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International Journal of Economics,
Commerce and Research (IJECR)
ISSN(P): 2250-0006; ISSN(E): 2319-4472
Vol. 4, Issue 1, Feb 2014, 35-44
© TJPRC Pvt. Ltd.
THE EXPORT –DRIVEN GROWTH IN CHINA: IMPLICATIONS FOR GLOBAL
ECONOMY
PRIYANAKA SAHNI
Assistant Professor, University College, Kurukshetra University, Kurukshetra, Haryana, India
ABSTRACT
The present paper attempts to analyze the export-driven growth in china since 1980s. In the present study we have
also investigated the mechanism of ELG in Chinese economy for the period 1980-2010.Ordinary least square (OLS)
method has been applied to investigate the ELG hypothesis in Chinese economy. The empirical results of the study support
the existence of Export - Led growth Hypothesis in China. The study further shows that relative share of china’s exports in
world exports has increased significantly after the introduction of economic reforms. Further, the rising exports have also
made a significant contribution to the economic growth of Chinese economy due to forward and backward linkages.
KEYWORDS: Exports, Economies of Scale, Economic Growth, Investment, Manufactured Exports, Linkages
INTRODUCTION
The Export- Led Growth Hypothesis (ELGH) states that export expansion is one of the important elements of
economic growth. Export-led Growth (ELG) strategies followed by Asian countries have contributed to strong economic
growth and fast international integration. They are considered as an essential part of the policy set behind the emergence of
these countries during the last decades, so called “East Asian Miracle” (World Bank 1993). Since the 1980s, all developing
countries have progressively converted to ELG strategies. Export-led Growth model encourage and support the production
of exports. Trade is seen as essential engine of growth as it promotes a most efficient allocation of resources and can bring
dynamic gains (Felipe, 2003). Models of ELG emphasize the possibility that export growth may set up a virtuous circle of
growth. They have traditionally been opposed to import substitution policies, aiming at minimizing imports and
encouraging production for the domestic market. From a macro-economic perspective, ELG can bring several kind of
benefits; “the growth of exports play a major part in the growth process by stimulating demand and encouraging savings
and capital accumulation, and because exports increase the supply potential of economy by raising the capacity to import”
(Thirlwall, 1994).
China introduced a sequence of market-oriented reforms that dramatically improved economic incentives and
efficiency and reduced distortions since 1978. In line with the Washington Consensus, and motivated by an increasingly
open and transparent multilateral trading system, opening up to foreign trade and promoting exports were key elements,
accentuated by the WTO accession in 2001.China has managed nearly double digit growth rates since it began economic
reforms and opening in 1978. The reform has transformed the Chinese economy from a planning economy to mixed
economy where market plays a dominant role in resource allocation. Much of China’s remarkable growth between 1978
and 2000 can be explained by the reform. In 1978 China began its “Open Door Policy” which is essentially an export-led
development strategy. Given that China is a labor abundant country, China’s Government adopted a variety of policies to
foster exports in the last three decades such as: setting up of a Special Economic Zones (SEZs), Export-Processing Zones
(EPZs), encouraging processing of trade, aggressively liberalization of trade etc. Therefore, the more recent and faster
growth in the last decade in Chinese economy has been driven mainly by exports. The main objective of the present paper
36
Priyanaka Sahni
is to find out the existence of export- led growth mechanism in Chinese economy, for the period 1980-2010. The Present
Paper has been divided into five sections. Section- I is devoted to Review of Literature. Section -II analyzes the china’s
export-driven growth since 1980s.In Section-III we have discussed about the methodology and data sources. Section – IV
deals with the regression results and their interpretation. The main conclusions emerging out of the study are discussed in
the Section-V.
SECTION:-I
REVIEW OF LITERATURE
There are many empirical studies on the relation between exports and economic growth. The prominent among
them are as follows:Balassa (1978), Attri (1980), Gupta (1985), Nandi (1996), Mallick (1996),Ghatak & Price (1999), Paras (2000),
Nidugala (2000), Thompson (2003). These studies clearly indicate that there exists a positive and significant relation
between exports and economic growth. Exports play a crucial role in influencing the level of Gross Domestic Product
(GDP). Countries with higher export growth registered best performance in terms of economic growth. Exports have been
an engine of economic growth. All the studies have favored Export-Led growth theory in the sense that growth of exports
leads to economic growth. The empirical study by Sinha & Sinha (1996) finds that trade liberalization; mainly
export-promotion is an important contributor to economic growth of a nation, especially in developing nations.
From the above studies it is clear that all the studies mentioned above have simply stressed on the relationship
between exports and economic growth. These studies don’t highlight on the mechanism of Export- Led Growth (ELG)
model. Only Lubitz Raymond’s study (1973) has empirically examined the ELG mechanism for the period 1954-1969 in
case of eleven industrial countries. He tested two important elements of export-led growth mechanism: economies of scale
and balance of payments effect on investment. The study found that there exists a positive and strong relationship between
exports and economic growth. But both the mechanisms of export-led growth are not confirmed in his study.
Therefore, our study follows in the footsteps of Lubitz Raymond's study and attempts to test the mechanism of
Export- Led Growth (ELG), using China as a case study during the period 1980 to 2010.
SECTION:-II
CHINA’S EXPORT –DRIVEN GROWTH SINCE 1980
An important ingredient in China’s economic reforms since 1979 has been the economic policy termed open-door.
The objective of this policy, which ended 30 years of economic semi-isolation from the rest of the world, was to expedite
China’s industrialization and modernization through economic interaction and integration with the world economy.
Since 1978, China introduced a sequence of market-oriented reforms that dramatically improved economic incentives and
efficiency and reduced distortions. In line with the Washington Consensus, and motivated by an increasingly open and
transparent multilateral trading system, opening up to foreign trade and promoting exports were key elements, accentuated
by the WTO accession in 2001. In line with both the Washington Consensus and strategies of other East Asian countries,
China also increasingly pursued orthodox macroeconomic management. However, China explicitly pursued investment
and industry-heavy growth, with a strong role for the government. In its transition from a centrally-planned to a market
economy, China diverged from the “shock” approach to economic reform used in the Soviet Union. Instead, China
followed the successful East Asian economies in combining export-oriented opening up to the global economy with
maintaining a leading role for the government in allocating and mobilizing resources towards selected industrial sectors
The Export –Driven Growth in China: Implications for Global Economy
37
and investment, including infrastructure. The government also encouraged and subsidized savings, especially by
companies; forfeited dividend from SOEs, channeled cheap credit to industry; underpriced key industrial inputs—energy,
resources, land, and the environment; and managed the exchange rate. In this policy setting, investment reached a very
high share of GDP while industry rather than services drove much of the growth. With the link between production and
consumption loosened by access to the open multilateral trading system, China became an export powerhouse.
Industrial companies became increasingly profitable under this pattern of growth, which also benefited parts of the
government, directly or indirectly. Thus, a constituency was built up in favor of maintaining the pattern of growth. China’s
growth model has been very good for the supply side. Looking at the drivers of “potential” GDP (production) growth,
reflecting China’s towering investment to GDP ratio, the contribution of capital accumulation has been very high.
An important driver, particularly since the late 1990s, is that in a policy setting favorable to industry and capital,
flourishing industrial firms ploughed back increasingly large profits into new capacity. With wage increases lagging behind
productivity growth, the share of companies’ profits in GDP could rise—pushing up the national savings rate. This has
seen a rapid expansion in china’s international trade, with merchandise exports directly accounting for approximately
one-fifth of Chinese economic growth over the past decade. Over this period, investments to expand industrial capacity in
china’s export oriented industries have also been an important contributor to economic growth. China’s export-led growth
model has played a much broader role in transmitting technologies and business practices to the wider economy, leading to
substantial productivity gains. This has helped to drive china’s economic growth to an annual average rate of 10 percent
since the reform period began 33years ago.
Figure 1: China’s Percentage Share in World Exports (1980-2011)
The above Figure 1 shows that China's share of exports in world's exports was only 0.9 percent in 1980 which
increased to 2 percent in 1991 and further to 7.4 percent in 2005 and 10.5 percent in 2011. It implies that China’s
percentage share in world exports has shown a rising trend due to the aggressive trade liberalization and various export
promotion schemes adopted by the government of Chinese economy. Rapid export growth has been largely driven by
china’s participation in vertically integrated global production supply chains – where different activities in the production
of single good are carried out in different economies.
Figure 2: Percentage Share of China’s Exports in GDP (1980-2010)
38
Priyanaka Sahni
The above Figure 2 shows the relative share of China’s exports in Gross Domestic Product (GDP) since 1980. ,
Ratio of China’s exports in GDP was only 6 percent in 1980 which increased to 17.70 percent in 1991 and further
increased to 26.67 percent in 2010. But the share declined in 2008 due to global recession. This implies that relative share
of China’s exports in GDP has increased significantly due to the various export-promotion measures adopted by the
Chinese economy.
Figure 3: Net Exports of China (1980-2010)
Figure 3 reveals that net exports of china is found to be negative during the beginning of economic reforms but
after 1994 net exports have been rising continuously which have contributed largely to the economic growth of Chinese
economy. The percentage share of china’s net exports in GDP has also increased significantly after 1994 as shown in the
Figure 4. The contribution of export to china’s economic growth is significant. The overall contribution of exports to GDP
is higher because of forward and backward linkages. In this way, China's export sector has proved pivotal to Chinese
economic growth and industrialization over recent decades. Its development has led to the dissemination of new
technologies and business practices to the wider economy, driving productivity gains and wage growth, and has supported
the ongoing transition of China's productive capabilities higher up the value chain.
Figure 4: Percentage Share of China’s Net Exports in GDP (1980-2010)
SECTION: III
METHODOLOGY
The present study depends on the secondary data only. In order to test the mechanism of Export-led Growth in
Chinese economy we have taken following variables i.e. Total Exports, Manufactured Exports, Investment and Gross
National Product (GNP). The time series data runs for the period 1980 to 2010.We have used Gross Fixed Capital
Formation as a proxy for Investment. All the relevant data has been collected from Statistical Yearbook of China
(various issues). Ordinary Least Square (OLS) method has been applied for the estimation. We have applied same
methodology to test the mechanism of ELG in China as in our earlier paper entitled “Export-Led Growth in India:
An Empirical Investigation”. We have used Log-Linear Model or double log transformation for this purpose. One
attractive feature of double log or log-linear model that has made it popular in empirical work is that the slope coefficient
The Export –Driven Growth in China: Implications for Global Economy
39
measures the elasticity of dependent variable with respect to explanatory variable. The general functional form of ELG
model can be written as:
Y = f (X, Xm, I)
Where,
Y= Gross National Product
X= Total Exports
Xm= Manufactured Exports
I = Investment
More precisely, the variable to the left-hand side of the equality symbol represents the dependent variable, while
those to the right-hand side are referred to technically as explanatory variables. Furthermore, if we take the derivative of
the functional model with respect to each of the explanatory variables, the following results are expected:∂Y/∂X > 0, ∂Y/∂Xm > 0, ∂Y/∂I > 0
For more details of methodology and specification of regression equations one can check our earlier on the topic
entitled study “Export-Led Growth in India: An Empirical Investigation”. In order to isolate the effects of changes in
Independent variables on dependent variable i.e. Gross National Product (GNP) we have used Natural logarithmic
equations instead of using linear regression equations. In the Present Paper, we have examined for statistical testing two
important elements of export-led growth mechanisms that are essential links in the model not only for advanced industrial
countries but also for developing countries:
The first is that export growth will stimulate industries with significant economies of scale.

The second is that export growth, by ensuring a strong balance of payments will encourage investment.
The export-economies-of-scale argument is tested by comparing total exports and manufactured exports as
explanatory variables of economic growth. If the manufactured exports, the carriers of economies of scale are more closely
related to economic growth as compared to the total exports, then the export-led growth works through economies of scale.
If the correlation with total exports is stronger, we cannot reject the export- led model, although the virtuous circle working
through demand increases and economies of scale is less compelling. The second element of export-led model is that a
virtuous circle operates through export demand on investment, and consequently technological progress and productivity;
this mechanism is consistent with a better showing for total export variable. The significant correlation of exports and
growth in an equation containing a significant investment variable weakens the second element of export-led theory.
SECTION: IV
EMPIRICAL RESULTS
The empirical results of regression analysis have been presented in the following table:Table 1: (Regression Results, 1980 to 2010)
Equation
Constant
1.
4.06
2.
4.89
X
0.74
(63.56)*
-
Xm
I
R2
F-Value
-
-
0.99
4040.13*
0.67
(55.42)*
-
0.99
3071.81*
40
Priyanaka Sahni
Table 1: Contd.,
3.
1.98
4.
3.76
-
-
0.90
(113.97)*
0.99
12990.58*
1.00
(3.10)*
0.20
(4.24)*
-0.24
(-0.81)
-
0.99
1997.30*
0.99
10323.91*
0.99
10988.84*
0.65
(10.92)*
0.17
0.67
6.
2.70
(4.58)*
(13.33)*
t *- Statistically Significant at 5% level of significance
5.
2.54
-
F *- Statistically Significant at 5% level of significance
INTERPRETATION OF EMPIRICAL RESULTS
The Equation (1) shows the relationship between level of GNP and level of total exports. It indicates that the
coefficient of total export Variable is statistically significant at 5% level with positive sign suggesting that higher exports
are associated with higher economic performance. The reason may be attributed to introduction of economic reforms in
China since 1978 and adoption of export-led development strategy which is consistent with its comparative advantage
driven by the country’s factor endowments. Sophistication of Chinese exports, diversification of its product mix and the
growth in new varieties also contributed to surge in exports. The regression equation also indicates that an average 1%
increase in exports is associated with 0.74% Jump in Gross National Product (GNP).This implies that China’s growing
exports have made a positive contribution to the process of economic growth of Chinese economy during the period under
study 1980-2010.
The Regression Equation (2) reveals that manufactured exports (Xm) are also positively related with Gross
National Product (GNP) during the period 1980-2010 because China exports more high-technology products to the rest of
world in terms of value and relative export market share.
The equation (3) shows that investment variable is the most powerful factor in explaining the performance of
Gross National Product (GNP) in China during the period 1980-2010. The value of regression coefficient took the expected
positive sign and it is also found to be statistically significant which explains the importance of investment variable in the
process of economic growth of Chinese economy. The relative importance of the investment variable is better than total
exports and manufactured exports. F-test is also found to be statistically significant at 5% level of significance.
In the Regression Equation (4), when we regress X and X m together, Xm took a negative sign and it is not found to
be statistically significant at 5% level of significance. The economies of scale mechanism operate when Xm is more
statistically significant than X. But here in case of China, correlation between total exports and economic growth (GNP) is
stronger in comparison to manufactured exports. Therefore, the mechanism of economies of scale is less compelling in
China as Chinese manufacturing is still primarily geared to domestic consumption. Therefore, its growth is limited by
domestic demand. For the increasing production to meet export demand there needs to be substantial productivity
improvement. Further our findings indicate that, despite a dramatic move out of agriculture, apparel and textiles into
machinery and electronics, china’s overall export structure has become more specialized, not more diversified.
The equation can still mean that a strong export performance, by fostering entrepreneurial confidence will enhance
investment, saving the export-led growth hypothesis. Hence, we accept the existence of Export-Led growth Hypothesis
(ELGH) in China.
The Equations (5) and (6) shows the results related with the balance of payment effect on investment (i.e. exportinvestment link) in case of china. In these equations, investment variable has been run together with total exports(X) in
The Export –Driven Growth in China: Implications for Global Economy
41
equation (5) and also with manufactured exports (Xm) in equation (6). In both these equations, the investment variable out
class the performance of total exports and manufactured exports as the value of regression coefficient and magnitudes of
t-statistics are larger than total exports (X) and manufactured exports (Xm). This implies that the positive relationship of
exports to growth does not run through the effect on investment, because investment has an independent significant effect
on economic growth. This is in conformity with an earlier study by Attri V.N, “Export - Led Growth in Developing
Countries (1960-80)” published in the Indian Economic Journal, 1996. As Lubitz (1973) has pointed out, if exports are
supposed to promote growth because of the encouragement to investment, this effect should be accounted for by the weak
investment variable when run in an equation with total exports (X) and manufactured exports (X m) whereas the results in
equations (5) & (6) represents the opposite case. The significant correlation of exports and level of GNP containing a
significant investment variable weakens the second mechanism of export-led growth.
SECTION: V
CONCLUSIONS
The study clearly indicates that there exists a significant and positive relation between exports and Gross National
product (GNP) for the whole period under study i.e. 1980 to 2010. The study supports Export-Led Growth Hypothesis
(ELGH) in Chinese economy over the period 1980 to 2010 as the coefficient of total exports (X) in equation (4) emerge
stronger and significant in relation to manufactured exports (Xm). Export-led growth has sustained high growth rates in
China. The fast growth of the export is a result of the combination of China’s double transition and it’s fully integration
into world system. An investigation of relation between GNP and investment shows that Investment emerges the most
powerful variable in affecting the process of economic growth. It seems that exports play an important role, only after a
particular stage of economic growth has been attained through domestic investment. Lastly, the study shows that none of
the mechanisms of export-led growth i.e. economies of scale (via manufactured exports) and balance of payments effect on
investment (export-investment link) are not proved statistically in case of China during the period under study. Our study
confirms the results of the export-led growth mechanisms in industrial economies investigated by Lubitz Raymond (1973).
Lastly, increasing share of china’s exports has made a positive contribution in the Gross Domestic Product (GDP) of
Chinese economy. This may be due to the aggressive economic reforms and export promotion policies adopted by the
Chinese government.
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