China's growth will continue
China's successful economic policies are specifically Chinese. But they are made up of universal ele
Deng Rong, Deng Xiaoping's daughter, commences a memoir of her father by noting that before he launched China's economic reform programme in 1978 policies had been adopted 'in violation of the laws of economics.' Deng Xiaoping, in contrast, restored policies respecting these.
This relates to a highly topical question. Little under a year ago there was controversy over whether the stimulus programme launched by China to confront the international financial crisis would succeed. Today this is essentially settled. Not only will China achieve eight percent growth in 2009, a year when every other major economy will contract, but even a former sceptic, Martin Wolf, chief economics commentator of the Financial Times, concludes 'Is this growth surge sustainable? In a word, yes.'
Such success comes after thirty years in which China has been the world's most rapidly expanding economy, with 9.8% annual average growth. China's urban investment is up over thirty percent in a year in which most other countries' investment is falling - and UK spending on infrastructure, such as housing and transport, has declined by the same amount. China is counter-cyclically expanding bank loans while lack of such lending throttles the UK and US economies. China is also responsible for one hundred percent of the reduction of world poverty in the last quarter century - as Professor Danny Quah of the London School of Economics recently point out.
However, on the one hand China emphases that its economic system is with 'Chinese characteristics' - that is, it asserts its specifically Chinese character. China does not seek to promote its economic model to other countries and its authorities explain that their specific duty is to lead a country with more than 1.3 billion people to economic development. But simultaneously, as Deng Rong notes, China considers its policy since 1978 is guided by 'laws of economics'.
Therefore to what degree are China's economic successes specific to that country, and without general lessons, and to what degree are they expressions of 'laws of economics', which are necessarily universal in character and from which others can draw lessons?
The paradox is only apparent. China's specific combination of policies is, of course, strongly unique and indeed with 'Chinese characteristics' - it would be highly foolish to attempt to double guess such characteristics from outside. Another country mechanically applying them would suffer failure as every situation is specific. But China's success is understandable in terms of internationally recognised economics because the elements of which its specific economic model is constructed are universal.
The fact that China does not seek to promote its economic model therefore does not mean that others cannot draw lessons. Such analysis show, first, that China has been successful in confronting the financial crisis because its policies are right not only practically but from the viewpoint of economic theory. Second, for other countries, that the elements of such economic policies are capable of being successfully applied in a parliamentary democracy.
For these reasons it is worth setting out key elements of such policies not in terms those in China would necessarily use but in those of an economic discourse familiar in Europe and the US - classical and Keynesian economics.
The first is the most classical economics imaginable. Adam Smith first demonstrated what modern econometrics confirms, that division of labour is decisive in raising the level of productivity. And division of labour in a modern economy is necessarily international. A high level of trade is the sole way to participate in this, as well as to benefit from advantages such as economies of scale. The high level of trade in China's economy is crucial to its "opening" process. Protectionist and "import substitution" strategies inevitably lead to inefficiency in capital use and low productivity. China's opposition to protectionism is integral to its economic model.
Second, is China's high investment level. Again modern econometric research confirms that, after division of labour, the largest element in economic growth is growth of fixed investment not only in a developing economy such as China but also in developed economies. As Dale Jorgenson, probably the world's leading expert on productivity growth notes: "investment in tangible assets is the most important source of economic growth in the G7 nations. The contribution of capital inputs exceeds that of total factor productivity for all countries for all periods."
The third point is decisive in regard to the financial crisis. Keynes understood that the driving force of any recession, as with the present one, is a decline in investment. Keynes advocated low interest rates, and in the short term budget deficits, to overcome this. But Keynes also noted in the final chapter of his General Theory, in a point highly relevant to a situation where mass unemployment is again soaring, that "a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment".
This "somewhat comprehensive socialisation of investment" is impossible in a purely private sector-dominated economy. A decisive advantage China has in the financial crisis is that it does not have to rely only on indirect means (reduction of interest rates, budget deficits) to attempt to influence investment. China can use its large state-owned company sector to increase investment and instruct its state-owned banks to lend - while Alistair Darling is still pleading ineffectually for UK banks to increase theirs.
China's economic policies are indeed very specifically Chinese. But the elements of which they are made are universally recognisable.
John Ross is Visiting Professor at Jiao Tong University Shanghai