China and the Global Economy

From the late 1970s to the late 1990s, the Chinese government used a wide array of industrial policies to support the growth of a ‘national team’ of large firms that could compete with the world’s leading corporations. The foundations of this effort were the large industrial plants inherited from the former command economy. This approach to economic policy directly challenged the prevailing trend of globalization and liberalization. It was radically different from that advocated by the free market orthodoxy of mainstream economics and from the policies advanced by the international institutions of the ‘Washington Consensus’, notably the IMF and the World Bank. It differed comprehensively from the industrial reform policies pursued in the former Soviet Union and in Eastern Europe. The attempt raised deep questions about the role of the state in promoting national economic development and about the nature of capitalism itself. It involved fundamental questions concerning China’s international relations in the early twenty-first century, namely the terms under which it will interact with the high-income countries in general, and, in particular, with the global superpower, the United States.

Part 1 analysed the way in which China pursued an industrial policy which had the objective of creating large firms that could challenge the giant global corporations of the advanced economies. China faces a special challenge which did not confront other countries that successfully built globally powerful large firms through industrial policy: China is attempting to catch up at the level of the large firm in the midst of the most profound revolution in business systems that the world has ever seen. This revolution presents a fundamental challenge not only for China’s industrial policy, but for industrial policy in developing countries as a whole. The global business revolution has produced an unprecedented concentration of business power in large corporations headquartered in the high income countries. It is an interesting paradox that the influence of mainstream neoclassical ideas, which emphasize small firms and competitive markets, has increased greatly within Chinese policymaking circles in precisely the epoch of unprecedented concentration of global business power.

Part 1 analysed the ways in which China’s policymakers and managers attempted to build large firms in different sectors that could challenge the global giants. In the course of two decades of struggle, China’s large enterprises changed greatly, achieving evolutionary institutional change in key aspects of their business organization. As was seen in Part 2, during the same period the world’s leading businesses underwent high-speed, revolutionary transformation. As the epoch of the ‘global level playing field’ moves ever closer, it becomes increasingly necessary for China’s reforming large enterprises to benchmark themselves realistically against the global giants. The historic agreement of 15 November 1999 between the US and China on China’s accession to the WTO (see below, Section 3.3), makes that task even more urgent. This section examines the capability of China’s national champions to compete on the ‘global level playing field’. It uses firm-level case studies, as well as secondary sources to examine the IT and financial services sectors.