China’s economic model retains a dangerous allure

Twenty years ago Joshua Cooper Ramo, a consultant, first wrote about the “Beijing consensus”. The Washington consensus of financial liberalisation, floating currencies and openness to foreign capital was, he posited, a damaged brand. China was pioneering its own approach to development based on principles of equality, innovation and a relentless focus on sovereignty and national security. This would appeal to lots of developing countries.

In the years since, China’s leaders have mostly denied any ambition to export a state-led model of development. But they are sometimes more brazen. Last year, for instance, Xi Jinping argued in a speech to Communist Party officials that the country’s economic model “breaks the myth that modernisation equals Westernisation”, and that its growth was expanding “choices for developing countries”. Leaders past and present in the developing world—from Pakistan’s Imran Khan and Malaysia’s Mahathir Mohamad to Brazil’s Luiz Inácio Lula da Silva and South Africa’s Cyril Ramaphosa—have expounded the benefits of at least some aspects of the model. And since Mr Cooper Ramo first wrote about the Beijing consensus, the Chinese economy has quadrupled in size in real dollar terms, boosting the country’s diplomatic and military sway.

More recently, though, China’s economy has stumbled. Its recovery from covid-19 has been weak, limited by a property crisis, which has seen investment in the industry drop by almost a quarter in nominal terms since 2021. Efforts to boost manufacturing have produced clashes with Western powers, whose leaders accuse China of dumping underpriced goods. Given this gloomy context, surely demand for the China model is slipping? Not quite. As Kristalina Georgieva, head of the IMF, put it in a recent interview with Chinese state television: “I travel around the world and I see models of development that have come out of China replicated in other places.” To analyse the extent to which this is true, we have produced an index that measures how similar other economies are to China’s. It mostly confirms her conclusion. There is, moreover, reason to believe that China’s influence will continue to grow.

What exactly is the China model? Some of its better-known features can also be found in other East Asian success stories, including Japan, South Korea and Taiwan. Economies in all four countries are orientated towards exports and investment. For its part, China has had a current-account surplus for three decades. Its gross fixed capital formation, a measure of investment, runs to 42% of GDP, one of the highest shares in the world. A largely closed capital account prevents citizens from moving money abroad. Financial repression, the practice of keeping interest rates artificially low, ensures cheap bank financing for industries favoured by the state.

But there are other more distinctly Chinese elements. South Korea and Taiwan moved from autocratic to democratic rule while poorer than China is today. In Beijing there has been no political liberalisation, and the state’s economic power is enthusiastically wielded for political ends, including through the use of state-owned enterprises. That is particularly true in the financial sector. Despite the growth of private enterprise since the 1980s, officials have kept a tight grip on the banking system, with more than 50% of bank assets still held by state-owned lenders.

The country’s development has also depended on the use of special economic zones (SEZs), areas that offer companies and individuals more liberal tax and investment rules. These did not originate in China, but the most successful Chinese ones, such as the vast zones in Shenzhen and on Hainan Island, have provided the inspiration for copycats around the world. The number of SEZs has exploded. Today the Philippines alone hosts more of them than existed worldwide in 1995.

Beijing’s trendsetters
Using these seven measures—a country’s current-account balance, the openness of its capital account, the scale of its investment, the share of exports that are manufactured goods, the size of the state-owned banking system, its level of democracy and the number of large SEZs per person—we calculate how much other economies have in common with China (see table). Most similar of all is Vietnam, which has an export- and manufacturing-intensive economy governed by its own Communist Party. Australia and Britain, neither of which is ruled by communists, are among those at the bottom of the rankings. Greece’s economy is the least like China’s.

Other countries’ positions are perhaps more surprising. Although South Korea’s early development is often compared to China’s, the two countries have now diverged. Indeed, China now has more in common with Bangladesh and Turkey, both countries that aim to promote exports but which have more democratic politics. India and Ethiopia also resemble China, in part owing to their state-led banking systems. Meanwhile, Angola’s closed capital account pushes it up the ranks. All these countries also have SEZs.

Instead of a cookie-cutter economic model, what China offers developing-world leaders is reassurance they do not need to become more democratic in order to grow. As Charles Robertson of FIM partners, an emerging- and frontier-market investment firm, puts it: “For a very large part of the global south, China’s success is immensely attractive because it shows white Westerners don’t have all the answers.” Even if the growth on offer now seems less certain than before, the bargain still looks like a good one to many autocrats. Countries including Angola, Ethiopia and Tanzania are led by dominant parties that emerged from national-liberation movements, and have long been fond of state intervention, close management of trade and political control of credit. China provides them with less of a blueprint, and more of an excuse, says Ricardo Soares de Oliveira of the University of Oxford.

On top of this, China’s promotion of its model has stepped up a gear in recent years. Elizabeth Economy of Stanford University’s Hoover Institution argues that this activity reflects an increased desire to promote Chinese companies abroad. The International Liaison Department of the Communist Party has fostered ties with elites across the developing world. Its first overseas training school for foreign bureaucrats, in Tanzania, began to accept students in 2022. Even as China’s economic difficulties have become more obvious in the past year or so, praise for its development model has continued to flow from foreign leaders, including Shavkat Mirziyoyev of Uzbekistan, Vladimir Putin of Russia and Yoweri Museveni of Uganda.
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Unlike the Washington consensus, which was supported by the IMf and World Bank, the Beijing consensus has no international institutions pushing it. China’s lending also comes with fewer political conditions. But it is extensive and focused on industries typical of the China model. Between 2019 and 2023, some 76% of China’s overseas disbursements and construction activity, running to $541bn, was in just four sectors: energy, metals, property and transport. Similarly, Yu Zhang and colleagues at the Civil Aviation University of China have identified 103 SEZs outside China that are run by China’s Ministry of Commerce, with investment facilitated by these zones focusing on industries associated with the China model. As a result, host countries may find their economies becoming more Chinese.

Is adopting the Beijing consensus a good idea? Although Vietnam, Bangladesh and Ethiopia have introduced China-like policies, they have fallen far short of China-like growth. Meanwhile the likes of Georgia and Poland have shown that fast growth is possible in less authoritarian systems. Yasheng Huang of the Massachusetts Institute of Technology notes that developing economies could learn far more from China’s experience of economic liberalisation soon after Deng Xiaoping’s reforms began in 1978 than its more recent performance. During the decade that followed, Chinese personal incomes rose faster than GDP, rural entrepreneurship boomed and the country flitted between a current-account surplus and deficit. “China did not have a mercantilist growth model in the 1980s,” says Mr Huang.

Countries that prioritise the expansion of the state, infrastructure, exports and heavy industry may find themselves struggling. Mr Huang cites Pakistan as one such example. Its literacy rate is still below 60%, but the government is nevertheless concentrating investment on energy, rail and the China-Pakistan Economic Corridor, a web of infrastructure projects that cross the border between the two countries. In other places, too, the Chinese economy is still looked upon with admiration, particularly by elites who have little intention of liberalising. Despite China’s struggles, the Beijing consensus is holding firm.
Source: The Economist