With its average per-capita GDP coming in around US$4,000, China has officially risen to the level of middle-income countries. For more than three decades, China has followed a development path with Chinese characteristics. What Deng Xiaopeng described as ‘crossing the river by feeling the stone,’ the Chinese practice of moving ahead with caution and in a steady manner, has come to be known as the China model.
China has now come to a crossroads of reforms and must make a decision on where to direct them. Is the China model a success or failure? What has China gained or lost from this model?
The term ‘China model’ has evolved from the term ‘Beijing Consensus,’ coined by a former Newsweek magazine journalist in Beijing. Ironically, no consensus has ever been reached, either among its advocates or its supporters, about the ‘Beijing Consensus,’ leaving the term misunderstood and obscure.
The China model cannot be viewed as political conservatism or economic radicalism, or ascribed to authoritarian leadership and the leading role of a state-owned economy. When examining the China model, we should concentrate our attention on three points: First, what is the force behind the miraculous growth and boom of the Chinese economy? Second, is central leadership a help or hindrance to China’s prosperity? And third, is the China model sustainable?
During its course of reform over the past three decades, China averaged an annual GDP growth of 9.7 per cent, an achievement hailed by many as miraculous because it has been made in a major economy highly characteristic of the dual sector model, which has been slow with political reform and has misallocated its resources. China owes its achievements so far to the power of a market economy and the creativity of private businesses rather than any other forces.
Even before 1992 when Deng Xiaoping toured South China, China was already registering a fairly rapid growth rate. After 1992, and since 2001, in particular, when China became a WTO member, the market has played a leading role in resource allocation and has demonstrated an enormous impact on China’s overall economic development. It is no exaggeration to say that without the market mechanism and a globalized market that developed after its WTO accession, China could have never grown so rapidly. It owes the miracle to market forces instead of government efforts.
From the very beginning China decided on incremental reforms, including the development of the private sector, which has since fueled the fast pace of the Chinese economy as a whole. During the three decades since China began its reform and opening-up, its private sector has had access to less than 30 per cent of national resources and yet contributed as much as 60 per cent of national economic growth; created 90 per cent of the job opportunities; and originated 70 per cent of the country’s patents and innovative technologies. While state-owned enterprises have been turned into chief market players, a new line has been drawn to demarcate powers between government departments and enterprises, and nurture chief market players that can compete with the government. Without the reform of state-owned enterprises or the cultivation of private businesses, there would never have been the prosperity that China sees today.
Those viewing China’s model often point to the powerful Chinese government and its centralized authority as the key in propelling the development of the Chinese economy. They argue that centralization of forces makes it possible to launch major undertakings and minimize internal frictions.
However, this conclusion does not hold water when examined from a historical point of view. When the, Chinese government controlled everything at the start of the reform and opening-up drive in China, China did not prosper. On the contrary, China’s national economy fell to the brink of collapse during this period due to extreme political and economic leftism. It is obvious, therefore, that policy stability and the exercise of government power are not the key to economic transformation. In fact, the biggest hurdle blocking China’s course of development has been its stagnation in political reform and the transformation of government, as well as the government’s control over resources. Because its political reform has lagged, the Chinese government has become too involved in economic affairs and its officials have received unfettered powers over the distribution of land, capital and other economic resources. By getting directly involved in project examination and approval, licensing standards for market access, price control, and the execution of other types of administrative measures, the government not only frequently interferes with micro economic operations, but also commits many types of malpractices such as rent seeking to throttle market economic vitality.
The public sector is another example. This is a sector that controls the majority of policy and financial resources in China, and yet has never been extremely efficient. Before the year 2003, China’s state-owned enterprises were the ‘black hole’ of wealth because they suffered heavy losses and had to survive on huge financial subsidies.
It was only after a series of reforms were passed that these enterprises became profitable. By the year 2010, they earned nearly 2 trillion yuan in profits. However, these profits were made through the control of resources and monopoly of industries. As a result, China’s social wealth has actually shrunk because the private sector has access to less than 30 per cent of national resources and yet has contributed more than 60 per cent to the economic growth, while the public sector has controlled of over 70 per cent of the resources but has contributed less than 30 per cent. Moreover, of the 2 trillion yuan profits it makes each year, only a little more than 40 billion yuan was handed into the national treasury. China’s economic growth could be vastly accelerated if these two sectors exchanged their positions in access to resources.
Therefore, the wealth China has accumulated over the recent 30 years since its reform and opening-up drive is by no means attributable to the so-called ‘China model’ of centralism, or to any model of supreme government authority. The honor goes to the market economy that China has developed. If it hadn’t developed a market economy, China would have never prospered. In my opinion, the China model is not a result of the advantages of a strong government. Instead, it shows that the market economy can still work wonders and yield fruitful results even under a system characterized by autocracy, monopoly, and constant government withdrawal from its role as a welfare guarantor. The wonders China has seen so far are wonders created through the development of the market economy. They have nothing to do with authoritarian politics or strong government.
As a matter of fact, an excessively powerful government has been the biggest hurdle blocking China’s development of a market economy. All the malpractices seen in China today, such as corruption and rent-seeking, can be traced to the government’s hold on too many economic and policy resources. This is why Zhou Qiren, a famous Chinese professor with the China Economic Study Center of Peking University, has concluded that the threats from the government are the biggest threats to the Chinese society and economy. When we examine the China model today and try to decipher the wealth China has built up over the last 30 years, we should never list its strong government as a primary force.
Neither should we count strong government as a source of wealth. Chinese society today is not yet a market economy where companies can play a leading role. The government still has the final say in resource allocation. China has prospered from the growth of its companies. To keep prospering, China must work to limit the power of its government, earnestly continue its political system reform, secure legal protection of the rights and interests of all private entities, and develop a civil society. Since the outbreak of the financial crisis, the Chinese government has extended its limit of power, and reforms have been withheld. China’s full adoption of a market economy is far from being complete, which points to a bumpy road ahead for China.
Ma Guangyuan is a Chinese financial commentator and senior lawyer based in Beijing.
This commentary originally appeared on author's blog.
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