Making policies work

GREAT insights Magazine

Development with Chinese Characteristics: Ten Lessons for Policymakers

27-11-2014

Kaplan, S.D. 2014. Development with Chinese characteristics: Ten lessons for policymakers. GREAT insights Magazine, Volume 4, Issue 1. December 2014/January 2015.

Share Button

Is the 21st century already the Chinese Century? Countries all over the developing world, from Ethiopia and Rwanda to Kazakhstan and Bolivia, are increasingly looking to China as a model for how to launch, sustain, and manage rapid economic growth. Top officials visit China on study trips. National planning bodies issue ambitious documents modelled on China’s experience.

Too often, however, China’s development model is misinterpreted or oversimplified as amounting to little more than strong leadership atop a highly centralised and economically interventionist state.

There is more to the lessons that China’s rise holds for the developing world than that, however. Given the myriad problems that the Western development model has run into in so many countries, having one that differs from it can be useful: despite decades of aid and advice premised on this model, too few developing countries have been able to transform and modernise their economies.

Chinese lessons

There is no one document that lays out the Chinese model; replicating it requires some reverse engineering. When Deng Xiaoping launched his post-Mao reforms in 1978, he was looking to fast-growing neighbours such as South Korea and Taiwan and hoping that his own country could make similar gains. As China’s reforms set off unprecedented economic growth, a number of key principles emerged – some by design, some by accident.

1) Start with small farmers and rural areas

Partly because of worries about an impending food crisis, China started by breaking up collective farms and empowering small-scale farmers. Yields soared. But China did not simply “unleash” agricultural markets. Instead, the state remained in control of prices (increasing them to spur effort), the distribution system, and the supply of fertiliser. Only in the 1990s did more widespread market liberalisation reach the farm sector.

Early on, reconfigured incentives cut the rural poverty rate dramatically, tumbling it from 76% to 23% in just the five years ending in 1985. Higher incomes and productivity fed demand for new products, hiked savings and investment, and enabled rural folk to take up factory work.

Rural industry took off. Benefiting from local officials’ help, township and village enterprises became the most dynamic part of the Chinese economy in the 1980s and 1990s. Today, leading firms such as the Hope Group (agribusiness), Huanyuan (air conditioners), and Chery (cars) are based in areas that are still mostly rural. And whereas 95% of Chinese villages have roads, electricity, running water, natural gas, and phone lines (compared with fewer than 50% of villages in India), many developing countries have ignored their rural areas, chronically underinvesting in agriculture and rural infrastructure.

2) Invest heavily in knowledge infrastructure

With 80% illiteracy as recently as 1949, China now has a well-educated workforce replete with skilled specialists. More than a quarter of college-age Chinese are now enrolled in higher education.

Some of the key gains – especially at the primary and secondary levels – came before the reform era. China emphasised health and education from the 1950s on, achieving human-development levels comparable to those of richer countries by the late 1970s and accidentally equipping its people to take advantage of the reform era’s opportunities.

China has prioritised knowledge infrastructure in ways that go well beyond basic schooling. It has set up advanced research centres that have helped it to learn foreign technologies, build the world’s fastest supercomputer, send astronauts into space, and develop its own satellite-navigation system.

3) Prioritise cohesion

China’s polity is authoritarian, but many of its leaders accept more de facto accountability than do top officials in some developing countries that hold regular elections while ignoring accountability during the intervals between them.

China possesses ethnic homogeneity and a long history as a unified state. The feeling of nationhood that results has imbued leaders with a sense (again, more de facto than institutionalised) that their compatriots can make them answer. This sets China apart from so many developing countries with colonial-era borders and no strong sense of national identity to contain ethnic, clan, or sectarian loyalties.

In effect, China’s leaders stake their legitimacy on results rather than votes. Communist ideology has waned, and the ruling Party promotes officials who produce growth and rising incomes.

As China’s economy has become more sophisticated, however, informal accountability has proven less effective. The Party’s tight grip leaves the country less prepared for the myriad challenges it faces today as a middle-income country. The legal system, for instance, only imposes accountability on Chinese Communist Party (CCP) officials when those above them in the pecking order feel the need to push for it.

While many developing countries begin from a different starting point, the Chinese experience makes clear that social cohesion and an organic sense of elite accountability are critical – though the latter may prove inadequate at higher levels of development.

4) Build a competent government committed to inclusive development

Three features of the Chinese state explain why China – following its own script – has outperformed almost all other developing countries.

  1. China has far greater state capacity than any other developing country.
  2. China is by developing-world standards unusually inclusive in key ways. Economic growth has sown fairly widespread benefits, and nearly every child gets basic schooling while nearly every village enjoys paved roads and electricity.
  3. The state is “all in” when it comes to development, framing aggressive policies to promote growth, investment, exports, technology, and human-capital formation.

In many developing countries, the state – corrupt, inept, slow, mercurial – is the biggest barrier to national development. China’s government has its problems (some serious), but it is nothing like that.

5) Pave the road to riches-literally

Much to the joy of investors and its own bottom line, China spends tons of money on roads, ports, railways, electricity, telecom networks, and airports.

Like the 1950s U.S. with its interstate highways, China knows that world-class transport and export facilities are crucial. Modern infrastructure has cut the costs of doing business and helped China’s huge and well-trained yet cheap workforce to make the country the world’s workshop with 2010 exports worth more than US$1.5 trillion. Investments in electricity, running water, and phones have also reduced inequality. 

6) Test before rollout

Unlike many developing-world states that decree changes wholesale (or let themselves be pushed into doing so), China is more tentative. Its officials favour experiments, trial-and-error, local pilot programs, and evidence to test and build support for new policies.

Instead of introducing market prices across the board, China used a dual-pricing system that unleashed incentives but limited disruptions. As production grew, so did marketisation. The dramatic reform of state-owned enterprises proceeded with similar caution.

7) Focus on gradually reworking incentives and removing obstacles to growth

Enormous economic advances occurred even though – and maybe because – institutional reforms were put off. China used a gradualist approach to rework incentives and remove obstacles by changing policies just enough to unleash pent-up energy and stir progress. Institutional weaknesses, government malfeasance, a lack of democracy, and even gross market distortions have mattered much less than Western theories say they should have because at every level, firms, workers, families, and farmers have found their initiative rewarded.

8) Use financial markets to promote development and stability

Instead of assuming that Western-style, unattended financial markets, accompanied by a stable macroeconomic and legal framework, would be best, China has intervened repeatedly to ensure that financial markets promote development and stability.

Beijing views unconstrained financial markets with suspicion and wants them to serve policy needs. It has emphasised the role of banks and a postal savings system, and limits financial market competition. By reducing risk and increasing convenience for small and rural depositors, the state has stimulated one of the world’s highest savings rates (40% for the average household). Such saving fuels one of the world’s highest investment rates.

The country has also tightly managed its capital controls and currency value. There are no wild cross-border currency flows such as those that caused the Asian financial crisis of 1997. Export competitiveness is protected.

9) Use policy to up competitiveness

While most Western economic thinking lauds liberalised markets, China practices strategic protectionism and a version of “industrial policy.”

Beijing favours certain sectors and companies deemed important to its economy and its mastery of key technologies. It uses regulation to limit foreign influence at times, even when promoting foreign investment in special economic zones and particular sectors.

Like many before it, China has recognised that the dynamic process of advancing economic development and industrial diversification requires substantial state involvement. Private firms sometimes lack the scale or incentive to overcome many externalities; in these cases, greater intervention is needed than Western policies typically prescribe.

10) Promote self-reliance

China sees reform as the door to self-reliance. In contrast, most developing countries have adopted policies – often under Western influence – that undermine their ability to engage the world on their own terms.

Instead of deploying the laissez-faire policies, China dictates the terms on which foreign companies can access key markets, aggressively acquires (and even steals) new technology, and grooms firms to compete internationally. It maintains a large government workforce and favours wealth creation (and exports) over poverty reduction (the typical focus of foreign aid).

With the right know-how, home-grown corporations, and a capable state, China sees globalisation as a game it can win. Trade builds up its companies, benefits the great majority of its citizens, and enhances its international position.

Be pragmatic and flexible

There is no single model of development. Every country has unique assets and challenges. Building on what works is far more likely to succeed than trying to import any particular model from overseas.

To distil the essentials: developing countries need leaders who can leverage a certain degree of cohesion, develop a reasonably competent government, and roll intelligently with local and national circumstances.

Deng Xiaoping famously said, “It doesn’t matter whether it is a white cat or a black cat, a cat that catches mice is a good cat.” (1) More than anything else, post-Mao China has been pragmatic, unafraid to follow results and to mix and match ideas from multiple sources. This lesson, more than any stock recipe for “reverse engineering” the Chinese Wirtschaftswunder (2), might be the best one for developing countries to draw.

Seth D Kaplan Photo

Seth D. Kaplan is a Professorial Lecturer in the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University, Senior Adviser for the Institute for Integrated Transitions (IFIT), and consultant to organisations working on governance, state building, and poverty reduction.

Footnotes

 
This article was published in GREAT insights Volume 4, Issue 1 (December 2014/January 2015).

Conflict, Security and ResilienceOther work to address conflict and crisisStatebuildingChina

External authors

Seth D. Kaplan