Service on Finance and Development (Sept20/02)
Geneva, 31 Aug (D. Ravi Kanth) – A senior economist at the United Nations Conference on Trade and Development (UNCTAD) has offered a blueprint on how to “structurally transform” economies in the developing and least developed countries, following the worsening Covid-19 pandemic that has so far claimed more than 834,000 lives around the world.
More crucially, the pandemic has exposed the dangers stemming from the implementation of the neo-liberal economic policies over the past 30 years.
Against the backdrop of the worsening economic crisis and enveloping global recession, UNCTAD’s senior economist Ms Rashmi Banga has outlined the crucial elements of structural transformation policies that the developing countries and LDCs need to pursue in the wake of the Covid-19 pandemic.
Banga, who is an expert on global digital trade, says that China is one of the few countries in the world that has moved away from “being a manufacturing hub of the world to an economic powerhouse”, using its huge market to embark on a range of transformative policies.
In her briefing note, titled “How nations can structurally transform their economies” and circulated by UNCTAD on its website on 27 August, Banga says that “there are significant lessons from the China experience which other countries can draw on.”
More importantly, “there are benefits to emulating advanced economies, but most developing countries are better placed to learn from bottom-up growth experiences,” she has persuasively argued.
As the public investments in health, education, and robust investments in digital industrialization suffered a huge hit in developing and least developed countries due to the uninterrupted trade liberalization policies advanced under the World Trade Organization’s trade rules, the Covid-19 pandemic has completely turned economies upside down in many countries.
Significantly, China has withstood the worst shocks arising from the Covid-19 due to its calibrated industrial policies that resulted in remarkable advances in the digital sector, particularly in the arena of advanced telecommunications and AI (artificial intelligence) among other areas.
China’s advances in various sectors, particularly in telecommunications and AI, which was the exclusive preserve of the United States and other industrialized countries, became an apparent eyesore for Washington and other major Western countries.
Against this backdrop, Banga says that China’s multi-billion-dollar infrastructure and investment venture called the Belt and Road Initiative (BRI) has provided vital infrastructure linkages.
UNCTAD is assisting nations in creating crucial linkages by sharing their policy experiences, she has argued.
“While China’s BRI is providing infrastructure linkages between the partner countries, UNCTAD’s project aims to provide the “soft linkages” among these countries through sharing of their policies and experiences in BRI,” Banga told the SUNS on 31 August.
She added that “while developing countries cannot replicate China’s structural transformation, there are some important policy lessons which helped China to transform from an assembly hub to a digital giant.”
Referring to a project that is being currently implemented by UNCTAD in the global South to gain insight into China’s developmental experience and to adapt appropriate policies in their respective countries, Banga says that UNCTAD’s BRI Platform has published six papers “outlining the policy experiences that facilitated the structural transformation of the Chinese economy.”
The six papers prepared by UNCTAD cover China’s experience in the areas of macro-economic management and finance; the digital economy; trade, industry and investment; and debt sustainability and debt management, she suggested.
HOW DID CHINA DO IT?
According to Banga, targeted actions propelled the digital revolution in China.
She said that UNCTAD’s two papers on China’s digital policy and e-commerce policies have laid bare Beijing’s well-designed “targeted policies and strategies” that brought about “structural transformation.”
China, according to Banga, “built its digital economy from scratch with a comprehensive policy that targeted both the supply and demand sides.”
The big push by China in the digital arena, she says, “included network, broadband and cloud computing infrastructure and data centers.”
“This was accompanied by a strategy to build an industrial internet ecosystem that was compatible with national economic and social development,” she emphasized.
China took 11 specific actions as part of its policy to bring about “targeted deep integration of the internet with the real economy along with building consumers’ digital skills.”
Among the developing countries, China is first to recognize the importance of data and the need to have an appropriate policy framework to ensure that data is stored within China.
Based on the recognition of the importance of data in the modern cyber world, China formulated its “cyber security law” which is a crucial scaffolding for storing the personal information and important data collected and generated within China’s territory.
The Chinese law clarified that where such data is transferred across borders for business needs, security assessments shall be conducted.
Cross-border e-commerce is closely regulated by the government, which has successfully implemented an array of associated tax policies, Banga says in her briefing note on how to pursue transformational industrial and trade policies.
Unsurprisingly, the United States, which is the leader in the global digital trade where its GAFA – Google, Amazon, Facebook, and Apple – as well as Microsoft have monetized the data from other countries to generate hundreds of billions of dollars of profits annually, has opposed China’s cyber security law.
In fact, this is the major area of contention between China and the US in the ongoing plurilateral Joint Statement Initiative (JSI) talks on electronic commerce.
The American internet company Facebook seems to have influenced the Trump administration to wage an aggressive trade war against China, according to media reports.
MACROECONOMIC POLICY FRAMEWORK
In addition to a comprehensive digital policy, Banga says that China’s macroeconomic policy framework played a central role in bringing about structural transformation in the country.
Through a combination of “proactive macroeconomic management, financial reforms, and carefully managed capital account liberalization,” China made significant progress, she has argued.
More importantly, the financial sector reforms launched by China have catalyzed “capital accumulation and economic diversification,” the UNCTAD note has pointed out.
During the past 40 years of economic reforms and opening up the market for foreign investors, China ensured that the resulting investments contributed to its overall economic development.
It demonstrated how market access can force companies to share their technologies which the industrialized countries managed to do during their industrialization in the last 200 years.
In his book “Kicking away the ladder”, the Cambridge economist Ha-joon Chang has succinctly argued that all major industrialized countries deployed “interventionist economic policies” in their early phases of industrialization, including protective tariffs, for transforming their economies while simultaneously threatening other countries for adopting the same policies.
In many ways, China chose to adopt the interventionist policies like the United States and other industrialized countries during their rapid rise in the global economy.
Also, China’s strategic approach to participation in global and regional value chains has been particularly successful, Banga has argued, suggesting that China’s investment policy has also played a pivotal role in attracting and regulating foreign investment and guiding it to positively contribute.
China also adopted a “strategic approach to debt management and debt sustainability” during the past 40 years of rapid structural transformation with double digit economic growth.
“Well-targeted project selection – aimed at market expansion and foreign exchange revenue generation – and the assignment of responsibility for raising debt and investment decision-making to local government authorities contributed to debt sustainability,” Banga says in her paper.
“This move also encouraged innovation and flexibility, as central authorities remained in control of aggregate debt risks and economic stability,” Banga concluded.
“As countries across the world tackle the economic fallout from the COVID-19 shock, their success will depend on the implementation of bold policy actions to structurally transform their economies,” said Richard Kozul-Wright, Director of the UNCTAD Division on Globalization and Development Strategies.
In the coming months, UNCTAD is projected to publish policy papers on experiences of countries piloting the South-South integration project, such as Ethiopia, Indonesia and Sri Lanka, as well as other developing countries, in implementing policies to structurally transform their economies.
Several environmental experts drew attention to the adverse environmental impacts that arose during China’s rapid industrialization in the last 40 years. However, the current Chinese administration is rapidly taking action on the environment front.