Chinese exceptionalism

Thanks to Brad Setser for recommending the following paper by economist Dani Rodrik, which describes how China's economy is quite atypical of a developing country at its income level. Setser adds that it is quite unusual for a developing country to expend 10% of GDP each year intervening in FX markets to keep its currency cheap. All this sounds like an argument that the RMB is undervalued...

NewEconomist: In a new paper, Harvard's Dani Rodrik asks What's So Special About China's Exports? (PDF) The short answer is that "China is exporting stuff that is way too sophisticated for its level of income, and that explains part of its success". Here's the longer version:

..what is so special about China’s exports is not that they are voluminous or that its large pool of labor gives it a huge labor cost advantage. What stands out is that China sells products that are associated with a productivity level that is much higher than a country at China’s level of income. This helps account both for why China’s trade is viewed as problematic in advanced countries, and for China’s rapid economic growth.

The economically relevant question for sustainability is not whether trade-GDP can keep on rising, but whether China will manage to latch on to higher- and higher-income products over time, and continue to fuel its growth thereby.

Rodrik is sceptical that China can manage it; if not, "this is something that is likely to slow down growth." He concludes by discussing the nature of future industrial policies:

A clear implication of this paper is that China’s industrial policies - however incoherent they may have been - have had a hand in China’s past success. Future economic performance may also need to be supported by such policies.

...Therefore, a key question for China going forward is whether Chinese policies will maintain their experimental and flexible nature - whether governments will remain willing to support new industries but also willing to turn against ventures that under-perform. Designing the appropriate institutional structure to foster such an experimental, carrot-and-stick approach to industrial policy is an important challenge facing Chinese policy makers. This is an area where institutional transplantation does not work very well.

...The challenge for China therefore is to develop institutional models that are based on Chinese realities.