[VIEWPOINT]China’s rising new economic model

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[VIEWPOINT]China’s rising new economic model

A package of 10 policies to achieve economic growth is called “the Washington Consensus.” It got the name because the package was created in Washington, D.C., where the International Monetary Fund and the World Bank are located.
The Washington Consensus consists of 10 policy recommendations, including five basic economic stabilization policies, such as the abolition of a dual exchange system, financial expenditures for social infrastructure and the guarantee of private property rights. There are also five open-door policies, such as privatization, deregulation and the liberalization of trade and financial transactions. However, the plan has been criticized because the economic performance of Latin American countries that implemented the Washington Consensus have turned out to be meager.
In comparison, South Korea and Taiwan, which promoted five open-door and liberalization policies later, recorded good results. Because of this, Professor Roderick of Harvard University and some other scholars have begun to espouse the East Asian model of development.The economic success of East Asian Countries was made possible by the inclusion of two additional elements, technological innovation and high education, in addition to the above policy package. Actually, the investment in research and development of South Korea and South American countries in the 1980s was equally about 0.5 percent of gross domestic product. Now, South Korea invests about 2.7 percent of its GDP in research and development, while South American countries are still not above the 1 percent mark.
The ratios of university students among the population in the same age group of South Korea and South American countries were on the same level in the 1980s, but South Korea has now crossed over the 70 percent mark, while Brazil is under 20 percent. The decisive blow to the Washington Consensus lately has been China’s economic miracle. In Chinese society, the phrase “Beijing Common Understanding” is popular. “Common Understanding” is a Chinese-style expression of the word consensus. Some time ago, the Chinese government invited the leaders of African countries to Beijing and publicized the Chinese-style development model.
By the way, although the per capita income of China is less than one-third of that of South American countries, China already invests more than 1.5 percent of its GDP in research and development. There is even an unconfirmed report that the gross total of China’s investment in research and development has exceeded Japan. China has also increased the number of university students it has by increasing the student quota 20 percent annually since 1998. Now, the ratio of university students among the population in the same age group is above 20 percent. Among the 10 policies of the Washington Consensus, China has adopted the liberalization policy on a gradual basis. Therefore, it is closer to the East Asian model than the Washington Consensus.
But the reason why the Chinese economic miracle dealt a blow to the consensus lies in the fact that economic growth co-exists with a dictatorship. The excuse that mainstream economic studies makes for the failure of the Washington Consensus is that it is a good policy but does not work in South American countries, because fundamental systems such as a democracy, the rule of law and control on irregularities and corruption are not fully developed there.
In other words, the theory is that economic growth will be possible if good systems are established first. But China seems to be following the path that South Korea walked in the past ― economic development first and democratization later.
Up to this point, China looks similar to its East Asian neighbors. But it is menacing to find that China is promoting a “Beijing Consensus,” with a few strategies that South Korea and Taiwan have never tried. The first is the appearance of educational entrepreneurs such as Lenobo, Fangjung and Dongpang, which link universities and research institutes directly with industries. The second is the strategy of international acquisitions and mergers, which will shorten the time needed to catch up with the front-runners by securing technology and brand names through the acquisition of foreign business concerns such as South Korea’s Ssangyang Motor Company and IBM of the United States. The third is the strategy of transferring foreign technology in exchange for opening the Chinese market. It is a horizontal study strategy of nurturing indigenous businesses by absorbing technology from foreign companies and surpassing them afterward.
Whether the “Beijing Common Understanding” will succeed or not depends on whether China can overcome a few pending problems such as the acquisition of design technology, the development of indigenous materials for machine parts, nurturing of China’s own brands and democratization. We have to keep an eye on them.

*The writer is a professor of economics at Seoul National University. Translation by the JoongAng Daily staff.

by Lee Keun

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