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Competitiveness

China needs to do more to rank with the world’s best

Published 17 June 2021 in Competitiveness • 6 min read

Why is the second largest economy only 16th in global competitiveness? Size and state dominance may still be partly to blame, but the People’s Republic is moving in the right direction, writes Arturo Bris 

 

China’s achievements over the past 30 years have been impressive. The changes that the country has enjoyed, and the resulting increases in prosperity, have no historical reference of similar magnitude. Between 1990 and 2016, the number of people living under the poverty line of $1.90 per day fell from 750 million to 7.2 million (only 0.5% of the population). Today, 14 out of the 100 largest companies in the world by market capitalization, and 23 out of the 100 largest unicorns, are Chinese.  

The country’s rise has been attributed to several factors. After decades of poverty, political repression, and inefficiency of the public sector, in one sense, the only way was up. Also contributing to the Chinese miracle were the country’s large population and the related deep and powerful internal market. Some government decisions, such as significant investment in infrastructure and education, together with a more tolerant approach to private property and enterprise, have definitely contributed as well. 

However, there is still a long way to go. This year China ranks 16 out of 64 economies in the IMD World Competitiveness Rankings, up four points from last year. Our rankings combine statistical data in areas of economic performance, government and business efficiency, and infrastructure (two-thirds) and survey data (one third) to evaluate the performance of these 64 economies across the globe. 

China’s ranking often raises questions because it is not obvious why the second largest economy in the world cannot yet be considered very competitive. At our center, we also rank Hong Kong and Taiwan. These economies with Chinese roots, but operating in different political and social environments, rank higher. Indeed, this year Hong Kong is ranked seven and Taiwan eight. One success factor is their small size, which allows them to implement effective policies, find the required social consensus, and specialize in technology and human capital. Another reason they are in the top 10 is that both Hong Kong and Taiwan have exploited the capitalist model of free enterprise, private property, and little intervention by the state in business. The model of the People’s Republic of China is quite different. 

What China has achieved is a system in which the public sector is a relevant actor in the economy

Indeed, the Chinese business ecosystem is unique, with a much more proactive intervention of the state in the economy, but with a promotion of entrepreneurship and competition that is not characteristic of a typical socialist state. This design is attributed to Deng Xiaoping’s modernization strategy, but it is also the result of emergent decisions and changes implemented since the early 1980s when he allegedly declared: “To get rich is glorious”. 

What China has achieved is a system in which the public sector is a relevant actor in the economy. The most striking aspect of the Chinese Third Way is its acceptance by society. In capitalist societies, the government is seen as providing support to businesses and passing regulation that promotes innovation and competition, at least in the most competitive ones, such as Switzerland and the US. However, in many free-market societies the government is seen as the enemy. For example, in our rankings we usually ask survey respondents to assess which (out of a list of 15) are the key attractiveness indicator of their economy. In the 2021 rankings, only 2.9% of Hong Kong respondents, and 7.3% of Taiwanese mention the “competency of the government”. By contrast, respondents in the People’s Republic of China rank this at 32.6%, the highest-chosen indicator being the dynamism of the economy (selected by 62% of survey respondents). 

In our survey indicator “adaptability of government policy” China ranks number three in the world. Taiwan is 10, Hong Kong is 23. Other top-ranked countries for adaptability of policy are United Arab Emirates and Singapore, neither of which are democracies.  

Adam Smith’s capitalist model rests on three pillars: perfect competition in which monopolies are viewed as bad; passive governments whose regulation provides guidelines only and whose main objective is to facilitate business; and shareholder value maximization, in which social objectives are not a goal but simply a means. This is not the case with the ecosystem in China. Rather than allowing businesses to freely operate within the parameters of its regulations, the Chinese government, instead, grants monopoly power to companies within an industry. That way, the government dominates a number of industries, for example, banking and technology, through state-owned enterprises. Only later on, once the industry is well-established, is competition allowed. By then, market dominance rests already in the hands of a few companies. 

State-directed capitalism is closely related to a quasi-monopoly market structure that focuses on social monopolies

The state dominance is formal, as in the case of the banking system, or implicit, as the recent IPO of Alibaba shows. Very often the state is also the largest customer, so corporate interests come second to the policy objectives of the government. 

In this peculiar economic model, there is a triangle between the state, companies, and the public. The state provides businesses with monopoly power, license to operate, financial resources, and subsidies; businesses provide services to customers; and customers, finally, support the state. The strength of the connection between the government and the businesses is, therefore, very strong in China, although the share of state-owned enterprises in industrial output has been dropping as the country steadily has allowed for more and more private enterprise. 

Arrows and numbers in parentheses indicate change from 2020 ranking. Source: IMD World Competitiveness Center

State-directed capitalism is closely related to a quasi-monopoly market structure that focuses on social monopolies and that some advanced Western economies have been moving toward. In such a model, governments assume a greater economic role by intervening in business. This involvement creates social pressure on corporations and, as a consequence, the public, corporations, and the government develop “shared value” objectives. In turn, companies expand their boundaries – thus maximizing business sustainability and social welfare – and maintain their competitive position. 

A good illustration of such ecosystem is the Chinese banking system. At the end of 2015, China was home to 12 joint-stock commercial banks, 133 city commercial banks, five private banks, 859 rural commercial banks, 71 rural cooperative banks, and 1,373 rural credit cooperatives. The number and size of players hides the fact that, originally, the Chinese financial system was created as a state monopoly. Only recently, the rapid rise of small- and medium-sized banks has broken such monopoly of large state-owned banks under the planned economy. From China’s only bank (the People’s Bank of China), the state transformed the banking industry, as part of China’s reform and opening-up agenda, in the late 1970s. The four major specialized banks, known as the Big Four —Agricultural Bank of China (ABC), Bank of China (BOC), Construction Bank of China (CCB), and Industrial and Commercial Bank of China (ICBC) — were either spun off from the monolithic Central Bank or were newly incorporated. Until recently, these four banks operated as monopolies in their customer segments. And even today they retain advantages with respect to other commercial banks (size, interest rate subsides and loss-ratio guarantees) that make full, Western-style competition in the industry still unthinkable. 

The Chinese model should be examined carefully by other countries: the traditional competitiveness model that we have used for decades has found a successful alternative. Traditionally, we have seen the private sector pulling (innovation, entrepreneurship, investment in technology and talent), with the public sector following (providing support through education and health systems, investment in infrastructure, passing of business-friendly regulation). In Switzerland, the most competitive economy in this year’s rankings, the efficiency of the government is ranked higher than the efficiency of the private sector (number two and five respectively). In China, we see the opposite, with the government ranked 27 and the private sector 17. This is not what we would expect from a traditional socialist economy, but it may well be the model for many in the future. 

Of course there are problems in China, notably the deficient rule of law and significant corruption in the public sector. There are significant inequalities in income and access to education; lack of democracy hinders quality of life, pollution and environmental issues; furthermore, there is a lack of access to technology in remote areas. But China’s rapid rise means that it is destined to sit among the top-10 most competitive economies in the years to come.  

Authors

Arturo Bris - IMD Professor

Arturo Bris

Professor of Finance at IMD

Arturo Bris is Professor of Finance at IMD. Since January 2014 he is also leading the world-renowned IMD World Competitiveness Center. He is Program Director of the Navigating Fintech Innovation and Disruption program.

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