Demystifying the Chinese Economy

 date:2014-1-16 10:35:00 source:BiMBA         

Demystifying the Chinese Economy

Review by Martin Wolf

Justin Lin gives a pragmatic account of China’s technocrats

Justin Lin is an example of a relatively new phenomenon: the self-confident Chinese scholar and global policymaker. He is now chief economist and senior vice-president of the World Bank. Though armed with a doctorate from the University of Chicago, he is distinctively Chinese: professional, patriotic and, above all, pragmatic.

The book is a translation of lectures Professor Lin gave at Peking University. It offers an insider’s view of the biggest economic event of our era: the rise of China. Whether one agrees, or not – I find much of his argument persuasive – we have to understand how such a man thinks.

So what does the book tell us?

First, China’s performance has been astonishing: “Since 1978 China has maintained rapid economic growth for 33 consecutive years. The average annual ... growth is 9.9 per cent and the average annual growth of foreign trade is 16.3 per cent.”

Second, China’s growth has also benefited the world. Thus, “China’s strong growth during the crisis was the most important driving force for the global economy.” Similarly, “over 2000-07 two-thirds of the economies in Africa grew at more than 5.5 per cent a year, and nearly one-third reached 7 per cent. Again, such unprecedented growth in Africa was in large part thanks to China.”

Yet there is far more here than this.

One intriguing discussion is of why China fell behind the west in the 19th century. Prof Lin does not ascribe this, as some now do, to western luck in having the right resources in the right places. He argues, instead, that the west made the big breakthrough of the scientific method. China failed to match this because its intellectuals were caught in the demands of its civil service examinations.

A point more relevant to policy is the distinction Prof Lin draws between “comparative-advantage-defying” and “comparative-advantage-following” development strategies. The former, he argues, have characterised most developing countries. The results included unviable enterprises, huge subsidies, distorted finance, pervasive corruption and feeble growth. In his view, the basis of Chinese contemporary success is that its policymakers encouraged the economy to evolve in the direction of its dynamic comparative advantage. That is what “reform and opening up” means.

Nevertheless, the book argues, policy must be flexible. It rejects “shock therapy”, for example. The argument seems to be partly that society cannot cope with huge disruption, which is strange, given the shocks imposed on the Chinese people by the Communist party. But it is also that policymakers too often simply do not know what is going to work. The book contains many examples of experiments that failed because people did not understand the incentives at work. The caution shown in China’s two-track approach to reform, which had controls and liberalisation side by side for a long time, is justified by its success.

An important discussion is of innovation. A “catch-up” country, such as China, should focus on absorbing technology that already exists. This lowers the costs of development. Much of this innovation will be embodied in new machinery, which is why high investment is so important.

Prof Lin is not blind to what still needs to be done. He is concerned about rising inequality, for example. He stresses that a further widening of the urban-rural income gap, already 3.3:1, would be explosive. But he is no fan of redistribution. He believes, instead, that further improvement of the market mechanism will be more effective. One policy he emphasises is development of small and medium banks, to support small and medium enterprises. Another is “building a new socialist countryside”, with stress on rural infrastructure, in support of investment and consumption.

He also pays close attention to “the three excessives” – excessive investment, excessive credit and excessive trade surpluses. That the economy is indeed unbalanced is all too clear,

This is far from a definitive work on China’s development. Many important topics are left to one side: China’s role in the world economy is just one example. Inevitably, it also largely ignores politics. Nonetheless, the book is informative and insightful. Above all, it comes from what is a depressingly rare intellectual stance: Prof Lin firmly believes in the beneficial power of market forces. But he is also aware of the need for a pragmatic approach to policy: the world is not to be found in textbooks. I suspect that this is the attitude the world should expect from the Chinese technocrats who will exercise increasing influence on global affairs in coming decades. If so, it could do a great deal worse.

The writer is the FT’s chief economics commentator


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