Abstract
In August 2012, the newly appointed minister of the Chinese Communist Party’s (CCP) International Liaison’s Office led a delegation to Singapore seeking expert opinions on how to tell the Chinese economic success story. Like other Chinese elites, members of the delegation were frustrated that the outside world, especially the West, portrayed China’s economic achievements as a result of its coercion in pursuing capitalism, if not by falsifying growth data. The reflective minister asked humbly, “Can we tell the story differently and effectively?” As the discussion deepened, the China specialists inside and outside China agreed that to understand China’s economic miracle is to grasp Western economic history, growth theory, Chinese tradition, and informal institutions.
China’s Remarkable Economic Growth, authored by a British economist near the end of his career (John Knight) and a Chinese one near the start of hers (Sai Ding), promises the possibility of helping the Chinese minister tell a story of China. The two authors, together, represent an invaluable combination of Western economics and Chinese tradition. The first and foremost inquiry they address is, what contributed to China’s remarkable growth? Relying on growth theories developed by Western economists based on Western experiences, they confirmed many classic explanations for China’s growth. In a nutshell, they conclude that China’s reforms since 1978 have created institutions and incentives that improved both static allocative efficiency and dynamic factor accumulation by absorbing the abundant resource, labor, into the expanding, more productive activities. Yet they agree with the simple answer offered by many China observers—that China “invests so much!” To explain the intensive investment trend in China, Knight and Sai offer the virtuous circle with sustaining feedback effect theory in China: high investment produced rapid economic growth, which in turn produced buoyant expectations that then elicited high investment. It is in the account of the virtuous cycle, however, that the economic theories and statistical models that the authors rely on fail to go deeper. Indeed, the questions become, how did the Chinese government initiate and maintain the virtuous cycle, and what are the domestic and international conditions of the process?
One can hypothesize, as Harvard scholar Dwight Perkins observes, that Chinese investment-led growth was so rapid because its need for investment was unlimited due to its socialist legacy. Basic provision of housing, for example, was largely nonexistent in Maoist China. Another socialist legacy was the destruction of private entrepreneurs. The process of reviving private companies during the reform era has been growth inducing, as private sectors are more efficient than public sectors. Or in the countryside, the basic goods and services were not supplied during the socialist period. By opening these investment opportunities, the Chinese economy was “simply returning to normalcy” and creating impressive growth statistics in the process, as Peking University professor Fu Jun argues. Exports and foreign capital also contributed to the demand and supply of investment in China. Thus, despite the inefficiencies of the financial market in mediating capital allocation in China, the everlasting reform process has made and kept enterprise investment highly profitable and generated powerful incentives for households, enterprises, and government to save and invest (p. 124).
As two economists, Knight and Sai understandably offer only limited discussion of politics in the book, yet they manage to touch on several important aspects. First is the political foundation of China’s investment patterns. They find that the Chinese government, as an authoritarian regime, was willing and able to take a long-run view with regard to investment because it expected to remain in power for many years, whereas democratic regimes are subject to pressures for “jam today, not jam tomorrow” (p. 163). Second, concurring with a number of China specialists, Knight and Sai reason that the Chinese government had a strong incentive to promote the rapid growth of household incomes as a shield against social discontent and argue that economic growth is the key source of legitimacy for the ruling Communist Party. Third, the virtuous cycle fundamental to China’s high investment was derived from the system’s reform capability. As Barry Naughton (2007) has maintained, “What is most remarkable is simply how far China has come toward a market economy and how the reform process has maintained its relevance as the challenges the economy faces have changed” (p. 86). The famous Chinese reform ethos states, “Crossing the river by feeling the stone” (mozhe shitou guohe), yet the rulers somehow continued the process of “crossing” without defining the other end of the “river.”
The political system is also impeding positive changes in China. For example, state-owned enterprises still control key product markets and occupy substantial investment in fixed investment, which makes China’s utilization of capital less efficient than a market-dominated system. Various studies, including this book, have found that investment in fixed assets by state-owned enterprises was associated with a decrease in the growth rate, while investment by private companies was associated with an increase in the growth rate. On the other hand, the solutions to many social problems appear to be contingent on changes in the political system. The authors note that rising inequality, the lack of rule of law, and institutional checks on power are at the heart of social tensions in China. Without reforming the political system, it is hard to imagine how these daunting tasks, or the threat of political shocks, can be resolved.
Chinese industrialization was built on social change in the nation. The most direct change was the mobility of the rural labor force. Immobile in the socialist period, the rural population became the key labor force in China’s manufacturing industries without receiving resident rights in the cities. This arrangement, however, is creating the least happy group of people in China. Based on a household survey conducted in China, Knight and Sai analyzed the association of happiness and economic gains. They find that “subjective well-being is a positive function of income but a negative function of aspirations, and that aspirations rise along with income, so cancelling out the positive effect of income” (p. 238). They segregate Chinese society into three groups: rural, urban, and migrants in cities. The findings are sobering. Rural China is not a hotbed of dissatisfaction with life. Yet rural migrant households living in the cities reported lower happiness than did both rural and urban households.
Economic growth in China is also creating a very unequal society: “a gradualist transition from central planning towards markets, a remarkable rate of economic growth, and a dramatic rise in economic inequality” (p. 215). Three factors have contributed to staggering inequality, according to the authors. The first is the state’s choice of efficiency over equity in the process of reform, which has given priority to eastern seaboard provinces over inland, urban centers over rural China. The second, however, is “the combination of semi-marketized economy, weak legal system, and ill-defined or insecure property rights,” which provides great scope for corruption, cronyism, rent seeking, and appropriation of state assets (p. 223). Finally, in the process of reforming state sectors, the government has allowed massive layoffs without creating social security for most sectors. Inequality is becoming a central issue in China’s economic management, yet the solution will have to involve changes in economic policies, legal institutions, and provision of social welfare.
One challenge to China’s growth has been rising labor costs combined with shrinking numbers of migrant workers in China. Knight and Sai, however, observe that China’s labor shortage has been less severe than previously described. In China’s countryside, there is still a substantial labor surplus. If the government improves conditions for migrants in the cities or loosens the hukou system of rural residents, there will be a significant increase in rural–urban migration and migrant settlement in the cities. Furthermore, they project that the political system will sustain growth trajectories in China, as it is likely that the ruling party will continue to prioritize growth and ensure that investment retains preference over consumption.
The political factors, unstated in the book but essential to the sustainability of China’s growth model, are far less certain, however. For example, scholars have argued that Chinese authoritarian leadership helps to stabilize economic policies and social stability, which are critical to investors’ perception of risk and gains in investment in China. Since Deng Xiaoping, we now have seen three generations of leaders. Can the semi-institutional rules set in place by Deng still prevail? Will the relatively static (or institutionalized) process of choosing leaders prevent the reforms badly needed in China? Second, Chinese economic growth is closely related to fiscal decentralization, which has given local governments tremendous autonomy and capacity to pursue growth. This, however, has led to enormous abuse of local power in recent decades, creating a surge in mass incidents in China. How can the Chinese leadership reconcile the contradictory need for decentralization to promote growth and enhancing accountability of local cadres? Last but not least, the CCP has seen ever-expanding membership in the recent decades and has thoroughly controlled the government and confined society, with no challenge. Yet its control has perhaps suffocated institutional innovations critical to maintaining growth or even holding the country together. Its need to incorporate as many party members as possible limits its autonomy to fight rampant corruption, for example. All these missing political factors are made even more important for the assessment of China’s economic growth, as they directly relate to the types of crises that China may encounter in the future. When they occur, all the bets in the book on future trajectories are off. Indeed, as the authors conclude, “If there is a political shock, an economic shock will become more likely, and vice versa” (p. 206).