Learning from China’s economic philosophy and policy — XIV

The 75th anniversary of diplomatic relations should improve the learning equation of Pakistan with regard to China. For far too long, a significant proportion of policymakers has predominantly not given enough attention to the non-shock-therapy, non-neoliberal, non-austerity, counter-cyclical policy approach, which have otherwise formed highly successful basis of the Chinese economic philosophical underpinnings of their policies.

This needs to change in a significant way, as the country continues to find difficulty over the years to come out of otherwise quite frequent boom-and-bust economic growth cycles, at the back of following the neoliberal/austerity based model both within and outside of the International Monetary Fund (IMF) programmes.

Also read: Learning from China’s economic philosophy and policy — XIII

This policy framework, in turn, has not delivered sustainability and resilience, and continuing to follow this framework will likely going to worsen the already negative economic consequences in terms of inequality, poverty, debt distress, and even diminishing political voice.

In developing countries in general, including Pakistan – but also in developed countries, though in a less impacting way, given overall economic institutional fundamentals serving as a relatively much stronger signal for foreign direct investment here – an important negative consequence of keeping loose capital control under neoliberal policy, and practice of over-board monetary austerity policy, in turn, keeping in general interest rates at an elevated level results in a significant level of volatility from sudden, and deep movements of foreign portfolio investment (FPI).

Hence, this requires both better financial, and real sector fundamentals in developing countries, for instance, in terms of much greater policy continuity, and also greater regulation/controls to rein in excessive risk averse, and over-board profit-oriented nature of FPI in general, caring less for balance of payments- related negative impact of this on local country economy.

In this regard, Pakistan can learn a lot from China’s highly effective capital market management over the decades, whereby, unlike Pakistan, they have been rightly cautious in terms of avoiding neoliberal, ‘shock therapy’ liberalization policies, and instead followed a policy of gradually loosening capital controls as a meaningful level of FDI was attracted, and capital controls were relaxed in a contextualized manner in line with the development of overall economy, bringing, in turn, the desirable benefits of controls on one hand and gradual liberalization on the other, as far as the economy allowed in terms of being mindful of financial/balance of payments, and real sector risks that can be created by sudden booms and busts in the capital markets.

Moreover, China established special economic zones (SEZs), that further enhanced attraction for investors for bringing much more stable investment in the shape of FDI.

The same handbook pointed out in this regard: ‘China’s four decades of capital account liberalization can be divided into six stages, capital account policy was rather restrictive, so that direct investments dominated capital account, and inflows dominated outflows.

As time went by, non-FDI gained more freedom to flow across the border. Therefore, capital account has become more volatile, diving into deficit in 2014–2016 before reversing to surplus in 2017.

China has greatly benefited from FDI inflow, but also suffered in recent years from the short-term capital flow swings.’ A point to be noted here is the highly volatile nature of FPI, which calls for overall much better capital control regime globally, without which it is difficult to move towards greater capital account liberalization in a much more meaningful application of globalization, where capital movement is motivated by investment opportunities to add to global economic stability, and resilience, and less by profit motive.

Highlighting the journey of China with regard to cautious, and gradual capital account liberalization, the same handbook pointed out, ‘The promulgation of the Joint Ventures Law in 1979 marked China’s first step to open up its capital account.

In the same year, China established four Special Economic Zones (Shenzhen, Zhuhai, Xiamen, and Shantou) on its southeast coast as pilot destinations for foreign investment, offering tax incentives and managerial autonomy. Since then, other provincial and local governments followed suit. In response to the broadening of preferential treatments, China’s FDI grew steadily.’

Here, an important learning curve perhaps is that initial inflow of FDI mainly came from regional areas, due to closeness, and greater connectivity, at the back of greater understanding of ground economic conditions by regional economies than by advanced countries.

The same handbook pointed out in this regard the following: ‘About 70% of total FDI inflows came from Hong Kong and Taiwan, which are geographically and culturally tied to the mainland, while capital from advanced economies remained cautious.’

Given Pakistan’s similar regional context first of all, and also because regional economies would find more confidence to invest, given the factors identified above, but more likely if like China, Pakistan provides meaningful governance and incentive structures, including greater political stability and less volatile environment for capital markets. This includes putting in place effectively deep capital controls, and meaningfully thought-out decisions to ease such controls in a gradual manner in line with underlying economic fundamentals, and establishment of deep FDI inflows.

The role of providing an adequate level of mission-oriented and purpose-driven leadership in terms of reform effort – something to be learnt from China in Pakistan – injected new vigour into the economic development, including enhancing impetus with regard to receiving FDI inflows, while protecting the economy from the deep volatility that otherwise generally came in an environment of largely unfettered market regime, that followed ‘shock-therapy’ policies.

In China, years of laying the basis of economy on strong fundamentals in terms of an appropriate level of role of public sector reached through following a non-neoliberal, non-austerity, primarily counter-cyclical policy approach.

This provides a deep learning curve, especially in terms of economic philosophical direction, which needs to be reflected in both policy and budgetary priorities, and both at the centre, and federating units level for reaping benefits of a unified policy response as has been done in China in terms of the country having an overall unified economic policy across centre, and sub-regions of the country; for instance, provinces, autonomous regions, municipalities, and administrative units. Here, strong leadership was provided through centre, which directed and gave greater role to local governments, playing a deeper role in economic development.

The same handbook indicated in this regard: ‘The year 1992 marked an inflection point in China’s modern history. Deng Xiaoping’s Southern Tour in the spring irreversibly reoriented China’s national priority toward reform and opening-up… Since then, foreign capital became increasingly confident in venturing into China.

FDI inflows surged by ten-fold from $4.4 billion in 1991 to $44 billion in 1997, comfortably dwarfing portfolio and other investment inflows as the main contributor to capital account surplus… In addition, the source of FDI inflows became more diversified: An increasing share of FDI came from major developed economies such as the United States, Europe, and Japan.’

Another example of Chinese gradual approach to policymaking, in addition to providing meaningful support to efficiency- and welfare-related goals, can be seen in the application of ‘dual-track’ mechanism to exchange rate management. Hence, in addition to such application in terms of price of goods, and capital, price of currency was also approached with this same approach to overall provide greater support, stability, and predictability to strategically important sectors in the overall spirit of public sector playing a dominant and decisive role in terms of price setting, while taking input from the markets while market-determined prices were kept for less important economic areas in terms of domestic production, exports, and consumption.

Be that as it may, greater market regulation meant that in the arena of market determination of prices, over-profiteering was checked meaningfully, which also brought greater financial stability, as reining in over-profiteering motivation helped avoid over-financialization, and the cost of much-needed investments into real sector, and overall supported enhancement of inclusive growth – since ‘dual-track’ pricing mechanism resulted in putting in place more effective pre-distribution policies under a more pro-active spirit of public sector, instead of redistribution policies placed by a reactive, neoliberal-minded, diminished role of public sector – and resilience.

(To be continued…)

Copyright Business Recorder, 2026