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Prelims Capsule

International Relations

Economic history of China – How did China become the factory of the world?

Economic history of China – How did China become the factory of the world?


  • GS 2 || International Relations || India & its Neighbours || China

Why is the issues?

  • China has slowly emerged as a global power due to a remarkable period of rapid growth in its economy. Ever since market reforms were initiated in China in 1978, the focus shifted from a centrally-planned to a market-based economy.
  • It has experienced rapid economic and social development within a few years. China’s GDP growth has averaged nearly 10 percent a year, which is the fastest expansion by a major economy in human history and it has managed to lift more than 800 million people out of poverty which is a great achievement.


  • 1950’s
    • In the 1950s, China and India began rebuilding their economies as independent nations, with India having a greater structural advantage.
    • Following the initial euphoria, both economies struggled and faced enormous challenges in dealing with a burgeoning population and a very low growth rate.
  • Other nations
    • Significantly, at the same time, Japan, Germany, and southeast Asian countries experienced phenomenal growth rates.
  • Threats-Excessive government control, corruption, and civil discontent were posing a serious threat in both.
  • Liberalization
    • Following Mao’s death in 1978, China liberalized its economy by welcoming foreign capital and promoting its coastal areas for investment.
    • In addition, agriculture was liberated from state control, and a “one-child policy” was implemented to reduce population.
  • Current Net worth
    • China’s economy is now worth $16 trillion, making it the world’s second-largest in absolute terms and the largest in PPP terms. China’s economy expanded by 2.3% in 2020.

Steps taken by China

  • Strong political leadership
    • China’s economic growth story starts with strong political decision-making and leadership qualities. It started when the transition of leadership in China has been very peaceful and smooth.
    • Premier Zhu RongJi paved the way for China’s entry into the World Trade Organization (WTO). When President Jiang Zemin proposed the scheme of promoting business and entrepreneurial class into the country’s one-party system, it greatly helped China’s economic expansion
  • Huge public investments
    • China is one of the first country’s to successfully allocate huge funds in public sectors.
    • The Chinese investment effort has remained stronger to maintain high levels of economic growth since investment reforms can generate huge gains which would allow rapid increases in per capita consumption, and greatly help in government expenditures targeted at sustainable development.
  • Massive export
    • It quickly attracted massive FDI and rose to become the world’s factory as well as the world’s largest exporter.
    • China adopted an export strategy and encouraged foreign investment. They opened a large number of special economic zones.
    • China’s exported goods and services represent 19.6 % of the Chinese GDP(Gross Domestic Product)
  • Job creation and poverty alleviation
    • To create jobs for its massive labour force, China initially focused on labor-intensive industries such as textiles, garments, toys, assembly lines, electronics, and so on.
    • Ever since Chinese economic reforms were implemented, it greatly helped the poor in the country through employment.
  • Established a pro-business environment
    • It established a number of “Special Economic Zones” (SEZ), in which large swaths of land along the coast were given a distinct pro-business environment.
  • Liberalized and decentralized model
    • It also enabled the growth of large firms that could invest and sustain a virtuous economic cycle through liberal bank lending.
    • A decentralized economic model that empowered provinces to make many economic decisions also aided in the reduction of bureaucratic bottlenecks.
  • Investment in education and skill development
    • China has made significant investments in skill development and higher education, as well as pushed over 500 million people into cities.
    • It amassed a foreign currency kitty of over $4 trillion through mercantilist policies and managed its currency to maintain its advantage.
  • Strong manufacturing setup
    • China’s transformation from a rural-based economy to a manufacturing-based economy has yielded numerous results and fuelled the growth of the economy.
    • Now, China makes and sells more manufacturing goods than any other country on the earth. The range of Chinese goods includes cement, steel, aluminum, iron, toys, chemical, electronics, and many other products.
    • Chinese manufacturing is the largest and most diverse sector. Besides, China is the world leader in many types of goods. China manufactures personal computers, solar cells, shoes, smartphones, etc.

China’s Economic Performance

  • China’s economic growth continued to gain momentum in the third quarter,with the GDP expanding 4.9% from a year earlier in the July-September, 2020 period.
  • China is witnessing an increase in tourism; growth in industrial production and exportsthat has generated revenue and jobs for millions of Chinese people. However, Consumption is yet to regain its normal vigour in China.
  • TheInternational Monetary Fund (IMF) has forecasted that China’s economy will expand by 2% in 2020,  China eked out full-year growth of 2.3 percent in 2020 making it the only major economy to register growth in a pandemic-hit year.
  • The economic rebound follows China’s broad return to normalcy in the early months of 2020, following sweeping Covid-19curbs including stringent lockdowns, extensive contact tracing, and restrictions on international travel through the first half of the year.

Current status of Chinses economy

  • The Chinese economy is the second-largest economy in the world in terms of nominal GDP. China is the largest foreign exchange reserve holder in the world also.
  • China’s GDP size (Second largest economy in the world):$ 16.64 trillion (nominal;2021 )and $26.66 trillion (PPP; 2021).
  • Per Capita Income of China:$11,819 (nominal; 2021) $18,931 (PPP; 2021).
  • Poverty Ratio in China:China has lifted around 800 million people out of poverty since 1978. This is an unparalleled achievement in the world.
  • Its per capita GDP increased almost 49 times, from US$ 155 in 1978 to US$ 7,590 in 2014, and US$10,099 in 2019. China has around 24% population below $5.50/day.
  • China has achieved average GDP growth of close to 10% per year until 2014 since 1978.
  • Sectorwise contribution to the Chinese economy
    • Agriculture: 7.7%
    • Industry: 37.8
    • Services: 54.5

How does this compare to India’s?

  • Incentivized Capital intensive
    • In contrast, India incentivized capital-intensive industries while ignoring job creation in the early years.
  • Rapid urbanization was ignored
    • India promoted the romantic notion of rural villages, failing to recognize that rapid urbanization and effective city governance were the way of the future.
  • Regressive policies
    • Furthermore, its policy of reserving many goods for the MSME sector, as well as its regressive labour policies, hampered free trade.
  • Notably, only 4.7 percent of India’s GDP was invested, despite the need for at least 6.5 percent, or 8.5 percent in China’s case.
  • As a result, India’s supply-chain costs are 14 percent of GDP, compared to China’s 6 percent, making India highly uncompetitive.

Way ahead for India

  • Taxation
    • While GST is a good way to boost trade, massive investments in infrastructure and job creation are required to improve the entire ecosystem.
  • Removing restrictive labour regulations and lowering corporate taxes to 25% for all, with special tax breaks for specific industries, should be considered.
  • Boosting employment
    • Over 85% of employment in India is in the informal sector. An unplanned national lockdown halted economic activity and wiped out livelihoods, especially of informal workers.
      • some 10 million people abandoned cities to return to their native villages during the pandemic.
    • As things are returning to normal, the priority for addressing our most chronic social problems has been reduced.
    • There are three problems we must address
      • Labour regulation,
      • Living conditions for migrant labour in cities,
      • The strength of our rural economy.
    • Strengthening the rural economy
      • The easiest way to grow farmer incomes is by having them grow more value-added crops.
      • Fruits and vegetables have great export potential, and exports must be consistently encouraged and not switched on and off as domestic prices change.
      • Also, the cultivation of palm plantations has the potential for huge import substitution.
      • Encouraging of agro-processing near the source. Fostering entrepreneurship in rural and semi-urban areas would combine nicely with local processing.
      • Need to invest even more massively in rural connectivity.
      • Today along with road connectivity digital connectivity is a must.
    • Increased investment of at least 6.5 percent of GDP, as well as divestment from state-owned mature infrastructure assets, would be beneficial.
    • Labour regulation
      • The 85 percent of our workforce who are informally employed, meanwhile, has almost no protection, and employers have almost complete flexibility.
      • India needs to address both ends of the labour spectrum to get the balance right between flexibility and protection for all labour.
      • Everyone must have a minimum level of protection, and every employer a minimum level of flexibility.
    • Focus on Innovation
      • Another priority is to promote innovation by granting significant autonomy to research institutions and investing in urban governance.
    • Massive Exports
      • The government has to reverse its recent raising of tariffs so that inputs can be imported at a low cost.
      • To improve our competitiveness, long-debated reforms to land acquisition, labor, power, and the financial sector should be implemented.
    • Investment in Infrastructure
      • Improving port, power, highway, and rail infrastructure, as well as investing in higher education to develop human capital, are critical.
      • India requires significant investment in infrastructure, manufacturing, and agriculture for the rapid growth rates of the last fifteen to twenty years to be sustained.
      • To fulfill this it needs to create a robust financial structure that can serve the needs and demands of a growing nation.
    • Governance in Indian banks (especially those in the public sector) needs to be reformed urgently.
  • The P J Nayak Committee’s report of 2014 had outlined a set of sensible reforms but, apart from some cosmetic changes, very little has been done on that front.

Mains  model question

  • India needs strong growth, not just to satisfy the aspirations of our youth but to keep our unfriendly neighbors at bay.