Past and future.

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Seeing China Through Its Economic History

Tyler Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “Average Is Over: Powering America Beyond the Age of the Great Stagnation.”
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Is it possible to better understand China today by looking back to the country's economic history? I don't mean the years of communism under Chairman Mao, but rather earlier times, those which seem to many Western observers like a blurred sequence of one dynasty after another.

Enter Richard von Glahn's “The Economic History of China: From Antiquity to the Nineteenth Century,” a book likely to go down as one of the year's best. Over the last 15 years, the economics profession has gone from a poor understanding of China's economic history to knowing quite a bit. Von Glahn's exhaustive but readable book is the best guide to this rapidly growing body of knowledge.

I took away several overall lessons, noting these are my extrapolations and not necessarily the opinions of von Glahn, a professor at the University of California at Los Angeles.

QuickTake China's Economic Data

First, in thousands of years of Chinese history there isn't much of a trend toward democracy or representative government. In an age when Turkey and Russia have been rejecting open and transparent representation, it hardly seems obvious that China will move toward greater political freedom. When Chinese leaders tell their citizens that Brexit and the Trump candidacy represent failures of democracy in action, a lot of Chinese citizens believe them. 

Furthermore, a lot of autocratic Chinese regimes in history have proven stable even in periods of fairly slow economic growth. It can take them centuries to fall and be replaced, and even then a foreign invasion, like ones by the Mongols or Manchus, may be required.

From today’s media, one sometimes receives the impression that a Chinese growth rate below 4 or 6 percent could mean radical instability and a rapid fall of the government, but Chinese history does not show this pattern. That is hardly proof of how things will run in the future, but it should shift our expectations in the direction of greater Chinese political stability.

It is striking how many contemporary Chinese economic policy ideas have parallels in earlier times. Going through this history, von Glahn explains the importance of state-owned enterprises, the use of fiscal policy to keep people working, commodity monopolies (then tea, now cigarettes) and population registration across many centuries. I take those continuities as signs that China today is embodying what the country was for a long time, rather than inhabiting a transitional state before morphing into something different.

The book also explains how China adopted an earlier series of modernizing, market-oriented reforms during what is called the Tang-Song transition of 755-1127. The most striking feature of this relatively successful time is that it lasted for almost 400 years, in spite of periodic territorial losses to outside conquerors. The extreme instability of the 19th and much of the 20th century in China is the historical outlier, not the norm, and so China today may have fallen back into one of its relatively stable episodes.

If there is a single common theme running through the many centuries covered by this book, it is the never-fully-successful quest of the Chinese state for revenue and fiscal stability. One reason China fell behind Western Europe in the 18th century is simply that the Chinese state spent less on creating valuable public goods and infrastructure.

In 1993, 15 years after it began making market-oriented reforms, the Chinese central government’s direct revenue was only 3 percent  of gross domestic product, with the usual caveat that no Chinese numbers should be taken as exact measures. Only in the last 10 years has that revenue share exceeded 10 percent of GDP; by comparison, in the U.S. in normal times that number sits in the range of 17 to 18 percent. For all the images Americans might have of China’s government as a communist behemoth, the country’s political order is better understood as still somewhat immature.

China's Quest for Direct Revenue
Tax revenue as a percentage of GDP
 
Source: World Bank

State-owned enterprises, local governments and direct Communist Party control all filled the gap to boost the power of the rulers, and that helps explain why the Chinese find it hard to fully modernize their economy. Their government has had too little facility in grabbing flows of revenue and thus it has overspecialized in taking, owning and controlling assets. Given that choice, the central government is reluctant to reform, shut down or unload its state-owned enterprises, if only for fear that too much bankruptcy and unemployment would result, not to mention a broader loss of control. Furthermore, local Chinese governments often still do not have enough revenue, and so they rely too heavily on sales or rental income from land to keep things up and running, a revenue model that cannot last forever.

In the view of this reader, China’s most likely near-term economic future is that of a relatively stable political regime whose artificial schemes for raising revenue and staying in power keep the economy distorted. In this perspective, China’s recent move toward a more comprehensive value-added tax was bigger news than many observers realized, and mostly positive, though the country has not yet achieved fiscal maturity.

Like the country’s ultimate resiliency, China's most serious economic problems may prove to be some of its most longstanding features. “The Economic History of China” may be an academic tome, but it is also an acute lens on the Middle Kingdom that you won't find in your daily news feed.

  1. See page 440 of “China’s Fiscal System: A Work in Progress” By Christine P.W. Wong and Richard M. Bird, included in “China’s Great Transformation” edited by Loren Brandt and Thomas Rawski.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Tyler Cowen at tcowen2@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net