Welcome to the first China resources round-up of 2019, covering China’s developing country status, its projected economic slowdown, the ‘middle-income trap’, and the environmental impacts of China’s economic growth.
China’s status as ‘developing country’ and major borrower
China is the second largest economy in the world. Taking purchasing power parity (a measure used to account for price variations between countries) into account, China is actually the world’s largest economy, ahead of the United States.
And yet by income per capita, China remains an upper-middle-income country according to the World Bank’s classification. It also chose ‘developing country’ status for itself when joining the World Trade Organization in 2001, thus facing weaker obligations and longer timeframes for implementing agreements.
While this made sense in 2001, this article questions whether ‘developing country’ status still works for China and other countries in a similar situation, like South Korea and Qatar.
China also remains one of the biggest borrowers from the World Bank, while also being an aid donor and one of the biggest lenders. This policy paper by the Centre for Global Development highlights how China has borrowed more than US$7.8 billion since 2016, when it reached an income per capita above US$6,895, the Bank’s threshold separating countries that can borrow from those that cannot. Surpassing this threshold does not mean countries stop borrowing immediately – it only triggers the start of a long process, which in the long term make the country unable to borrow from the Bank.
Much of China’s borrowing has gone into global public goods and capacity-building initiatives – the areas flagged for countries that have passed the income threshold. But significant elements of the Bank’s engagement in China do not fall under these areas.
A recent Devex interview gives a different perspective. Former World Bank China country director Yukon Huang highlights that the World Bank can lend at low rates because it also lends to financially strong middle-income economies, such as China. In this sense, he says, lending to China is necessary for the World Bank to function the way it does.
Beyond debates on China’s supposed economic decline
The debate on China’s economic growth, recent slowdown and projected decline is alive and well. Recent pieces by the Financial Times’ Martin Wolf and Arvind Subramanian, as well as the Australian National University on the East Asia Forum – like many before them – claim that the current course of the Chinese economy is unsustainable and forecast its imminent collapse.
Paul Krugman’s approach shows a greater self-awareness. He argues in the New York Times that while signs do point to a coming crisis, time and again such predictions (including those by Krugman himself) have proven wrong. This is not to say that a crisis will never happen, but that it will be difficult to predict with precision.
The reality is, as Krugman suggests, that we do not know if or when such a crisis will happen. Signs of an economic slowdown are partly due to China’s economy transitioning from an investment-led to a consumption-led model – a transition that the Chinese government is managing carefully.
The real subject for those interested in development is the transition itself. What does it mean for low- and middle-income countries, especially those that trade extensively with China? What does it mean for commodity exporters? Very little research has been done on this topic to date.
The middle-income trap
Not unrelated to the discussion above is the fact that China may face the ‘middle-income trap’ – a term used to describe economies that struggle to progress to high-income status. And while it is not certain that China will ever incur this challenge (see here and here), the Chinese government has been actively thinking about this.
A new volume by the Asian Development Bank Institute on ‘Avoiding the middle-income trap in Asia’ presents research on several Asian countries, with a focus on China. It looks at the policies that the Chinese government should put in place to avoid the middle-income trap, particularly on urbanisation and finance.
The book is a useful resource for everyone interested in learning more about this topic. Surprisingly though, while it recognises the importance of advancing innovation and moving up the value chain as ways to escape the trap, it makes limited reference to existing policy initiatives like Made in China 2025, the Chinese government’s plan to grow national capabilities in advanced manufacturing and innovation. It’s important to recognise how these initiatives will play a key role in China’s future economic development.
Pollution, green infrastructure and lessons for Africa
Two recent articles highlight how China’s economic growth has come at great cost to the environment. In an article on China Dialogue, Ma Tianjie argues that while China had managed to reduce air pollutants, the prospect of a trade war and slower growth has made the government abandon some of its commitments to green growth – resulting in the undoing of many positive achievements. Meanwhile the Financial Times describes how subsidies are awarded to prop up the local economy in provinces targeted by anti-pollution campaigns.
Over the last 20 years, China has paid increasing attention to the environmental burden of its economic policy. This paper published by the South African Institute of International Affairs looks at some of China’s experiences with green infrastructure, such as high-speed railways, ports and urban rail systems, and draws out lessons for African countries.
Africa’s infrastructure gap is well documented, and it is important for African countries to factor in environmental considerations when planning their own infrastructure networks. However, their unique geographical and financial conditions can make it difficult to extrapolate relevant lessons from the Chinese experience.
These were my top picks this month. The next big thing related to China and development is the Belt and Road Forum scheduled for April 2019, which I’ll focus on in my next round-up.
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