China's growth will continue

Published 17 September 2009

China's successful economic policies are specifically Chinese. But they are made up of universal elements

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

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5 comments from readers

michaelpetek
17 September 2009 at 22:16

"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."

Unlike Mr Darling, China can also shoot its bankers if they don't do as they're told.

barry_rochford
18 September 2009 at 17:11

The above comment is futile as the question is economic policy. Is Michaelpetek against us democratically being able to use statutory instruments to ensure that investment is made in Britain ? As John Ross states: 'the elements of such economic policies are capable of being successfully applied in a parliamentary democracy'. Martin Wolf is a serious FT journalist who looked at the facts. I doubt whether he gives any political support to the Chinese regime.

Anyone serious about looking at economics right now would look at the facts. Yes the Chinese bureaucracy does have repression as an option, but so did Joseph Stalin. Why then was the Soviet economy a hopeless mess, with little growth and low levels of consumption in a country that could not feed its people?

Learn what is useful from the Chinese. Reject what is useless from Brown and Cameron.

davidhill
26 September 2009 at 13:11

HSBC’s chief executive’s permanent move to China should show to any person now with any intelligence at all, that the UK’s financial services are increasingly in terminal decline. Indeed according to leading economists, the City of London contributed enormously to the collapse in the people’s personal wealth through the financial meltdown and where 40% of all global assets of the people were destroyed. For nearly 15-years now our web-based ‘scientific discovery’ newsletter (http://www.thewif.org.uk/version2/nlett/class/issue.html) has been outlining the great threat of China to the economy of the UK. Therefore if people would not listen then, they certainly should now and where politicians should stop investing in the financial sector immediately and start to invest in a new economic base for Britain. For this new economic base resides as we have also said, in the British people’s innovative thinking, the best in the world according to authoritive reports by the government of Japan in the 1980s and Germany in the 1990s. Indeed, this is the only strategy that will prevent the UK from unparalleled economic decline in the 21st century. For continuously we have told succeeding governments over the past two decades what they have to do and where this is soundly based in high-technology. Indeed in this respect, Britain has the most creative minds in the world, commanding up to 55% of all the thinking that has made the modern world what it is today according to both Japan and Germany. Therefore we have to STOP investing in our declining international banking industry and start a ‘New Britain’ based predominantly upon it’s greatest competitive advantage, the creativity and innovative thinking of the British people. But where unfortunately it also has to be said like all else, politicians are always the last to realise this and where they always invest in things that cost wealth and jobs in the long-term through keeping on with persistent strategies that continually consume.

mount
29 September 2009 at 12:22

Curiously unfulfilling article.

One thing I did notice though is the way the third point chimes a little with Maurice Saatchi in the Times yesterday. Check it out - http://www.timesonline.co.uk/tol/comment/columnists/guest_co...

Middle East
02 October 2009 at 22:20

michaelpetek: "Unlike Mr Darling, China can also shoot its bankers if they don't do as they're told."

What a stupid remark! No one here is defending China's political regime or structure. The article is about the superiority of a planned economy as opposed to a private-dominated economy. China's is developing and expanding despite its dictatorial methods.Wonders could be achieved if China was also democrtaic. Wonders for the majority can alos be achieved in the Western countries if the economy the commnading heights of the economy are publicly owned and democratically controlled. This also would leave small businesses run privately. Yes, to China's economic model no to its political model!