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China’s Structural Transformation – What Can Developing Countries Learn

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Introduction

Covid-19 and the Multiple Development Challenges Facing the South

The Covid-19 pandemic has created new development challenges for the South. Millions of people are losing their jobs and being pushed into extreme poverty. The global economy contracted by 3.9 per cent in 2020 (UNCTAD, 2021) and 255 million full-time jobs were lost (ILO (2021).

Developing countries have not only been hit harder economically by this crisis but will also take more time to recover because of their limited financial resources (UNCTAD, 2020).

The World Bank (2021) estimates that globally the Covid-19 crisis has added between 119 to 124 million new poor, with around 60 per cent of them living in South Asia. While rapid vaccination can lead to faster recovery on the health front, economic recovery will require additional financial resources and policy support. Billions of dollars are being rolled out by developed countries to revive their economies. According to UNCTAD (2020), on average developed countries have spent 30 per cent of their GDP on economic recovery measures, while developing countries spent less than 5 per and least eveloped countries only 1 per cent. With limited financial resources, developing countries will need to revisit their macro-economic, financial, trade, and industrial policies. Developing countries need not only to recover faster from the pandemic but also ‘recover better,’ with more equitable and sustainable growth. Achieving this goal would require refocusing their policies on the structural transformation of their economies.

However, very few developing countries have been able to achieve structural transformation, especially with the onset of the fourth digital industrial revolution. China is one example: it has evolved from an agrarian economy to the world’s manufacturing hub and now has emerged as one of the global digital leaders.

Has China Structurally Transformed Itself?

While it can be said that China has successfully transformed itself from an agrarian economy to a digital economy, whether China has achieved structural transformation or not is still an open question. Structural transformation is a multidimensional concept and has been defined in many ways. A normative definition of structural transformation is “the movement of a country’s productive resources (natural resources, land, capital, labour, and know-how) from low-productivity to high-productivity economic activities” (Monga and Lin, 2019: 1); or “the ability of an economy to constantly generate new dynamic activities characterized by higher productivity and increasing returns to scale” (UNIDO, 2013: 16). However, beyond analyzing compositional changes, it is also necessary to assess whether they were accompanied by: (i) diversification of output and exports; (ii) rising labour productivity; (iii) convergence of the level of labour productivity of different economic sectors (McMillan and Rodrik, 2011); (iv) higher income per capita; and (v) substantive poverty reduction. These structural changes also need to be sustainable and should not lead to premature deindustrialization.

In the case of China, we find that GDP has recorded an average annual growth rate of 9.3 per cent from 1990 to 2019, with an average GDP per capita growth of 9 per cent annually. While 30 per cent of the population was below the national poverty line in 2005, this ratio declined to 0.6 per cent in 2019. In early 2021, China announced that it has eradicated extreme poverty
based on the national poverty line. Pulling millions of people out of poverty was accompanied by other structural transformation indicators, including the declining agriculture, forestry, and fishing value-added as a percentage of GDP from 27 per cent in 1990 to 7 per cent in 2019. At the same time, the value-added by the manufacturing sector declined from 41 to 39 per cent, while value-added by services increased from 32 per cent to 54 per cent (World Development Indicators). The unemployment rate dropped from 4.1 per cent in 2015 to 3.6 per cent in 2019. Further, employment in the tertiary sector increased from 23 per cent in 1994 to 46 per cent in 2018. In the same period, employment in agriculture declined from 54 per cent to 26 per cent (National Bureau of Statistics of China).

However, despite China’s titanic growth, which made it the second-largest economy in the world, the country still faces many developmental challenges. Among them, rising income inequality is one of the most daunting ones. Inequality measured by Gini Coefficient has been increasing in China since 2015 , along with a rising gap in per capita disposable income between rural and urban households.

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Read more at UNCTAD . . . . .

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