Where To Find China’s Economic Model

Recently, The Economist explained China’s economic model through seven elements. Only the beginning, their goal was to identify the extent to which countries have copied the model.

Where are we going? To China’s economic model, to a model of the market, and to the countries that adopted each one.

China’s Economic Model

Among the seven elements cited by The Economist, we can start with the China model’s authoritarian tilt. As a result, the state uses its power to favor certain industries with easy bank financing and owns more than 50% of the country’s bank assets. Also, the government constrains citizens from moving money abroad. Furthermore, called a current account surplus, China makes sure that the incoming payments for its exports exceeds outgoing import expenses. They also spur production through tax and investment perks in special economic zones (SEZs) (like Shenzhen). And finally, as we have seen, manufactured goods occupy a sizable share of their exports.

Listed by The Economist as ranking criteria, they cite seven characteristics (that I quote and then parenthetically add my own brief details):

1. a country’s current account balance (a surplus)
2. the openness of its capital account (largely closed)
3. the scale of its investment (at 42%, a massive proportion of China’s GDP)
4. the share of its exports that are manufactured goods (sizable)
5. the size of the state-owed banking system (dominant)
6. its level of democracy (authoritarian)
7. the number of large SEZs per person

Those seven characteristics are most evident in Vietnam, the country that tops a much longer Economist 85-country list. Below, I’ve copied the top 10’s ranking for three of the seven criteria. If, for example, I had included the dominance of manufactured goods exports, then, with 1 the highest, Vietnam (.86), Bangladesh (.96), Pakistan (,75), and Turkey (,74) led the group. Meanwhile, least resembling the China model, Australia (83), New Zealand (84), and Greece (85) were at the bottom of the list:

Our Bottom Line: The Market

Whereas China’s economic model is top down, a market system works best from the bottom up. Requiring a mostly laissez-faire (leave the economy alone) government, the market depends on the supply and demand incentives that shape the behavior of consumers and businesses. In a market, self-interest propels behavior while competition constrains it. On the supply side, self-interest leads to profit seeking behavior that controls costs and encourages innovation. Creating economies of scale through a division of labor, factories producing vast quantities of goods disburse the paychecks that labor spends. Meanwhile, on the demand side, buyers look for low prices and high quality. Described by Adam Smith in his Wealth of Nations, (1776), an invisible hand ensures appropriate supply-side and demand-side behavior.

As a counterpoint to the China model list, the Index of Economic Freedom ranks how closely economic systems adhere to the market. With criteria that include property rights, the role of government, and investing freedom, Singapore tops their list:

My sources and more: I enjoy listening to The Economist app (gated) when I walk. Recently, their Money Talks column on China’s economic model was most memorable. Then, for the description of a market economy, I hope you will take a look at my newest book, Economics: Everything You Need To Know To Master The Subject-In One Book.