Why The Chinese Development Model May Not Work in South Africa

The Chinese development model has been profoundly successful in recent decades, leading many to wonder whether it could be replicated in other emerging market economies such as South Africa. Characterized by high levels of state led investment in infrastructure and government control over the economy, this model has won praise for the economic growth it has produced in China, but there are several reasons why it may not be easily replicated in South Africa.

One of the reasons the Chinese development model might not work as well in South Africa is the difference between the two countries state-owned enterprises (SOEs). The Chinese government’s effective management of its SOEs, combined with access to large amounts of credit at low interest rates, has allowed them to invest heavily in infrastructure and industry. This is something that most emerging market economies with floating exchange rates are unable to do due to the effect issuing this debt would likely have on their currencies.

In contrast, South Africa’s SOEs have been plagued by leadership failures, inefficiency, and financial mismanagement. South Africa’s SOEs must also borrow money at much higher interest rates making capital expenditure more expensive. The government also has less room to recapitalise struggling SOEs due to fiscal constraints derived from low tax yields and high borrowing costs. As such, South Africa has been unable to achieve the same level of state-led economic growth as its BRICS partner.    

This is why some economists argue that a combination of austerity and high real interest rates may be counterproductive. After all, it is not just China that relies on low interest rates and government subsidies. Every country in the G7 faces a budget deficit this year, and every country in the G7 (with the exception of Germany) has a higher debt-to-GDP ratio than South Africa. As such, the benefit of austerity and high interest rates remain an ongoing debate in the country.    

Biden’s green energy subsides are a notable example of this trend which has included massive bailouts for European energy companies as they transition away from Russian natural gas. This has seen several European energy firms become nationalised and has increase their debt levels beyond even those of Eskom relative to the size of the economy. Based on figures from Bloomberg these debts make up over 10% of the EU’s GDP compared with Eskom’s debt which amounts to roughly 6% of the South African economy.

Another reason why the Chinese development model may not be easily replicated is that the Chinese government has a high degree of control over the financial system. This has allowed the government to implement policies such as currency controls, which helps stabilise the economy and encourages income to be reinvested in the country. This level of control is difficult to replicate in countries like South Africa which are reliant on financial support from jurisdictions that demand we retain open financial markets even if this leaves us vulnerable to capital outflows and external shocks.

In addition, China has a large domestic market, which has been a key driver of its economic growth. The country's massive population and rapidly growing middle class have helped to drive domestic consumption, which has helped to balance out the economy's reliance on exports. Interestingly, consumption overtook manufacturing as a share of the Chinese economy for the first time this year. However, other emerging market economies such as South Africa do not have such a large domestic market and tend to be more reliant on the fluctuating value of commodity exports.

China's development model is also based on a unique combination of low cost labour and a high-skilled workforce. The country has a large pool of cheap labour that has helped keep labour costs low, which has helped make Chinese exports competitive. At the same time, the country has also been able to produce high-skilled workers that have helped to drive technological innovation and productivity. Other emerging market economies may not have the same combination of both affordable and high-skilled labour, which may make it difficult for them to replicate China's success.

This is considered a major obstacle to BRICS partners like India and South Africa’s ability to replicate the Chinese development model, as both countries have an excess of unskilled labour. According to recent data from UNESCO, China's adult literacy rate is 94% compared to 77% in India. Furthermore, a greater proportion of the Chinese population has higher education compared to South Africa, with a gross enrolment rate in tertiary education of 64%, compared to 24% in SA.

It is equally important to note that China and South Africa also have very different historical and cultural backgrounds, which have shaped their approaches to state control of the economy and society. China, for instance, has a long history of state control and central planning, dating back to imperial times, which allows the country to successfully implement a state-led development model.

In contrast, until as recently as 1994, South Africa was a divided country led by a racist authoritarian government, whose discriminatory policies left a lasting negative impact on the country's economy and society. Ironically, the ANC has looked to maintain a centralist, state-led approach to governance, despite its history as a struggle movement against a overly bureaucratic state. This is likely due to the influence of the party’s historical socialist allies, including China.

Ultimately, while the state led model of economic growth can be successful, it requires a number of conditions to be met, first and foremost of which is a competent government. A well-educated and skilled working age population must then be put to work in a well-capitalised private sector which is supported by massive levels of state-led infrastructure spending. This may only be possible if there is already a high degree of growth, and debt can be serviced affordably.

South Africa may not be in a position to adopt such a model and could be better served embracing a more libertarian economic policy. Many have argued that the private sector would be willing to build infrastructure and grow the economy if the government implemented policies that encouraged this. But even if this approach proved effective, it would remain politically contentious in a country where most of the businesses are still owned by minorities and foreigners. As such, others would like to see South Africa follow the Chinese model, having witnessed that country’s enormous success.