Month / February 2021

by Andrew

The definitive book on China’s industrial policy is also free

Once an obscure topic, China’s industrial policy now gets attention from heads of state. The entire US-China trade war waged by the Trump administration was, in formal legal terms any way, justified as a response to distorting industrial policy. Understanding industrial policy seems to be a requirement for participating in current intellectual debates about China.

Thankfully, Barry Naughton has written a short and highly readable book, The Rise of China’s Industrial Policy, 1978 to 2020, that explains its history and functioning. Even better, it is available as a free PDF download from the Centro de Estudios China-México at the Universidad Nacional Autónoma de México. Based on a series of lectures, the book has a conversational tone and jargon-free style that is rare for this subject matter, a topic both highly technical and highly politicized.

Naughton’s argument is plainly stated in three short sentences:

Until 2006, China never had “industrial policy.” Since about 2010, China has had industrial policy on a massive and unprecedented scale. The outcomes of post-2010 industrial policy in China have not been adequately studied and are as yet unknown.

A prominent economic historian of China–his textbook The Chinese Economy is the standard–Naughton argues that industrial policy on its current grand scale is a very recent development in post-1978 China, and not at all part of the “China model” responsible for its decades-long growth miracle. He sees current policies as a departure from past practice, rather than as part of the deep structures of Chinese socialism.

Powerful targeted industrial policies in China have been generally absent (1978-2005) and have sometimes been overbearing (2010-present), but they have never been a crucial component in explaining rapid Chinese economic growth. That doesn’t mean that government doesn’t matter, or that distinctive Chinese approaches have not been important: it does, and they have been. Indeed, it should be intuitively obvious that the impact of a large-scale fixed investment effort, massive investment in human resources, and the presence of thousands of growth-promoting local governments competing with each other will be much greater than the impact of government efforts to directly intervene in the sectoral development pattern of the economy. Of course, these are not mutually exclusively choices. But targeted industrial policy is still utterly unproven in terms of its impact on China’s development. It may turn out, 20 years from now, to have been a huge success, but as of today, there is very little evidence for its importance or success.

Naughton admits his own skepticism of the benefits of large-scale industrial policy, but his main point is that neither scholars nor the Chinese government have a solid understanding of the actual consequences. The scale of resources being mobilized by industrial policy is enormous, and thus clearly poses some economic risks. He thinks that China was well on its way to being a global technological powerhouse before the introduction of all of these industrial policies, thanks to its highly competitive manufacturing sector and skilled technical workforce. So to him, it is not obvious those risks were worth taking:

It is unclear to what extent Chinese policy-makers have considered the technological, economic, and international risks of their
industrial policies. It appears rather that policy-makers have been seduced by the vision of a technological revolution and a substantial re-ordering of global strategic relations and have rushed ahead with an aggressive and decisive round of industrial policies. At a minimum, this is an enormous gamble. As stated repeatedly in this essay, Chinese would in any case have emerged as a technology giant over the next decade or two. It is not necessarily beneficial to have government forcibly attempt to accelerate the process, creating substantial additional risk, waste, and conflict. Indeed, it may end up seriously retarding the global benefits that are potentially available from new technologies, particularly if the world ends up partitioned into competing technological blocks.

Plainly, the Chinese government thought that the risks of not carrying out industrial policy were also great. And Naughton does a good job of explaining the intellectual framework that has justified their large-scale interventions. I found the book helpful and clarifying.

by Andrew

What I’ve been listening to lately

  • Django Reinhardt – Renown And Resistance 1937-1943. Django’s recordings with his string-band group the Quintette du Hot Club de France are legendary, and rightly so. But he played in many different contexts, and this collection brings together a mass of recordings of him with other swing-era musicians. One of the highlights is a session with Rex Stewart and Barney Bigard from the Ellington band; together they make some of the best small-group swing on record.
  • John Zorn – More News For Lulu. The original News For Lulu album was a landmark of the 1980s avant-garde, taking on traditional hard-bop tunes with a very untraditional lineup: Zorn on alto, George Lewis on trombone, Bill Frisell on guitar. This live recording is even better, the players more assured and adventurous.
  • Duke Ellington – Piano In The Background. A somewhat obscure session that delivers the opposite of what the title promises: it’s a feature for Ellington’s often-underrated piano playing. The repertoire is largely familiar territory for the band but Ellington’s solos lift the playing out of the ordinary. The 1960s were a great decade for Ellington: two years after this he would record the stunning piano-trio masterpiece Money Jungle.
  • Steve Lacy – Blinks. A terrific, exciting live recording from a great working band. The rhythm section of Jean-Jacques Avenel and Oliver Johnson push the horn players (Lacy and his longtime partner Steve Potts) to startling heights.
  • Archie Shepp – Blasé. Of most interest on this 1969 Paris session are the first two tracks, in which Shepp brings in two harmonica players and the adventurous vocalist Jeanne Lee to improvise alongside his rough-edged tenor. The result feels like a glimpse of a possible new musical genre, a sort of free blues.
Rex Stewart, Django Reinhardt, Duke Ellington: Paris 1939

by Andrew

Is China experiencing an advance of the state sector?

That was the question I was asked by Jude Blanchette at an excellent CSIS panel on China’s state capitalism. It’s a reference to an old debate over the phenomenon known pithily in Chinese guo jin min tui, and less concisely in English as “the advance of the state and the retreat of the private sector.” As Jude remarked, it certainly feels like this has been happening in China in recent years, with the government proudly celebrating its state-directed economic model and the contributions of state-owned enterprises. The below are my notes, in which I try to pull together a concise answer to this vexed question:

The answer is yes and no. That’s not a cop-out. I say that because there’s a couple of different ways of looking at the advance or retreat of China’s state sector: you can look at it in a purely domestic context, or in a global context.

I’ve crunched a lot of numbers to get a handle on the economic size of China’s state sector. What I’ve found is that the value-added produced by state-owned enterprises has usually been in the range of 25-30% of China’s GDP. And what’s really striking about those numbers is that they just haven’t changed very much over the past 25 years. The share of China’s economic output being produced by SOEs today, under Xi Jinping, is not significantly different than it was under Hu Jintao, or even in the later years of Jiang Zemin.

In a purely domestic sense, then, there hasn’t been a major change in the balance of the economy between state-owned and private enterprises. I think that’s evidence that there’s some pretty strong continuities between the approach of the Xi administration and that of previous administrations. Xi certainly did not invent the idea that SOEs are and should be a central part of the Chinese economy, and he hasn’t actually taken huge parts of the economy away from the private sector and handed them to SOEs.

What I think has changed more under Xi is not so much the relative size of the state and private sectors, but more the political context in which both private-sector and state-sector firms have to operate. These days, both types of companies are expected to follow the government’s guidance more closely.

But the trajectory of China’s state sector looks pretty different if you look at it from the perspective of the world economy. Let’s not forget the obvious fact that China’s economy has been consistently growing much, much faster than the rest of the world. Since the share of SOEs in China’s economy has been basically stable, that means SOEs have also been growing quite fast, just as fast as the private sector. And that means China’s SOEs have gotten a lot bigger in absolute terms, and a lot bigger relative to the world economy.

The arithmetic here is pretty simple. At the turn of the century, China accounted for about 3.5% of global GDP. Now, China is about 17% of global GDP. The SOE share of China’s economy is about the same today as it was 20 years ago. Therefore, the share of global GDP produced by China’s SOEs has substantially increased: on my estimates, China’s SOEs account for about 4.5% of global GDP now, compared to about 1% back in 2000. I would point out that 4.5% of global GDP is a lot; it is more than the entire GDP of the UK, France or India.

So for those of us outside China, it is very much the case that China’s state sector is advancing. Chinese SOEs are a much bigger part of the global economy than they were before, and their international activities have also become much more important. I think it’s obvious that the rise of China’s SOEs represents a very substantial change in the structure of the world economy, and it should not be at all surprising that there is a lot of debate in other countries about how to respond to that change.

My contribution was pretty small, but the folks on the second half of the event tackled that exact question–how the US should respond–and generated a very useful discussion. I recommend watching the video.

by Andrew

Reading “China’s Great Boom as a Historical Process”

For a compact and highly analytical overview of 200 years of Chinese economic history, it is hard to do better than this new paper from Loren Brandt and Tom Rawski (it’s a chapter for the forthcoming Cambridge Economic History of China but is available as a working paper from IZA).

What’s notable is how it crosses the Great Divide of modern Chinese history–the founding of the People’s Republic in 1949–with a unified conceptual scheme. It looks at long waves of centralization and decentralization under Communist, Nationalist and Qing rulers, and emphasizes the economic contributions from episodes of decentralized reform. Here’s a sample of how the authors draw these parallels:

China’s recent boom emerged from an episode of extreme central weakness following the Cultural Revolution. … Long before the start of China’s recent boom, a parallel episode linking regime weakness and economic innovation figured prominently in China’s nineteenth century history, when twin shocks of foreign encroachment and domestic rebellion stripped the Qing throne of both revenue and authority. Erosion of central power created space for new institutions – some externally imposed, others emerging organically – that contributed to significant growth and structural change through the late nineteenth and early twentieth centuries. …

The creation of semi-autonomous treaty ports unleashed a flood of innovation, especially in Shanghai, which anticipated Shenzhen’s contemporary role as a magnet for ambitious and entrepreneurial migrants, an entry port for new ideas and a hotbed of institutional innovation. … In both instances, local economic dynamism prompted competitive reactions elsewhere: self-initiated open ports under the Qing, multiplication of special economic zones under the PRC and relaxation of restrictions on entry and competition in both systems.

Throughout the paper the authors do an excellent job of deploying a few well-chosen statistics to make broader points. I found the facts below about the extent of China’s economic openness and global integration in the 1930s pretty impressive:

China’s share of global trade rose from 1.3% in 1913 to 2.1-2.3% during 1927-1929 and 3.7% in 1936; comparable PRC figures languished below 1% throughout 1968-1980, regaining the 1936 level only after 2000. Throughout the early 20th century, China was also a major beneficiary of foreign direct investment, much of it from advanced countries. By the 1930s, China held more than 10% of the global stock of inbound foreign direct investment and over 15% of the stock located in developing nations, with the largest portion directed toward (mostly rail) transportation.

Openness strengthened the economy, particularly in coastal regions where modern education, returned overseas students and migrants, and frequent interaction with foreign business stoked the transfer of technologies and the spread of commercial knowledge among would-be Chinese entrepreneurs. … Although foreign firms benefited from a head start, favorable treaty provisions and superior access to capital, Chinese-owned firms offered powerful competition: by 1933, they contributed 73% of nationwide manufacturing output and 78% in China proper.

Yet the Nationalist period also highlighted the limits of decentralized reform: China’s political disunity made it impossible for the government to build on the economic gains that had been made, or for private-sector actors to have real certainty and security. The transition to Communist rule involved a step-change in China’s state capacity, which had some good effects initially, before the state’s new capacity was turned to destroying to destroying private business:

Firm nationwide political control, reinforced by universal presence of Communist Party branches, provided the new government with an unprecedented capacity to implement policy even at the village level with minimal reliance on unofficial intermediaries. … Fiscal expansion demonstrated the new regime’s control. The ratio of government revenue to GDP, which had languished below 10% for centuries, exceeded 20% percent throughout the planned economy period.

Growth initiatives benefited from political unity, the cessation of internal warfare, and the return of monetary stability following destructive wartime hyperinflation. … The new system severely curtailed the engines of prewar growth: private entrepreneurship, commercial competition, and market integration that allowed growing circulation of commodities, information, capital, technology, and individuals within and across China’s national boundaries.

The 1980s are China’s most obvious example of decentralized reform, with both urban and rural initiatives often bubbling up from below. Yet what I particularly liked was their treatment of the 1990s, a pivotal decade in which the foundations of today’s Chinese economy were laid, but one that is less easy to characterize than the freewheeling 1980s. In a way, Brandt and Rawski argue that the 1990s and early 2000s were a kind of golden mean between centralizing and decentralizing approaches, with both going on at the same time and each delivering benefits.

The period between 1992 and the 2008 global financial crisis represents an interlude of relative political calm in which contentious debate about the long-term objective of economic policy continued even as major reforms delivered large and tangible benefits to advocates of both market transformation and state-led development. …

Liberalizing reformers rejoiced as openness, entry and competition swept across large swathes of China’s economic landscape. Jiang Zemin’s dual 2001 initiatives, first opening the CCP to private entrepreneurs, and then proposing a “socialist market economy with Chinese characteristics,” fanned expectations of gradual convergence to market outcomes. …

Developments between 1992 and 2007 equally reinforced the position and prospects for state-led development. … Beijing maintained strong control over large segments of the economy, including major upstream industries (petroleum, electricity), railways and large segments of the service sector (finance, telecoms). Fiscal and banking reforms massively enlarged the central state’s command over resources, while … economic success created vast pools of discretionary funds.

Given this framework, it’s not surprising that Brandt and Rawski are much more negative about the post-2008 economy. They see a breakdown in the 1990s’ balance between centralized and decentralized approaches, with a strong political preference for a more centralized approach being solidified under Xi Jinping. They cite multiple studies showing poor productivity growth as evidence that the economic fundamentals have become poorer as a result:

Multiple studies track China’s transition to “intensive” growth – with the majority of output expansion attributable to higher productivity rather than increased quantities of labor and capital inputs – for three
decades from 1978. Beginning in 2008, however, we see a return to “extensive” growth powered solely by larger inputs. A succession of studies using national, provincial and enterprise-level data point to TFP stagnation or even decline since the eve of the global financial crisis. The size of the private sector and the scale of productivity deterioration suggests that declining performance encompasses both.

There is much more in the full paper, which is well worth a read.