Institutions and Chinese Economic Development

A Comparative Historical Approach

Li Tan

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000474244
• Edition: 1
• Topic: Économie
• Subtopic: Histoire économique

China's rise as an economic power has posed some challenging questions: how did China achieve GDP growth that was even faster than the Four Asian Tigers? Is the "Chinese model" superior? Why hasn't the rapid economic growth lead to democracy in the country as many observers expected? And can China sustain its rapid economic growth with its existing social system?

Institutions and Chinese Economic Development: A Comparative Historical Approach explores these questions by studying the historical relationship between institutions and economic development in China, drawing comparisons with England, Japan and other Asian economies as appropriate. The investigation focuses on several junctures in China's economic development: the starting point of the divergence between China and the West; the externally-provoked industrial development in the late19th century; and the contemporary Chinese Miracle. The analysis foregrounds the role played by Chinese institutions and examines their effects on both the country's failure to industrialize in the past and its economic achievements in recent time. The book also asks whether, without reform to the existing state institutions, China might still be subject to the historical dynastic cycles today, despite its recent economic success.

This work is of great interest to students and scholars of the Chinese economy, economic history and institutional economics, as well as comparative history and Chinese studies more broadly.

1Introduction

DOI: 10.4324/9781003202042-1

China’s rise as an economic power in the 21st century posed some challenging questions for intellectual thinking. First, what accounted for the super-rapid growth of the Chinese economy in the past few decades? A popular view attributed the Chinese high growth to the introduction of free markets in 1978. Yet this view cannot quite explain why China remained a low-income agrarian society until the end of the 20th century, even though it had developed markets and private ownership since an early time in history. Why did the re-introduction of markets in our day lead to rapid industrialization? Next, why hasn’t the rapid economic growth brought forth democracy in China? By the theory of modernization, economic growth will lead to democracy as a middle class emerge in the industrialization process. People in the middle-class, with material affluence and good education, will demand civil rights and democracy will follow. But, in the case of China, despite the huge increases in the Chinese GDP, the authoritarian institutions remain largely intact. What impeded the introduction of the pluralistic institutions in the Chinese society? Finally, could China sustain the economic growth and move onto high-income levels with the existing social system?

The last question is actually similar to an old one raised about the Soviet Union in the 1950s and 1960s, amid the competition between the capitalist and communist systems in the Cold War period. Nevertheless, contemporary China is not the Soviet Union. Unlike the latter, the contemporary Chinese economy has a large market-driven content and is closely integrated with the world’s capitalist economies, although the party-state has retained its control over the society. Then, allowing for these differences, could the Chinese authoritarian system sustain the economic growth and outperform the Western democracies? This question carries profound implications for the world, as it concerns whether a country could achieve long-term economic prosperity by social systems other than modern democracy.

To explore these questions in depth, one must turn to the historical developments of Chinese society. As Douglass North (1990) put it, “[h]istory matters. It matters not just because we can learn from the past, but because the present and the future are connected to the past by the continuity of a society’s institutions. Today’s and Tomorrow’s choices are shaped by the past. And the past can be made intelligible as a story of institutional evolution.”

This book investigates the historical relationship between institutions and economic developments in China from a comparative perspective. It seeks to gain a deeper understanding of the institutions that underline China’s failure to industrialize in the past as well as its economic success in our time. A better understanding of these institutions not only helps assess the growth prospects of the Chinese economy but also provides clues to the choices the country could possibly make today and in the future in order to achieve long-term economic prosperity.

Interpreting the Chinese Miracle

The Chinese Miracle is a known story in our day. In 2010 China overtook Japan to become the world’s second largest economy. The Chinese gross national income (GNI) per capita surged from US$190 in 1978 to US$8,805 in 2017.¹ The astonishing economic growth has lifted hundreds of millions out of poverty and turned the country into a middle-income economy from a low-income one in a matter of decades.

The interpretation of the Chinese Miracle, however, diverged vastly and the controversy over China’s growth prospects has continued. The optimistic views hold that China will maintain rapid growth for another 20 years or more (Lin 2011; Hu 2015). Although the Chinese growth has slowed to around 6–7 percent per annum since 2014, this “new normal” rate is still way above the world average. With the new normal rate, China’s per capita GDP measured by purchasing power parity could reach about half of that of the US by 2030 (Lin 2011). It means that China would become a high-income economy by then.

The optimistic projections of China’s future growth reflected the strong confidence in the so-called “Chinese model” or Chinese domestic institutions. The belief is that the Chinese model must be superior, as it delivered super-rapid GDP growth that no country has ever achieved in history. China’s GDP increased at an average rate of about 10 percent per year from 1978 to 2012, which exceeded not only the growth records of the old industrial countries in their respective take-off periods in the 18th and 19th centuries, but also that of the East Asian Tigers in the 20th century. But is the Chinese model solely responsible for the unprecedented growth of the contemporary Chinese economy?

A critical factor that should not be neglected in comparing China’s miracle growth with the growth records of older industrial economies is the international environments or external conditions. The global environment has changed dramatically from the 19th century to the 21st century. Two aspects of the international conditions particularly affected the growth rates of late developed economies: the continuous progress of the world’s technologies in the modern era and the continuous deepening of globalization. As will be elaborated later in this chapter and Chapter 6, both technological progress and globalization provided the latecomers in the 20th century with tremendous benefits that were not available to the early developers in the 18th and 19th century. These benefits, including much higher levels and much larger stocks of technologies in the world, as well as much closer trade and investment links with the world’s advanced economies, are indispensable for the progressively faster GDP growth some latecomers achieved in their catch-up industrialization. Thus, contemporary China’s super-rapid rate of GDP growth could not be fully explained without considering the factors outside of the Chinese model, namely, the international conditions.

With that said, the Chinese model was still worth a thorough study because China alone, among all the low-income countries in the same international environments, achieved the super-rapid GDP growth. As some Chinese scholars summarized, the Chinese model has the following main features: state-led development; development as the top priority; focus on good governance of the government; and gradual and pragmatic reform (Zhang 2011; Li 2015). By these features, the Chinese model looks very similar to the East Asian growth model. Indeed, the Chinese government purposely emulated the East Asian export-oriented growth strategy at the beginning of the economic reforms and expanded it on a large scale. Thus, the Chinese model is not unique after all. Then, could one infer that the Chinese growth will lead to long-term economic prosperity since the Asian Tigers have successfully moved onto high-income economies?

On the other side of the controversy, the collapse of the Chinese economy has been frequently predicted and the decay of the China’s communist regime continually proposed (Chang 2001; Shambaugh 2015; Pei 2016; Ringen 2016). In general, the negative views about China’s economic prospects are based on the proposition that economic growth cannot be sustained under authoritarian regimes. Acemoglu and Robinson argued that Chinese growth is not sustainable under the country’s current political institutions because these extractive institutions could not tolerate innovations and the creative destruction associated with innovations required by sustainable growth. Additionally, the struggles for the highly-coveted power under extractive institutions tended to push the society towards political instability (Acemoglu and Robinson 2012). Thus, China’s long-term prosperity is conditioned on the country’s transition to the democratic system, by these views.

While the economic prosperity of the modern world is sourced from the institutions of pluralism and rule of law, the leadership of authoritarian or absolutist states could also generate rapid economic growth in catch-up industrialization, as evidenced by Russia and Japan in the 19th century, the East Asian Miracle in the 20th century, and the extreme case of the Soviet Union. Nonetheless, the state-led developers that succeeded in achieving long-term economic prosperity, such as Japan, South Korea, Singapore and Taiwan, have also succeeded in establishing democratic system. In their cases, the authoritarian governments also launched social/political reforms for introducing pluralistic institutions while leading the catch-up industrialization. Democracy eventually prevailed at respectable income levels obtained through the industrialization. In the case of China, the state-led industrialization has not brought in pluralistic institutions. Instead, the economic success somewhat enhanced the legitimacy of the authoritarian regime based on the absolutist institutions that survived all the endeavors to establish democracy in China in modern times. Thus, the more imperative question is why it is so hard for China to make the transition to democracy or what impeded the transition?

Meanwhile, the Chinese Miracle also encouraged scholarly enthusiasm in searching for the historical roots of the economic strength demonstrated by contemporary China. The comparative studies on the relative developmental levels of China in the late 18th century had inclusive results. Some researchers suggested agricultural developments and living standards in China’s most advanced region, the Lower Yangzi, were largely comparable to that in the North-western Europe in the 18th century. Commercialization and urbanization in certain Chinese regions also reached high levels with the development of sophisticated craft manufacturing and extensive trade networks among the regional markets (e.g. Wong 1997; Pomeranz 2000; Li 2000; Rosenthal and Wong 2011). On the other hand, other researchers provided the evidence that living standards in China were far lower than in North-western Europe around that time (e.g. Broadberry and Gupta, 2006; Li and van Zanden, 2010; Allen et al, 2011).

Even if it is assumed that the markets in China were no less developed than Western Europe up to the 18th century, we still need answer the question of why China, given the similar levels of market developments up to the 18th century, didn’t shift to Kuznetian growth through techno-economic breakthrough like the first Industrial Revolution? Kenneth Pomeranz’s study leaned on the difference in resource endowments as the explanation for the economic divergence between China and the West since the first Industrial Revolution.² Nonetheless, the first Industrial Revolution was not just about labor-saving technologies per se. It opened up a whole new era of sustained increases in productivities of human society through systematic application of science and technology. If the differences were just in resource endowments, the traditional Chinese economy should have experienced some other kind of “techno-economic breakthrough” based on the resource endowments in Lower Yangzi, instead of no techno-economic revolution at all. The causes of the economic divergence went beyond resource endowments, as suggested by the burgeoning literature that takes economic and political institutions as the ultimate determinants of long-term economic growth.

The absence of industrial revolution (or techno-economic breakthrough) in the traditional Chinese society is an unavoidable subject in interpreting the contemporary Chinese Miracle, as the country’s economic catch-up today was connected to the point where it fell behind the West through the continuity of institutions in society. The market developments in traditional China had brought about advancements in agriculture and commerce but did not lead to a meaningful techno-economic breakthrough that could give rise to modern economy. Why? The similar levels of agricultural and commerce developments before the first Industrial Revolution and the divergence afterwards between China and England (or Western Europe) suggest that the market developments in the two traditional agrarian societies could be supported by different sets of institutions. The differences in those institutions may have played a critical role in determining the occurrence or non-occurrence of the Industrial Revolution in the two societies. Put another way, the market-supporting institutions in the Chinese society may have been incompatible to the occurrence of the Industrial Revolution.

From historical perspectives, also accounting for China’s economic backwardness in the past two-plus centuries, was the fact that the country again missed the opportunity to industrialize in the late 19th century when the waves of industrialization spread from Western Europe to Eurasia and Asia. While Western Europe and the United States led the second Industrial Revolution ...