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Economy

Seeking lessons from China’s long economic boom

THAT CHINA has had decades of stellar growth is beyond doubt. More controversial is what can be learned from it. Does China prove that the basic tenets of developmental economics are right? Or does it argue for an overhaul? These questions brought together an august group of Chinese and foreign economists on December 9th in Beijing. They debated a new report that distils China’s experience into a handful of lessons which, the authors argue, belong in textbooks. But judging from the reaction, publishers will not be rushing to pulp current editions just yet.

The exercise, held at Tsinghua University, was a reflection on the start four decades ago of China’s “reform and opening” period, the rebirth of the economy following Mao’s disastrous rule. The anniversary is intensely political. Yet it is also a good moment to ask how China has done so well. Forty years ago, it had a 2% share of global GDP in terms of purchasing-power parity; now it has more than 18%.

On one point there was broad agreement. The debate about China’s growth is sometimes divided between those who credit the government and those who credit the market. Many at the forum noted that this distinction was too crude: both government policies and market forces have clearly been important. The real issue is how they have interacted.

The report, by scholars from Tsinghua’s Academic Centre for Chinese Economic Practice and Thinking, focused on the need to get incentives right. Because the central government promotes officials based on local economic performance, they have long been motivated to attract businesses and encourage investment. Li Daokui, head of the Tsinghua centre, argued that this was a vital element in China’s take-off, even if it has also led to problems such as pollution and a big increase in debt.

Critiques came on three fronts. First, some of the reports’ suggestions were restatements of what for many economists are truisms. One lesson, that the government should tame economic cycles, is a bog-standard Keynesian view. Second, China has certain advantages that others lack. As Edward Prescott, an American Nobel laureate, noted, the country’s sheer size has fostered healthy competition between regions. Third, much of what once worked for China no longer does. Barry Eichengreen of the University of California, Berkeley, concluded that, having invested so much already, China’s only path forward is to increase productivity—yet that requires fraught reforms such as the privatisation of state-owned firms.

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The lack of a neat consensus hinted at a bigger point. The main lesson from China’s development is how hard it is to draw ideological lessons from it. Dani Rodrik of Harvard University emphasised China’s constant experimentation, whether in its first export zones or its introduction of market pricing. When policies worked well in one place, they were copied. When they did not, they were discarded. That does not make for a grand new economic theory. But it has made for good economics in practice.

Source: economist.com

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