The China Enigma and the China Way

From: English Edition of Qiushi Journal Updated: 2011-09-19 17:11
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 As well as providing enlightenment for developing nations, the rapid development of the Chinese economy over the past 30 years has also presented economics and social sciences in the developed countries with a perplexing conundrum. In the mainstream media of the West, the topic of China has become the most disputed but possibly also the most innovative one.

 I. The Western media’s difficulties in understanding the enigma of China’s development

 In explaining the reasons for China’s development, several simple formulations are in vogue in the Western media. These basically negate the new mode of development for the developing countries which China’s development provides. On the face of it, these formulations do grasp certain features of China’s development, but on closer scrutiny we find that they do not tally with the historical experience of world development.

 Firstly, there is the theory of cheap labor. According to this theory, it would seem that the only advantageous access Chinese products have to the world market is the low cost of Chinese labor, particularly relative to that of the developed countries. The Western media criticize China for helping international capital to exploit Chinese labor and advocate that China introduce a Western-style system of independent trade unions and social welfare in order to raise China’s labor costs and reduce the international competitiveness of Chinese products. If this theory were tenable, then given that labor costs in South Asian countries are even lower than in China, why are the manufactured goods of these nations not as competitive as those of China on the world market?

 Secondly, there is the theory of actuation by foreign investment. According to this line of argument, the technological progress and industrial upgrading of China’s coastal areas were the obvious result of their ability to attract foreign investment. During the past 20 years, China has ranked first or second in the world in the total amount of foreign investment she attracted, second only to the United States. However, if the criterion for comparison is not the total amount of foreign capital absorbed, but the per capita average, the amount is far less than that of Eastern European countries. However, the economies of Eastern European countries shrank by 50% in their ten years of transformation, their speed of economic development remains far lower than that of China and East Asia to the present day, and nearly all of their state-owned banks have now been sold to Western transnational banks. When the financial crisis erupted in the West these foreign banks withdrew capital to their home countries in total disregard of Eastern Europe’s economic stability.

 China received no foreign aid of any kind in the 1980s and needed to pay interest on loans from the World Bank. Even after China joined the World Trade Organization, China’s total amount of foreign funds still accounted for less than 5% of total investment within the country. Foreign funds mainly brought in new technologies and new managerial modes; the capital needed for China’s development mainly came from the accumulations of domestic enterprises, residents, and the government. Funding for urban infrastructural facilities did not rely in the main on bond issues or loans, but on sales of land-use rights while retaining state and collective ownership of the land. China safely tided over the global financial crisis because it did not excessively rely on foreign capital, did not have long-term continuous trade deficit, and retained favorable balances in both capital accounts and current accounts. Therefore, we can say that the amount of foreign capital absorbed was not the decisive factor in economic development but rather the proper management of foreign capital. This was an important experience of China.

 The third explanation relates to the theory stressing the pull exerted by exports. Western observers attribute the success of China’s economic reform to the openness of the American market and the globalization of the economy led by the United States. They also argue that the Chinese economy will fall into decline once the United States corrects its excessive consumption. The problem here is that if the emphasis on exports is a decisive factor in China’s economic development, then the Latin American economy should have a greater advantage than China. The Latin American countries have rich resources, and export such bulk commodities as cocoa, beef, petroleum and minerals, thereby fulfilling the comparative advantage theory of classical economics. However, regrettably, the economic growth of Latin American countries also falls short of that of China.

 The fourth theory singles out authoritarian government as a decisive factor. Western classical economic theory emphasizes “the invisible hand,” believing that the economic mode ascribed to governments of socialist countries cannot compete with the free market economy of the West. Simplistic classical economic theory is obviously unable to explain the China miracle. Therefore, the Western political theory stressing the factor of authoritarian government in China has become highly popular in the Western media. The most influential formula states that “corruption is the driving force for economic growth.” Yet why is the speed of construction of China’s infrastructural facilities much faster than that of Western countries? Their explanation is that it is much cheaper to bribe a mayor than to pay off an entire municipal parliament, and they argue that in order to compete with China on an equal footing, it is necessary for the West to urge China to take the parliamentary road in politics and reduce its speed of policy making. Although this theory recognizes that the system of parliamentary democracy of the West is not necessarily superior in global competition, the theory linking an exaggerated picture of corruption to China’s growth reveals an ignorance of contemporary world history. If an autocratic authority can ensure sustainable economic growth, then the world should present many examples of successful economic development pursued by authoritarian governments, but these successes are only temporary, come with the cost of sacrificing the interests of the masses of the people, and do not yield sustainable development. China is the most open country for competition in the world today. In the more than 30 years of reform and opening up about 200 million people have been lifted from poverty and China’s social order is more stable than some developed countries, providing a stark contrast with many other countries in the same period. The Communist Party of China has built up a broad social consensus and properly handled the relationship between reform, development, and stability, endowing the handover of supreme state power with procedures and transparency, and effectively averting the military coups and internal disorders often seen in developing countries. The efforts made by China in reforming the state-owned enterprises have exceeded those of the West in reforming the welfare society, and China has avoided the predicament in reforms caused by interest groups as in the reforms of the Soviet Union and Eastern Europe in the earlier period. China has attached great importance to safeguarding the authority of the central government, but the theory of authoritarian government presented in the Western media has underestimated the achievements of political developments in China and is obviously unable to explain China’s realities.

 It is obvious that theories derived from mainstream Western social sciences cannot provide an explanation of China’s development. We therefore need to discuss the next question: Is China also pursuing a course different from that of Western political and social systems in its economic reform and development?

 Waigaoqiao Container Wharf of Shanghai Port. The National Bureau of Statistics of China announced on July 15, 2010 that China’s GDP reached 17,284 billion yuan in the first half of 2010, an increase of 11.1% compared with the same period of last year in terms of comparable prices and 3.7% faster than the same period of last year. According to initial estimates, value added in primary industry in the first half of this year reached 1,336.7 billion yuan, up 3.6% compared with the same period of last year. The value added of secondary industry was 8,583 billion yuan, up 13.2% and the value added of tertiary industry was 7,364.3 billion yuan, up 9.6%. / Photo by Xinhua reporter Chen Fei

 II. The perplexity of neoclassical economics in explaining the rapid development of China’s economy

 Neoclassical economic theory addresses property rights in the institutional economics of the West, and regards private enterprises as the optimal institutional arrangement, arguing that the development of China’s private enterprises is the fundamental reason for the development of the Chinese economy. This argument, however, is extremely lopsided. The rise of collective enterprises in China’s rural areas and the revitalization of such large state-owned enterprises as Haier, Changhong, and Lenovo, which can compete with transnational companies, and the Industrial and Commercial Bank of China and China Construction Bank, which rank among the world’s top 500 enterprises, is all the result of the reform and opening up of the country. Private enterprises have their distinct advantages, but it is the state-owned enterprises which have been reborn in the reforms that are still the main entities and pillars of the Chinese economy. China adheres to the policy of making public ownership the main body in tandem economic development with multiple ownerships. China has not implemented a comprehensive privatization of large state-owned enterprises as in Eastern Europe or the Soviet Union but introduced a mechanism of competition in the reform of state-owned enterprises and raised productivity and the social benefits of state-owned enterprises. China’s theory on clearly defined property rights is in essence designed to change the property right under socialist conditions into an incentive mechanism under public ownership. This is more general and convincing than the Western theory of property rights based on private property. Moreover, its performance in the current financial crisis has exhibited the contributions of China’s state-owned enterprises to making society stable, creating job opportunities, and ensuring tax income.

 A second aspect of the neoclassical theory is the endogenous growth theory in macroeconomics. This theory holds that the motive force of economic growth is the accumulation of knowledge and that development is the spread of knowledge from the developed countries to the developing countries, a process in which it is impossible for the latter to challenge the former. Liberalism is the chief means for eliminating obstacles to the spread of knowledge. These theorists advocate that China should implement a liberal policy, especially by removing controls on the movement of capital accounts and the supervision of information networks. The weakness of this theory lies in the fact that it negates the renewal mechanism of knowledge. If knowledge is only “learning by doing,” as stressed by neoclassical economics, and not “learning by trying” as we have observed, then, the United Kingdom as the earliest industrialized country would still dominate the world and Germany and the United States would not have risen later. The fact is that rising industries often eliminate backward industries; there are serious issues of choice and digestion for developing countries in their efforts to catch up with and surpass the technology of developed countries. China has strict industrial policies governing the introduction of foreign capital which obstruct sunset industries and polluting industries from flowing in, and is thus more capable of selectively absorbing advanced technologies and managerial modes from the West compared with the transitional countries of Eastern Europe. The fact that rising enterprises, such as Chery Automobiles and Geely Automobile Holdings Ltd., dare to challenge transnational companies in the auto industry hinges on their courage in innovating rather than on any “superiority in the accumulation of knowledge.”

 A third aspect of the neoclassical theory is the democratic theory applied to economics and politics. Western theoreticians have always held out good prospects for India, a “democratic country,” rather than China, their theoretical basis for this being that freedom and democracy fit better with the nature of human selfishness.

 It is very difficult for persons who have not lived in the West for a long time to imagine that the Western parliamentary democratic system is in essence a system for safeguarding the status quo of interest groups rather than a system for reforming irrational situations. Simon Johnson, former chief economist at the International Monetary Fund and now professor at the MIT Sloan School of Management, made it clear that the source of the current financial crisis springs from the US government being captured by financial consortiums; only by dissolving financial consortiums can we get rid of financial crises.

 In the current financial crisis economists have widely observed that monetary policies have a limited role to play. The fiscal policies of the Chinese government have yielded instant results, but in contrast the fiscal policies of the governments of Western countries have encountered difficulties at every step. The reason is that voters in developed regions are not willing to subsidize the construction of infrastructural facilities in underdeveloped regions and are afraid that enterprises might move to places where labor is cheaper. In other words, the parliamentary democratic system based on the market economy is inclined to maintain the gap between regions, which objectively obstructs the structural readjustment of the country as a whole. The rapid growth of the Chinese economy and its ability to upgrade technologies and resist crisis have demonstrated that the macro management system of China can better take into consideration the interests of the whole people and take a new road in macroeconomics. The speed of structural readjustment of China has exceeded the objective of Keynesian economics in purely stimulating internal demand and maintaining employment.

 III. The problems for sociology and history in explaining the economic development of China

 Not only Western economists find it difficult to understand the economic development of China, but traditional Western sociologists and historians also find themselves highly perplexed by it. It is very difficult for Western left-wing thinkers to comprehend why the trade unions of developed countries have become obstacles to, rather than motive forces for, reform. Western politicians believe that Marxism is the ideology of the poor, but as soon as development of the economy hastens the birth of the middle class, the political system of China will necessarily return to the track of the Western model of freedom, democracy and the rule of law, and that this is a universally applicable value. It is not only sufficiently strange that the course of China’s reform and opening has shattered these traditional ideas, but several facts are particularly worth noting.

 Firstly, the creativity of Chinese farmers under the influence of new ideas is one of the superiorities of the socialist road with Chinese characteristics. Not only did the Chinese revolution rely on the peasants, China’s reform and opening drive also began with contracting farm output quotas on a household basis created by peasants. The popularization rate of education of China’s peasants is much higher than that of India and other developing countries, laying a foundation for rural workers to migrate to cities. The rise of China’s township enterprises has promoted the reform of China’s state-owned enterprises and restricted the monopoly of transnational companies in the domestic market. The system of collective land ownership in China’s rural areas is more importantly the basis for China’s inexpensive social security. The technical progress of China’s agriculture has not only enabled it to feed the Chinese population but also to attain competitiveness for exports. It seems pointless to discuss the economic development of developing countries without addressing the development of rural areas. The building of a new countryside in China has taken a path different from that followed by big farms in the West.

 Secondly, China’s drive for the reform and opening up has provided new experience in capital accumulation. The historical experience of capitalism holds that poor countries have abundant labor and lack capital. In the more than 30 years of its reform and opening up, China’s savings and investment rates have been much higher than those of the developed nations of the West. China’s foreign exchange reserves accumulated over the years have been the world’s largest and a still-developing China has even exported capital to the richest country – the United States. We cannot deny that China’s high savings rate and its progress in high technology are miracles in economic history. In the final analysis, the public ownership of China’s natural resources has provided the greatest credit for China’s economic development. The efficiency of the Chinese government has turned this credit into capital, reducing the risks for starting up enterprises by a large margin and considerably raising returns on capital. This is the Chinese innovation not predicted by traditional theories on capital.

 Thirdly, China’s open policy not only aims at opening to foreign funds but also opening to internal migration. The colonialism of Western Europe only saw the emigration of tens of millions of people abroad over 400 years, and in this process they occupied enormous territories in Africa, America, and Australia, traded populations, slaves and drugs, wiped out local nationalities and cultures, and ignited two world wars. In contrast, in the more than 30 years of China’s reform and opening approximately 200 million peasants entered the nation’s cities, resulting in neither large scale social turmoil nor world war. Instead, this expanded China’s urbanization and prosperity in the global supply of consumer goods. The speed with which China has eased restrictions on peasants entering the cities formed a sharp contrast with the hesitation of the developed Western countries in easing restrictions on immigration. Unlike Germany and Japan which were defeated in World War II, China’s reform, opening, and peaceful development were not choices imposed under the occupation of the US army, nor the self disintegration of the former Soviet Union in the face of Western challenges, but independent reforms and independent innovations of the collective Chinese leadership. China’s all-round learning experience dispensed with previous ideological limitations and cultural bias and emerged from China’s own history and confidence in continuously overcoming difficulties.

 Fourthly, the course of China’s reform has solved the contradictions between traditional culture and modern science and technology. The speed of China’s technological progress has broken away from the conventional practice of the developing countries where scientific progress depended on economic development, and indicates that the educational traditions advocated by China’s Confucian culture have deeply penetrated the hearts of the Chinese people and are more capable of adapting to the challenges of technological revolution and globalization than Judeo-Christian cultures. Once they derive an income from working in the cities, the poorest of the poor families from rural areas invest it in the education of their children rather than in material consumption. China’s rural entrepreneurs dare to compete with state-owned enterprises and transnational companies. The adventurous spirit of daring to go abroad and the entrepreneurial business abilities of merchants from Wenzhou, Zhejiang Province and peasants from Fujian province have surpassed the expansionist capabilities of Western colonialists supported by gunboat policies. In the face of an anti-China wave in the West during the Beijing Olympics, Chinese students studying abroad and overseas Chinese displayed a solidarity that amazed the world. The cohesion of Chinese culture that has resulted in a unified history of 2,000 years has surpassed the imagination of the Western media and broken the limitations imposed by such Western concepts as a nation state and democratic consciousness. The ability of local governments to integrate township enterprises and foreign investment has surpassed the era of Adam Smith when the government only played the role of the night watchman. During the earthquake in Wenchuan County, Sichuan Province, the world was given a completely new impression of the abilities of the Chinese army, entrepreneurs, non-governmental organizations, the central government, and local governments to coordinate.

 IV. Observations and explorations of the China way

 The first experience of China’s economic development is the healthy development of a mixed economy which is superior to the total privatization that took place in Eastern Europe. The abilities for innovation of China’s private enterprises, the competitiveness of China’s state-owned enterprises, and the capacity to learn shown by China’s non-profitable undertakings are all important features of China’s socialist market economy. The cost of China’s social security is low. The social security of China’s rural migrant workers mainly relies on the collective ownership of land rather than social security taxation. The present financial crisis has caused a sharp drop in exports. The impacts sustained by Japan and Germany have far surpassed those of the United States. However, the return of China’s 20 million rural migrant workers to their home villages brought new motive forces for modernization to rural areas rather than fomenting social turmoil. The socialist market economy of the Chinese model is a mixed economy with balanced development. When the private economy or the state-owned economy becomes either too large or too small, it may adversely affect the sustainable development of the economy and society. The society cannot have long-term peace and stability without the development of non-profitable education, scientific research, or medical care.

 The second experience of China’s reform and opening drive has been the redefinition of the role of the government as “the hand of planning and coordination,” far surpassing the role of “the night watchman” assigned to the government by “the invisible hand” theory of Adam Smith. A night watchman state can only look after the property of property owners and does not need to care about creating employment or eradicating poverty. The development of division of labor has made the task of social coordination far more complex than in the handicraft workshops of Adam Smith’s time. The interest groups of sunset industries often use political, economic, and legal means to obstruct the development of rising industries. The unequal competition in the age of globalization has also led developing countries to have the need of support from nation states in catching up with and surpassing developed countries. The elimination of the creativity of the technological revolution has sharpened the contradictions in the restructuring of sunset industries. The accelerated development of science and technology has resulted in market supervision often lagging behind the development of the market. The special feature of sharing that typifies the intellectual economy has made the protection of private property right increasingly more restricted. The new situation of the international division of labor has greatly strengthened the position of governments in state insurance in the course of globalization. China’s local governments have played a role as organizers, coordinators, and catalysts in supporting industrial readjustment, creating jobs, and encouraging technical innovation. The central government of China has assumed the mantle of providing social security for innovations and experiments of enterprises and localities, thereby greatly reducing risks in initiating enterprises by internal and foreign capital enterprises. During this financial crisis, governments at all levels in China have intervened in the reorganization and integration of private enterprises with an efficiency far exceeding that of developed countries in the West when done through procedures for bankruptcies and mergers in the law courts and requiring the injection of funds from the Ministry of Finance to continue operations. This has made the efficiency of China’s economic restructuring foremost in the world.

 The third experience of China’s reform and opening drive has been that governments and enterprises have found that the market is the means for international competition and not the strategy for development as the controllers of the destiny. The radical liberalization of prices and foreign trade in the Soviet Union and Eastern European countries destroyed their socialist industrial system. Replacement of double-track price system by a single-price system created room for enterprises to learn and make adjustments. China’s exchange rate and tariff policies were changed to suit the times and provided appropriate protection to domestic enterprises in new industries at the time when they did not have the ability to compete internationally. The special economic zones as the windows for opening up provided strategic information to export-oriented enterprises. When the technical competitiveness of Chinese enterprises was gradually strengthened, China also took the initiative in introducing international standards, reducing exchange and tax rates and raising the international competitiveness of Chinese products. These measures better suited the actual conditions of a developing country compared with Latin America and Eastern Europe, which adopted one-sided measures of market liberalization guided by Western countries, and were also conducive to grasping the opportunities presented by international competition. China has been skilled at adapting itself to and grasping the trends of the international market and has avoided the possibility of becoming an appendage of the international market dominated by the West. On the contrary, China’s development has helped to restrict the short-term behavior of transnational companies and the self-interest pattern of the Western powers, causing the international economic order to transform in a more equitable direction. The present currency swap agreement of the BRICs is conducive to evading the risks of depreciation of the US dollar. This is a major contribution of China towards improving the international financial order.

 The fourth experience of China’s reform and opening up drive is that China has created a new mode for democratic checks and balances under the conditions of a market economy. The crisis precipitated by the bankruptcy of the three major automobile companies of the United States revealed that with the traditional relationship of antithesis and the system of checks and balances between capital and the trade unions in the developed countries of the West it was difficult to realize the structural readjustment of industries and international competition. The abilities of American enterprises to innovate and compete have been worn down by inefficient coordination in American society.

 The Chinese people have been prepared since childhood to endure hardships and not indulge in creature comforts, because the per capita average ownership of resources is far lower than that in Western countries. Chinese history has always taught the masses of the people and the leaders to prize talented individuals, because the short-term interests of the masses of the people can only be ensured with the guidance of long term interests. The fact that China is undertaking experiments and innovations from the bottom up has dispersed the risks brought about by experiments. The success of regional experiments will be followed by other regions and summarized by the central government and be promoted. This has made China far better able to abolish old rules and establish new ones rapidly and bring about social results than developed countries in the West which face the dilemma of having to implement superfluous legal regulations and relax other regulations and systems. We can say that the “competition to register achievements in one’s official career” among officials of the Chinese government is superior to “the competition to make promises” among candidates in parliamentary elections of the West. The model of social reform based on “opportunity, consultation, and experiment” initiated by China has given the developing countries a new alternative to the traditional social operational mode of “freedom, democracy and the rule of law” of the West.

 The fifth experience of China’s reform and opening up drive is that China has developed a new model of equity. The fact that China made rapid industrial readjustment in the financial crisis was rapidly appreciated by society at large and did not ignite the conflicts or entanglements that typify regional and industrial groupings in American and European parliaments, revealing that Chinese culture stresses the vitality of integrated thinking which harmonizes perfectly with the trend to integration in today’s complex sciences. The medical science mode and the ways of maintaining good health that stem from combining Chinese and Western medicines have also reduced the costs of medical care relative to those in the United States and Europe. The medical system in the West led by analytical science and consumer modes has resulted in the pernicious expansion of medical costs, which are extremely difficult for enterprises and the whole of society to sustain. The Western mode of division of labor might save labor forces but this has been achieved at the cost of depleting resources and bringing about global warming and an ecological crisis. Chinese civilization has always sought to save resources and absorb human resources. In the new period of the intelligence economy China will take into consideration the modes of development of economies of scale and of economies of scope and effect a transition from ensuring material civilization to developing spiritual civilization. In the period of globalization of the intellectual economy, exploration of the China way to development has only just begun.

(From Red Flag Manuscript, No. 4, 2010)

Note: Author: Professor, China Center for Economic Research of Peking University

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