“You don’t try to cross a chasm in two jumps,” goes a famous saying about the leap from a planned economy to open markets.
Just mind the gap before you spring, advises the World Bank’s chief economist, Justin Yifu Lin.
“If the chasm is too deep and too wide, to jump is tantamount to suicide,” he writes in “Demystifying the Chinese Economy,” a patriotic yet hardheaded look at how his country notched up average annual growth (CNGDPYOY) of 9.9 percent for three decades.
Lin represents a new breed of Chinese scholar, an international policy maker with a doctorate from the University of Chicago and a reservoir of self-assurance. Proud of his country’s successes yet reasonably frank about its failings, he sets forth here to correct misperceptions about China’s past and shed light on its future. Other developing nations, he suggests, have much to learn from China’s rapid rise out of poverty.
Based on a course Lin taught at Peking University, this book doesn’t present the final word on the Chinese economic “miracle.” Nor does it delve very deeply into the politics of a country associated with tumultuous discontinuities.
What we get instead is a pragmatic history of economic cause and effect -- an insider’s account of why China, which dominated the world economy right into the 19th century, fell so far behind the West and how it came roaring back in our times.
Confucius and Famine
The reason China missed the scientific and industrial revolutions is now well known: Its rigorous civil-service examinations, which emphasized the Four Books and Five Classics of Confucianism, left clever and ambitious people with little time for mathematics or scientific experiments, as Lin says.
Less understood are the disasters spawned by Mao Zedong’s regime. Lin brings a clinical dispassion to bear on these blunders, notably the 1959-61 agricultural catastrophe, which led to a famine that left 30 million dead by his count (and sparked cannibalism according to others).
Discounting hypotheses that blame the plummeting output on bad weather or mismanagement, Lin invokes game theory to explain what happened. The government, eager to exploit economies of scale, had in 1956 encouraged the creation of farm cooperatives with the slogan, “Free to join and free to exit.” As yields swelled (CHAGUFMY), the state promoted ever-larger communes, where food was distributed according to need, not performance.
Then, in 1958, the policy became compulsory, eliminating the right to exit. That changed the game, Lin says: The ability to withdraw had protected diligent workers and discouraged freeloading. With the right stripped away, shirkers took advantage of industrious workers, who quickly became less so. Productivity plummeted.
All of this occurred while China was seeking to leap into the league of advanced industrial economies (CHVAIOY). The attempt to catch up proved futile, Lin says, because it defied the country’s comparative advantages, a theme threading throughout this book. Heavy industry requires large capital outlays and creates relatively few jobs. Mao’s China had the opposite: scarce capital and abundant labor.
China did manage to test an atomic bomb in the ‘60s and launch a satellite in the ‘70s. It also paid a high price in low living standards and inefficient state-owned enterprises that required massive protection and support. That legacy lingers to this day, as Lin unflinchingly shows.
It took a second generation of leaders under Deng Xiaoping to adopt a development strategy in 1978 that tapped the country’s comparative advantage. Seeking to win popular support and distance itself from the murderous Gang of Four, Deng’s administration introduced market reforms that inadvertently encouraged rural households to take responsibility for their own gains and losses.
Farm output soared. Impressed, the government began extending market-oriented policies to cities in 1985. The rest is economic history.
In sharp contrast with the shock therapy that jolted the former Soviet Union and Eastern Europe in the 1990s, the Chinese opted for what Lin calls “a gradual dual-track process.” This freed private enterprises to compete in new, labor-intensive industries yet continued to prop up state-owned companies, shielding them from bankruptcy and severe job losses. Instead of trying to leap the chasm in a single bound, China produced growth that made the divide “narrower and shallower,” Lin says.
Far from defending the state-owned monoliths, Lin describes how they feed corruption and warp the country’s fragile financial system. State-owned enterprises vacuum up 80 percent of all bank loans, making it hard for private companies to get financing, he says.
Lin is less persuasive when it comes to today’s global economic imbalances. The blame, he says, lies less with China’s export-led growth and undervalued currency than with U.S. financial deregulation and the Federal Reserve’s low rates after the dot-com bust (CCMP). Well, it took two to build Chimerica.
This is the best book on China’s economy that I’ve read, even if it emits a whiff of historical revisionism. The country’s communist leaders would be wise to heed Lin’s advice on how to revitalize or mothball its state enterprises. Will these dinosaurs submit to the therapy without a shock? Somehow I doubt it.
“Demystifying the Chinese Economy,” translated from Chinese by Stephanie Wang, is published by Cambridge University Press (330 pages, $27.99, 17.99 pounds). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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