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China’s Export-Led Growth Research Paper


Introduction

The export sector is an integral part of China’s economy since it accounts for nearly 35% of the country’s GDP. Despite its importance, depending on export earnings is considered unsustainable in China. This research paper will evaluate the role of the export-led growth strategy in China.

The study will answer the following questions. First, what is the contribution of exports to China’s economic growth and development? Second, what are the challenges associated with China’s export-led growth strategy? Third, is the export-led growth strategy sustainable in China? Finally, which strategy should the country adopt to address the challenges created by the export-led strategy?

Contribution of Exports

Economic Growth and Development

China’s economy grew at an average annual rate of 10% in the last three decades. In 2011, China became the “second largest economy in the world after overtaking Japan” (Xing 2-12). This impressive achievement is mainly attributed to the export-led growth strategy, which the country pursues as part of its economic reforms. In order to implement the strategy, the government had to introduce incentives to attract foreign direct investment (FDI) (Xing 2-12).

This involved investing heavily in transport infrastructure and cheap sources of energy. In addition, tax incentives were used to motivate local and foreign companies to produce for the export market. The government also devalued the country’s exchange rate, thereby improving the competitiveness of exporters’ goods in international markets by making them cheap. The resulting expansion of businesses and increase in FDI enabled China to maintain a double-digit growth rate for nearly thirty years.

Poverty Eradication

The export-led growth strategy has played a critical role in reducing poverty in China. Between 1981 and 2001, the proportion of China’s population that lived below the poverty line reduced from 53% to 8.5% (Xing 2-12). By 2012, only 5% of the population was living below the poverty line. Overall, approximately “400 million people have been lifted above the poverty line since the introduction of the export-led growth strategy” (Akyuz 2-22).

The government of China focused on subsidizing exports, thereby enabling the rural populations that depended on agriculture to access external markets. This led to an increase in net income in the rural areas as shown in figure 1 in the appendix. The increase in household income enabled thousands of people to afford adequate shelter, education, healthcare, and other basic needs.

Job Creation

The export-led growth strategy led to a significant reduction in the level of unemployment in China. Several companies from the US and Europe have relocated their production facilities to China to take advantage of the opportunities created by the export-led growth strategy. One of the opportunities that attract foreign companies is availability of an efficient transportation system that reduce production and exportation costs (Razmi 1-33).

In addition, increased investment in education by the government enables foreign companies to access cheap skilled labour. As FDI increased in the manufacturing and service industries, millions of Chinese were able to find jobs in urban areas (Yao 1-29).

In the rural areas, improvement in agricultural export earnings promoted large-scale farming, which in turn created new employment opportunities. The reduction in unemployment rate was accompanied by an increase in personal incomes, which in turn improved the standards of living in the country.

Economic Integration

The export-led growth strategy facilitated the integration of China into the world economy. China has joined the WTO and signed bilateral and multilateral trade agreements with several trade blocs such as NAFTA, ASEAN, and the EU. One of the advantages of the trade integration is access to foreign capital. Foreign companies have formed joint ventures with Chinese firms, thereby enabling the later to access the capital that they need to expand their businesses (Akyuz 2-22).

Knowledge transfer and technological advancements have also been brought about by the economic integration. Producing for the export market promotes innovation and use of advanced technologies to overcome competition. As a result, Chinese companies have invested heavily in research and development. This has led to technological advancements in the country.

Moreover, local companies have benefited from knowledge transfer by learning from their foreign partners. For instance, China’s automobile manufacturers have focused on forming joint ventures with European car producers to access the technology that they need to improve the competitiveness of their products in the export market.

The Challenges of the Export-led Growth Strategy

Uneven Economic Growth

The export-led growth strategy has resulted into uneven economic growth in China in the following ways. First, the disparity in household incomes has significantly increased in the last three decades. The incomes of the richest households have been growing more rapidly than the wages earned by the middle-income and poor households.

This trend has been attributed to the fact that wages have not increased in tandem with corporate profits. In particular, the rich families that own businesses in key industries such as manufacturing have been keeping a large share of their profits rather than increasing the wages of their employees (Razmi 2-33).

Second, the country has experienced unequal economic growth in its provinces. Specifically, the inland provinces have lagged behind the coastal regions that continue to experience rapid economic growth. For instance, between 1978 and 2004 inland provinces reported an average annual economic growth rate of 5.9%, whereas coastal provinces grew at an average rate of 13.3% (Razmi 2-33).

One of the causes of the uneven growth is that investment in infrastructure favored coastal provinces whose strategic location was expected to promote exportation. As a result, most companies were established in coastal regions rather than inland provinces.

Finally, uneven growth has been experienced across various sectors of the economy. The government focused on developing the industrial sector at the expense of the service and agricultural sectors. For instance, the government subsidized importation of intermediate goods that were used in the manufacturing industry, as well as, limiting exportation of raw materials through quotas.

This led to a rapid growth in the industrial sector of the economy. However, the service and agricultural sectors lagged behind due to inadequate investment by the government and private companies. For instance, the industrial sector accounts for 43.9% of GDP in China, whereas in the UK and the US it accounts for only 20.5% and 19.5% respectively (CIA). This shows that the share of China’s industrial sector in GDP is significantly higher than would be expected in a country at its level of development.

Low Domestic Consumption and Dependence on External Demand

The export-led growth strategy has led to low domestic consumption in the following ways. To begin with, the strategy limits the growth of household incomes in the country (Yao 1-29). Companies have focused on reinvesting their profits in order to increase their production capacities to satisfy the ever-increasing external demand. Consequently, wages in most industries have grown at a very low rate. Low income reduces domestic consumption since most citizens have a low purchasing power.

Domestic consumption has also remained low because of the country’s high saving rate. An average Chinese saves nearly a quarter of his/ her annual disposable income (Maggu 2-13). The high saving rate is attributed to the fact that the export-led growth strategy forced the government to increase spending on capital formation rather than providing social safety nets.

For instance, reduced funding of higher education and healthcare by the government has forced citizens to save in order to access basic services. However, the country’s aggregate consumption reduces as citizens focus on saving their incomes.

Moreover, much of the domestic savings is underutilized in China. Apart from the export sector, there are very little investment opportunities in other sectors such as the financial industry in China. This problem has been exacerbated by the capital account restrictions that limit investment of domestic savings in foreign markets.

Lack of consumer credit has also led to low domestic consumption. Most government owned banks prefer to lend to businesses rather than individuals to promote exports. As a result, individuals have limited access to credit, which is needed to increase domestic consumption. The low level of domestic consumption means that producers in China have to depend on the demand in other countries to sell all their goods (Akyuz 2-22). Thus, production in the country is heavily influenced by the business cycles of its major trading partners.

Sustainability of the Export-led Growth Strategy

The strategy is unsustainable because of the following reasons. First, increased integration into the world economy and dependence on external demand exposes China to adverse exogenous shocks. For instance, China is likely to experience a severe economic downturn if its major trading partners such as the US and the UK are in recession.

In this case, the downturn will be caused by the sharp reduction in external demand that supports China’s GDP growth. For instance, during the 2008/2009 global financial crisis, China’s GDP reduced to 6.1% in the first quarter of 2009 as exports declined due to low demand in North America and Europe (Xing 2-12).

Increased competition from emerging economies such as India and Brazil also limits the sustainability of China’s export-led growth strategy. China’s wage rates are expected to converge to those in European countries and the US in the next decade (Banister 2-6). As a result, cheap labor will no longer be a competitive advantage that helps China to improve the competitiveness of its exports. Consequently, China’s products will lose market share to cheap substitutes from countries such as India where labor costs are expected to remain low. This will lead to a reduction in GDP growth in China.

The income inequalities and uneven economic growth caused by the export-led growth strategy are also likely to cause political instability in future. Low household incomes and inadequate social protection are likely to cause dissent, which will eventually deteriorate into violent confrontations. Consequently, economic growth will decline.

The Solution

The challenges associated with exportation can be addressed by adopting a domestic consumption-led growth strategy. This will require reducing household savings, increasing household incomes, and providing consumer credit to increase domestic consumption (Maggu 2-13). The saving rate can be reduced by increasing government expenditure on social protection projects such as financing healthcare and higher education.

This will motivate citizens to spend instead of saving for precautionary purposes. In addition, the saving rate can be reduced by improving returns on assets. Specifically, the interests earned on bank deposits, T-bills, and government/ corporate bonds should be improved to enable savers to achieve their targets early. In this case, the interest will reduce the proportion of disposable income allocated to savings.

Household incomes can be increased by expanding the labor-intensive sectors of the economy such as the service industry. Moreover, providing credit to small and medium size enterprises (SMEs) will increase job opportunities (Maggu 2-13). The resulting increase in demand for labor will boost household incomes.

Improving domestic consumption will reduce China’s dependence on external demand. Thus, the country will avoid negative exogenous shocks. Moreover, it will reduce income inequalities since the government will have to increase wages in all parts of the country to improve domestic consumption.

Conclusion

The export-led growth strategy has helped China to achieve rapid economic growth. The strategy has also helped the country to reduce its unemployment rate and poverty in the rural and urban areas. However, the strategy has created challenges such as low domestic consumption, reliance on external demand, and uneven economic growth.

Thus, the strategy is not sustainable because it exposes the country to adverse exogenous shocks and creates inequalities that are likely to cause political instability. In this respect, the government of China should consider adopting a consumption-led growth strategy to achieve a balanced and sustainable economic growth.

Appendix

Growth in rural net income
Figure 1: Growth in rural net income

Works Cited

Akyuz, Y. “Export Dependence and Sustainability of China.” China and World Economy 19.1 (2011): 2-22. Print.

Banister, J. China’s Manufacturing Employment and Hourly Labor Compensation. Beijing: International Labor Commission, 2013. Print.

CIA. GDP Composition by Sector: China 2014. Web.

Maggu, A. How Should China Transition to a Consumption Driven Economy? Academic. Pune: SCMHRD Pune, 2012. Print.

Razmi, A. Is the Chinese Investment and Export-led Growth Model Sustainable? Some Rising Concerns. Academic. Amherst: Unversity of Massachusetts, 2008. Print.

Xing, Y. How Important is Exports and FDI for China’s Economic Growth? Academic. Tokyo: GRIPS, 2013. Print.

Yao, Y. The Double Transition and China’s Export-led Growth. Academic. Beijing: China Center for Economic Research, 2010. Print.

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