Making Of An Economic Superpower, The: Unlocking China's Secret Of Rapid Industrialization

Unlocking China's Secret of Rapid Industrialization

Yi Wen

• Publisher: WSPC
• Year: 2016
• eBook ISBN: 9789814733748
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

The rise of China is no doubt one of the most important events in world economic history since the Industrial Revolution. Mainstream economics, especially the institutional theory of economic development based on a dichotomy of extractive vs. inclusive political institutions, is highly inadequate in explaining China's rise. This book argues that only a radical reinterpretation of the history of the Industrial Revolution and the rise of the West (as incorrectly portrayed by the institutional theory) can fully explain China's growth miracle and why the determined rise of China is unstoppable despite its current "backward" financial system and political institutions. Conversely, China's spectacular and rapid transformation from an impoverished agrarian society to a formidable industrial superpower sheds considerable light on the fundamental shortcomings of the institutional theory and mainstream "blackboard" economic models, and provides more-accurate reevaluations of historical episodes such as Africa's enduring poverty trap despite radical political and economic reforms, Latin America's lost decades and frequent debt crises, 19th century Europe's great escape from the Malthusian trap, and the Industrial Revolution itself.

Contents:

• Introduction
• Key Steps Taken by China to Set Off an Industrial Revolution
• Shedding Light on the Nature and Cause of the Industrial Revolution
• Why is China's Rise Unstoppable?
• Wha's Wrong with the Washington Consensus and the Institutional Theories?
• Case Study of Yong Lian: A Poor Village's Path to Becoming a Modern Steel Town
• Conclusion: A New Stage Theory of Economic Development

Readership: Academics, undergraduate and graduates students, journalists and professionals interested in economic development, the history of the Industrial Revolution, and especially China's economic transformation and industrial growth, as well as the political economy of governance.
Key Features:

• Gives a detailed account of China's secret of setting-off an industrial revolution
• Uses China's experience to shed light on the long-standing puzzle of the English Industrial Revolution itself
• Provides a new conceptual framework to understand economic development and poverty traps

Chapter 1

Introduction

China’s sudden emergence as an economic superpower has astonished the world. Even as recently as 15 years ago (say, around the 1997 Asian financial crisis), few would have predicted China’s dominance as a regional industrial power, let alone a global superpower. In fact, many were betting on China’s collapse, citing the Tiananmen Square incident, the collapse of the Soviet Union and Eastern European communism, the Asian financial crisis, and the 2008 global recession (which cut China’s total exports almost permanently by more than 40% below trend). But reality has repeatedly defied all these pessimistic predictions: With a 35-year run of hyper-growth, China came, saw, and prospered — in merely one generation’s time, China has created more massive and more colossal productive forces than have all her preceding 5,000-year dynasties together, and transformed from a vastly impoverished agrarian nation (with per capita income just one-third of the average Sub-Saharan African level) into the world’s largest and most vigorous manufacturing powerhouse.

China today, for example, with less than 6% of the world’s water resources and just 9% of the world’s arable land, can produce in one year 50 billion t-shirts (more than seven times the world population), 10 billion pairs of shoes, 800 million metric tons of crude steel (50% of global supply and 900% of the U.S. level), 2.4 gigatons of cement (nearly 60% of world production), close to four trillion metric tons of coal (burning almost as much coal as the rest of the world combined), more than 23 million vehicles (more than a quarter of global supply), and 62,000 industrial patent applications (150% times that in the United States and more than the sum of the U.S. and Japan). China is also the world’s largest producer of ships, speed trains, robots, tunnels, bridges, highways, electricity, chemical fiber, machine tools, cell phones, computers, bicycles, motorcycles, air conditioners, refrigerators, wash machines, furniture, textiles, clothing, footwear, toys, fertilizers, agricultural crops, pork, fish, eggs, cotton, copper, aluminum, books, magazines, newspapers, television shows, as well as college students.¹

China’s astonishing 30-fold expansion of real GDP since 1978 was unexpected, not merely because of its pervasive backwardness after centuries of turmoil and economic regress, but because of its enduring “extractive” and authoritarian political institutions — which, according to the institutional theories of economic development, would predict nothing but dismal failure for China’s industrialization.²

These theories overly glorify the modern Western political institutions that China lacks, but ignore the not-so-glorious historical paths Western powers once traveled themselves. By asserting that democratic political institutions and the rule of law are prerequisites for economic development, such theories overlook the endogenous and evolutionary nature of institutions and the frequent disconnections between rhetoric and practice, between the rule of law and its actual enforcement, and between political institutions and economic policies.³ Thus, these theories end up confusing consequence with cause, correlation with causation, political superstructures with economic foundations, and open access to political power with open access to economic rights.⁴ Specifically, universal suffrage was the consequence of the Industrial Revolution instead of its cause, and modern sophisticated Western legal systems and the ability to enforce them were the outcome of centuries of economic development under colonialism, imperialism, mercantilism, the slave trade, and painful primitive accumulations.

Such confusion is at the root of the Western enthusiasm in advancing Western-style democracy in backward, developing countries regardless of their initial economic-social-political conditions. The consequence of such a political top-down approach to economic development has been clear: Look at the economic stagnation and continuous political turmoil in Afghanistan, Egypt, Iraq, and Libya and the situations in Ukraine and other parts of Eastern Europe where democracy advances only to collapse, living standards progress only to regress, and the hopes of prosperity rise only to burst.⁵

Thus, despite nearly 250 years since the publication of “The Wealth of Nations” and all the ink spilled on general-equilibrium models of economic growth, economists are still in the dark searching for the key — the “double helix” — of economic development.

Adam Smith was perhaps closer to finding it than his modern neoliberal followers. He explained the wealth of nations by the division of labor based on the size of the market, using examples from early 18^th century pin factories, but his modern neoliberal students mix democracy with free markets, free markets with property rights, and property rights with incentives. They assert that the British Industrial Revolution could still have run its course as long as democracy prevailed, without the great voyage and discovery of America, and without England’s hegemony over global textile markets, its colossal wealth generated from the Trans-Atlantic slave trade, its powerful state assistance in creating and coordinating market activities, and its endorsement and fierce military protection of the East Indian Company’s global commercial interests and monopoly power.⁶

At the other extreme, neoclassical growth models based purely on (government-free) resource allocations still face daunting challenges connecting rational individual choices with long-term economic growth: How could merely re-shoveling available incomes by self-interested individuals across different consumption bundles have enabled Europe’s great escape from the Malthusian trap and yielded unprecedented waves of technological changes and industrial revolutions? In such growth models not only is the state redundant but the market and its creators automatically exist, so much so that the Ford automobile assembly line and the textile cartage workshop are the same thing as long as they have the same capital’s share in an abstract production function.⁷

No wonder technological change remains a black box in neoclassical growth models. No wonder the “Solow residual” in neoclassical production functions measures nothing but our ignorance. No wonder the Industrial Revolution that took place roughly 250 years ago first in England remains a great mystery.

Even for learned economic historians, the Industrial Revolution is, at the very best, considered a “tacit” knowledge comprehensible only to a handful of “predestined” countries blessed with geographical locations or mysterious cultural genes. “Explaining the Industrial Revolution is the ultimate, elusive prize in economic history. It is a prize that has inspired generations of scholars to lifetimes of, so far, fruitless pursuit” (Economic Historian Gregory Clark, 2012).

But China has just rediscovered this “tacit” knowledge — the secret recipe of industrial revolution. This very fact has gone almost completely unnoticed and unappreciated by Western academia and media; hence, we see in the West the severe under-prediction and lack of clear understanding of China’s rapid and pronounced rise to economic prominence.

In terms of industrial chronology, China already successfully finished its first industrial revolution during its initial 15–20 year rural-industrial growth after the 1978 reform. It is now already halfway through its second industrial revolution and on the verge of kick-starting a third industrial revolution — “deceivingly” and stubbornly, despite all the stereotypical and pessimistic views predicting China’s collapse.⁸

What is industrial revolution? Why was it absent or delayed in China for more than 200 years? How did China eventually manage to detonate such an industrial revolution (or a sequence of industrial revolutions) soon after a 10-year-long Cultural Revolution that destroyed so much of its already scarce human capital and business/cultural genes? What are the roles that geography, property rights, institutions, the rule of law, culture, religion, natural resources, science, technology, democracy, education, human capital, international trade, industrial policy, protectionism, mercantilism, and state power play in industrialization? Are there secret recipes to achieve rapid, “engineered” industrialization? Can other developing nations such as India and Ethiopia emulate China’s success and ignite their own industrial revolution in the 21^st century?⁹

i. China’s Perseverance and Unfaltering Attempts at Industrialization

The Industrial Revolution appears a mysterious process of dramatic social-economic changes that only a handful of Western countries (with just a small percentage of the world population) experienced in the 18^th and 19^th centuries. It is a process that many backward nations (with more than 90% of the world population) longed to emulate but have failed miserably and repeatedly in the 20^th century. And it is a process that economists and economic historians are still struggling to comprehend and identify its ultimate cause and explanations.¹⁰

But if a perceptive Western observer could travel to China once every year over the past 35 years, without wearing ideological Eurocentric institutional glasses, she would have witnessed the Industrial Revolution unfolding vividly in front of her eyes. China compressed the roughly 150–200 (or even more) years of revolutionary economic changes experienced by England in 1700–1900 and the United States in 1760–1920 and Japan in 1850–1960 into one single generation. What the Western traveler might see in China are the ideas of Adam Smith (1723–1790), Alexander Hamilton (1755–1804), David Ricardo (1772–1823), Friedrich List (1789–1846), Karl Marx (1818–1883), and Joseph Schumpeter (1883–1950) unfolding and playing out vividly in the 9,600,000 square kilometers of Chinese theater with more than 1 billion real Chinese actors — hundreds of millions of organized farmers, craftsmen, peasant-manufacturers, engineers, entrepreneurs, merchants, textile producers, coal miners, railroad builders, industrialists, speculators, arbitragers, traders, innovators, the state, and business-minded government officials. They all wear Chinese costumes and thus look unfamiliar to the Western observers. Yet, China today is perhaps more “capitalistic” than any 19^th or 20^th century emerging Western power. With mercantilism on the one hand and market competition on the other, without any “Glorious Revolution,” “French Revolution,” “Orange Revolution” or “Jasmine Revolution,” Deng Xiaoping and his successors made capitalism (or capitalistic materialism) China’s Absolute Spirit (a la Hegel) in the new millennium. And they did so under China’s so-called “extractive” institutions.¹¹

But what is “capitalism,” exactly? Is it a new way of living (McCloskey’s “bourgeois dignity”), a new system of belief and ideology (Joel Mokyr’s “enlightened economy”), a new work ethic (Max Weber’s ascetic Protestantism), a new configuration of civilization, state power, and social order (a la Samuel P. Huntington), or a new mode of production (a la Karl Marx)?

So many economists and economic historians have preoccupied themselves with the “ultimate and elusive prize” of explaining why the industrial revolution took place 250 years ago in late 18^th century England instead of 18^th century China or India. But, isn’t it equally or even more intriguing to ask why China and India remained unindustrialized more than 200 years later despite ample opportunities to emulate the British industrialization? In other words, the fundamental reason the Industrial Revolution took place first in England instead of India may be found by asking why India remains unindustrialized even today. The lack of democracy and property rights is clearly not the explanation: India has been the largest democracy for decades, with one of the longest histories of private property rights on earth. Nor does the shifting of comparative advantage in cotton textiles from India to England in the 18^th century (Broadberry and Gupta, 2009) explain India’s failure to embark on the Industrial Revolution: India had more than 200 years to observe, learn, emulate and reclaim the comparative advantage from England, just as China finally did in the 1990s (China became the World’s largest textile producer and exporter in 1995). Equally intriguing is the proclivity of researchers to ask why the Industrial Revolution did not start in the 17^th and 18^th century China, given its superior technologies and Yangtze River delta region’s hyper-economic prosperity,¹² instead of asking why China remained poor and unable to industrialize even hundreds of years later in the 20^th century? Simply attributing this failure to the vested interests of the elite class and the lack of democracy (as the institutional theories do) is unconvincing at best and misleading at worst.¹³

Take note that the economic reform in 1978 was not China’s first ambitious attempt to ignite industrialization on a vast and populous impoverished land. It was the fourth attempt in 120 years since the second opium war around 1860.¹⁴

The first attempt was made during 1861–1911, after China’s defeat in the Second Opium War by the British in 1860.¹⁵ Deeply humiliated by unequal treaties imposed by Western industrial powers, the late Qing monarchy embarked on an ambitious program to modernize its ba...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Dedication
• About the Author
• Abstract
• Quotes from the Book
• Contents
• Chapter 1 Introduction
• Chapter 2 Key Steps Taken by China to Set Off an Industrial Revolution
• Chapter 3 Shedding Light on the Nature and Cause of the Industrial Revolution
• Chapter 4 Why Is China’s Rise Unstoppable?
• Chapter 5 What’s Wrong with the Washington Consensus and the Institutional Theories?
• Chapter 6 Case Study of Yong Lian: A Poor Village’s Path to Becoming a Modern Steel Town
• Chapter 7 Conclusion: A New Stage Theory of Economic Development
• References
• Index