Chinese development constraints and strategies

Carlos Aguiar de Medeiros is an associate professor at the Federal University of Rio de Janeiro (UFRJ). He holds a degree in Economics and a Master’s degree in Production Engineering from UFRJ and a PhD in Economic Science from the State University of Campinas (Unicamp). He mainly researches the following topics: development, unemployment, growth, technology, state, market, institutions, monetary standards, balance of payments, growth and industrialization, and international insertion.

In an interview to Panorama, Medeiros evaluates what has been central to the growth of China and points out that the country stands out for the production of sophisticated goods. He also looks at the food supply and environmental sustainability in the country and discusses changes in the China-U.S. relations after Trump’s victory in the U.S. election.

Panorama: Many analysts point out that China has been transitioning from a previously “export-led” model to a new growth strategy focused on the domestic market. Do you agree with this characterization? What kind of qualification can be done in this regard?

There is no consensus in the literature on the definition and measurement of an “export-led” growth model. It is clear that in China the share of gross exports in the final demand is high. However, the share of foreign value added in the Chinese exports is very high. Investment was the component with the strongest absolute and relative growth in the last decade. A share of this investment is associated with exports. The other share, larger than the previous one, is linked to the expansion of urbanization and heavy industry, led by state-owned enterprises. The central issue for China to grow (irrespective of its growth model) is to maintain high rates (at a time when the world economy is growing at reduced rates) and to build a “harmonious society”, i.e., a system of social protection and labor regulation laws, in order to reduce the inequality in the appropriation of income. This is not only an economic issue, but, above all, a political one.

Panorama: How can we qualify the results already achieved by the Chinese based on the efforts they have made in recent years to promote scientific and technological development?

China’s shift towards building an economy focused on innovation and not only on the production of sophisticated goods with foreign technology took place in the 2000s and was largely driven by strategic concerns associated with both defense and energy. It has resulted in a vast expansion of research and development (R&D) resources, largely funded by Chinese companies, strong demand and government funding for technologically strategic areas, such as semiconductors, space research, alternative energy, pharmaceuticals, infrastructure (communications and high-speed trains) and high-performance computers. It is largely based on Chinese firms (mainly state-owned ones), and the priority is the creation of proprietary technologies and domestic brands. Indeed, China is distinguished by the production of sophisticated goods, not by design and innovation activities. Changing this situation constitutes a government strategy of the 2000s. In terms of alternative energy, Chinese industry is in the state of the art; in aviation and space research, despite its important catching-up strategies, it remains out of date. With regard to the industry focused on information and communication technology, to date the great challenge has been the semiconductor area. There has been unquestionable progress in consumer electronics and other areas of high technological content in this industry, in an import substitution effort, including the more sophisticated activities of this production.

Panorama: One of the central issues of Chinese development has always been the food supply. Does this centrality persist? What kind of opportunity may arise from the point of view of foreign trade?

Certainly, China’s amount of arable land per capita available is one of the most limited in the world and due to the urbanization process the Chinese have been changing their eating habits. The opportunity is there. China has now become the world’s largest importer of soybeans and other agricultural commodities. This demand tends to continue to grow in absolute terms, albeit at a declining pace as the level of income raises.

Panorama: To what extent do environmental sustainability issues matter in China’s case?

Environmental degradation and pollution are a central issue in an economy still largely powered by coal. On the other hand, the high expansion of the automobile industry has increased CO2 emissions. The last five-year plans highlight and prioritize alternative sources of energy (wind, electric), but despite their substantial expansion, they still do not constitute a real energy alternative.

Panorama: In general, what are the main internal or external social changes brought about by the strong Chinese development of the last few decades? How do they challenge its continuity?

The main internal social change has been the dissolution, since the 1980s, of social control and regulation institutions centered on the commune and on state factories and the adoption of capitalist institutions based on wage employment and on the market, albeit in a transition process in which the State remains in control of the land, the credit and, in general, the investment rate. In this state-regulated capitalism, social conflict is big regarding both the expropriation of land and the regulation of labor, the wage rate, and the introduction of social rights. The Chinese government is moving ahead in building a still incipient Welfare State (minimum income, welfare, health), and the prospects are positive, but with results in the medium and long terms.

Panorama: With Trump’s victory in the U.S. and his apparent proximity to Russia, what is going to happen to the chess game of international relations involving China?

It is too early to speculate, but the changes might be less discontinuous than one might think based on the temperament and style of the American president. In fact, he suspended the U.S. involvement in the Transpacific Agreement, an agreement built precisely to isolate China and to expand U.S. trade with the Asian countries that are China’s trading partners. There may be some rise in tariffs on Chinese exports and systematic accusations of exchange manipulation, but I do not believe that substantial changes can occur in the U.S.-China trade relationship, because there is great complementarity in this trade, and strictly all large American companies either export to China or produce in China and export from there. Regardless of the negative balance, the U.S. exports to China have grown substantially in recent years. China is now the largest holder of U.S. treasury bonds, with more than a trillion dollars. Reapproaching Taiwan and denying the principle of a single China could have a drastic effect on the historic relationship with Beijing, but the U.S. government has already withdrawn. Penalizing China with criticism about its expansion in the South Seas or through a closer rapprochement with Japan has not changed anything substantially. China’s priority is to rebuild and to expand its trade relations with the “silk route” countries and achieve trade liberalization, and investments in infrastructure funded by Chinese banks are a central strategy.