of communism, or authoritarianism, depending on how politically correct you are, to a lot of unhappy capitalist laborers.  Certainly it is in the interest of the political leadership to avoid this confrontation, but in my opinion, the longer the exchange rate stays undervalued, the more subsidies that flow to manufacturing, and the larger the global imbalances that exacerbate this trend, the more volatile and painful the political correction will be when it comes.

So is China really all that different?  On the surface, perhaps it is not so different.  China has used a historically proven development model to lift hundreds of millions out of poverty.  The imbalances, which are very much a result of China’s size and a global systemic shift to floating exchange rates, were an unfortunate byproduct that now must be dealt with.  What is different about China is the relative position of labor in the political sphere and the precarious position of workers as they demand better wages and opportunities.  The few countries that actually made a shift up the value chain benefitted from cooperative relationships between the interests of labor, business, and the state.  I don’t think I would describe the relationship between these stakeholders in China as cooperative. 

Rajeev Sibal is a MPhil/PhD Candidate at the London School of Economics.