LOOK AT CHINA

This argument is often used to prove the effectiveness of centralized governance. They say: after all, they don’t have capitalism or a market. There is a single vertical of power, five-year plans, state-owned enterprises, protectionism.

The problem is that the same characteristics are present in many other developing countries, but they don’t help them. Some developed countries also suffered from this in the past, but harsh regional competition sobered them up.

What else can explain China’s successes? Institutional economists highlight a number of factors.

1. Low base effect. Historically, China has always been one of the largest economies in the world, and in the 17th century, its per capita income was higher than that of the U.S. By the late 1970s, before Deng Xiaoping’s reforms began, China’s per capita income was only 6% of the U.S. level (17 times lower).

Over the course of 300 years, the Western world developed a wide range of innovations – both organizational and technological. When China opened up, this “compressed spring” effect triggered rapid growth. It reflects the advantage of latecomers entering the market.

2. Market liberalization. In fact, privatization in China has been recognized as the largest in the world. Control over quasi-state companies was decentralized. The flow of people and capital ceased to be tightly controlled. Free zones were created, modeled after Hong Kong.

Nobel laureate Ronald Coase believed that in its attempt to build "socialism with Chinese characteristics," the country had de facto become capitalist.

3. Regional decentralization and competition. Yes, politics, ideology, and personnel matters remained under the "center." But administrative and economic functions were transferred to regional authorities.

Why then didn’t China repeat Argentina’s path? Because there is no "central" pie to be divided by all. There is competition among regions for investment, including incentives for upward career movement. Competition even reaches absurdity, when regional authorities are unwilling to help neighbors during disasters.

4. A capable state apparatus. China has a long history of developing a state bureaucracy — in the positive sense of the word. Many countries in the region, including Japan, followed its example.

5. Supportive informal institutions. The "center" de facto has weak influence at the grassroots level, and its "failures" are mitigated by society itself. Many "private" enterprises are essentially collective – at the village or township level. Local businesses are closely connected with local authorities. Strong social norms of behavior exist. There is even a special term – guanxi.

What else do institutional economists say:

A. The future is not determined. China has grown to middle-income status, regaining lost historical positions. But to what extent can it continue to grow rapidly without reforms in the rule of law and market-building? After all, China is large — it’s not only the eastern megacities, but also the inland regions and more than 1 billion citizens.

B. Clearly, there is a major and complex Asian specificity. This also applies to other countries in the region — Japan, Korea, Singapore, and so on. The issue is not in successful central strategies and plans.

Therefore, for other countries, it is pointless to blindly copy China’s experience while having a completely different institutional structure.

Source: Menard & Shirley (2022)