Review: Rather more than a middling kingdom

May 18, 2012

By Edward Hadas 
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s economic development since 1978 is unprecedented. After more than a century of political chaos, GDP in the most populous country in the world has increased at a steady 9 percent annual rate for more than three decades. Behind the impressive numbers are a collection of gigantic transformations: the renunciation of the Communist values which were promoted heavily for a generation; the construction of new economic and social institutions; a vast expansion of education and a huge migration from country to city. All this has been managed with little in the way of civil unrest.

“Remarkable” is the adjective used in the title of “China’s Remarkable Economic Growth”, which analyses the accomplishment. It may be more appropriate to say the growth is “extraordinary” or “tremendous”. But the title matches the sober approach of the authors, John Knight and Sai Ding. Knight is an Emeritus Professor at the University of Oxford who has been studying China for decades. Ding, now at the University of Glasgow, is a beneficiary of China’s economic growth – she is a recent graduate of the vastly expanded Nankai University in Tianjin.

China’s recipe for success is in some ways conventional. Knight and Ding show that the Chinese data fit well with an augmented version of ordinary models of economic growth. By comparing China with other developing economies and comparing the economic growth of China’s provinces, they show that investments in physical and human capital are the main source of the growth. The investments, in other words, did what they were supposed to do.

The authors also show that private companies promote growth better than state-owned enterprises and that most of the investments have been funded by the high profits made by Chinese producers. In turn, the profitability can be traced back to the relatively low wage demands from members of the vast army of surplus rural labour.

Such conclusions may not be surprising to China-watchers, but the authors’ statistical analysis is both impressive and persuasive. In addition, there is a remarkably clear narrative, written by Knight, of the institutional changes which have accompanied the economic breakthrough.

Knight uses a single term to tie together the various strands of growth: he calls it the “developmental state.” The powerful and basically popular government of China was able to orientate the entire country to economic development. The quest for social equality, environmental quality and the highest possible wages were delayed until institutions which stood in the way of the growth agenda were changed, improved, or neutered.

The book has many tables and some sophisticated methodological discussions. These won’t lure in the amateur, unlike the chapter dedicated to the question of whether the increase in prosperity has brought happiness. The answer, according to surveys of satisfaction, is basically “no”. Poor rural people seem more content with their lives than richer city-dwellers.

There is also a discussion of how long the remarkable growth can continue. Knight, like most observers and like the Chinese governments, expects a slowdown in the growth rate over the next decade as the stock of excess rural workers declines and the economy becomes more efficient. But if crisis can be avoided, the de-acceleration should be more gradual than many pessimistic experts expect.

Knight points out that the developmental state succeeds in large part because of its own success. The government also retains its legitimacy as long as it continues to provide the governed with greater prosperity and economic opportunities. The government has managed to do that, thanks in no small part to its remarkable flexibility on policies and principles. But, as Knight points out, the next phase of development will be more difficult to manage. He does not rule out a crisis of some sort. Expectations of social justice are rising in tandem with the power of entrenched economic interests.

Yet when the single-minded developmental state was no longer applicable in Korea and Taiwan, both countries changed their systems of government – without much social discord. If China’s Communist Party manages to shed power, or to change along with the People’s Republic that it founded, even Knight and Ding might be tempted to call such progress miraculous.

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