Jan 22nd 2019

What Next for China’s Development Model?

by Michael Spence

 

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. 

 

MILAN – China’s strategy for economic growth has been a work in progress since Deng Xiaoping launched the country’s “reform and opening up” in 1978. While the last 40 years of reform have been far from error-free, the government has displayed a willingness to adapt, as well as a capacity for navigating complex transitions, supported by a healthy internal policy debate. But how is China’s development model likely to evolve in the future, as external conditions pose new challenges to economic growth?

A defining feature of China’s four decades of reform has been the state’s evolving role in the economy, about which there is still significant domestic disagreement. Some argue that the state – and, by extension, the Communist Party of China (CPC) – must retain a prominent role, in order to uphold the social stability needed to sustain economic development. Others claim that spurring the innovation needed to reach high-income status requires the state to be less like a market participant and more like a referee, regulator, and arbiter of economic and social priorities.

Without question, the state has been integral to China’s development, not only by investing in areas like infrastructure and technology, but also by serving as a backstop as nascent markets and private-sector institutions developed. State involvement is also needed to help manage inequality and ensure that growth patterns are inclusive, which markets alone cannot be counted on to do.

Moreover, the Chinese state has resolved coordination problems that are not easily or efficiently handled by decentralized markets, particularly in developing countries, where market institutions and administrative capabilities may be at different stages of development. In its five-year plans, China’s government establishes clear priorities and expectations that help to ensure that complementary policies and investments occur simultaneously or are properly sequenced.

Proponents of giving markets and the private sector a “decisive” role in the economy largely do not dispute these points. Instead, they emphasize that innovation, productivity growth, and overall growth have been driven primarily by the expanding private sector. A vibrant marketplace of ideas is a key part of this model. The CPC’s increasing presence in private firms, heavy-handed economic intervention, and a growing preference for orthodoxy could pose a threat to dynamism and growth.

Already, the lack of clarity about the state’s role in private firms is hampering outward investment by Chinese multinationals, especially in industries that involve national and cyber security, a sector that is growing rapidly as the world’s economies shift onto digital foundations. If China reverts to a model in which the state owns the assets in key sectors, those sectors could underperform due to a lack of competition and experimentation, resulting in stagnation.

It is worth noting that China never adopted the shareholder-value model of corporate governance that has long prevailed in the West, though the West is now arguably moving toward a multi-stakeholder model. Instead, the Chinese authorities view corporations (and financial markets) as instruments to achieve economic and social objectives.

In a sense, therefore, China has had a kind of multi-stakeholder model all along. As environmental, social, and corporate governance (ESG) takes hold in the West, the Chinese and Western models may begin to converge, with the key difference that, in China, the CPC and the state represent the non-owner stakeholders, or the public interest.

The relative roles of the state and the market in China’s economy have yet to be definitively decided. The details of the model will probably be determined by pragmatic considerations and course corrections. But it is clear that achieving the authorities’ technological goals, as outlined in the “Made in China 2025” plan, will require a dynamic and relatively freewheeling private sector, as well as significant state support in the form of upstream investment in advanced education and scientific research.

China’s state-led efforts to spur innovation have raised tensions with its economic partners, especially the United States. But China can take steps to assuage its critics, especially by committing to respect intellectual property, remove non-tariff barriers to cross-border trade and (especially) investment, and eliminate joint-venture requirements for private cross-border investments, so that technology transfer is not coerced.

The bigger challenges concern the role of the state at the nexus of technology and national security. Private Chinese firms investing abroad must credibly signal that their focus is purely commercial, and that they are not pursuing other agendas, like national security. A commitment from the Chinese state to insulate the country’s private multinationals from such agendas would go a long way. No government can be expected to renounce the use of cyber tools in espionage, but governments can avoid implicating the private sector.

China’s state-owned enterprises (SOEs), by contrast, are likely to continue to face higher barriers to clearing foreign-investment review processes. Chinese SOEs can receive difficult-to-detect subsidies, privileged access to low-cost capital, and protection from competition at home. More fundamentally, when the government is the controlling shareholder, the challenge of credibly separating commercial interests from state objectives seems insurmountable.

Obstacles to cross-border investment in the Internet are also high and likely to persist. Here, too, major differences in regulation (including the state’s role with respect to content and access to data) will be difficult, if not impossible, to overcome.

Convergence with the evolving Western model is unlikely in the short run. Tensions between China and the West, especially regarding the state’s role in the market, will persist. But the market-oriented development path will certainly help reduce these tensions. Introducing much greater clarity about the division of responsibilities between the state and the market would remove a major obstacle to further progress.


Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. 

Copyright: Project Syndicate, 2019.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Aug 10th 2022
EXTRACT: "Central banks are thus locked in a “debt trap”: any attempt to normalize monetary policy will cause debt-servicing burdens to spike, leading to massive insolvencies, cascading financial crises, and fallout in the real economy. ---- With governments unable to reduce high debts and deficits by spending less or raising revenues, those that can borrow in their own currency will increasingly resort to the “inflation tax”: relying on unexpected price growth to wipe out long-term nominal liabilities at fixed rates."
Jul 29th 2022
EXTRACT: ".... the likelihood is that Biden, who spent his life as a senator, played a central behind-the-scenes role in turning Manchin around and keeping the Democratic Party Senators together on this pared-down version of Build Back Better. Biden’s legislative accomplishments, not to mention his administrative ones, will likely end up being very impressive for the first two years of his presidency. ------ In matters of climate, every ton of CO2 you don’t put into the atmosphere is a decrease in how hard life will be for our grandchildren. They will have reason to be grateful to President Biden and the Democratic Party if this bill becomes law."
Jul 29th 2022
EXTRACTS: "Right-wing media outlets including Fox News, One America News (OAN), Newsmax, and talk radio are grossly abusing the right to free speech and are causing profound, if not irreparable damage to our country at home and abroad. They have been engaged in these deliberate practices of spreading poisonous misinformation all in the name of free speech." ---- "A team at MIT, analyzing propaganda techniques in the news, underscores the use of logical fallacies – such as strawmen (the misrepresentation of the other’s position), red herrings (the provision of irrelevancies), false dichotomies (offering two alternatives as the only possibilities), and whataboutism (a diversionary tactic to avoid directly addressing an issue). ---- Whataboutism is worth considering more closely because it is becoming ubiquitous among Republicans – perhaps this is not surprising given that it is certainly Trump’s “favorite dodge.” It is one of the fundamental rules by which he operates: when you are criticized, say that someone else is worse. In an interview with Trump, Bill O’Reilly states the obvious fact that “Putin is a killer,” and who can forget Trump’s response: “There are a lot of killers. You got a lot of killers. What, you think our country is so innocent?” That is classic whataboutism. And it is also of course all over Fox News’ most popular line-up."
Jul 24th 2022
EXTRACTS: "For three hours, against the unequivocal advice of his counsel, friends, and family, Trump purposefully and steadfastly declined to give the mob he had summoned any signal to disperse, to exit the building peacefully, or to simply cease threatening the life of his vice president or other members of Congress." ------ "Trump is corrupt to the core, a traitor who deserves nothing but contempt and to spend the rest of his life behind bars because he remains a menace to this country and an existential threat to our democratic institutions."
Jul 21st 2022
EXTRACT: "For some countries, diasporas also are not new. Just ask the Russians. For three-quarters of a century, Stalin’s NKVD and its successor, the KGB, kept close tabs on expatriate Russians, constantly worrying about the threat they might pose. And now, Russian President Vladimir Putin’s security service, the FSB, is continuing the tradition. According to recent FSB estimates, almost four million Russians left the country in the first three months of this year. Obviously, FSB statistics are hard to verify. But the sheer magnitude of this year’s departures is striking."
Jul 20th 2022
EXTRACTS: "We need leaders who will be honest about our problems in the short, medium, and long term. We are becoming poorer than our neighbors, with our per capita growth and productivity lagging behind theirs. We confront surging energy prices, soaring inflation, and public-sector strikes. Our fiscal deficit is uncomfortably high. Our influence is diminished. Far from recognizing these challenges, let alone proposing sensible solutions, the candidates to succeed Johnson are trying to win votes with reckless proposals like ever-larger tax cuts." ----- "There is one exception. Former Chancellor of the Exchequer Rishi Sunak refuses to abandon the notion that expenditure should bear some relationship to revenue. "
Jul 13th 2022
EXTRACT: "Looking ahead, five factors could make today’s energy crisis even worse. First, Putin has opened a second front in the conflict by cutting back on the contracted volumes of natural gas that Russia supplies to Europe. The goal is to prevent Europeans from storing enough supplies for next winter, and to drive prices higher, creating economic hardship and political discord. In his speech in June at the St. Petersburg International Economic Forum, Putin made his reasoning clear: “Social and economic problems worsening in Europe” will “split their societies” and “inevitably lead to populism … and a change of the elites in the short term.” ...... As it is, Germany is now anticipating the need for gas rationing, and its minister for economic affairs, Robert Habeck, warns of a “Lehman-style contagion” (referring to the 2008 financial crisis) if Europe cannot manage today’s energy-induced economic disruptions."
Jul 5th 2022
EXTRACT: "Fortunately, I am not alone in claiming that the survival of democracy in the US is gravely endangered. The American public has been aroused by the decision overturning Roe. But people need to recognize that decision for what it is: part of a carefully laid plan to turn the US into a repressive regime. We must do everything we can to prevent that. This fight ought to include many people who voted for Trump in the past."
Jul 2nd 2022
EXTRACT: "The Israeli philosopher Avishai Margalit described this succinctly in his book On Compromise and Rotten Compromises. In “politics as economics,” material interests are “subject to bargaining, everything is negotiable, whereas in the religious picture, centered on the idea of the holy, the holy is non-negotiable.” This, then, is why politics in the US is now in such a perilous state. More and more, the secular left and the religious right are engaged in a culture war, revolving around sexuality, gender, and race, where politics is no longer negotiable. When that happens, institutions start breaking down, and the stage is set for charismatic demagogues and the politics of violence."
Jul 2nd 2022
EXTRACT: "...EU enlargement is essentially a political decision by member states, based on a multitude of considerations that sometimes include dramatic events. Russia’s war of aggression against Ukraine is such a turning point."
Jun 29th 2022
EXTRACT: "Most market analysts seem to think that central banks will remain hawkish, but I am not so sure. I have argued that they will eventually wimp out and accept higher inflation – followed by stagflation – once a hard landing becomes imminent, because they will be worried about the damage of a recession and a debt trap, owing to an excessive build-up of private and public liabilities after years of low interest rates." ----- "There is ample reason to believe that the next recession will be marked by a severe stagflationary debt crisis. As a share of global GDP, private and public debt levels are much higher today than in the past, having risen from 200% in 1999 to 350% today (with a particularly sharp increase since the start of the pandemic). Under these conditions, rapid normalization of monetary policy and rising interest rates will drive highly leveraged zombie households, companies, financial institutions, and governments into bankruptcy and default."
Jun 28th 2022
EXTRACT: "It is tempting to conclude that today’s central bankers are damned if they do and damned if they don’t. Maybe if they sit tight, they will ride out the storm. Then-Fed Chair Paul Volcker was Public Enemy Number One in the United States in the early 1980s, when he squeezed post-oil-shock inflation out of the system with double-digit interest rates. But in his later years he was revered, and became a national treasure, called on to advise successive presidents in any financial emergency. ----- But central bankers would be wise not to assume that their reputations will automatically recover, and that the status quo ante will be restored. We live in a more disputatious age than the 1980s. Public institutions are more regularly challenged and held to account by far less reverential legislators." ----- "Moreover, former central bankers have joined the chorus of critics. Former Fed Chair Ben Bernanke, breaking the unwritten rule not to reproach one’s successors, has said that today’s Fed made “a mistake” by responding slowly to inflation. And Bailey’s immediate predecessors, Mervyn King and Mark Carney, have weighed in, too, with challenges to the BOE’s policy. The fabric of the central banking fraternity is fraying."
Jun 25th 2022
EXTRACT: "Public opinion in Belarus remains firmly against involvement into the war with Ukraine. Moreover, according to a Chatham House survey, 40% of Belarusians do not support Russia’s war, compared to 32% who do, while around half of those questioned see predominately negative consequences of the war for Belarus (53%) and for themselves (48%). The Belarusian military and security services are also aware of the determined and skilful resistance that Ukrainian forces have put up against Russia and the risks that they would therefore be running if they entered the war against Ukraine. This, in turn, means that the risk to Lukashenko himself remains that he might lose his grip on power, a grip which depends heavily on the loyalty of his armed forces." ---- "Ultimately, Belarus may not be on the brink of being plunged into war quite yet, but its options to avoid such a disaster are narrowing."
Jun 20th 2022
EXTRACT: "Russification (the policy of enforcing Russian culture on populations) appears to be being reinforced by ethnic cleansing. Last month the Ukrainian parliament’s commissioner for human rights, Liudmyla Denisova, informed the United Nations’ High Commissioner for Refugees, Filippo Grandi, that 1.3 million Ukrainians, including 223,000 children, had been forcibly deported to Russia."
Jun 11th 2022
EXTRACT: "If Trump had his way, then Vice-President Pence would have also broken his oath to the constitution and derailed the certification of electoral votes. Our continued existence as a Republic might very well have hung on Pence’s actions that day. The mob’s response was to call for Pence to be hanged, and a noose and scaffold was erected apparently for that very purpose. What was Trump’s reaction when he was told that the mob was calling for Pence’s summary execution? His words were: “Maybe our supporters have the right idea.” Mike Pence “deserves” it."
Jun 10th 2022
EXTRACTS: "Speaking to journalist Sophie Raworth on the BBC’s Sunday Morning show recently, former war crimes prosecutor Sir Howard Morrison, now an advisor to the Ukraine government, highlighted the dangers posed by the negative – often insulting and dehumanising – statements made by some Russian politicians and media personalities about Ukraine and its people." ---- "The conditions and attitudes described by Morrison have existed for centuries: Russians have viewed Ukrainians as inferior since before the Soviet era." ----- "And, as Morrison said, stereotyping and denigrating a people as inferior or lacking agency makes atrocities and looting more likely to happen, as we are seeing in Ukraine."
Jun 9th 2022
EXTRACT: "Unless Russia realises that the west is willing and able to push back, a new, stable security order in Europe will not be possible. Concessions to Russia, by Ukraine or the EU and Nato, are not the way to achieve this. That this has been realised beyond Ukraine’s most ardent supporters in the Baltic states, Poland, the UK and the US is clear from German support for strengthening Nato’s northern flank and a general increase in Nato members’ defence spending."
Jun 8th 2022
EXTRACT: "Highly civilized people can turn into barbarians when demagogues and dictators exploit their fears and trigger their most atavistic instincts. Rape, torture, and massacres often happen when soldiers invade foreign countries. Commanding officers sometimes actively encourage such behavior to terrorize an enemy into submission. And sometimes it occurs when the officer corps loses control and discipline breaks down. Japanese and Germans know this, as do Serbs, Koreans, Americans, Russians, and many others."
Jun 1st 2022
EXTRACTS: "Like Metternich, Kissinger commits the fatal error of believing that a few wise policymakers can impose their will on the world. Worse, he believes they can halt domestically generated change and the power of nationalism. Many years ago, this is what Senator William Fulbright termed the “arrogance of power.” This approach failed in Vietnam, Iraq, and Afghanistan. It is also doomed to fail in Russia and Ukraine." ------ "Not surprisingly, Kissinger misunderstands Russia. He appears to believe that, because Russia has been an “essential part of Europe” for over four centuries, it is therefore fated to remain so for the foreseeable future.The claim is completely at odds with history." ---- "Finally, Kissinger misunderstands the implications of his own analysis for Western relations with Russia. “We are facing,” he said, “a situation now where Russia could alienate itself completely from Europe and seek a permanent alliance elsewhere." ---- "But what’s so bad about Russia’s isolating itself from Europe and becoming a vassal state of China? "
Jun 1st 2022
EXTRACTS: "According to the latest figures from China’s National Bureau of Statistics, China’s population grew from 1.41212 billion to just 1.41260 billion in 2021 – a record low increase of just 480,000, a mere fraction of the annual growth of eight million or so common a decade ago." ----- "China’s total fertility rate (births per woman) was 2.6 in the late 1980s – well above the 2.1 needed to replace deaths. It has been between 1.6 and 1.7 since 1994, and slipped to 1.3 in 2020 and just 1.15 in 2021."