Bai Gao China and Japan Ecodev

4
Neoliberal and Classical

Developmentalism: A Comparative
Analysis of the Chinese and
Japanese Models of Economic
Development
Bai Gao
In the past few years China’s development model experienced a major

transformation. After 30 years of opening and reform, China’s devel-
opment has achieved astonishing results. In 2012, China’s per capita
GDP exceeded 6,094 USD (IMF WEO 2013). At the same time, however,
there are problems with the developmental model, and with changes
in the international conditions and the domestic environment, these
problems have become more prominent.
In this chapter I will compare basic features of the Chinese develop-
ment model with the Japanese development model, and analyze the
different historical conditions that gave rise to these two unique models.
The two models differ in their approach toward the market and related
institutional arrangements. China’s model reflects neoliberalism, while
Japan’s model represents classical liberalism. The emergence of these two
models reflects not only the impact that various stages of globalization
had on the countryies’ economic development, but also reveals the lega-
cies of differing strategies nations adopt to respond to the challenges of
globalization, and how these affect their present economic structures.
The Japanese model formed in response to the reversal of the first wave of
globalization and the emergence of the second wave of globalization after
World War II. It has a strong focus of protecting society from the impact of
market competition. The Chinese model has developed in response to the
second wave of globalization and reflected the need to release the power
of market forces. The efforts to release the power of market forces have
exerted great pressure on the existing domestic and international political
68
Neoliberal and Classical Developmentalism 69
economic order. If the advance of globalization is arrested, the Chinese

model faces a much more dire challenge than the Japanese model.
1 Japan’s classical developmentalism
Mainstream social science literature began to take notice of East Asia’s

development in the early 198 0s. After 20 years of research, the classical
developmentalism represented by Japan’s and South Korea’s experiences
of modern economic development is now well understood by scholars.
This classical development model is often characterized as follows:
First, Japan had a government that used industrial policy to protect

infant industries and restrict foreign capital’s access to the domestic
market, while actively cultivating strategic industries for export to
foreign markets.
Second, Japan had a mode of production that relied on nonmarket
institutions or mechanisms, such as industry guilds and enterprise
groups, to coordinate market activities of economic agents.
Third, Japan made efforts to establish endogenous innovation mecha-
nisms to carry out independent research and development, create inde-
pendent brands, and promote rapid industrial upgrading in order to
produce high-value-added products.
Fourth, rather than relying on the government to select winning
enterprises, the Japanese model fostered the competitiveness of enter-
prises through “oligopolistic competition.” Oligopoly and monopoly
are two opposite economic phenomena: monopoly means there is only
one large enterprise that dominates the market of a product. Oligopoly,
on the other hand, means there are several large enterprises of similar
capacity that compete in the market of a product.
Fifth, since the 1950s, Japan paid special attention to the balance
between economic development and political stability. In the early
post–World War II years, there were significantly high tensions in
industrial relations. Union activities often led to large-scale strikes.
From the mid-1950s, the government began to solve labor tensions and
conflicts. The Japanese enterprise management established the “three
magic weapons” in the early 1960s: lifetime employment, seniority-
based wages, and enterprise-organized trade unions. Such institutional
arrangements significantly reduced the tension between labor and
management.
Sixth, the Japanese model placed more emphasis on coordinating
than monitoring in corporate governance. Coordination between
70 Bai Gao
individual enterprises, and between banks and enterprises can be

very effective, and transaction costs involved are low. At the same
time, however, the cost of agents for Japanese enterprise governance
became particularly high. Because the relationship between enterprises
and banks was particularly close, shareholders were largely unable to
monitor the managers and banks were unable to effectively oversee
the enterprises.
Seventh, the Japanese model often sacrificed the upgrading of economic
structure to pursue political stability. Although Japan achieved interna-
tional competitiveness, especially in industries such as automobiles and
home appliances, it continued to maintain extremely inefficient sectors
that could provided large numbers of jobs. Japanese cities are populated
with many so-called family businesses; they account for one-third of
all jobs. Unlike the United States, Japan’s economic structure does not
value creative destruction, but is satisfied that the new builds on the old
in order to guarantee employment.1
What is the institutional basis of Japan’s classic developmentalist
model? As shown in Table 4.1, the Japanese model emerged between
the early postwar period and 1960s, under the Bretton Woods inter-
national financial system and the General Agreement on Tariffs and
Trade (GATT) international trade system. In this particular international
economic order, the Japanese government used expansionary mone-
tary policy to promote economic development, tightening fiscal policy
to curb inflation. It created a bureaucracy to implement protectionist
policies favoring its various industries and ensured the smooth growth
of the private sector. In the treatment of a bank’s investment risk, the
US government pays attention to the incident (ex post). It provides
$100,000 of insurance for each bank account, but does not interfere in
the daily affairs of private banking. In contrast, the Japanese govern-
ment pays attention to the incident (ex ante) and favors prevention.
Therefore, the Ministry of Finance of Japan regularly interfered with the
day-to-day operation of private banking. It implemented the convoy
policy in order to reduce the banking industry and also strictly control
the generation of new banks.
The Japanese government was very active in implementing a variety
of industrial policies to promote exports. To promote international trade
and industry, the state attached great importance to the international
competitiveness of large enterprises in strategic industries. To foster a
number of enterprises rather than one or two large enterprises, it opened
windows of competition for competitive oligopolies to emerge and to
strengthen the competitiveness of enterprises.
Table 4.1 Institutions and mechanisms of Japan’s high-growth economy
International The role of Intermediate Corporate

economic order government policies governance
Bretton Woods Expansionary Indirect finance Permanent
System fiscal policy employment
system
Fixed exchange rate Aggregate Mobilization of Stable labor
resources by national savings relations and
limiting which improved product
banks could open quality
branch offices
Control free Central banking Escort Strong
movement of management cooperation
capital between banks
and partners
GATT Assist bankrupt Guarantee Continuous
banks to maintain industrial capital innovation
stability
Asymmetry between Provide steady Strengthen
US–Japan stream of credit cooperation
cooperation to banks in major
cities
Export Development of
promotion enterprise groups
Aggregate Cross-
resources by shareholdings
allocating foreign
exchange quotas
based on firm size
Source: Gao (2004b).
In the middle of the system level, the Japanese model relies on indi-
rect finance to provide financing to enterprises, a practice different
from the United States. In the United States, companies raise capital by
issuing bonds and shares in the stock market, but Japanese companies
borrowed from banks. For an international comparison, the share of
corporate bank loans in the 1950s was 5.8 percent in the United States,
4.3 percent in the United Kingdom, 18 .8 percent in West Germany, and
12.4 percent in Italy.
72 Bai Gao
In contrast, Japanese corporate bank loans in the period from 1958

to 1974 increased from 68 .4 percent to 8 3.3 percent (Morozimi 1963).
Japanese companies are serviced by have a main bank. The main bank is
a bank that provides large loans to the enterprise. The main bank often
holds the shares of the company and in theory provides “delegate moni-
toring” on the company on behalf of the other banks that lend money
to the company. Another mechanism is “cross-shareholding” as a way to
shield listed companies from the malicious effects of the stock market.
In 1950, 60.3 percent of shareholders of listed companies were Japanese
individuals and 23.7 percent were held by institutions. However, by 1973
the portion of individual shareholders of had decreased to 32.7 percent
while the share held by institutions increased to 60.4 percent.
The last mechanism is that during the high-speed growth period,
large enterprise groups adopted a grand, comprehensive “one-set invest-
ment strategy” that invested in all newly emerging strategic industries
in order to occupy the commanding heights of market competition.
At the enterprise level, it relied on the lifetime employment system to
support the strategy. An important effect of lifetime employment on
enterprise management is it prioritizes aims in enterprise management
from more profit for the shareholders to the survival of all members of
the company. Overall, coordination was the strength of the Japanese
model, but monitoring was a particular weakness (Gao 2004).
2 China’s neoliberal developmentalism
China’s neoliberal development model differed from Japan’s classical

development in its bold introduction of market forces. China’s develop-
ment was more neoliberal than Japan’s by a variety of measures. First,
China boldly attracted foreign direct investment. Since 1993 China has
become the largest recipient of foreign direct investment among devel-
oping countries and the second largest recipient of FDI after the United
States. Since opening and reform, China has attracted $560 billion in
foreign investment. In 2003 alone China attracted FDI to equal all FDI
received by Japan in the entire postwar period. Second, China’s domestic
market is far more open than Japan’s. In 2011, China is the world’s
second largest importer, while Japan is only the fourth largest importer.
Third, the Chinese economy did not have as many nonmarket govern-
ance mechanisms as Japan. Although inertia from the plan economy still
persists in varying degrees, the market has become the most important
driver of the Chinese economy. Fourth, China’s cheap labor allowed it
to participate in large-scale international production while Japan did
Table 4.2 Institutions and mechanisms of China’s economic growth
International Corporate Economic

financial order Public policy governance consequences
Simulation of the Attract foreign Participate in the Rise of world
Bretton Woods system investment global division factory
(using dollar peg of labor through
to maintain stable processing trade
exchange rate, open
capital accounts)
Encourage Debt default Export-led
exports (triangular debt) growth
Local activism Excessive Large scale
Deepening of competition infrastructure and
reform real estate, driven
by growth
not. Until 2011, the establishment of mechanisms for indigenous inno-

vation to achieve value-added production was not a focus of the govern-
ment policy in China.
Fifth, there is an excessive competition in Chinese economy.
Enterprises compete at any cost. At the same time, in particular indus-
tries, monopoly remains a serious problem in China. Sixth, China’s level
of corporate governance is comparable to Japan’s. While the respective
institutional arrangements are different, they share emphasis on coordi-
nation over monitoring. Seventh, the Chinese model was often willing to
bear the risk of social instability in its pursuit of upgrading in economic
structure, something that the Japanese model was loath to do.
As seen in Table 4.2, there are similarities and differences between China
and Japan in the operation of their respective development models. I call
the international economic order upon which the Chinese model has
relied a “simulated Bretton Woods system.” Two features of the Bretton
Woods system were the fixed exchange rate and the initial restrictions of
free movement of capital. The renminbi has been fixed, although Chinese
officials call it a managed floating exchange rate. This “floating exchange
rate” is qualitatively different from the floating exchange rate commonly
used. Floating exchange rate in China’s current exchange rate regime
emphasizes the fact that renminbi value is allowed to change within a
very limited band, while that in the broad international use emphasizes
the mechanism of exchange rate formation: a floating exchange rate
74 Bai Gao
refers to the fact that the market demand directly determines the value of
the currency in international financial markets.
Seen from here, the international economic order the Chinese
economy faces is very similar to the one Japan found itself in during
the high days of its classic developmentalism. So far China has not
liberalized its capital accounts. Short-term capital still cannot legally
enter China’s financial markets. Japan had the same problem under the
Bretton Woods system in the early postwar years.
The Chinese government actively attracted foreign investment and
relied on that to generate exports, and further economic growth. Local
governments are willing to compete for investment. Unlike Japan during
its years of high-speed growth, the Chinese government used active fiscal
policy to promote economic growth. This was apparent when China
faced deflation, and especially after the Asian financial crisis in 1997–8 .
One critical difference from the Japanese model is that China is
willing to allow market forces to drive economic activities. Japan placed
greater emphasis on social stability in economic development, while
in China, to move economic reform and structural change along, the
government tolerated the risks of social instability. Large-scale layoffs
of employees seen in China would have been a difficult thing in Japan.
After the economic bubble burst in the 1990s, Japanese companies still
did not lay off large numbers of workers, but kept them on even though
this meant a much slower process of industrial upgrading.
The Chinese and Japanese models also differ in the basis upon
which they participate in global division of labor. China participates
in a largely factors-of-production–based global division of labor, in the
labor-intensive manufacturing part of the global value chains. Data
show that in 2004 China’s processing trade accounted for 53 percent of
its total trade, meaning that over half of its trade is in Chinese compa-
nies manufacturing parts for foreign companies or using imported parts
to assemble final products for foreign companies. The part that China
occupies in the global division of labor is largely labor-intensive manu-
facturing. This is very different from the Japanese model that focused
on mechanisms of endogenous innovation, developing independent
brandings, and producing high-value-added products.
On corporate governance, however, China and Japan are actually quite
similar. In both countries, for example, monitoring is a big problem
for state-owned enterprises (SOEs). The resulting chain of debt is very
serious. There was the similar problem of “overcompetition” in both
China and Japan. In Japan the problem arose because of the close rela-
tionship between banks and enterprises. In China this concerned the
problem of property rights as well as government policy. For example,
in the early 1990s, China had the so-called “stability and unity loan.”
To prevent state-owned enterprises from trouble, the government often
provides loans to state-owned enterprises to keep them afloat, not
considering the financial health of these enterprises. The result of the
Chinese neoliberal model of development was China’s emergence as a
world factory.
3 Comparative analysis of the two development models
Table 4.3 shows the strengths and weaknesses of the classical and neolib-
eral development model. In capital formation, the Japanese model was
totally dependent on endogenous capital. The Chinese model was
dependent on a combination of endogenous and foreign capital. In
2004, foreign investment contributed to about 17 percent of China’s
total capital formation (Huang 2003:7). In Japan that accounted for less
than 1 percent in that same year. Japan relied mainly on the country’s
relatively sound financial system, turning effectively domestic savings
into industrial capital to finance growth. The Chinese financial system
is very fragile. While rapid economic growth has accumulated a lot of
wealth, this wealth has not been effectively turned into industrial capital
and China must rely on investment of foreign capital.
In terms of approach to and relations with the international market,
the Japanese model focused on developing their own brands while China
became part of global value chains, bearing the labor intensive part of
production. In the development of new technology, China relied more
heavily on the introduction of foreign-produced technology while Japan
Table 4.3 Strengths and weaknesses of the two development models
Classical Neoliberal
developmentalism developmentalism
Capital formation Endogenous Endogenous and foreign
simultaneously
International market National ownership of Service for global value
brands chain
New technology Dependent on intellectual Introduction of foreign
property–based R&D production technology
Trade/GDP dependence Low High
Resource dependence High/low High/low
Resilience to changes in High Low
external environmental
changes
76 Bai Gao
emphasized research and development (R&D), based on independent

intellectual property (IP). In terms of the ratio of trade and GDP, China’s
GDP growth is much more heavily dependent on foreign trade than
Japan’s was. At the highest level, Japan’s trade was 35.2 percent of its
GDP in 2008 .
In China, trade represented 70.6 percent of its GDP in 2006. China and
Japan are comparable in their resource dependency. Japan is a country
severely lacking natural resources and highly dependent on imports. At
the same time, Japan learned to use resources very efficiently. After the
first oil crisis in the early 1970s, the Japanese government implemented
an energy conservation policy. Japan is now far ahead of the rest of the
world in energy efficiency. China uses resources inefficiently. According
to statistics, in 2004 China contributed 6 percent to global GDP but used
33 percent of world’s steel and cement.
Under a changing external environment, the viability of Chinese and
Japanese models would be quite different. It is very likely that Japan’s
model can survive better. This is because of its capacity for independent
technological innovation. Even as Japan’s exports faced greater chal-
lenges after the mid-198 0s with the appreciation of the yen, Japan still
relied on its brand products to remain one of the largest exporting econ-
omies in the world. While the Japanese economic bubble burst and it
experienced a “lost decade,” Japan has managed the challenge of trans-
formation of industrial structure in advanced industrial countries, with
its competitive products such as flat-screen TVs, hybrid electric cars, and
digital cameras.
As a point of comparison, Germany has been a crafting state, with
strong manufacturing. But in the latest transformation, Germany has
not been able to adjust to change in industrial structure, outsourcing
a large number of production lines to Eastern Europe. Today, Japan
can still maintain its ability in technological innovation while keeping
much of its production processes within the country to support its
economy of scale. The ability of the Chinese model to sustain changing
external conditions and survive is much weaker. Its cheap-labor-based
comparative advantage can quickly vanish with the appreciation of
the yuan.
The different economic effects of the two different development
models are significant. This can be seen, for example, from the role of
foreign capital in the economies. Table 4.4 shows that in 198 4 the total
sales of foreign direct-invested enterprises in all industries, as well as the
specific industries of manufacturing and petroleum, are much high than
Table 4.4 Foreign direct investment as a portion of sales and profits in the
Japanese economy
Foreign direct
invested enterprises* All enterprises
Total sales All industries 14,548 523
Manufacturing 23,903 68 8
Petroleum 669,790 23,059
After-tax profits All industries 250 6

Manufacturing 470 12
Petroleum 7,170 149
Note: *Mean value of the company; unit: 1 million yen.

Source: Weekly Diamond (198 4a: 30).
Table 4.5 Foreign direct investment as a proportion of the Japanese economy

Japan (%)
Proportion of sales accounted 2.20
by foreign invested
enterprises
Manufacturing: proportion 4.70

of sales accounted by foreign
invested enterprises
Oil industry: proportion of 38 .10

sales accounted by foreign
International Domestic
market (%) market (%)
Market share of foreign 7.30 92.70
Source of raw materials 60 40
Source: Weekly Diamond (198 4a: 30, 198 4b: 33)
Japanese enterprises. In overall performance, after-tax profits of foreign

enterprises in Japan are much higher.
At the same time, as seen in Table 4.5, 92.4 percent of the products of
foreign direct-invested enterprises are in Japanese domestic markets. Only
7.3 percent of them went to international markets. By contrast, foreign
direct-invested enterprises (FDIEs) in China sold the majority of prod-
ucts on international markets. Imports and exports of FDIEs accounted
78 Bai Gao
300
200
100
0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Figure 4.1 FDI net inflows to China, 198 2–2011

Note: Unit: billion USD.
Source: World Bank (2013), World Development Indicators.
2,500
2,000
1,500
1,000
500
0
1986
1982
2010
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1993
1994
1995
1996
1997
1979
1980
1981
1984
1985
1989
1990
1991
1992
1988
1983
2011
1989
Exports of goods and services (current billion US$)

imports of goods and services (current billion US$)
Figure 4.2 China imports and exports, 1979–2011

Note: Unit: billion USD.
Source: World Bank (2013), World Development Indicators.
for 57 percent of China’s total trade. This means that foreign investment
went to Japan with the goal of occupying the Japanese domestic market.
While in China, in addition to occupying the domestic market, FDIEs
are largely aimed to participate in global value chains. Manufacturing
of parts and components or assembling of goods by FDIEs in China are
ultimately for international markets.
Compared with the Japanese model, what are the strengths of the
Chinese model? Figure 4.1 shows China’s foreign investment and foreign
trade development since 1970. It can be seen that since Deng Xiaoping’s
southern tour, China undertook bold steps to liberalize foreign invest-
ment. As a result, foreign investment in China has developed very
rapidly. The momentum became more apparent after China’s accession
Table 4.6 Levels of economic openness of China and Japan
Japan
China (Billion USD)
GNI (rank) 6643.2(2) 5739.5(3)
2011 trade in goods (USD billion)
Export 1903.8 (1) 78 7.0(4)
Import 1660.3(2) 8 07.6(4)
2011 trade in Services (USD billion)
Export 0.18 3(4) 0.145(7)
Import 0.238 (3) 0.168 (5)
Trade as % of GDP (Year) 32.5(1990) 17.1(1990)
58 .7(2011) 31.4(2011)
Export as % of GDP (Year) 31.4(2011) 15.2(2011)
Sources: World Bank (2013) World Development Indicators; MOFCOM (2012).
to the WTO. Along with the rapid development of foreign investment,

China’s foreign trade also developed quickly (Figure 4.2). FDIEs have
made significant contributions to the growth of China’s international
trade. In 2012, 48 percent of China’s trade, whether imports or exports,
were from FDIEs in China. At the same time, trade dependence of
China’s economy has also risen rapidly, reaching above 70 percent in
2004. These facts show that China’s economic development, especially
since the 1990s, has been supported largely by foreign trade driven by
foreign investment.
China’s neoliberal model of development has transformed China into
a highly open market economy. As Table 4.6 shows, the dependence of
China’s GDP in its trade was up to 58 .7 percent in 2011, while in Japan
this was only 31.4 percent. Measured in exports as a share of GDP, Japan
was only 15.2 percent in 2011 and China 31.4 percent. This means that
China’s economy is much more open than Japan’s. China has become
the world’s largest exporter since 2010 and is currently the second
largest importer after the United States, while Japan remains fourth in
the ranking of both importing and exporting countries. The table also
shows that the Japanese economy relies on its huge domestic consump-
tion while the role of China’s domestic demand is much smaller in
generating economic growth.
According to the UNCTAD survey conducted in 2004 on the inter-
nationalization of R&D (Table 4.7), for experts on foreign direct invest-
ment, or multinational corporations, China was the first choice for
80 Bai Gao
Table 4.7 Views of world’s most commercially attractive areas, 2005–6
Experts (%) Multinational corporations (%)

1 China 85 1 China 8 7 87
2 USA 59 2 India 51 51
3 India 42 3 USA 51 51
4 Brazil 24 4 Russia 33 33
5 Russia 21 5 Brazil 20 20
6 UK 21 6 Mexico 16 16
Source: UNCTAD (2005), World Investment Report
foreign direct investment in 2005–6, 20 percentage points over the

second best destination country. This indicates that the Chinese model
is very successful in attracting foreign investment, utilization of foreign
capital, and using factors of production and foreign capital together in
generating economic growth. Continued foreign capital inflows means
there will continue to be pressure for China’s economic growth.
Even in terms of industrial upgrading, the openness of the Chinese
model has clear advantage. Figures 4.3 and 4.4 show that China had
become the third choice for multinational companies to do global
R&D, after the United States and United Kingdom (the findings of the
UNCTAD 2005). Looking at future trends, 61.8 percent of multinational
companies say that their first choice for global R&D will be China. The
main reason is that China can provide a large number of well-trained
but low-cost engineers to engage in R&D work. Second, China will
become one of the world’s largest commodity markets. An important
task of global R&D work is to develop products catering to local market
conditions and preferences. This part of the R&D can be best done in
large consumer markets. Now nearly 700 multinational companies have
established R&D centers in China.
In waves of globalization, globalization of production has already
advanced. Globalization of R&D has also started. Accompanied with that
is globalization of logistics, that is, global procurement. Centered around
Shanghai, for example, more than a dozen cities in China have devel-
oped plans to turn themselves into a large-scale global logistics center.
While China’s share in multinationals’ total global procurement is less
than 1 percent, many experts believe that China has already become
the world’s largest manufacturing center but in China the multinational
corporations’ share of global sourcing is only 5 percent. China’s role as
the global factory is still far from reaching its maximum potential. These
0 20 40 60 8
United States 58.8
United Kindom 47.1
China 35.3
.
France 35.3
Japan 29.4
India 25
Canada 19.1
Germany 19.1
Singapore 17.6
Italy 14.7
7
Figure 4.3 Current foreign locations of R&D in the UNCTAD survey, 2004
Note: Unit: Percent of responses.
Source: UNCTAD (2005: 133).
0 20 40 60 80
China
United States
India
Japan
United Kindom
Russian Federation
France
Germany
The Netherlands
Canada
Figure 4.4 Most attractive locations for future foreign R&D in the UNCTAD
survey, 2005–9
Note: Unit: Percent of responses.
Source: UNCTAD, World Investment Report (2005: 153).
facts indicate that compared to Japan’s classical development model,

China’s neoliberal development model displays great advantage in this
new environment of globalization. It relies on an open economic system
to improve the economic structure and enhance China’s economic
competitiveness.
One key weakness of the Chinese model is mainly reflected in the
large share of foreign investment in the Chinese market. Taking the
example of the Chinese automobile market in 2003, we can see that
foreign brands in China’s automobile market share add up to 90 percent.
8 2 Bai Gao
Table 4.8 Foreign companies in China’s auto industry
Planned
production in
Year of Major local 2003 Market thousands/
market entry partner share % year
Volkswagen 198 5 Shanghai 37 1600/2007
Automotive
Industry
Corporation
First Auto Works
(FAW) Group
Co.
GM 1997 Shanghai 10 766/2006
Automotive
Industry
Corporation
First Auto Works
(FAW) Group
Co.
Toyota 2000 Guangzhou 9 650/2010
Automobile
Group Co.
Suzuki 1993 Chongqing 8 Unknown
Changan
Automobile
Group Co.
Honda 1999 Guangzhou 7 Unknown
Automobile
Group Co.
Peugeot 198 5 Dongfeng Motor 6 300/2006
Group Co.
Ford/Mazda 2001 Chongqing 5 150/unknown
Changan
Automobile
Group Co.
Renault/ 2001 Dongfeng Motor 4 900/2010
Nissan Group Co.
Hyundai 2002 Beijing 3 650/2007
Automotive
Investment
Co.
Source: Li (2004); Jia and Chun (2001).

Table 4.9 China’s GDP and GNI
GDP GNI
Year (Billion USD) (Billion USD) GDP–GNI
198 1 194.11 193.99 0.12
198 2 203.18 203.56 –0.38
198 3 228 .46 229.61 –1.16
198 4 257.43 258 .97 –1.53
198 5 306.67 307.51 –0.8 4
198 6 297.8 3 297.8 1 0.02
198 7 270.37 270.16 0.22
198 8 309.52 309.36 0.16
198 9 343.97 344.20 –0.23
1990 356.94 357.99 –1.05
1991 379.47 38 0.31 –0.8 4
1992 422.66 422.91 –0.25
1993 440.50 439.22 1.28
1994 559.22 558 .19 1.04
1995 728 .01 716.23 11.77
1996 8 56.08 8 43.65 12.44
1997 952.65 941.65 11.00
1998 1019.46 1002.8 1 16.64
1999 108 3.28 1065.30 17.97
2000 1198 .47 118 3.8 1 14.67
2001 1324.8 1 1305.63 19.17
2002 1453.8 3 1438 .8 8 14.95
2003 1640.96 1633.12 7.8 4
2004 1931.64 1928 .12 3.52
2005 2256.90 2240.8 0 16.10
2006 2712.95 2707.55 5.40
2007 3494.06 3501.8 6 –7.8 0
2008 4521.8 3 4539.53 –17.70
2009 4991.26 4998 .56 –7.30
2010 5930.53 5903.56 26.97
2011 7318 .50 7305.44 13.06
Source: World Bank WDI (2013).
Domestic Chinese car brands account for less than 10 percent of the
market (see Table 4.8 ).
Another major weakness of the Chinese model is the distribution
of wealth. As the basis of China’s participation in global production is
mainly of the factors of production, that is, primarily cheap labor, multi-
national corporations control intellectual property rights and own the
brands. They take most of the profits. According to statistics, capital
from multinational companies accounted for about 30 percent of total
8 4 Bai Gao
capital in China in 2004. However, they controlled 50 percent of the

shares and took away 70 percent of the profits (H. Gao 2005).
A Ministry of Commerce Multinational Research Center study shows
(Table 4.9) that since the comprehensive liberalization started in 1992,
the gap between China’s gross national income and gross national
product has widened. The value of GDP includes all production activi-
ties carried out in China, including those by multinational companies,
but GNI only includes what is retained domestically. This means that
although China’s economy developed rapidly in the 1990s, a significant
part of the wealth generated in China went to multinational corpora-
tions. GNI grew at rates far below GDP.
Why did China adopt such a development model? There are both
international and domestic forces shaping the model.
4 The global conditions of time and place for the classical

and neoliberal development models
On the international conditions, we see the profound impact of globali-

zation on the neoliberal development model of China and classical
development model of Japan. Figure 4.5 depicts the long-term move-
ment of globalization. The curve in the figure is the ratio of global GDP
and global trade. Mainstream literature seems to have a consensus that
25
Percentage (%)
1939–1945: 1971 onwards:

20 WWII Bilateral trade
1944: The setup agreements
1914: The breakup of of Bretton Wood
15 the gold
g standard and system
y
WWI
1929–1933: 1953:
Great GATT
A
depression 1971: The
10 collapse of
Bretton Wood
system
5
0
1900 1925 1950 1975 Year 2000
Figure 4.5 The institutional progress of globalization

Source: Gao (2004a: 33).
the first wave of globalization occurred from 18 70 to 1913. The trend

started to reverse in 1914 when the gold standard system collapsed and
the First World War broke out.
Globalization further retracted and the world experienced the Great
Depression and two world wars before the United States and the United
Kingdom realized that there can be no economic development without
a stable international financial order and trade order. Driven by the
United States and the United Kingdom, the Bretton Woods system and
the General Agreement of Tariff and Trade (GATT) were established.
Under the international economic order built on these two core financial
and trade systems, the global GDP and trade began to rise. The Bretton
Woods system collapsed in the early 1970s. From then, developed coun-
tries all adopted the floating exchange rate regime and started financial
liberalization. Large-scale international capital could flow across borders
and foreign investment increased rapidly. This led to the second wave of
globalization (Gao 2005).
Table 4.10 The effect of globalization on two types of development model
Classical development New development

model in Japan model in China
Economic theorem and German Historical School, Neoclassical economics
ideology The Theory of Total War,
Marxism, Schumpeter,
Keynesianism
The stage of Recession period in the 1st Fast expansion period
globalization stage of globalization and in the 2nd stage of
early expansion period in the globalization
2nd stage of globalization
Fundamentals of global International division of labor International division of
trade mainly for final products labor mainly for factors
of production
Driving force for Life cycle of products, market, Production efficiency,
foreign investment resource economics of division,
of multinational value chain
corporations
Relationship between Substitution Promotion
foreign investment and
trade
Policy paradigm of Import substitution Encouraging exports,
developing countries investment liberalization
86 Bai Gao
We can see that Japan’s classical development model formed between

the late 1930s and the early 1960s during the reversal of the first wave
of globalization and the emergence of the second wave of globalization.
China’s neoliberal development model formed at the rise of the second
wave of globalization from the end of the 1970s.
These different conditions of time and place had profound impact on
the shaping of the two development models. As shown in Table 4.10,
and reflected in the dominant economic theories and ideologies at the
time, the international environment had significantly changed when the
Chinese and Japanese models emerged. Popular in Japan in the period of
the 1930s to 1960s were the German historical school, Germany’s total
war theory, Marx’s economic thought, Schumpeter’s theory of innova-
tion, and the Keynesian effective demand theory (Gao 1997). The fact
that these economic theories became very popular reflected the widely
held skepticism at the time toward the role of the market as the invisible
hand when the reversal of the first wave of globalization and capitalist
markets faced hard times.
Toward the end of the 1970s, however, globalization made a new
wave around the globe and along with it came more respect and high
expectations for the market to be the primary force driving and shaping
economic growth and economic order. Corresponding to that, neoclas-
sical economic theories that emphasized efficiency in resource alloca-
tion not only became popular in advanced economies, but also gained
great influence in mainstream discourse and policy debate in developing
countries (Badb 2001).
From this we can see that there is a clear relationship between the rise
or fall of economic theories and ideologies on the one hand and the
cycles in the movement of globalization. The retreat of the globalization
movement came with a series of economic crises. This is when market
forces were seen as evil and economic theories were more interested in
how to constrain rather than release the force of the market. In the early
postwar years, when the forces of globalization moved up again, coun-
tries were still building up institutions and mechanisms to regulate and
restrain markets.
Japan’s classical model therefore reflected the conditions and economic
thinking at the time that the challenge was how to utilize nonmarket
systems and mechanisms to coordinate activities of economic agents,
rather than how to use market forces and release the force of the market.
In contrast, China’s neoliberal development model formed at the time of
the rapid resurgence of globalization. The profound interest at this time
was how to unleash the force of the market and use market forces to
solve economic problems. This was the profound historical background

for the popularity of neoliberal economics in China.
To understand the difference between the Chinese and Japanese
models, we must analyze the enormous changes in the nature of divi-
sion of labor in international trade in the past 30 years. When Japan
and South Korea had their high-speed growth, international division of
labor was formed around final products. A country would not be able
to participate in international trade if its enterprises were unable to
produce international competitive final products. The Japanese realized
then that with international trade Japan’s economy would not be able
to grow. Japan therefore made all efforts to develop their own innova-
tion system. Various institutional arrangements in the Japanese model
emerged from these efforts to strengthen coordination in innovation.
The environment for China when it began its reform and opening
from the late 1970s was entirely different. Today, international division
of labor is shaped largely around factors of production (FOP): labor,
resources, technology, capital, and so forth. This new international
environment made it much easier for developing nations to participate
in international trade without having to develope their own national
innovation system. Developing countries can now participate in global
production by providing cheap labor for labor-intensive parts of produc-
tion. This was simply impossible in the past before the invention of the
global supply chain.
This new structure of international division of labor led to the rapid
development of the volume of trade within multinational companies. It
is estimated that in the late 1990s, intra-firm trade inside multinational
corporations (between their subsidiaries in different countries) already
accounted for more than 50 percent of total world trade. This form of
international division of labor also allowed China to participate in inter-
national division of labor with its cheap labor. This was almost impos-
sible for the Japanese model in the 1950s and 1960s.
The FOP-based international division of labor emerged with change in
the forces shaping foreign investment of multinational corporations. In the
1950s and 1960s, foreign investment of multinational corporations was
influenced largely by product cycles. The evolution of a product has its
cycles. Multinational corporations with strong innovation capacity do
not usually want to invest in other countries when they first develop a
product. They can make monopoly profits through international trade.
When the technology is standardized for this product, enterprises of
other countries can also make this product as standardized technology
is easy to adopt and utilize. This is when enterprises of cheap labor
88 Bai Gao
countries can also produce this product. They can produce the product
more competitively and therefore pose a threat to the original company
that invented the product. The original enterprise would have a great
incentive now to invest in the place where the market and potential
competitors are to control the local market and prevent the emergence
of international competitors (Vernon 1971).
In the 1950s and 1960s, there was a large amount of foreign invest-
ment in Latin America largely for access to natural resources. This was
a cause for developing dependency in Latin America. With this type of
foreign investment in Latin America, the economic structure of Latin
American countries was “forced to lock in,” that is, to be locked into the
low-value-added part of the global division of labor.
By the time China’s development model started to take shape, the
incentives and motivations for multinational corporations’ foreign
investment had undergone a profound change. Productivity and effi-
ciency, division of labor, and value chains became the primary purpose
of foreign investment. Through foreign investment China can partici-
pate in international production using cheap labor, promoting exports,
and generating economic growth, before an effective system of endog-
enous innovation mechanism is established. This is the profound histor-
ical background of the Chinese model.
In this era of globalization, the relationship between foreign investment
and international trade has also undergone a deep change. This is another
source of the differences between the Chinese and Japanese models.
At the time when the Japanese model formed, foreign investment and
foreign trade could be a substitute for one another. If you have foreign
investment, you would not have international trade. Once foreign
investors enter a market and they produce and distribute locally, there
was no need for trade. At the time when the Chinese model developed,
foreign investment and foreign trade had become mutually reinforcing.
When foreign investors come in, they take advantage of cheap labor for
the production of a component or to assemble a product. The remaining
parts of the product will need to be imported from other countries. So
foreign investment facilitates international trade.
A further difference between the two models is the profound change in
development policy of developing countries. In the era of the Japanese
model, most developing countries were engaged in import substitution
and protection of domestic market. It is no surprise that nonmarket
mechanisms were widely employed in the Japanese model. In the
Chinese model that formed in the last 20 years, developing countries
encouraged exports and liberalized foreign investment. As Table 4.11
Table 4.11 Government foreign policy change, 1991–2004
Project 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Countries changing 35 43 57 49 64 65 76 60 63 69 71 70 82 102
investment policy
Number of countries 82 79 102 110 112 114 151 145 140 150 208 248 244 271
in control
Tend to attract FDIa 80 79 101 108 106 98 135 136 131 147 194 236 220 235
Tend to exclude 2 – 1 2 6 16 16 8 8 3 14 12 24 36
FDIb
Source: UNCTAD WIR (2005)

90 Bai Gao
120
100 62
11.7
29.4
80
40.4
46.9
60
50.9
40
53.4
20
44.4
19.6
0
2012 2013 2014
Pessimistic and very pessimistic Neutral Optimistic and optimistic
Figure 4.6 TNC’s perception of the global investment climate, 2012–14

Source: UNCTAD (2012: 18 )
0 10 20 30 40 50 60 70 80 90
Greater targeting
Other promotion measures
Additional incentives
Futher liberalization
No new measures
2005–2006 2004
Figure 4.7 Investment policy measures to attract FDI: responses by IPAs

Source: UNCTAD (2005: 35)
shows, since the early 1990s the number of countries adopting poli-
cies that encourage foreign investment has far exceeded those that limit
foreign investment. In other words, attracting foreign investment has
become a global trend in recent decades.
According to the same UNCTAD survey (Figure 4.6), it is the
consensus among multinational corporations’ CEOs and foreign invest-
ment specialists, and institutions that attract foreign investment, that
foreign investment will further increase internationally. Moreover, more
governments around the world are committed to make greater efforts to

attract foreign investment (Figure 4.7).
This suggests that promoting economic growth through attracting
foreign investment and then advancing foreign trade has become a
common policy direction or development strategy around the world.
Among developing countries, China has so far attracted more foreign
investment than any other country. However, as previously discussed,
the Chinese model has its weakness in the share of foreign investment
in domestic market and in the distribution of wealth created. It is a
model that cannot be long sustained.
5 The historical origins of China’s neoliberal

development model
Closely related to international conditions and dynamics, the rise of the

neoliberal development model in China also has deep domestic roots. I
have argued elsewhere that there is a level of synchronicity in the historical
movement of the globalization wave and modern Chinese history (B. Gao
2005). From the First Opium War in the mid-nineteenth century to the end
of the Cultural Revolution in the mid-1970s, along with the rise and fall of
globalization waves, there developed two last-impacting schools of thought,
policy and social movements in China toward the world economy.
Table 4.12 Traditions of China’s foreign economic relations
Mao Zedong
Yangwu yungdong thought Dynamics today
Markets Abundant commerce Closed Opening starting
with SEZs
Foreign capital Open, became Closed One of the largest
dominant recipients of FDI
Technology Guns & Cannons Bombs & Foreign brands
Satellite dominating
domestic brands
Government Emphasis on Nationalization Great importance
attitude bureaucratic capital of SOEs at
expense of private
enterprises
Industrial Buying is better than Self-reliance Develop own
policy building own brands brands rather than
buying foreign
brands
92 Bai Gao
The first formed during the latter half of the nineteenth century at
the rise of the first wave of globalization. Yangwu yundong represented
this tradition of opening to the outside world, and reform, industrializa-
tion, and modernization in China. The other emerged after the 1930s
with the reversal of the first wave of globalization. Socialism gained
sway in China in response to the Great Depression and the failure of the
capitalist market economy, and in this process self-determination and
self-reliance developed into a dominant tradition that largely framed
the official thinking and policy of Mao’s era. My discussion here will
not dwell on an ethnic judgment of these two profound traditions, but
rather it will focus on how these two differ at a more functional level.
Seen in the general relationship between the Chinese economy and
the international market, Yangwu yundong represents the tradition of
opening to the capitalist world economic system, even though such
opening was forced under the pressure of external forces led by major
powers. During Mao Zedong’s time, China’s foreign trade was limited
to the Soviet Union and East European socialist camp and closed to
the capitalist world economic system, except for the small window of
Hong Kong in limited trade with capitalist countries. The majority of its
economy was closed off to the capitalist world economy.
Seen in this perspective, today’s reform and opening up continues
the tradition of Yangwu yundong. Interestingly, the views of academics
in China toward Yangwu yundong has changed a lot since reform and
opening up. Prior to 1978 , they were generally negative. Since then,
however, they have become overall positive (Jiang 2004).
The role of foreign investment in the Chinese economy has also
changed since the time of Yangwu yundong. Foreign capital began to
enter China during Yangwu Yundong years. Following China’s defeat
in the Sino–Japanese war and signing of the Treaty of Shimonoseki in
18 95, foreign investment into China was formally allowed. There was a
lot of foreign investment before but the Qing government never legally
recognized it. The Treaty of Shimonoseki formally recognized the legal
status of foreign capital in China. The position of foreign capital in
the Chinese economy has been improving from the late Qing to the
Republican period. According to 1936 statistic, the shares of foreign
investment in several key industries, such as shipping, coal, and iron
production, ranged from 66 percent to 99 percent (Hou 1965).
In the Mao era, foreign investment disappeared in China. One can
argue that today’s opening up is a continuation of the trend that began
during Yangwu yundong. Needless to say, the portion of foreign invest-
ment in China’s national economy then is not comparable with that of
today. Now China is a strong and sovereign state which is different from
China in the 1920s and 1930s. However, in terms of the treatment of
foreign capital, China today is closer to the Yangwu yundong era than to
the Mao Zedong era.
In term of the role of technology and innovation, Yangwu yundong was
to “buy foreign guns and cannons.” Modernization, especially mili-
tary modernization, was largely a matter of buying new hardware and
machinery from the West. During the Mao Zedong era, China relied
on independent innovation for research and development. Nuclear and
hydrogen bombs and satellites were exemplary products of this indig-
enous innovation system. With the reform and opening, foreign brands
became dominant in the Chinese domestic market. We seemed to return
to the time of Yangwu yundong. In recent years, China has become more
aware of its need for indigenous national brands. There has been a series
of efforts by the government to develop China’s own system of innova-
tion. There are signs that China is swinging back from Yangwu yundong
tradition to the tradition of independent innovation. Independent
innovation will become a core component of China’s industrial policy
in the future.
In government’s approach toward different types of enterprises, we can
also see the differences between the traditions. Under Yangwu yundong,
state capital and foreign capital were treated more highly than domestic
private enterprises. In the Mao Zedong era, there was full-scale national-
ization, and domestic private capital was subject to discrimination. State
centralism continued from the time of Yangwu yundong. Many private
enterprises in China are still subject to discriminatory policies. Foreign
capital enterprises are often treated much better than domestic private
enterprises. However, as shown by Huawei, ZTE, and many others enter-
prises, private enterprises are often an important source of independent
research and innovation capacity. But because private enterprises are not
given due rights, many choose to become foreign registered companies
and then enter China again as foreign businesses.
On the relationship between industrial capital and government procure-
ment, the policy of the Qing government at the time of Yangwu yundong
was always “buying is better than making.” In the Mao Zedong era, this
completely reversed. Recent debates on industrial policy have shown,
however, that many government departments today take government
procumbent more from the government as a consumer rather than from
the perspective of industrial policy. For example, for high-speed rail
locomotives for Beijing–Shanghai lines, China already had developed
the China Star, but the government chose instead to buy the German
94 Bai Gao
Maglev and Japanese Shinkansen instead. Manufacture of these high-

speed locomotives can benefit the development of many associated
industrial sectors. It is hard to imagine that the governments of Japan
or Korea would do the same thing – buy foreign products although their
own enterprises could produce them.
Y-10 is another example. When Nixon’s Boeing 707 arrived in Beijing,
Mao allegedly ordered that China must also build a large commercial
aircraft. The start of the Y-10 project was only two years later than the
start of the Airbus project in Europe. In 1979, China made a prototype
that flew successfully to Lhasa six times. In 198 6, because of the problem
of a RMB 30 million budget, the project was abolished. China chose to
work with McDonnell Douglas, which promised to help China make its
own large commercial aircraft in 20 years. Today, China is doing very
limited part of manufacturing and use huge foreign exchange reserves
to buy foreign products. This is not really possible under the classical
developmental models of Japan and South Korea.
One can argue from the above analysis that there are significant
elements of Yangwu yundong tradition in China’s neoliberal development
model. I would further argue that China is currently facing a dilemma.
The opening tradition of Yangwu yundong is not all that problematic. We
should avoid moralizing the discussion of the indigenous innovation
system. China’s neoliberal development has many shortcomings, but it
has also played a positive role in the following areas: first, foreign invest-
ment has brought jobs and production technology;. second, the model
mixed Chinese economic interests with that of other countries and thus
has reduced the risk of confrontations with them. It has allowed achieve-
ment of high-speed economic growth before the endogenous system of
innovation has been fully developed.
6 Challenges in transformation of China’s economic model
Both the Japanese classical development model and the Chinese

neoclassical development model were products of their specific histor-
ical environment. When major changes take place in such an environ-
ment, these models will inevitably face the challenge of responding
and subsequently adjusting and transforming themselves. The Japanese
model arose in the declining stage of the first wave of globalization and
the beginning of the second wave. The Japanese model proved to be
highly resilient. However, as the second wave of globalization surged
ahead, the Japanese model appeared to become increasingly incompat-
ible with the changing environment and experienced a painful process

of transformation, which has still not ended.
The Chinese model emerged at the time of the rapid rise and expan-
sion of the second wave of globalization. This wave has not receded and
the Chinese model shows great competitiveness. However, signs show
that the rapid rise and expansion of globalization may be reaching its
turning point: developed countries are increasingly facing great pres-
sure from developing countries in employment and wage levels. Many
economies see housing market bubbles with signs of bursting, increase
of trade protectionism, and the rising influence of right-wing political
forces in some countries. There are growing imbalances in the interna-
tional economy.
If we compare the challenges faced by the Chinese development
model today and by the Japanese development model in the 198 0s (see
Table 4.13), we will find that China’s challenges are more severe. Let
me show this first in the relations of the two countries with the hegem-
onic United States. Both the Japanese and Chinese economies have high
dependence on US domestic consumption. This results in their huge
trade surpluses with the United States. This will inevitably lead the two
Table 4.13 Challenges in transformation of the two development models
Japan China
Relationship with US ally in Cold Regarded as main
hegemonic powers War, asymmetrical challenge to US
collaboration within hegemony, constraints
GATT framework of the WTO framework
Temporal and spatial Trade friction of the Post-Cold War
conditions of conflict Cold War, bubble burst economic, political, and
with hegemonic power at end of the Cold War strategic friction
Level of dependence on High degree of High degree of
market of hegemonic dependence, high trade dependence, high trade
power surplus surplus
Cost of trade patterns Lower resource and Higher resource and
energy dependence, energy dependence, very
high value added low value added
Impact of exchange rate Caused the bubble to Losing comparative
changes burst, still maintained advantage in cheap
comparative advantage labor, double risk of
in technical aspects bubble and deflation
96 Bai Gao
countries to experience political and economic friction with the United

States and resulting political pressures from the United States.
However, there is one key difference. While Japan had huge trade
surpluses with the United States in the 198 0s, it was a Cold War ally
of the United States. When the former Soviet Union collapsed in 1990,
Japan’s economic bubble also burst. Therefore, Japan never experienced
the situation China is facing: since the end of the Cold War, China
is often treated as the potential challenger or opponent in the same
way the United States saw the Soviet Union during the Cold War. Both
development models posted a similar challenge to the United States, but
Japan is a democratic ally, with a market economy.
Because of this, hardliners in the United States had a harder time
persuading the American people to take a tough stand against Japan.
China, on the other hand, is more likely to face this potential conflict
with the United States, because, for one thing, it has a different political
system. The Chinese model does have one advantage in balancing these
unfavorable conditions. Its markets are highly integrated with global
production, and it takes only a small part of profits from global value
chains. US interests and China’s interests are closely tied together. This
in a way can help neutralize the voices of hardliners.
The transformation of the Chinese model faces a more severe chal-
lenge than that of the Japanese model also because of the emerging new
global challenges. Resources, energy, and exchange rate are just a few
of them. A development model can have great impact on a country’s
ability to adjust to the changing external environment driven by the
changing relations between energy resources in trade and the value
added. The Japanese model emphasizes creative and original work of
high-value-added products, using less resources and energy to create
higher added value.
The Chinese model, however, uses a lot of resources and energy but
produces low-value-added goods. For example, in 2004 China used
33 percent of the world’s cement and steel to produce only 6 percent
of the world total GNP. When the exchange rate changes, such a devel-
opment model is much more exposed to ticks in the exchange rate
change. In the late 198 0s, Japan experienced a bursting of its economic
bubble but it was still able to rely on innovation to maintain competi-
tive advantage in the global economy. If the renminbi appreciated to 1:4
or even 1:5 against the US dollar, one can imagine that many multina-
tional corporations would relocate their production to places with lower
labor costs. In face of similar challenges, therefore, the Chinese model
may face far more dire consequences than even the Japanese model.
7 Conclusion
Different from the classical East Asian developmentalism represented

by Japan that has emphasized the protection of domestic markets and
making value-added products with self-owned brands, China’s new
developmentalism has actively opened up domestic markets for inter-
national capital, relying on cheaper labor to participate in the global
production system and stimulating economic growth by promoting
exports of manufactured goods.
This chapter argues that these differences reflect the very different
historical conditions under which the two different types of develop-
mentalism operated and the state’s attitude toward market forces. In
particular, the Japanese classical developmentalism from the 1930s to
1970s suited well to the transitional period between the first and second
stages of globalization where the classical thinking of competiveness of
national products and social stability prevailed. In the second period of
globalization, Chinese developmentalism began to take shape in the late
1970s during the rapid development of the second wave of globalization
when the ideas of free market, efficiency, and international division of
labor dominated. A particular development model, the author argues, is
a product of historical conditions.
Note
1. Summary and discussion of Japan’s neoliberal developmentalism are seen
in Gao (1997), Gerlach (1992), Johnson (198 2), Murakami (1996), Tilton
(1996), and Uriu (1997).
5
Chinese Developmentalism:
Beyond the Japanese Model
Marc Lanteigne
1 China considers globalization
As a developing state, China’s methods of economic growth have been

very distinct during the past three decades, both because of the size of
its market and the speed and effectiveness by which it has implemented
market reforms thus far. Not long after the concept of “globalization”
was accepted into Chinese policy statements under then-President
Jiang Zemin in the early 1990s, globalization as a source of essential
economic goods and its great socio-economic risks was acknowledged
by Chinese policymakers. In comparison with many other countries,
the components of globalization were introduced at a much slower pace
in Chinese policymaking and academic discourse, and in a very conserv-
ative fashion.
There was recognition under the Jiang government that China could
ill afford to eschew a further deepening of its engagement with the
global economic system, despite its ongoing domination by Western
market powers. As well, China in the 1990s had neither the means nor
the desire to establish, or even promote, a separate system of economic
networks to better suit its needs, as the Soviet Union had attempted
to do a generation earlier when it established the Council for Mutual
Economic Assistance (Comecon) during the Cold War with its Eastern
European and Asian socialist satellite states (Kim 2006: 279–8 4). Instead,
Beijing had to pursue globalization through direct engagement with
Western-dominated rules, norms, and organizations.
China continues to be faced with the same questions about globali-
zation as many other states, including how to maximize its social and
economic potential while avoiding an unacceptable erosion of state
power. Beijing has approached some aspects of globalization differently
98
Chinese Developmentalism 99
from the West, and this schism has grown as a result of the post-2008
global recession and growing Western wariness of Chinese economic
policies. At the same time, China’s economic growth and resilience
has placed the country in a unique position to purchase and invest in
European, American, and other assets to a much greater degree (SMH
2011: December 3). Crucial to this understanding of China’s approach
to the global economy has been its domestic economic policies of modi-
fied “developmentalism,” borrowing extensively from Japanese and,
by extension, other East Asian economic growth models, beginning in
the 1990s. This growth model has allowed for an ongoing strong state
presence in key Chinese economic sectors while continuing to promote
openness and enhanced engagement in international markets and was
largely responsible for the expansion of the Chinese economy to the
point where it was acknowledged in 2011 to have become the second
largest in the world.
The ongoing adjustment of the Chinese economy to market forces
and globalization currently takes place under the twin problems of
what Zheng Bijian, author of the initial views on the concept of China’s
“peaceful rise” (heping jueqi) in the international system, termed the
“mathematical propositions.” First, any socio-economic issue related to
development, no matter how minor, has the potential to be multiplied
exponentially by China’s population of 1.3 billion. Second, the country’s
financial and material resources must be viewed as being divided among
this great population (Zheng 2005: 38 ). This level of economic distor-
tion caused by the population factor raises the country’s sensitivity and
vulnerability to the potential problems of globalization significantly, in
proportion to other emerging markets.
At the same time the population factor both underscores and helps
to explain the cautious approach the Chinese government has taken
toward maximizing the benefits of its international opening while
seeking to minimize the risks. These size restrictions had previously
impeded Beijing from engaging in developmental policies more identical
to those which were credited for the economic development of Japan
after the war and subsequently the East Asian “newly industrializing
economies” (NIEs) of Hong Kong, Singapore, South Korea, and Taiwan
in the 1970s and 198 0s. Nevertheless, Chinese developmentalism acted
as a first stage in the creation of a Chinese economic model which has
been increasingly examined as an alternative method not only to the
Japanese/NIE model of economic development but also to the faltering
liberal approaches of the United States and Europe as a result of the post-
2008 global credit crunch and subsequent recession.
100 Marc Lanteigne
2 Models for Chinese growth
In seeking to entrench Chinese reform policies, Deng Xiaoping looked

closely at Japan and the growing “tiger” economies of East Asia, and
opted to develop a modified “developmental” economy as it emerged
from the no – longer viable Maoist command system (Z. Li 2004: 1–6).
The post-1978 opening of the Chinese economy has been described as
implementing export-oriented policies designed to take advantage of the
country’s strong position in both labor and manufacturing, while still
retaining degrees of important substitution industrialization (ISI) left over
from the late Maoist/transition period (1972–8 ). It was during this period
that a tentative reopening to the global economy was attempted, and
the removal of radical elements within the Communist Party of China
(CPC) assisted with the stabilization policies of Zhou Enlai and later
Deng, upon his return from political exile (Naughton 2007: 76–7). An
ISI system involves the widespread blocking of imported industrial goods
into a country, thus favoring and protecting domestic companies while
strongly encouraging consumers to purchase local goods and services.
This was a common practice among newly independent developing
states in the last century, especially in Latin America, as a means of
protecting infant industries. These policies were also practiced in other
East Asian states, including South Korea, before being abandoned in
favor of export-oriented economic reforms (Brawley 1998 : 279–8 5). In
order for China to successfully open to international markets and be
accepted into the global economy, however, its command system and
ISI policies needed to be scaled back to permit foreign goods and serv-
ices to be offered to Chinese consumers, and Chinese companies had to
prepare for competition or run the risk of bankruptcy. Thus a major facet
of the Dengist economic reforms was a turn toward export orientation
but in a manner much different from that of the West.
True “developmental” states have been rare in the international
economic system, and the debate concerning the degree of develop-
mentalism contributing to the rise of Asia as a strong economic region
remains a subject of ongoing analysis. The Asian developmental model,
as seen in Japan as well as South Korea and Taiwan after World War II,
along with other economies in East Asia, is defined by its observance
and respect for market economics and private property, in contrast to
command economies which abhor such concepts. At the same time,
there is acknowledgment of the importance of competition both in and
from international markets, with growth and stability being considered
the primary goals.
However, unlike the traditional neoliberal economic models, markets

in the developmentalist model are largely guided by a small group
of highly skilled and educated elites. There are commonly strong
links, including information sharing between government and major
economic actors, (firms, factories, and unions, for example), which
allow for mutual consensus building on the direction development
should take. Under developmentalism, internal political debates over
methods of growth are kept to a minimum even at the expense of social
equality and, in some cases, labor rights. The state bureaucracy therefore
has a commanding role in overseeing development, or “politicians reign
while bureaucrats rule” (Öniş 1991: 109–10).
Moreover, in a regulatory state such as those found in the West,
governments concern themselves with whether businesses and indus-
tries are following rules and laws of conduct but do not normally delve
further into which economic sectors should be promoted and which
are obsolete. In a developmentalist model, the state is much more inva-
sive and often does directly intervene in deciding which industries and
sectors need to be promoted, internationalized, or discarded. Often
there is also a “pilot agency” in the form of a ministry with broad and
overreaching policymaking powers and influence, such as the former
Ministry of International Trade and Industry (MITI)1 in Japan, to coordi-
nate policymaking and the implementation of new schemes, and links
are strengthened between governments and firms. In the case of Japan,
many firms arranged themselves into conglomerates known as keiretsu,
and governmental connections were maintained through a variety of
means, including the practice of amakudari, or “descent from heaven,”
whereby firms would hire early retired bureaucrats to fill senior manage-
ment positions (Johnson 198 2: 2–23, 1995: 142–6). These practices
greatly improved information flow between states and firms and allowed
governments to more efficiently accumulate necessary knowledge about
which sectors required attention and occasionally intervention.
In other Asian developmental states, similar corporate structures, along
with close government–industry ties, were created in order to facilitate
economic planning and modernization, including the chaebol system in
South Korea and the development of conglomerates in Taiwan, known
as “caifa” (Wu 2007: 98 6). Both economies, along with other newly
industrializing East Asian states, also benefited from the overspill not
only of Japanese economic ideas but also, in many cases, the importing
of offshore Japanese firms and factories, a process which was commonly
referred to in Japanese policy circles since the 1930s as the “flying geese”
effect.
102 Marc Lanteigne
Under this process, leading countries at the forefront of technological

innovation begin to move secondary industries to other more-developing
economies, and then when those developing economies accumulate
enough capital, said industries are moved to less-developing economies,
creating a chain reaction, which eventually improves the economic
well-being of an entire region (Akamatsu 1962: 3–25; Korhonen 1994:
93–108 ). This process was used to describe Japan as the lead goose, with
the NIEs close behind, and eventually other Asian economies catching
up. However, in the initial calculations, China was not seen as a major
participant in this process given that, until the 1970s, the country was
isolated and mired in economic destitution. After the turn of the twen-
ty-first century, Japan’s role as the lead goose began to be eclipsed by the
flying panda. Nevertheless, Japan’s developmental model did begin to
be adopted by several other Asian economies before being incorporated
by China.
Developmentalism also has a visible political component. In the case
of Japan, the post–World War II developmental system was constructed
during a period of one-party dominance by the Liberal Democratic
Party (LDP), which maintained a near monopoly on power for almost
four decades. In the case of the equivalent systems in South Korea and
Taiwan, they were developed under authoritarian regimes: the military
rule of Park Chong-hee in Korea and Chiang Kai-shek’s Kuomintang
party-state in Taiwan. The combination of an authoritarian government
and economic policies dominated by market economy and export-led
economic growth led to the dominance in these countries of bureau-
cratic-authoritarian industrializing regimes, or “BAIRs,” a term used to
describe the Korean and Taiwanese variants of the developmental model
(Cumings 198 7: 69–78 ) .
The fact that South Korea and Taiwan were also forced to deal with
direct threats to their very existence at times, in the form of North Korea
and mainland China respectively during their high-speed economic
growth period, further contributed to the urgency in ensuring no serious
errors were committed in the economic development process. There was,
therefore, little opposition to the sweeping reforms which punctuated
the developmental systems. With opposition forces either marginalized
or banned, these systems could undertake selective economic activism,
meaning the frequent practice of the state in engaging in the manage-
ment and guidance of national-level economic activities (Huang 2009:
105–6), with little disruption either from other political actors or other
groups such as unions. The models created by Japan and the BAIRs,
therefore, offered much to Beijing at a time when it was searching for an
economic alternative to the Maoist system while avoiding an outright

variation of the Western capitalist model.
3 China adapts to developmentalism
During the 198 0s and 1990s, when the Dengist economic reforms in
China were still very much in the experimental stage, it was under-
stood that economic modernization should be undertaken carefully and
slowly, in keeping with Deng’s idea of “crossing the river by feeling the
stones” (mozhe shitou guohe). The gradualist approach, although criti-
cized for permitting excessive rent-seeking behavior as well as encour-
aging corruption by those within the government able to manipulate
the rules to enrich themselves,2 was nonetheless seen as a more viable
alternative than practicing “shock therapy” by liberalizing too much of
the economy in a short space of time. The example of Russia in the years
immediately following the fall of the Soviet Union, when attempts were
made by the Yeltsin regime to “de-communize” the economy, resulting
in widespread economic chaos and corruption, seemed to vindicate
Beijing’s “go slow” approach to economic reform.
There was, however, great urgency to stimulate external trade. With
so many economic sectors crushed flat during the late Maoist Cultural
Revolution period of the 1960s and early 70s, there was plenty of avail-
able capacity and labor in China which could be redirected toward
stimulating trade along the lines of classical economist Adam Smith’s
ideas of “venting for surplus” (Meier 198 4: 48 9–92), to allow excessive
capacity to be channeled into providing goods and services for inter-
national trade. However, because China was very much a newcomer to
global market behavior, such reforms had to be undertaken in a conserv-
ative fashion which did not challenge the primacy of the Chinese party-
state or Deng’s “four cardinal principles” which included keeping China
on the socialist path.
At the same time, Deng had to convince a skeptical party apparatus
that the Chinese people, who not too long before had been described
by Mao as “poor and blank” (yiqiong erbai) (Schoenhals 198 6: 108 ), were
now ready to be exposed to the international market. Deng’s justifica-
tion for opening China to the outside economy was the need for both
higher technology and knowledge of business management, as well as
the fact that “the world is open” and that maintaining a closed economic
system would only perpetuate the backwardness into which China had
descended and prevent the country from achieving modernization levels
seen in the advanced economies (Deng 1993: 90, 1994: 127).
104 Marc Lanteigne
Unlike Mao, who was unwilling to consider economic models which

strayed too far from Marxist-Leninist forms, Deng, at the start of the
reform era, was more than willing to examine and, if necessary, adapt the
development models of other states. The success of Japan and other East
Asian economies on China’s periphery caught the attention of Beijing in
short order, especially since the developmental states in Asia were deliv-
ering high growth rates at that time, while maintaining the dominant
role of the state. At the same time, the developmentalist idea fit well
with the traditional Chinese thinking of “all under heaven” (tianxia), a
classical Chinese sociopolitical theory which stresses the need for inclu-
siveness coupled with garnering mass support from the people via good
governance (Zhao 2011: 21–36).
Moreover, as So noted in his study of Chinese developmentalism,
Beijing did have the advantage of a highly centralized state which
was constructed during the Maoist era that facilitated the “top-down”
reforms needed for a developmentalist state to take root (So 2002: 6). As
well, the recently ended Cultural Revolution (1966–76) and the discred-
iting of leftist radicalism within China also facilitated Deng’s policy of
finding a different path to Chinese economic development.
However, the Chinese economy differed greatly from those of Japan
and the NIEs for three major reasons. First, China has a much larger
population than the traditional developmental economies, along with
an economy which was still very much dominated by the agricul-
tural sector and by state-owned enterprises. These had to be carefully
reformed so as not to spark widespread unemployment and discord. The
process of SOE reform continues to be a sensitive area of the Chinese
economic reform process. At the same time, in contrast to that of many
other parts of East Asia, China’s population was overwhelmingly rural at
the start of the Dengist reforms, a situation that was only reversed well
after the reforms were under way. It was announced that China’s urban
population finally became a majority in 2011, standing at 51.27 percent
(Xinhua 2012: January 17).
However, even taking into account the country’s growing urbaniza-
tion levels, there is also the question of how much of China’s city popu-
lations are a result of government-engineered urbanization, designed to
bolster local revenues but contributing little to the overall economy, a
process seen as “pseudo urbanization,” or “urban sprawl” (Yew 2012:
28 1–98 ). This situation stands in marked contrast to the heavily urban-
based economies found in Japan and other areas of the Pacific Rim.
Moreover, the shape of the urban versus rural economies became mark-
edly different as a result of the Dengist reforms, and one study suggested
that much of the reform era was marked by a seesaw competition between
the more entrepreneurial rural sectors and the state-controlled urban
sectors, with the state expanding its presence in the Chinese economy
in the 1990s (Huang 2008 ).
Second, unlike Japan and the NIEs, China was still in the process of
reforming what used to be a staunch command economy developed
after the Soviet model, a difficult and extremely risky process especially
during the first stages of the Dengist “opening up” process. A corner-
stone of the developmentalist idea was that the ruling elites had to be
economically knowledgeable (and sufficiently savvy) in order to under-
stand which sectors were and were not relevant in the global market and
to predict economic trends in order to “pick winners.” Misreading the
market or not being able to address global economic shocks would be
disastrous for a Chinese government which was staking more and more
of its reputation, both under Deng and Jiang Zemin, on consistently
improving domestic living standards.
The case of Indonesia in 1998 was a warning bell for Beijing. The
Suharto government collapsed after being unable to forestall the coun-
try’s economic collapse, which included mass bank closures, a harsh
International Monetary Fund (IMF) austerity plan, and a rapid drop in the
country’s currency value during the Asian Crisis. When the Indonesian
economy began to collapse, the Suharto regime’s own experimentation
with economic developmentalism came to an abrupt halt when the citi-
zenry, having no outlet for holding the government accountable due
to a compromised electoral system, instead erupted into protests which
eventually forced Suharto’s resignation (Rodrik 1999; Haggard 2000:
65–70; Thompson 2004: 1079–95). There is the concern in China that a
similar economic slowdown might lead to a similar result, and therefore
maintaining high growth rates remains a key policy for Beijing.
Third, Japan and, to a lesser degree, other NIEs also had the added
benefit of constructing a developmentalist, state-guided economic
system while having their security concerns largely overseen by the
United States throughout much of the Cold War era. The American secu-
rity umbrella meant that funds which would otherwise have been used
for military expansion were instead channeled to other economic areas,
and as a result Tokyo, in particular, chose to pursue what had been called
“mercantile realism,” meaning the pursuit of “techno-economic” secu-
rity and to ensure that domestic economic growth was protected and
remained a paramount concern of the state (Heginbotham and Samuels
1998 : 171–203). South Korea, Taiwan, and, to a degree, other parts of
Southeast Asia also benefited from the American security presence.
106 Marc Lanteigne
China, however, had no such umbrella and therefore had to begin

its economic development program in the late 1970s and early 198 0s
with one eye fixed on hard security concerns, including border tensions
with the Soviet Union and a brief frontier skirmish with Vietnam. Even
in the 1990s, when China experienced a much more congenial security
atmosphere around the Pacific Rim with the disappearance of the Soviet
Union and the warming of Sino–Southeast Asian relations, the military
continued to play a strong role in both Chinese politics and economics,
and remains a factor in Beijing’s economic planning, as evidenced by the
steady annual rise in military spending which reached US$106 billion
by the beginning of 2012 (New York Times 2012: March 4).
China’s developmental ambitions had to be tempered by political
realities, including the oftentimes vicious 198 0s internal CCP debates
over the depth and breadth of the general reform process, to the point
where one scholar referred to China’s attempts to adapt the develop-
mentalist model as “dysfunctional” (Breslin 1996: 68 9–706). While it
was not possible for Beijing to completely duplicate the developmen-
talist models of Japan and the NIEs for the reasons noted above, many
facets of the later Dengist economic reforms, and those continued by
Jiang Zemin in the 1990s and Hu Jintao in the 2000s, followed liber-
ally developmentalist ideas, especially the idea of state-led develop-
ment under what one Chinese economist referred to as “competitive
advantage-following.”
The government of a developing country seeking to modernize, it was
argued, should act as an information collector as well as a coordinator
of economic activities. Under certain circumstances, the state should
play the role of protector of Chinese firms which suffer from unforeseen
“externalities” or do not succeed despite following government guid-
ance. Since a developing state, compared to advanced states, already has
the advantage of being a latecomer to economic modernization, there
is somewhat more predictability, but at the same time the state must
ensure that developing firms are given a comfortable degree of state
support (Lin 2012: 128 –31).
As well, unlike Japan, China did not seek to develop an overreaching
pilot agency or “super-ministry” along the lines of MITI, providing one of
the reasons why its model of developmentalism has also evolved differ-
ently from those seen elsewhere in East Asia. When the government of
Jiang Zemin sought to accelerate economic reform and expand foreign
trade and investment, the focus was on addressing outdated ministries
and excessive bureaucratization of the Chinese economic system. In
the 1990s, there were attempts to pare down the number of ministries
overseeing economic affairs in China, one of the most ambitious being

the widespread 1998 party-state restructuring overseen by then-Premier
Zhu Rongji. The overall number of ministries was reduced and some
were absorbed into the State Economic and Trade Commission (SETC)
which was overseen by Zhu himself and given widespread coordination
of regulatory powers (Yang 2004: 25–64).
At the same time, other ministries seen as useful for developing a
fledgling e-commerce dimension of the Chinese economy were rolled
into the newly created Ministry of Information Industry (MII), which
oversaw Internet development until 2008 when MII was reordered into
the Ministry of Industry and Information Technology (MIIT) in 2008
(Lanteigne 2005: 45; Xinhua 2008 : June 27). Despite this consolida-
tion, it cannot be said that China developed an equivalent of MITI or
its successor in Japan, the Ministry of Economy, Trade and Industry,
although China’s Ministry of Commerce, or MOFCOM, created in 2003,
does have considerable oversight powers in the areas of imports and
exports, trade and investment.
In China, the line between state-owned and non-state-owned indus-
tries is less defined, and there is more emphasis on “bottom-up devel-
opment,” encouraging the development of small businesses at very
local levels as well as larger firms, but with more risk of corruption and
gaps between rich and poor (So 2003: 18 –19). This has affected both
internal economic reform and the development of trade in the country.
While the CPC, since the Dengist era, recognized that the market would
need to be freed in order to promote faster development, a threshold
level of control over large economic sectors and especially those which
would become more fully internationalized was required to prevent a
nightmare scenario similar to that which befell the Soviet Union during
the last years of the “perestroika” reforms by Mikhail Gorbachev in the
late 198 0s.
From the time of the initial Dengist reforms to the economic restruc-
turing under Jiang Zemin and Zhu Rongji to the more current policies of
Hu Jintao and Wen Jaibao, there had always been the emphasis on reform
while keeping the integrity of the party-state in China intact. Therefore
foreign interests and the non-state economy have been considered by
Beijing as important but not as much as those economic actors supported
by the state, known collectively as the “in the system” (tizhinei) economy
(Walter and Howie 2011: 8 ). Moreover, several sectors were opened to
competition by the end of the 1990s while attention was refocused on
key industries in a similar fashion to the Japanese model. Thus the catch-
phrase in Chinese governmental circles became “grasp the big, let go of
108 Marc Lanteigne
the small” (zhuada fangxiao). This meant that Beijing had to let smaller,
local firms be free of governmental control or support while focusing on
large enterprises in key industries (Ho and Lin 2003: 68 6).
China’s views on economic liberalization as well as a deepening of
the engagement with the global economy became much more favorable
as the country grew in economic power. Beijing remains a supporter
of both the World Trade Organization and of a satisfactory resolution
to the moribund Doha Round of WTO global trade talks, while at the
same time often siding with those demanding more equitable treat-
ment of developing states. The latter stages of the WTO negotiations
in the 1990s were very difficult, especially the direct negotiations with
Washington, and, as a result, two separate schools of thought on these
issues emerged. On the one side are liberalists who have supported
greater economic opening, and on the other is the so-called “New Left
Movement” (xinzuopai). The latter emerged over the past decade and has
been highly critical of Beijing’s rush to join economic institutions which
are Western-dominated as well as unquestionably embracing of Western
economic practices and globalization (Wang 2009).
Their argument, which has manifested itself in scholarly articles and
commentaries, was that China’s rush to join international economic
institutions and to rapidly liberalize the Chinese economy has been
inherently destabilizing and has resulted in an overabundance of
Western control over China’s development (Fewsmith 2008 : 221–4).
The debate had flared up with the publication of the book, China Can
Say No, in 1996 and resurfaced with the publication of the controversial
2009 study Unhappy China (Song et al. 2009). This deliberation between
economic liberalists and “new leftists” further underlines how the
domestic and international economies in China have become increas-
ingly blurred, as well as whether the Chinese developmental model can
continue to successfully resist both internal and external pressures.
China, although not adapting all aspects of the developmental model,
has created a modified version to account for the still-embryonic and
debated private property laws, a very large agricultural sector, and a
considerable percentage of the Chinese economy which remains directly
state-owned. The number of SOEs, along with their financial contri-
bution to the Chinese economy, has been dropping since the acceler-
ated reforms of the 1990s, but many are still kept in business through
government and bank support. Then there is the simple fact that China
is much larger, geographically and demographically, than the other
developmental states of the past, presenting a different set of govern-
ance concerns for the party-state and accentuating the need to avoid
economic chaos which could spark domestic crises. China today is on

a much different economic footing from the East Asian developmental
states of the 1960s and 1970s, when they first adopted such policies.
Nevertheless, there are many points of comparison between Japanese
developmentalism and the modified Chinese version which continues
to take shape. As with previous developmental systems, the Chinese
state was insulated to a sufficient degree for it to implement develop-
mental policies without facing strong domestic opposition, and also had
the ability to make changes or repairs during the process, again without
significant barriers.
Also, the dominant role of the Chinese Communist Party in govern-
ment allowed for the implementation of developmentalist policies
as well as to “capture” emerging economic actors, especially business
sectors, using economic incentives, a process commonly associated with
what is studied in comparative politics theory as “state corporatism”
or neo-corporatism (Schmitter 1974: 8 2–131). In the case of China, the
often complicated division between SOEs and private and semi-private
industries, as well as Chinese enterprises and the government, further
allowed state oversight of major economic “players” and the sharing of
information.
There is also the widespread practice in China of newly developing
private companies registering themselves as “collective enterprises”
and further disguising their true nature in the hopes of receiving better
treatment from state agencies and greater access to loans and start-up
funding, a practice known as “wearing a red hat” (dai hongmaozi).
Former CPC members have also gone into business at various levels,
becoming so-called “xiahai entrepreneurs” who often maintain their
previous governmental connections.
The term xiahai, or “jump into the sea,” comes from the popular
Chinese euphemism for entering the world of private business with
all of the associated risks compared to the relatively more predictable
public sector (Tsai 2007: 53–4). These trends have further blurred the line
between public and private enterprise in China and presented an added
challenge for foreign investors and analysts seeking to better understand
the country’s economic landscape. Therefore one central tenet of the
developmentalist model, namely the close association between govern-
ment and business, is being echoed in China today, albeit through
different means.
It has been argued that bona -fide developmental states are not only
rare but also appear in very specific cases, namely when state leaders
perceive distinct and potentially very harmful economic challenges to
110 Marc Lanteigne
governance, the process of “systemic vulnerability.” A state may seek

developmentalist policies if it is facing the threat of economic insta-
bility precipitating mass unrest, an increased need for foreign exchange,
the wherewithal to fight wars based on national-level insecurity, and
constraints on budgets caused by a lack of easily accessible sources of
revenue (Doner, Titchie, and Slatre 2005: 327–61). It can be argued that
China falls into all three categories to varying degrees, and this would
explain why Beijing would wish to retain developmental features even
under globalization pressures. As well, although China does not share the
same issues as Japan and other East Asian economies regarding limited
natural resources, the rate at which China is seeking raw materials in
order to sustain continuous growth is becoming of greater concern to
Beijing, particularly in the area of energy.
As China’s economy continues to modernize, its level of engagement
with the global economy has also, by necessity, expanded. The country’s
first few steps into the global market were tentative, but as a member of
the WTO and as a recognized large emerging market, China is demon-
strating more confidence in its dealings with outside economic actors,
even with giants like the United States, the European Union, and Japan.
However, as China adapts to the changed global economic system,
which has seen a variety of power shifts in a very short time, many
new questions about China’s economic maturation and developing
power have appeared. While China’s economic development has moved
further away from the traditional Japanese model, it is likely that several
vestiges of Japanese-style developmentalism will be retained after the
2012 leadership transition in Beijing has been completed.
4 Beyond developmentalism: the Beijing consensus
As China continues to deepen its economic reforms and expand its

economic reach well beyond the Asia-Pacific region, the term “Beijing
Consensus,” which has its origins in the Chinese developmental model,
has evolved over the past decade from a theoretical idea to one which is
increasingly taken seriously in analyzes of China’s foreign policy as well
as its growing economic footprint on a global level. The question of how
an alternative “Chinese” path to development is taking shape is directly
linked to whether such a “consensus” actually exists.
Moreover, these ideas also coincide with the growing debate over
whether China has developed a threshold degree of “soft power,”
meaning the ability to influence via attraction rather than coercion, as
a result of its economic successes (Gill and Huang 2006: 17–36). The
Beijing Consensus idea, first coined by Joshua Cooper Ramo of the

Foreign Policy Centre in London in a 2004 paper (Ramo 2004), suggested
an alternative theory of development to the standard Washington
Consensus model. The Washington Consensus model was omnipresent
in the 1990s and formed the cornerstone of loan and assistance policies
issued by international financial regimes such as the World Bank and
International Monetary Fund, as well as the United States in its financial
dealings with the developing world.
The Washington Consensus was first articulated by economist John
Williamson in 198 9 (Williamson 1993: 1329–36), and stressed neoliberal
economic policies including the reduction of the public sector, open-
ness to foreign economic competition, fiscal discipline, the sale of state
enterprises, and liberalized trade. Under this view, the state was to inter-
vene as little as possible in favor of allowing “trickle-down economics”
both within states and among them. These ideas were routinely used by
developed states and regions in their financial engagement of developing
states in the name of improving the economic status of the latter.
However, this approach soon came under harsh criticism in developing
states, especially in the wake of economic crises in Latin America, Russia,
and East Asia during the 1990s, for perpetuating “neo-mercantilism”
and entrenching divides between rich and poor both within developing
states and between the developing and developed countries. The back-
lash against the neoliberal policies of the Washington Consensus was
keenly felt at the turn of the century in many developing states in Africa
and Latin America. The onset of the global recession, which was largely
blamed on too little state intervention in banks and financial institu-
tions and the accumulation of an excess of debt, seemed to further call
into question the wisdom of the neoliberal economic model.
The Beijing Consensus, by contrast, rejected many aspects of the
neoliberalist approach as well as the uniform approach to helping coun-
tries develop and prosper in the international economy. According to
Ramo, “China is in the process of building the largest asymmetric super-
power in history,” one which thus far has not been built on Western
concepts of hard power and rigid policy ideas but rather coming up with
alternative development ideas and adhering to a strong Westphalian
view of the primacy of state sovereignty. It can therefore be argued that
while it is agreed that China’s status as a great power and that questions
over whether China will continue to dominate international discourse
for the longer term have largely been answered, China as a great power
is considerably different from like powers of the past, including when
measuring its economic capabilities.
112 Marc Lanteigne
The Consensus itself rests on three assumptions. First, the idea that
innovation is the key to swift and steady economic development, and
that the old model of starting with simpler technologies and then
working one’s way to more complex ones should not be viewed as the
only method of successful development. Certainly China’s growth has
upended the aforementioned flying geese model of Asian economic
growth, whereby the lead goose, Japan, continuously transferred older
technologies to geese further back (the NIEs) as it developed new ones
(Kojima 2000: 375–401). However, Beijing by the 1990s had refused
to remain at the back of the flock, and the center of economic gravity
in Asia began an inexorable move from Tokyo to Beijing during that
decade. The pivotal event that caused this change in thinking was
widely regarded to be the 1997–8 Asian financial crisis, which saw
China largely immune from its effects due to the fact that its currency
was still tightly government controlled.
However, Beijing was affected peripherally as the Hong Kong stock
market dropped suddenly in October 1997, and as surrounding states
experienced currency crashes, Beijing was under intense pressure to
devalue the renminbi to remain competitive. Not only did Beijing opt
not to do so but China also provided emergency loans to some affected
states (Moore and Yang 2001: 203–6). These events, plus the growing
reputation of the Chinese economy as categorized by conservatism and
strong state oversight, created the impression of the PRC as a safe haven
in a sea of economic chaos in Asia, which Beijing encouraged by calling
for regional organizations like the ASEAN-plus-three (APT) and later the
East Asian Summit (EAS) to prevent a further economic meltdown in the
Asia-Pacific (Malik 2006: 207–11). The eclipse of the flying geese model
appeared to be complete with the overtaking of Japan by China as the
second-largest economy in the world, as well as Tokyo’s focusing on the
recovery from the March 2011 Tohoku earthquake and tsunami coupled
with the Fukushima nuclear accident (Matsumura 2011: 19–25).
Innovation is still an area in which China required much new
thinking. A major priority for the current Chinese economy is the devel-
opment of global brands, which can successfully compete with interna-
tional counterparts. After two decades of developing an “inviting in”
policy of encouraging foreign firms to invest in China and develop joint
ventures with domestic corporations, the catchphrase for the past two
decades has been “going out,” a policy which calls upon Chinese firms,
once they have developed global-level products and gained the neces-
sary expertise, to venture out into international markets and prepare
themselves accordingly for intensified international competition with a
necessary degree of government support (Hong and Sun 2006: 610–34;

Li 2004: 134–6).
So far results have been mixed. Although many products sold around
the world are made in China, the number of truly international brands
developed in China remains very low, with possible exceptions such as
Lenovo, Huawei, and Haier (Deng 2009: 74–8 4), compared to the United
States and Europe as well as the developmental states of East Asia, where
firms such as Toyota and Mitsubishi in Japan, Samsung and LG in South
Korea, and Acer and HTC in Taiwan were built up as global brands.
The second assumption of the Beijing Consensus is that chaos is a
constant in economic development but should nevertheless be mini-
mized using state supervision and measurements beyond traditional
ones such as per capita GDP, and instead greater attention should be paid
to quality of life standards via sustainability and improving equality.
Chaos management, therefore, becomes of paramount concern during
the development process. As well, the idea that a single economic reform
approach can solve every developing country’s ills is rejected, along with
the idea of shock therapy to push a given economy from command to
liberal economies. Beijing had been critical of such approaches by the
West, both during the 1997–8 Asian Crisis and during the global reces-
sion. Since 2008 there had been the view within the Chinese govern-
ment that the West bore much responsibility for the banking crisis and
subsequent economic downturn.
China has consistently favored a gradualist approach to economic
reform to minimize potential disruptions, and the effect on China of
the global recession appeared to bear out the wisdom of that approach.
However, despite China’s impressive economic growth, it still faces
many challenges in addition to riding out the current recession which,
if not properly addressed, have the potential to slow or even reverse
the country’s economic gains. Deng Xiaoping spoke of the color of a
cat, black or white, as being not important as long as it caught mice
(Chen 1995: 22–34). In his report Ramo argued that China needed to
pay greater attention to the “green cat,” namely environmental prob-
lems as a result of unchecked growth, and the “transparent cat,” the
need to make economic institutions more open, accountable, and free
from corruption.
Both these “cats” have been perceived as considerable drawbacks to
the Chinese model. From an environmental viewpoint, concerns have
been raised that unchecked growth is creating considerable damage not
only to health but also to future Chinese economic gains. Meanwhile,
the transparency issue is now being looked at more seriously by Beijing
114 Marc Lanteigne
and has taken on many facets, including the desire to strengthen the rule
of law while keeping the primacy of the CPC intact, and in addressing
economic inequalities which were seen as major contributors to the
social unrest and political tensions around China.
Third, the Consensus suggests that there is the need for states to
develop using their own methods, free from unwelcome international
interference. Self-determination should be a right of all states in the
development process, a direct challenge to the Washington Consensus
ideas of interventionism and an extension of China’s traditionally
strong Westphalian view of state sovereignty. These views were first
elucidated in the late 1950s with the development of the “Five Principles
of Peaceful Coexistence” (heping gongchu wuxiang yuanze), tenets which
would become the focus of Chinese foreign-policy thinking until well
after the Maoist era.
The principles, which borrowed heavily from China’s traditional
views of state supremacy and sovereignty, were the mutual respect for
territory and sovereignty, mutual nonaggression, mutual noninterfer-
ence in other states’ domestic affairs, the equality of states and mutually
beneficial exchanges, and peaceful coexistence. These ideas were revived
in the 1990s out of concern for unchecked American unilateralism and
interventionism, as the Consensus suggests, and received much greater
notice from other developing states seeking to modernize their own
economies via alternative methods to those held by the United States
(Kennedy 2010: 468 –9). Since then these principles have been folded
into the Beijing Consensus, which tends to view all states as equal and
deserving of noninterference.
The debate over the Beijing Consensus remains in its infancy, and
there will continue to be much discussion over how “distinct” China’s
growth model actually is and whether its components can readily be
transferred to other developing states successfully. What can be said,
however, is that the existence of the Beijing Consensus, even as a source
of debate, is proof that China is now creating its own economic growth
patterns which are becoming more distinct from their developmental
origins, and that as long as Chinese economic growth remains at an
appreciable level, the question of how much the state should retain a
commanding role in the country’s development will also persist.
5 The challenges ahead for China
In examining Chinese economic strategies and policies during the

initial stages of Dengist economic reform, an argument can be made
that the economic system being created was not solely a mix of import-
substitution and export-guided policies, but rather a modified develop-
mental system, resembling considerably the Japanese post–World War II
economic model, designed to expand China’s economic presence while
keeping its economic mechanisms under a threshold degree of party-
state control.
The question here, however, is whether developmentalism will be a
transitory process in Beijing’s shift from a closed economy to a liberal-
ized one, or will the political and social pressures of globalization, the
free market, and the aftershocks of the global recession assist in the
perpetuation of some degree of developmental economics in China for
the near term? This “conundrum” (Lanteigne 2008 : 162–8 3). became
more pressing for Beijing due to economic troubles in the United States
and European Union and China’s increased exposure to economic conta-
gion from the West. On one hand, as the recession deepened, China
found itself one of the few areas of stability and growth, but on the other
hand, the Chinese economy faces growing scrutiny from the West over
its currency and trade policies.
The requirement for Beijing to maintain economic growth and stability
in the face of international financial uncertainty began to contribute,
according to some critics, to a retrenchment of the Chinese state in the
economy, as evidenced by post-2008 Chinese policies which included
interest rate controls, manipulation of price rates including energy
costs, and consistent monitoring of the value of the renminbi. Even
before the recession took hold, it was argued, Beijing had been scaling
back the privatization of state assets either directly or tacitly (Scissors
2009: 24–39).
Moreover, the post-2008 drop in demand for Chinese goods, especially
in the West, and concerns that China began to pass the Lewis turning
point, meaning the falloff of surplus labor leading to worker shortages in
key industries, has also prompted much more attention from the state due
to worries about a longer-term erosion of Chinese growth rates (Zhang
Yang, and Wang 2011: 542–54). These trends would seem to suggest that
China’s distinct brand of developmental economics is reasserting itself,
and to quote an increasingly visible phrase in Chinese blogs, “the state
capital is advancing while private capital is retreating” (guojin mintui).
The post-2008 global recession prompted a great deal of economic stock-
taking within Beijing and in the period 2011–2, during the preparations
for the leadership succession, significant divisions appeared to be opening
up as to how Beijing should respond to the financial crises as well as which
paths the country should take in continuing the economic modernization
116 Marc Lanteigne
process. For example, an internal debate which flared up in late 2011 and
early 2012 was centered on the degree to which the Chinese government
should continue to play a central role in economic growth.
On one side of the debate was the “Guangdong model” of enhanced
economic liberalization advocated by Wang Yang, CPC Secretary of
Guangdong, which calls for a decreased role of government and the
enhancement of both private enterprise and civil society. Wang had also
won much respect in higher party circles after his provincial government’s
delicate and moderately peaceful handling of the September 2011 Wukan
protests by farmers angered over land seizures without compensation.
On the other side of the debate there is the developing of “Chongqing
model,” a populist, party-state-dominated development approach,
which includes a revival of Maoist ideas of collectivism, put forward by
the CPC Chongqing Party Committee Secretary and “red princeling,”
Bo Xilai (WSJ 2012: March 2). This dichotomy was only one manifesta-
tion of the differences over economic direction which appeared in the
lead-up to the 18 th Communist Party Congress at the end of 2012.
Further contributing to the Chinese internal debate over the future
of state-led economic growth was the February 2012 release by the
World Bank, but also significantly in partnership with the Chinese
Ministry of Finance (MoF), and the Development Research Centre of
the Chinese State Council (DRC), of a report, China 2030: Building a
Modern, Harmonious, and Creative High-Income Society (World Bank 2012).
The publication recommended a series of reforms designed to further
liberalize the Chinese economy, including creating a more independent
financial sector and banking system, adapting further environmental
initiatives, enhanced land reform and education systems, and encour-
aging greater innovation, especially in the private sector.
With these changes China could look forward to becoming an advanced
economy by 2030. Although the report’s recommendations were greeted
with suspicion by more conservative elements within the CPC, the fact
that the coordination of the World Bank and the two Chinese agencies
was assisted by Chinese Deputy Prime Minister Li Keqiang, slated to
become prime minister in March 2013, coupled with an editorial in the
People’s Daily during the same month as the report’s release which called
upon the economic reform process to continue and that there would be
some with “vested interests” seeking to hamper needed change, appeared
to suggest that the report did have its supporters in Beijing (World Bank
2012: People’s Daily 2012: February 23; Economist 2012: February 28 ).
As well, the sensitivity of the Chinese economy to exports and foreign
investment also became a political issue during the global recession. As
Beeson noted, another difference between Chinese and Japanese devel-

opmentalist approaches is that the former was much more dependent
on foreign investment as a means to develop its exports, and that many
Chinese exports are heavily reliant upon imported raw materials and
components often with low value added (Beeson 2009: 27–8 ). Signs began
to appear at the onset of the global economic slowdown that China was
seeking to boost its domestic economy and reduce its dependence upon
exports, starting with the injection of a 4 trillion renminbi (US$58 6
billion) stimulus package into the Chinese economy in November 2008 ,
which was primarily designed to improve domestic infrastructure (Cai,
Wang, and Zhang 2010: 33–46).
The announcement of the stimulus package came on the heels of
several warnings issued by Premier Wen Jiabao beginning in 1997 that
the Chinese economy was showing expanding signs of unsteadiness and
imbalance, concerns which began to be echoed by Hu Jintao by the
middle of 2011 (Lardy 2012: 44). There was also an announcement by
Premier Wen in March 2012 that China was only expected to attain
a GDP growth rate of 7.5 percent that year in order to “increase the
quality” of Chinese economic development (China Daily 2012: March
10). This was an unusual prediction given the preference of the Chinese
government to seek growth rates of 8 percent or higher in order to main-
tain economic stability, and was viewed as further evidence that China
is seeking to turn its priorities toward developing its domestic economy
even at the risk of slower growth rates.
The further internationalization of the Chinese economy, the growing
debate about a Beijing Consensus growth model, and the country’s
response to the global recession have all indicated that China is moving
away economically from its developmentalist policies and experiments
of the previous decades. While it is likely that the Chinese state will
continue to maintain significant control over the economy for the fore-
seeable future, both internal and external pressures to attempt greater
liberalization will continue to factor into Beijing’s attempts to modernize
its fast-changing economy.
Notes
1. MITI existed between 1949 and 2001, when it was restructured and renamed
the Ministry of Economy, Trade and Industry (METI).
2. For example, see Pei (2006).

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4

Neoliberal and Classical

In the past few years China’s development model experienced a major

economic order. If the advance of globalization is arrested, the Chinese

1 Japan’s classical developmentalism

Mainstream social science literature began to take notice of East Asia’s

First, Japan had a government that used industrial policy to protect

individual enterprises, and between banks and enterprises can be

Table 4.1 Institutions and mechanisms of Japan’s high-growth economy

International The role of Intermediate Corporate

Source: Gao (2004b).

In contrast, Japanese corporate bank loans in the period from 1958

2 China’s neoliberal developmentalism

China’s neoliberal development model differed from Japan’s classical

Table 4.2 Institutions and mechanisms of China’s economic growth

International Corporate Economic

not. Until 2011, the establishment of mechanisms for indigenous inno-

3 Comparative analysis of the two development models

Table 4.3 Strengths and weaknesses of the two development models

emphasized research and development (R&D), based on independent

After-tax profits All industries 250 6

Note: *Mean value of the company; unit: 1 million yen.

Table 4.5 Foreign direct investment as a proportion of the Japanese economy

Manufacturing: proportion 4.70

Oil industry: proportion of 38 .10

Source of raw materials 60 40

Source: Weekly Diamond (198 4a: 30, 198 4b: 33)

Japanese enterprises. In overall performance, after-tax profits of foreign

Figure 4.1 FDI net inflows to China, 198 2–2011

Exports of goods and services (current billion US$)

Figure 4.2 China imports and exports, 1979–2011

Table 4.6 Levels of economic openness of China and Japan

Sources: World Bank (2013) World Development Indicators; MOFCOM (2012).

to the WTO. Along with the rapid development of foreign investment,

Table 4.7 Views of world’s most commercially attractive areas, 2005–6

Experts (%) Multinational corporations (%)

Source: UNCTAD (2005), World Investment Report

foreign direct investment in 2005–6, 20 percentage points over the

facts indicate that compared to Japan’s classical development model,

Table 4.8 Foreign companies in China’s auto industry

Source: Li (2004); Jia and Chun (2001).

Table 4.9 China’s GDP and GNI

Source: World Bank WDI (2013).

capital in China in 2004. However, they controlled 50 percent of the

4 The global conditions of time and place for the classical

On the international conditions, we see the profound impact of globali-

1939–1945: 1971 onwards:

Figure 4.5 The institutional progress of globalization

the first wave of globalization occurred from 18 70 to 1913. The trend

Table 4.10 The effect of globalization on two types of development model

Classical development New development

We can see that Japan’s classical development model formed between

solve economic problems. This was the profound historical background

Source: UNCTAD WIR (2005)

Figure 4.6 TNC’s perception of the global investment climate, 2012–14

Other promotion measures

Figure 4.7 Investment policy measures to attract FDI: responses by IPAs

governments around the world are committed to make greater efforts to

5 The historical origins of China’s neoliberal

Closely related to international conditions and dynamics, the rise of the

Table 4.12 Traditions of China’s foreign economic relations

Maglev and Japanese Shinkansen instead. Manufacture of these high-

6 Challenges in transformation of China’s economic model

Both the Japanese classical development model and the Chinese