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.

One Comment

  1. > 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

    This sounds like a long term pattern in Chinese history: the only decentralisation it gets is unwanted and the result of weakness if not outright war.

    Liberal countries with a traditions of federalism and limited government have more and better options, so long as they hold on to their traditions.

    Reply

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