How did China develop so fast?

Via Yao Yang, professor at the National School of Development and China Center for Economic Research at Peking University, at Project Syndicate:

BEIJING – This year’s Nobel Memorial Prize in Economic Sciences recognizes Abhijit Banerjee, Esther Duflo, and Michael Kremer for their work using randomized controlled trials (RCTs) in developmental studies. This year’s selection has elicited a broad array of reactions from around the world, not least because RCTs are a source of controversy among academic economists. To many in China, the Nobel Committee seems once again to have missed the Chinese development experience, which, after all, had nothing to do with RCTs.

To be sure, some of this criticism amounts to sour grapes. The Nobel Prize has been awarded to only three Chinese nationals – for literature, medicine, and peace – since its inception. Nonetheless, China’s economic history offers important lessons that today’s RCT-driven approach to development research has missed. Researchers in the field seem to have forgotten the wisdom imparted by the classical development economists of the 1950s: economic development is about taking the difficult but necessary steps to achieve sustained growth.

For example, increasing domestic savings is very difficult, but imperative. Classical development economists such as Pei-Kang Chang, Roy F. Harrod, Evsey Domar, and Robert Solow saw that savings are essential for jump-starting economic growth in a poor country. Their central insight was mostly intuitive: even subsistence farmers know that improving one’s life in the future requires saving some money in the present, in order to purchase another piece of land or better equipment with which to improve one’s current plot.

But in the 1970s, savings from oil-rich countries and Japan flooded global financial markets, and gave rise to a new idea. Thenceforth, it was assumed that developing countries could simply rely on international borrowing to accumulate domestic capital. Despite the severe losses suffered by the heaviest borrowers, particularly in Latin America, this idea has lingered on.

Yet for its part, China launched an effort to accumulate capital through domestic saving starting in the early 1950s. Despite being one of the world’s poorest countries, China’s national saving rate never fell below 20% of GDP before 1978. And after that, its national saving rate increased in most of the years leading up to 2008, reaching a peak of 52% of GDP in that year.

For a country to make full use of domestic savings, it must develop its own manufacturing capacity. As Lee Kuan Yew, Singapore’s founding leader, famously observed: “No country has become a major economy without becoming an industrial power.” But building manufacturing capacity is hard: it often requires a country to start with “dirty jobs,” while encouraging tireless entrepreneurship.

China has done both. It began with labor-intensive exports, and gradually developed the most complete production network in the world; and it now ranks among the countries with the largest number of entrepreneurs globally. Yet, since the 1990s, very few development economists have studied how countries can industrialize and produce their own entrepreneurs.

Likewise, today’s development economics has largely missed how society-wide coordination can capture scale economies of production over time. While classical economists such as Paul Rosenstein-Rodan, Albert O. Hirschman, and Alexander Gerschenkron had systematic and convincing theories to explain the mechanism, the prevailing neoclassical Arrow-Debreu model cannot account for increasing returns.

Practically speaking, economic coordination tends to require government action. When the four East Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) attracted worldwide attention in the late 1980s, their rapid growth invited a lively debate about the proper role of government in economic development, giving rise to the notion of a “developmental state.” But the 1997 Asian financial crisis raised serious doubts about the Asian model, and development economics has since reverted to the neoclassical paradigm.

In China’s case, government has played an obvious role, but it should not be credited with all of the country’s success. Government intervention has proved most effective when it has mirrored that of other East Asian economies: helping with the accumulation of production capacity and providing coordination when needed. It is unfortunate that China’s economic success is so often viewed as a harbinger of an entirely new development approach: “state capitalism.”

In any case, there is much that RCTs and contemporary development economics have missed. Experiments might help policymakers improve existing welfare programs or lay the foundation for new ones, but they cannot tell a poor country how to achieve sustained growth. As the old Chinese saying goes, “Giving people fishing nets is better than giving them fish.”

There is no secret to China’s economic success. It has simply followed the advice of classical economists, taking the difficult steps that are necessary for progress over the long term. One doesn’t need an experiment to identify those steps; they are the same for all developing economies, and they have been known for decades.

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Comments

    • Also the vast majority of economists don’t understand the role technology plays in wealth generation. The vast majority of China’s leaders are technologists/scientists. Contrast that with Australia.

  1. As Lee Kuan Yew, Singapore’s founding leader, famously observed: “No country has become a major economy without becoming an industrial power.”

    He knew what he was on about, that bloke.

    • Yeah, nah. Singapore got rich by being a tax haven and financial hub so companies can rip off their host country whilst doing profit transfers to the Singapore subsidiary.

    • Ditto, apart from ship building and maintenance (and building apartments and hotels like another country we know) using a cheap workforce, many of whom are 2 nd class citizens, where is their manufacturing?

  2. Interesting quote from Lee ““No country has become a major economy without becoming an industrial power.””
    I wonder what that implies about Australia’s future. A future where we have deliberately de-industrialises, closed manufacturing and pushed the FIRE sector? Will we go back to a third world status?

  3. – All good very sound economic logic – with an outstanding result for China.
    – During the same time in the West – saving was punished – borrowing was rewarded
    – Where is the West now? Bankrupt!

  4. Ronin8317MEMBER

    How China developed so fast can be explained in one sentence : by shamelessly copying the Japanese. Shameless because the CCP refuse to acknowledge they copied the model and insist they somehow developed it themselves.

    Adam Smith, the father of modern economy, is the first to popularise the concept that ‘balance of trade doesn’t matter’. It’s the economic equivalent of ‘Kool Aid’, and many wars are fought (including the Opium War where China is devastated) because balance of trade matters very much. China’s fast pace of growth is all due to a huge trade surplus with the rest of the world. The turbo-charged growth is however not sustainable, which is why China is now building empty apartments : there is too much capacity and not enough demand.

  5. Stewie GriffinMEMBER

    China developed so fast because a new Cultural Elite in America, with little attachment to the underlying society, saw that they could make squillions of dollars by exporting the US manufacturing base to China.

    It effectively killed two birds with one stone – helped demoralise and weaken the dominant social demographic, white men and their Christian based society i.e. “the deplorables”, who are have always been the cultural enemy of these particular elitists, while making those at the top and their barbarian allies, wealthier than Egyptian pharaohs.

    China possessed neither the technology nor sufficient social capital, to allow its own society to generate the sort of aggregate demand that would necessitate the manufacturing base it is now equipped with.

    The Opium Wars, while doubtlessly contributing to China’s status as a basket case, is overblown as a cause of their fall in the economic league of nations. The civil war that saw the Qing Dynasty over throw the Ming Dynasty, saw nearly a century of internecine warfar with an estimated 25 million casualties, that only ended in 1683. Then there was the Taiping Rebellion attempting to over throw the Qing Dynasty in 1850 through to 1864, with a further 20 million casualties, as well as smaller revolts including the Dungan revolt – 10 million.

    • One might ask, how did communist Russia develop so fast, to become a superpower last century.

      • Stewie GriffinMEMBER

        A good question – Russia was similarly a backwards agrarian society, dominated by peasents in the same fashion as the Chinese was during the 19th century to the turn of the 20th century. However there were still a number of differences besides the commonality of communism.

        Despite the Bolshevik revolution Russia remained relatively well integrated into the Global economy compared to China, at least up until the end of WW2. There were still large export markets in Europe that Russia could access far easier than China – the tyranny of distance was a smaller factor for Russia vs China in terms of nearby prosperous markets.

        While still on the periphery, Russia also had some pre-existing heavy industry, following the industrialisation of Western Europe and Germany during the 19th century. Perhaps sensing the coming conflict, it also enacted a number of great leaps forward under Stalin. These were only partially complete by the time German attacked, after which it switched over to a form of total war, whereby the entire economy was transformed into a military production complex.

        This left Russia far more industrialised in the 1950s than China. However, Russia was not able to move beyond the heavy industry industrialisation following the war. It was still able to compete with the US for a time, militarily, due to its legacy heavy industry and control over its satellites markets, but like China, without its own domestic free market and the creative and dynamic economic growth that it facilitates, it was ultimately unable to continue competing with dynamism of the West.

        Ultimately Russia withered for the same reason China eventually boomed – Russia was locked out of the world economy, while China was given access to the US markets and technology.

        “Savings” had very little to do with either of their development paths – it is consumption that drives development.

        • How about,
          ‘whereby it WAS FURTHER EXPANDED into a military production complex – encompassing the entire economy.’
          Russia had significant military production capabilities prior to 1941. They were about to invade Germany first. Germany had no idea of their true military strength. To what extent the USA helped them to achieve this? Prior to hostilities Goring did a tour of one of their aircraft factories and saw it to be the best in the world.

          • Stewie GriffinMEMBER

            No disagreement from me – Russia was well along the path of Industrialisation by the outbreak of hostilities. One of the reason why the Germans did so well initially was more to do with the chaos and dysfunction from Stalin’s purges of its military leadership, catching Russia flat footed when Germany attacked.

    • SG, most of the US business leaders who made the decision to off-shore manufacturing, would have been bible-holding churchgoers, it just worked out that the Chinese option was cheaper than screwing your Deplorables in the Deep South, in longstanding fashion.

      • Stewie GriffinMEMBER

        It was the cultural values and ideas around Globalism to which I refer, that transformed the values and ideas of civic responsibility between the elite and the masses.

        The people behind the effort to enforce globalism are tied together by a particular ideology, and outgrowth of their own cultural values, in which they envision a world order as described in Plato’s Republic.

        They believe that they are “chosen” either by fate, destiny or genetics to rule as philosopher kings over the rest of us. They believe that they are the wisest and most capable that humanity has to offer:

        “The New World Order cannot happen without U.S. participation, as we are the single most significant component. Yes, there will be a New World Order, and it will force the United States to change its perceptions.”

        – Henry Kissinger, World Action Council, April 19, 1994

        The US business leaders that made the decision to off-shore manufacturing were these Globalist’s Barbarian allies, bribed with filthy lucre.

        They did so freely as their own cultural values in terms of understanding of “free trade”, notions of “debt” and the social contract had already been contaminated with these toxic ideas and transformed into something else.

        While some people see globalism as a “natural offshoot” of free markets or the inevitable outcome of economic progress, the reality is that globalism is an outright war waged against sovereign peoples and nations…. and those most likely to argue against sovereign people and nations are those who do not possess one themselves.

        Cultures erect borders because, frankly, people have the right to vet those who wish to join and participate in their endeavors. People also have a right to discriminate against anyone who does not share their core values. In other words, we have the right to refuse association with other groups and ideologies that are destructive to our own.

        Those most threatened by borders are the stateless diaspora untied only by culture. They would rather freely travel the world, exploiting locations for their own benefit, while retaining their own cultural distinctiveness without heed, care or any obligation for the wider society beneath them.

        • The90kwbeastMEMBER

          Stewie, I understand what you are saying however you can’t hold your position without first agreeing that no matter eloquently you are phrasing your position, your position is actually that “the Jews are behind it.”

          I don’t disagree that in the case of pushing multiculturalism they have had a part to play (but my position is it is still the Government that makes the decisions and needs to be held to account – as per the 100s of the articles on MB about lowering immigration currently) however the topic of this thread is “how did China develop so fast”. It’s near universally accepted this is because of a combination of western greed by the wealthy and a willing CPC.

  6. Well the Chinese are certainly having a go, but where’s the mention of all the industrial sponsorship by the West’s multinationals & even our local sellouts deserting their home bases for fatter profits & cheap labour just to bring shoddy knockoffs back?

    Survival was apparently forced upon them by the Neoliberal/Deregulation psychosis, but a Still Ignored large mass of redundant blue collars don’t see it that way!

  7. I thought it was largely fairly obvious how China developed so quickly…

    The industrial bases of Europe and the USA were transferred there, to utilise cheap labour for short-term gains…is there really much more to it?

  8. “”Those most threatened by borders are the stateless diaspora untied only by culture. They would rather freely travel the world, exploiting locations for their own benefit, while retaining their own cultural distinctiveness without heed, care or any obligation for the wider society beneath them.””

    Maybe I am reading too much into this but it brings to mind a particular “chosen” group of people who happened to be stateless until the late 40’s yet who’s people have been and are disproportionately represented in the political, banking and business elite of the United States and other First World Countries. They also tend to be supporters of open borders though somewhat surprisingly not so much for their own nation-state.

    • Stewie GriffinMEMBER

      There is no need for a conspiracy, all that is necessary is for these people to pursue their own cultural values and promote them in competition to the society that they have chosen to reside in.

      Culture Matters – it is the starting point for every decision that is made from that point on in a society. It isn’t necessary that they need dominate in physical numbers either. Studies have shown that as little as 10% of the population are needed in order to aggressively pursue their own values and beliefs in order to change the beliefs and actions of a large passive majority:

      http://freakonomics.com/2011/07/28/minority-rules-why-10-percent-is-all-you-need/

      This particular population group is far, far smaller than 10% of the population – BUT – due to their population groups higher median IQ they tend to not only occupy more than 10% of certain fields but occupy the leadership positions of influence as well:

      German Universities at the turn of the century:

      A further illustration of Jewish overrepresentation in higher education is the census of 1879 which showed that of every 10,000 Protestant inhabitants of Berlin, 81 had obtained secondary education; the rate among Catholics was 22 and among Jews 350. In Upper-Silesia, the region adjacent to Breslau, the rate was 81 Protestants, 19 Catholics and 423 Jews

      https://www.theoccidentalobserver.net/2012/01/23/the-german-jewish-kulturkampf-in-the-weimar-republic/

      Once a cultural clique take over and control your Universities, then they are no longer your univiersity and the ideas and notions they teach, such as Multiculturalism, are not your societies cultural values, but theirs.

      • Self Cuc ked! I recall reading elsewhere it’s as little as 6% (subject to conducive preconditions) to turn the herd…… so not much either way, as the preconditions can be easily created……