The following article by Shiran Illanperuma, originally published in the Sri Lankan daily newspaper The Island, explores some of the key elements of China’s economic rise, in particular debunking the myth put forward by neoclassical economists that China is “the model par excellence of market liberalisation and the superiority of private sector driven growth”.
Shiran argues that the main competitive advantage of China’s labour force is not its low cost – after all, there are far cheaper labour markets in the world – but the fact that it is well-educated and healthy, and benefits from excellent transport and energy infrastructure. “This, combined with a domestic value chain, is China’s main strength and why economic growth has been combined with rising wages and standards of living.”
Foreign direct investment (FDI) has been leveraged very purposefully in China particularly from the 1990s onwards in order to develop the domestic economy, and to build up the country’s technological capabilities. Meanwhile, “state-owned enterprises (SOEs) are the elephant in the room when it comes to China’s development model”.
Broadly speaking, SOEs in China perform four ‘macroeconomic’ functions. First, they conduct the low-cost production of upstream inputs such as metals, chemicals, and rare earth minerals. Second, they manage essential commodity reserves and intervene in commodity markets to stabilise prices. Third, they engage in countercyclical spending on public works during economic downturns. Fourth, they are deployed to respond during emergencies and external shocks such as the 2008 Sichuan earthquake and the COVID-19 pandemic. The through line in these functions is to keep costs low and smoothen out business and commodity cycles. This is why China has not yet faced a recession comparable to many capitalist economies.
The leading role of the CPC in China’s economic strategy is also crucial:
The Communist Party of China, which has around 100 million members (almost five times the population of Sri Lanka!), has been key to the process of China’s development. The party remains committed to developing Marxist-Leninist philosophy and applying it to the country’s concrete conditions. It retains deep roots in all levels of Chinese society, engaging in consultation during the policymaking process.
As such, China’s remarkable rise cannot be separated from its system of Socialism with Chinese Characteristics.
Shiran Illanperuma is a researcher at Tricontinental: Institute for Social Research and a co-editor of Wenhua Zongheng: A Journal of Contemporary Chinese Thought
China’s rapid development over the last few decades has been the source of much debate among economists. Some claim China as the model par excellence of market liberalisation and the superiority of private sector driven growth. Others equally argue that China’s model is one of planning and state intervention.
On 28 March, I was invited by Nexus Research to deliver a presentation on China’s development model alongside former Ambassador to China Dr. Palitha Kohona. Unfortunately, the contents of this presentation have been misreported in an article in the Island published on 4 April (Dr Kohona: developing countries should covet China model). The article claimed that my presentation touched on “low-cost labour, foreign direct investments, and global trade agreements”. In fact, such simplistic tropes were precisely what I had intended to counter.
China’s development model challenges many of the axioms of neoclassical economics. If low-cost labour were the decisive factor for take-off, then investment should be pouring into much-cheaper labour markets in sub-Saharan Africa. On the contrary, rising wages in China have not led to the outflow of capital one would expect under such a model. This is because the advantage China offers is a healthy and skilled workforce (relative to price) and an infrastructural system that keeps non-wage operating costs (such as transport and energy) low. This, combined with a domestic value chain, is China’s main strength and why economic growth has been combined with rising wages and standards of living.
While foreign direct investment (FDI) has been a huge part of China’s success story, it is possible to overstate their importance. First, FDIs only really took off from the 1990s onwards, yet to begin there would be to ignore the decades of work done to develop the country’s agricultural self-sufficiency, basic industrial system, and institutional structure. Second, what has mattered for China is the quality of FDI, which is determined by government policy. By the standards of the OECD Foreign Direct Investment Regulatory Restrictiveness Index, China remains fairly selective on what FDI is allowed and encouraged. FDI is promoted not as an end in itself but as a means to acquire technology that should be transferred to national champions.
Role of Local Government
A significant portion of my presentation for Nexus Research was on the role of local governments economic policy – something that is often neglected (though there is a growing literature on the subject). China has a fairly decentralised system of governance, a product of its vast size and geography, as well as the institutional changes and experiments in direct democracy during the period of the Cultural Revolution.
Chinese economist Xiaohuan Lan, in his book How China Works (2024), has said that “In China, it is impossible to understand the economy without understanding the government.” While the central government in China formulates indicative plans and the overall goals and trajectory for development, implementation of these plans is delegated to local governments. Local governments have a broad remit to interpret these plans, experiment with implementation, and compete with each other for investment. This leads to a much more dynamic and decentralised development process that encourages grassroots participation.
A comparison between China and India on the share of public employment at different levels of government is very revealing. For China, over 60% of public employment is at the level of local government, with federal and state governments comprising less than 40% of employment. In contrast, less than 20% of Indian public employment is in local government. India, therefore, despite its much-touted linguistic federal system, is far more centralised than China. The weakness of Indian local governments remains a significant barrier for its development.
The Role of SOEs
State-owned enterprises (SOEs) are the elephant in the room when it comes to China’s development model. Chinese political scientist Prof. Zheng Yongnian said in 2011 that “the state sector is in fact important for China’s macroeconomic stability.” This is a radically different approach from neoclassical economics, which views macroeconomic policy purely through the lens of fiscal and monetary policy.
Broadly speaking, SOEs in China perform four ‘macroeconomic’ functions. First, they conduct the low-cost production of upstream inputs such as metals, chemicals, and rare earth minerals. Second, they manage essential commodity reserves and intervene in commodity markets to stabilise prices. Third, they engage in countercyclical spending on public works during economic downturns. Fourth, they are deployed to respond during emergencies and external shocks such as the 2008 Sichuan earthquake and the COVID-19 pandemic. The through line in these functions is to keep costs low and smoothen out business and commodity cycles. This is why China has not yet faced a recession comparable to many capitalist economies.
As a consequence of this model, SOEs remain a significantly large part of the Chinese economy in quantitative terms. According to data compiled by the Peterson Institute for International Economics, SOEs accounted for around 75% of the aggregate revenue of Chinese firms in the Fortune 500. While it is true these firms are often not as profitable as the private sector, this is by design, as they pass on low prices to domestic manufacturers.
China has entities such as the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) which facilitate the centralised governance and oversight of SOEs. This model is crucially different from the Temasek model often discussed in Sri Lanka. Under Temasek, SOEs are almost entirely market-oriented and depoliticised. This is not the case in China, where SOEs continue to play crucial social and political functions.
The Role of Competition
What confuses most observers of China is the fact that it very obviously has a fiercely competitive and dynamic private sector. How then to reconcile the preceding elaboration of the role of local government and SOEs with a competitive private sector? Local governments and SOEs provide the basic institutional framework and economic building blocks for the private sector to play its role in capital accumulation and innovation.
The competitive cycle in China could be broadly divided into four phases. In the first phase, incentives created by the central and local governments lead to a flood of investment in desired sectors and sub-sectors, resulting in the establishment of new firms and production capacity. In phase two, these incentives are eased, leading to fierce competition and survival of only the fittest firms. In phase three, once the market has reached a stage resembling monopoly, one of three tactics may be used: 1. Firms are forced to compete internationally and export; 2. monopoly firms are broken up by the state; or 3. monopoly firms are nationalised or brought under stronger state supervision. The system is designed to resist the market’s natural tendency towards monopolisation.
Political Leadership
The Chinese state has an exceptional ability to maintain what political sociologist Peter B. Evans calls ‘embedded autonomy’. It is close enough to the private sector to understand economic conditions and formulate policy but politically independent enough from capital to resist capture by private interests. This is a key difference between China’s development model and the developmentalism of East Asian states such as Japan and South Korea, where large private firms (zaibatsu in the former, chaebols in the latter) dominate political life.
China’s development model cannot be understood in isolation of its leadership system. The Communist Party of China, which has around 100 million members (almost five times the population of Sri Lanka!), has been key to the process of China’s development. The party remains committed to developing Marxist-Leninist philosophy and applying it to the country’s concrete conditions. It retains deep roots in all levels of Chinese society, engaging in consultation during the policymaking process.
To what extent China’s model can be replicated by other countries is an open question. While the CPC has often invited academics and political parties to study its system, this does not equate to the party attempting to export said system. There is no real ‘Beijing consensus’ that is equivalent to the ‘Washington consensus’. On the contrary, President Xi Jinping, in 2023, cautioned that modernisation “cannot be realised by a cookie-cutter approach”.
“For any country to achieve modernisation, it needs not only to follow the general laws governing the process but, more importantly, consider its own national conditions and unique features.”
