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How nations can structurally transform their economies


How nations can structurally transform their economies

How nations can structurally transform their economies
Photo credit: Li Wenyong | World Bank

The policy experiences that transformed China from a manufacturing assembly hub of the world to an economic powerhouse offer valuable lessons for countries in the global south.

The COVID-19 pandemic is forcing countries to reassess and recalibrate their national and foreign policies. The need for the structural transformation of economies, which has eluded many developing countries, has never been greater.

Structural transformation is the movement of labour and other productive resources from low-productivity to high-productivity economic activities.

China is one of the few developing countries that have managed this feat, rising from being a manufacturing assembly hub of the world to an economic powerhouse, thanks to the sheer scale of its market.

“There are significant lessons from the China experience which other countries can draw on,” said UNCTAD’s senior economist, Rashmi Banga. “There are benefits to emulating advanced economies, but most developing countries are better placed to learn from bottom-up growth experiences.”

While China’s Belt and Road Initiative (BRI), a multibillion-dollar infrastructure and investment venture, is providing infrastructure linkages, UNCTAD is helping nations create linkages by sharing their policy experiences.

UNCTAD is implementing a project to support countries in the global south to gain insight into China’s development experience and adapt, where applicable, relevant policies for their own success.

UNCTAD’s BRI Platform has published six papers outlining the policy experiences that facilitated the structural transformation of the Chinese economy.

The papers cover China’s experience in the areas of macro-economic management and finance; digital economy; trade, industry and investment; debt sustainability and debt management.

So, how did China do it?

Targeted actions powered the digital revolution

UNCTAD has published two papers on China’s digital policy and e-commerce policies.

According to the papers, China designed targeted policies and strategies for its structural transformation.  It built its digital economy from scratch with a comprehensive policy that targeted both the supply and demand sides.

Its big push included network, broadband and cloud computing infrastructure and data centres. This was accompanied by a strategy to build an industrial internet ecosystem that was compatible with national economic and social development.

China had 11 specific actions under its policy that targeted deep integration of the internet with the real economy along with building consumers’ digital skills.

It understood the importance of data. It put in place a cyber security law that stipulated that the personal information and important data collected and generated shall be stored within China's territory, and 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.

Forward-looking policies and reforms

Along with comprehensive digital policy, China’s macroeconomic policy framework has played a critical role in the country’s structural transformation.

China has achieved this through a combination of proactive macroeconomic management, financial reforms and carefully managed capital account liberalization.

The financial reforms that China has undertaken, and the financial sector that has emerged from these reforms, have played a special role in catalysing capital accumulation and economic diversification.

In the past 40 years of reform and opening up, foreign trade and foreign investment have been important driving forces for China's economic development.

China’s strategic approach to participation in global and regional value chains has been particularly successful.

Investment policy has also played a pivotal role in attracting and regulating foreign investment and guiding it to positively contribute to domestic development.

China’s strategic approach to debt management and debt sustainability during the process of structural transformation over the past 40 years has also helped it achieve sustainable 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.

This move also encouraged innovation and flexibility, as central authorities remained in control of aggregate debt risks and economic stability.

“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, UNCTAD’s director of globalization and development strategies.

In the coming months, UNCTAD will 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.


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