Thursday, April 22, 2010

Is China a Developing Country?

Is China a developing country? With all the hype about China's rapid rise, many seem to believe that China is now a "developed" country, like those in North America and Europe, and should follow the same rules as the rich countries. Steven Pearlstein put the case recently in the Washington Post:
As a developing economy, it was entitled to a grace period from the normal rules of global commerce as it transitioned from state control to open markets. But with China's extraordinary success, its grace period has now run its course.
The normal rules would mean things like allowing its currency to float freely, liberalizing trade, or adhering to the rules and regulations developed by the Organization for Economic Development and Cooperation, the club of 30 industrialized countries established in 1960 that has welcomed a handful of formerly "developing" countries since then, including Mexico (1994), Korea (1996) and Poland (1996).

But what makes Pearlstein think that China's extraordinary success has now brought it out of the developing country category?

According to the World Bank, developing countries fall into either "low income" or "low middle income" or "high middle income" categories, when their total national income is divided by their total population to give per capita gross national income (GNI). The most recent data we have on GNI is from the World Bank, for 2008. Country groups (below) were based on the 2008 categories.  

Country Groups
  • low income, $975 or less (Mozambique: $380, Zambia: $950)
  • lower middle income, $976 - $3,855 (India: $1040, Nigeria: $1170, China: $2940)
  • upper middle income, $3,856 - $11,905 (S. Africa: $5820, Malaysia $7250, Mexico: $9990)
  • high income, $11,906 or more. (S. Korea: $21,530, USA: $47,930, Norway: $87,340)
According to this, China's extraordinary success has merely brought it to the top of the list of lower middle income countries. Many argue that China's exchange rate is undervalued. If we add 40% to China's GNI, which would bring it to $4116, the per capita figure still remains squarely in the middle income range. Although China is close to upper middle income, it is not anywhere near being a high income country.

Several years ago, Cambridge economist Ha-Joon Chang wrote a prize-winning book with the provocative title Kicking Away the Ladder. Chang's argument is that historically, as today's wealthy countries became rich, they used extensive state intervention. However, after they have climbed up that ladder, they "kick it away" by insisting that developing countries follow free market principles.

Less polemically, given China's still low-middle income economy, it is not surprising that all kinds of standards in China are also still low, even though in labor, environment, and safety, the government is starting to push standards up the ladder. We are starting to see a trickling down of the new rules and rhetoric on standards even in some of China's proposed projects overseas. Advocacy to increase this trickle is a great idea. But keep in mind that China is still a developing country, with standards and policies that reflect this status. It's not Norway, or even South Korea.

6 comments:

  1. Dear Deborah,

    I am currently writing my bachelor thesis on China's development cooperation or aid, however one names it, and not only is defining aid very tricky but also researching its impacts and consequences. I haven't managed to find any decent analysis on single projects, only general talk about China's actions causing environmental damage and China keeping the dictators in power et cetera. Can you give me any tips on where to look? Thank you very much for your articles, books and this blog!

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  2. Much agreed.

    Why single out China?

    However, there is evidence that the Chinese MNCs are, as part of their desire to emulate established global MNCs, in the process of embracing aspects of the corporate responsibility agenda. As Chinese firms become ‘marketised’ — accountable to shareholders, adhering to governance principles and becoming more socially aware — so their business practices will evolve. Both China and Africa have institutional shortcomings when it comes to the regulation of commerce and, as such, the conduct of Chinese firms whether domestically or in Africa, differs little. Indeed, even critics admit that if one sets aside the particular cases of Sudan, Angola and Equatorial Guinea, ‘the rest of PetroChina and Sinopec activities on the African continent are not especially reprehensible’ or at least no more so than many of their Western counterparts. In the long run, perhaps it is this drive to emulate Western ‘best practice’ that will be the determining factor in Chinese corporate conduct in Africa.

    Chris Alden and Martyn Davies, 'A Profile of the Operations of Chinese Multinationals in Africa', South African Journal of International Affairs, 13(1):84.

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  3. Stacyann ForresterApril 25, 2010 at 7:55 AM

    Deborah,

    A very timely post. As a result of a debate with a friend over whether China is considered a developing country I decided to look into this. Since I'm in the international development field, we typically group China into the developing/emerging markets category. But is it fair to do so? Also at what point should emerging markets be held up to the same standards as developing countries? I would argue that the best time for these markets to be held up to the same standards and policies is before they are fully industrialized and allowing enough flexibility so that these standards do not hinder growth.

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  4. Since you mention Ha-Joon Chang I feel the need to recommend some more authors and papers/books (not directly related to Sino-African relations though...).

    Dani Rodrik has an excellent paper called Economic Development as Self-Discovery (http://www.hks.harvard.edu/fs/drodrik/Research%20papers/selfdisc.pdf).

    Another great book by Chang is "The Political Eocnomy of Industrial Policy".

    And I would also recommend Erik Reinert's book "How rich countries got rich and why poor countries stay poor".

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  5. These are all great comments, and thanks everyone for the reading lists. I have been traveling, will be back early next week and will post again. It's interesting to think about the point at which lower income countries should "graduate" to the kinds of standards richer countries try to live by. Perhaps history provides some lessons here on the level of income today's rich countries enjoyed when they first transitioned to today's standards. This doesn't mean countries should get a "free pass" on standards, just that we should be realistic about how quickly change will happen, and by what means.

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  6. Rider i
    The problem I find with many economists who actually try and allow China to stay a developing country is the actual inability to take in all circumstances. The reason why China has such a low quality of life and salary is purely political. This is because of massive SOE's being allowed to intertwin and take market shares as they are not privitizing but conglomerating. Then China has a go out and get it policy were they spend massive amounts of money on SOE's to aquire foreign market shares. All this while leaving their domestic policy a lower rate. Which keeps their quality of life and domestic salaries lower. This is at an advantage to China. As it allows them to keep up high foreign currency and debt holdings while being able to buy free markets currencies and debts. This then forces the free markets to not be able to compete as their currency can't follow market forces. Basically because China wishes to hold down their quality of life until their foreign aquisition strategy of domination is complete.
    However, with all included as such politically, neo-mercantalist holdings, crashing and then devouring free markets after each service bell curve business models runs out of steam, their military power, their resource holdings, their high foreign direct investment into foreign countries, their own domestic direct investment, it comes out to China is not a developing country.
    The only difference between the US and China is their domestic quality of life. Which has been shown over and over again is purely Political as Communist wish for world economic domination as free markets concetrate more on domestic consumption and market forces of individuals and groups of individuals unbeounced to SOE's.
    Also the free markets did come up through free enterprises and small SOE's. This is true. Foreign Communists have long tried to say that free markets should use SOE's more. However, the example I am using currently is the difference between Hong Kong style freedom of economics v Venezuela COmmunist neo-mercantalist style economics. HK doing great, Venezuela doing bad.

    Rider i
    I have a must see cite if you think that GNP is the only thing that explains if a country is a developing country or not. Trust me with the Communist it is purely political in nature that their domestic quality of life is below par. They wish for international dominace first for exports and intra domestic quality of life last. While greedily holding the worlds wealth in one country of neo-mercantalism while not spreading out the wealth to poor countries with a fair currency and a non SOE padded economy.

    http://rideriantieconomicwarfare.blogspot.com/

    Oh by the way our high tech engineers that work on nano tech, computer tech, or communications tech get paid around $50,000 a year the same industry in China makes well just divide that by their neo-mercantalist currency rate and it is $8,333. When China is creating all the same products as the US, has more resource contracts, and padds their economy way more by use of Communist style SOE's, well there are a lot of factors that are not being properly inputted if you think that China is not a developed country. They are just a different political system than a free market based on freedom of economics.

    Rider i

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