How economic growth happens

Posted: January 31, 2012 in Economics
Tags: , ,

For years now the debate has been going on about the superiority of China’s economic model. China has averaged around 10% annual GDP growth for the past 30 years while, on a very good year, western capitalist countries might see something like 3% – and that’s on a very good year. Yesterday Global Times ran an interview with Ding Chun, a member of the Global Agenda Council on Europe of the WEF, and asked, “Do you think the West should learn from developing countries like China?”

He replied, “I believe so. The West used to praise highly the Washington Consensus. Then they promoted the so-called conscientious market economy. Now the economic situations of developing countries are better than those of Western countries.”

The Chinese government loves to tout the idea that, since Western countries are suffering and China’s economy is soaring, it means capitalism is bunk and Socialism with Chinese Characteristics (AKA authoritarian capitalism) is superior. China is lucky to have the Communist Party ruling it.

I’m not an economist, but I have taken one entry-level economics class – which is one more than anyone who would make a claim like that has taken. China’s meteoric rise would be completely predictable to any economist worth giving himself that title. Let’s dumb down growth for developing countries to its most basic form. Essentially, it’s turning this:

into this:

A poor developing country isn’t very productive, so after people save up enough money from picking wheat, they buy a machine to improve productivity and income. Eventually they can buy the most productive machine there is and learn how to use it most efficiently. Then with all the new money, industries that never existed before (ie-tourism) can also bloom. Voila! Growth.

China is massive and there are still a lot of people doing things the old-fashioned way. So it’s completely normal that, as long as the government doesn’t get in the way, there will be large growth for a long time. But China’s government did get in the way from 1949 to 1979. Then Deng Xiaoping had the wild notion that if you let people reap the direct benefits of their work rather than force them to slave for the good of the motherland, they’ll be more productive. So I suppose you can credit China’s government for the huge economic growth of the past 30 years. Just like if I won a marathon I could credit the guy who was bear-hugging me at the beginning of the race for finally letting go.

To be sure, China’s development under authoritarian capitalism has been much faster than, say India’s democratic capitalism during this stage (although not necessarily better). But what happens when everyone finally has the biggest, most productive machines? Then they have to innovate and make an even better machine or method if they want to keep growing. This is what western capitalist countries are doing now – and it’s much slower.

In fact, this is what they’ve been doing for more than a hundred years because they were the first to build these big machines. Late-comers like China only needed to buy (or pilfer) this technology and learn these methods that already exist – a big 2nd mover advantage. So naturally, its development has been much faster than the West’s was.

Now that developing countries like China, which are more numerous and have much larger populations, are getting these machines, their workers with lower wages and less stringent labor/pollution laws are making it cheaper to produce basic goods while developed countries struggle with ways to make them more efficiently.

During this struggle, developed countries are losing production they’ve traditionally had, yet their people have still clung to the quality of life they’ve grown accustomed to. Hence, many are going into debt. They’re trying to make up for this with even more innovation at the frontier, but again, it’s slow-going. So given China’s huge population, it will indeed continue to grow until its GDP is well past any western capitalist country. However, China’s growth is already slowing because of it’s diminishing returns in increasing productivity. So what happens when China eventually gets everyone the newest, most efficient machines?

Then even less developed countries will take away many manufacturing jobs and China will go head-to-head with developed capitalist countries in innovation. It will come down to who has a better education system and more intellectual freedom.  Given the current atmosphere, who would you put your money on as more sustainable in the long run?

  1. Lorin Yochim says:

    It would be a fine theory of economic growth in China if it were true. First, the notion that economic growth did not occur prior to 1976 is false. Second, it is obvious that development prior to 1976 provided the conditions of possibility for the explosion afterward. Third, China has pursued more than one model since 1976. Finally, the bear hug is part of the so-called Chinese model, hence authoritarian capitalism. I do think there is much to be said for the unleashing of individual initiative. However, the way in which this was done in the 1980s was quite precisely planned and experimental. I suppose we can all admit, however, that the wild success of the 80s was not predicted by even the wildest enthusiasts. At any rate, the point is, China did not follow the neo-classical approach that you describe in your post. Noting this is what makes people wonder if it is a superior model.

  2. sinostand says:

    I don’t see how China’s isn’t basically following the classic development approach. It’s government has made itself unaccountable to the people that get exploited or trampled on in the process. So infrastructure goes up quicker and pollution doesn’t slow it down. The result is still that those machines get into people’s hands; just considerably faster with a host of side-effects.

    The point is that comparing China’s model to the developed western countries and saying it’s superior because China’s current growth is better is absurd. China is at an earlier stage of development with much more room to grow and a second mover advantage. The authoritarian hand knows how to direct through the process BECAUSE the West already slogged through it…slowly innovating every step of the way. If the Communist Party had come to power and started its model in 1800, then it would be worth comparing.

    I never said economic growth didn’t happen before 1976. But it happened much faster after…and exponentially faster after real economic freedom was given in the 90’s. (China’s GDP growth chart for reference: )

    And the bear-hug I was referring to was things like The Great Leap Forward, where people were mobilized by the government to melt farming utensils to make useless steel – which made China’s economy shrink by over 25%. Not the obscenely pro-business government of today that can pollute, divert resources and uproot millions of people without being challenged in order to make a better business atmosphere.

  3. Winston Ling says:

    I congratulate you for this article and I will post it on my Facebook wall.

  4. Potomacker says:

    Nations have been increasing economic gains ever since large numbers of people were moved out of low productive pursuits (e.g. farms) and into high productive sectors (e.g. factories). And even though the PRC got with the program rather late in the game, they have followed the paths of every other industrialized nation. It has never been hard to understand the basic idea and it works as long as fossil fuels are abundant and cheap.
    Please let me know as soon as China does anything original with regards to economics.

  5. Lorin Yochim says:

    There are any number of ways that China has done development differently, including precisely not following one of the foundations of the classical path: private property. With respect to @potomackers point, this is quite unique. Also, RE moving people out of low productive pursuits, this is partially true, but there is a a degree of “recentism” going on here, as though the system we see now is responsible for its own appearance. The period of greatest poverty reduction in the reform era, for example, is actually the 80s, a time associated mainly with the household responsibility system and small (i.e., tiny) entrepreneurship. Post-Tiananmen or post-1992 has proven to be quite a different era. Finally, and this goes to my points one and two above, the only way to sustain the argument that China’s development is not unique is to discount entirely the first four decades of the PRCs existence. While truly explosive growth did occur after 1976 and one might hold that the change in path was objectively necessary, post-Mao growth cannot be understood without reference to the time that came before. Above I referred to “development” broadly during that time, which includes educational development, not to mention massive growth in arable land, dams, etc. The Great Leap Forward, as damaging as it was, does not represent the entire history of growth 1950-1980. It’s true that the Mao era did not produce sustained growth of the kind we see now, but it did result in remarkable development in any number of domains. The tragic hidden costs of that development are well known.

    Having said all of this, one could make an argument that this is all stuff we’ve seen before, but the way to do that is to say that early capitalist development is always accompanied by the kind of obscenely pro-business government that we see in China today. Making that argument, however, would seem to render any kind of analysis of China’s specificity impossible.

  6. FOARP says:

    I deeply distrust any analysis which uses buzz-words-of-the-moment like “neo-liberal”. And yes, Eric is basically correct – China’s economic growth is being driven (or has so far been driven) by an industrial revolution. There is no new or special formula to what China has done, but this does not imply that what they have done was easy or came about through the simple absence of government controls.

    • Lorin Yochim says:

      If this is the case, when did this Chinese industrial revolution begin?

    • FOARP says:

      Modern industrialisation in China began in earnest during the 1920’s following the establishment of the Nanjing government, but was also seen before this point under the Japanese in Manchuria as well as other colonial enclaves.

      There then followed a period of destruction during WW2, followed by the introduction of a Soviet-style command economy emphasising heavy industry with Soviet assistance after the civil war. Some of this was then undone following the Sino-Soviet split, the failure of collectivisation, and even more so during the Cultural Revolution.

      After 1976 an attempt was made to rebuild the old Soviet-style economy under Hua Guofeng, before Deng Xiaoping replaced Hua and introduced his program of reforms in 1978. These reforms were also coupled with a program of investment in small-scale industry in the countryside, but this was followed by a ‘cities first’ strategy after the rise of the Shanghai Clique after the Tiananmen massacre. The 90’s saw the selling off of a significant part of the nationalised industry, although the more profitable parts were either kept or effectively remained under government control in fact if not in name.

      However there has been little in the way of further reform in recent years. No significant economic reforms have been introduced since at least the coming into force of the full provisions of the WTO agreement.

      One of the great problems is the lack of reliable economic growth statistics for much of China’s 20th century history. Put simply, even those periods during which statistics were made available, there is great doubt as to whether they are anything but a tissue of lies – particularly those released during the Cultural Revolution. It also has to be said that economic statistics in command economies can suffer great distortion from the production of goods for which there is no buyer – the case of over-production of typewriters in the old USSR during the late 80’s being a shining example. There is, therefore, significant reason to doubt the Chinese economic statistics of the years 1949-76, and no great reliance should be placed on them.

  7. kingtubby1 says:

    The whole concept of industrial revolution as classically outlined by Walt Rostow, TS Ashton, David Landes et al is a cul de sac which retrospectively misrepresented what actually took place in England circa 1790 – 1840. In fact, the all-encompassing term industrial revolution used to explain a major shift in methods of production did not gain currency until the 1880s, directly aligning the shift from pre-industrial hand and batch methods of production to modern machinofacture..

    Put simply, a percentage say 5% of net national product must be put aside to facilitate an industrial takeoff, and thereafter the process becomes self -sustaining as profits are ploughed back into fixed and variable investments ie land, plant and machinery, raw materials and labour costs.

    In fact, nothing could be further from the truth in England 1790-1840. Rented premises, letters of credit to acquire raw materials, delayed wages and a largely unfree labour force, plus a hotch podge of very basic industrial technologies which definitely did not add up to modern machinofacture as we know it today. Not to mention at least twenty definitions of profit.

    The whole idea of an industrial revolution facilitated by an industrial take- off is a waste of effort whatever the country in question. Rather, focus on changes in methods of labour management and discipline and complex credit arrangements based around basic technologies already in use, and you will be on the right track in tracing the origins of the modern Chinese economy.

    Why do Chinese factory owners prefer a female labour force? Management and discipline considerations.

    Obviously, I have greatly simplified a complex issue, and I think Yasheng Huang’s research is also pertinent here. Easily googled, since I am tired of linking it.

    If you are fortunate enough to read Mitchell Deane’s The Constitution of Poverty Routledge 1991 Chapters 2 and 3 you can pick up on my full argument about the real nature of how economies transform themselves into industrial modernity and Foxconn.

    • FOARP says:

      I think you’re right to point to the key being in organisation rather than in technology. A factory which produces goods on an assembly-line employing 100 workers is more productive than 100 workers working to produce the goods individually even if the manufacturing process is entirely un-mechanised. A business man who can obtain credit based on future earnings will acheive more than one who cannot. A workforce free to move is a more fertile ground for recruitment than one which is not, and so on.

  8. kingtubby1 says:

    I don’t have the reference at hand, but there is a study of the first phase of the so-called Korean Industrial Revolution which makes my point in an Asia context: it largely consisted of sweat shops using basic batch processes and predominately Korean female labour.

    Riffing on does not substitute for conceptual clarity, rigour and real case studies.

  9. Lorin Yochim says:

    KT’s understanding of industrial revolution basically aligns with mine. On post-Mao, Yasheng Huang’s work is very good. There is an excellent review Joel Andreas and response from Huang in New Left Review. For a view from 30,000 Giovanni Arrighi does a good job, although his optimism about the prospects for socialism in China is perhaps misplaced. Still, there is another aspect of this discussion that we’re not really addressing adequately, one that KT perhaps inadvertently reminds us of. That is, and his goes to the initial post, the question of the desirability of the Chinese model has less to do with which system is objectively better. Rather, it is an argument about what legitimating ideology best mystifies the actual process taking place. FOARP’s suspicion aside, the term “neoliberal” (when used responsibly rather than as a buzzword–see David Harvey, for e.g.) is a very useful term that specifies an ideology rather than a practice. Getting into an argument about whether or not authoritarian capitalism is a better method is a fool’s errand.

  10. Lorin Yochim says:

    A reasonably interesting talk by Stefan Halper at LSE. If you read his book, don’t bother:

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