China's economic model may be flawed, but hasn't short-changed consumers

Is China’s development model short-changing domestic consumers? Although there is almost universal agreement that it is, that does not make it true.

 

Among the various forms that this argument takes, the simplest is based on the mercantilist-free trade dichotomy: China’s model is mercantilist and therefore preferential towards production and investment over consumption and welfare. For example, in Trade Wars Are Class Wars, Matthew C Klein and Michael Pettis contend that there is a serious distributional conflict within China (“class wars”), with policymakers favouring elites and cronies in big business, and thus prioritising profits over wage income. Alternatively, some argue that repressive labour policies are critical for the success of the Chinese and East Asian model more generally.

 

Exhibit A for all these arguments is the share of household consumption in Chinese gross domestic product (GDP). Although this metric is lower in China than in the United States, it was respectably high until the early 1990s. That is when China turned mercantilist, running large current-account surpluses that brought the consumption share down dramatically. This metric bottomed out at about 35 per cent in 2010, and stands at only 40 per cent today — substantially below the US and even below comparable countries in East Asia.

 

But this often-cited metric is potentially misleading in three ways: It is of more interest to macro-economists than development economists; it does not assess countries at comparable points in development time (meaning at similar points in their growth trajectory); and it is probably of more interest to analysts than to Chinese consumers. The latter arguably care more about how their consumption is changing in real time than about the notional share of GDP or some counterfactual scenario envisioning an alternative development strategy. 

 

That is why my 2011 book on China, Eclipse, offered an alternative metric. When one looks at Chinese household consumption per capita alongside comparable countries in terms of their post-war growth “take-off time,” the picture changes.

 

If consumption per capita is a reasonable proxy for the standard of living, Chinese citizens have done remarkably well, even better than their counterparts in the fastest-growing East Asian countries. For example, between 1978 and 2024, Chinese household consumption per capita grew by an astounding 7.6 per cent per year, on average, compared to 5.2 per cent growth in Japan, 5.7 per cent in South Korea, and 6.2 per cent in Taiwan over a comparable 46-year period. That makes China’s performance not just impressive but unprecedented.

 

Of course, several caveats are in order. China’s growth and consumption data might be dodgy. Averages can conceal sharp changes in income distribution, masking the median citizen’s real experience. And China started off at lower levels of consumption, which tends to flatter catch-up growth rates (at their starting points, other countries’ consumption was 3-5 times that of China). Nonetheless, the notion that the Chinese consumer is being short-changed is not consistent with reality.

 

It is also noteworthy that China’s extreme mercantilist phase — when the consumption share of GDP declined sharply from the late 1990s — did not cause any slowdown in per capita consumption growth. Although the consumption share of GDP was declining, GDP itself was rising so rapidly (owing to the broader development strategy) that absolute levels of consumption surged, too.

 

To put it differently, even if real (inflation-adjusted) wages are growing more slowly than productivity at every point in time, preserving global competitiveness will allow for faster and more durable growth over time on the back of the resulting export juggernaut. This is indeed what the data show. Average annual Chinese household per capita consumption growth was 7.9 per cent during the phase of peak mercantilism (1995-2010), coinciding with the sharp decline in the consumption share of GDP; when that went into reverse after 2010, consumption growth declined to 6.2 per cent.

 

What policy conclusions can be drawn from these trends? For starters, China’s mercantilist strategy can be questioned on the grounds that it harms other developing countries by occupying excessive export space in low-skilled goods, as Shoumitro Chatterjee of Johns Hopkins and I recently argued. Moreover, the distortions (from industrial policy and exchange-rate undervaluation) that sustain Chinese mercantilism have generated global imbalances and triggered trade conflicts. And China’s approach is also leading to excessive, unproductive investment at home — a problem with the potential to jeopardise future growth.

 

For all these reasons, calling on China to change its development strategy may well be warranted. But critics cannot question Chinese mercantilism on the grounds that it penalises Chinese consumers. Labour repression has evidently not come in the way of soaring economic gains. It seems odd to criticise a country for delivering growth rates in standards of living and consumption that have been perhaps the fastest, longest, and most broad-based (affecting hundreds of millions of people) in history. The prevailing consensus tells us more about China watchers than it does about realities on the ground. We should be wary of “China bashing” masquerading as a concern for Chinese consumers.

 

The author is a senior fellow at the Peterson Institute for International Economics and co-author (with Devesh Kapur) of A Sixth of Humanity: Independent India’s Development Odyssey (HarperCollins India, 2025). ©Project Syndicate, 2026