The Chinese development model has been profoundly successful in recent decades, leading many to wonder if it could be replicated in other emerging market economies such as SA.
Characterised by high levels of state-led investment in infrastructure and government control over the economy, the model has won praise for the economic growth it has produced in China, but there are several reasons why it may not be easily replicated in SA.
One reason is the difference between the two countries’ state-owned enterprises (SOEs). The Chinese government’s effective management of SOEs, combined with access to much credit at low interest rates, has allowed them to invest heavily in infrastructure and industry. Most emerging market economies with floating exchange rates are unable to do this due to the effect issuing this debt is likely to have on their currencies.
In contrast, SA’s SOEs have been plagued by leadership failures, inefficiency and financial mismanagement. They must also borrow money at far higher interest rates, making capital expenditure more expensive. The government also has less room to recapitalise struggling SOEs due to fiscal constraints derived from low tax yields and high borrowing costs. As such, SA has been unable to achieve the same level of state-led economic growth as its Brics partner.
This is why some economists argue that a combination of austerity and high real interest rates may be counterproductive. After all, it is not just China that relies on low interest rates and government subsidies. Every Group of Seven country faces a budget deficit this year, and bar Germany, they all have a higher debt-to-GDP ratio than SA. As such, the benefit of austerity and high interest rates remain an ongoing debate in the country.
US President Joe Biden’s green energy subsidies are a notable example of this trend, which has included enormous bailouts for European energy companies as they transition away from Russian natural gas. This has caused several European energy firms to become nationalised, and has increased their debt beyond even those of Eskom relative to the size of the economies. Based on Bloomberg figures these debts comprise more than 10% of the EU’s GDP, compared with Eskom’s debt, which amounts to about 6% of the SA economy.
Drive consumption
Another reason the Chinese development model may not be easily replicated is that the Chinese government has much control over the financial system. This has allowed the government to implement policies such as currency controls, which helps stabilise the economy and encourages income to be reinvested in the country. This level of control is difficult to replicate in countries such as SA, which rely on financial support from jurisdictions that demand it retains open financial markets even if this leaves it vulnerable to capital outflows and external shocks.
In addition, China has a large domestic market, which has been a key driver of its economic growth. The country’s enormous population and rapidly growing middle class have helped drive domestic consumption, which has helped balance out the economy’s reliance on exports. Consumption overtook manufacturing as a share of the Chinese economy for the first time this year. Other emerging market economies such as SA lack such a large domestic market and tend to rely more on the fluctuating value of commodity exports.
China’s development model is also based on a unique combination of low-cost labour and a high-skilled workforce. The country has a large pool of cheap labour that has helped keep labour costs low, helping to make Chinese exports competitive.
The country has also been able to produce high-skilled workers that have helped drive technological innovation and productivity. Other emerging market economies may not have the same combination of both affordable and high-skilled labour, which may make it difficult for them to replicate China’s success.
This is considered a major obstacle to Brics partners such as India and SA’s ability to replicate the Chinese development model, as both countries have an excess of unskilled labour. According to recent Unesco data, China’s adult literacy rate is 94% compared with 77% in India. A greater proportion of the Chinese population has higher education compared with SA, with a gross enrolment rate in tertiary education of 64%, compared with 24% in SA.
Centralist approach
China and SA also have different historical and cultural backgrounds, which have shaped their approaches to state control of the economy and society. China has a long history of state control and central planning dating back to imperial times, allowing the country to successfully implement a state-led development model.
Until as recently as 1994 SA was a divided country led by a racist, authoritarian government, whose discriminatory policies had a lasting negative effect on the country’s economy and society. Ironically, the ANC has looked to maintain a centralist, state-led approach to governance, despite its history as a struggle movement against an overly bureaucratic state. This is likely due to the influence of the party’s historical socialist allies, including China.
While the state-led model of economic growth can succeed, it requires a number of conditions to be met, foremost among which is a competent government. A well-educated and skilled working age population must then be put to work in a well-capitalised private sector that is supported by high levels of state-led infrastructure spending.
This may only be possible if there is already a high degree of growth, and debt can be serviced affordably. SA may not be in a position to adopt such a model and could be better served by embracing a more libertarian economic policy.
Many have argued that the private sector would be willing to build infrastructure and grow the economy if the government implemented policies that encouraged this. But even if this approach proved effective it would remain politically contentious in a country where most businesses are still owned by minorities and foreigners.
As such, others would like to see SA follow the Chinese model, having witnessed that country’s enormous success.
• Shubitz is an independent Brics analyst.
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