MAKING SENSE OF ‘THE CHINA ECONOMIC MIRACLE’
MAKING SENSE OF CHINA’S ECONOMIC TRANSFORMATION
Dic Lo
Department of Economics, SOAS, University of London,
and, School of Economics, Renmin University of China,
E-mail: diclo@soas.ac.uk
and
Yu Zhang
School of Economics, Renmin University of China
laoaozhang@.cn
July 2009
Address for correspondence: Dr Dic Lo, Department of Economics, School of Oriental and African Studies, University of London, Thornhaugh Street, Russell Square, London WC1H 0XG, U.K.
We wish to thank the following persons for their constructive, critical comments on earlier versions of this paper: Perry Anderson, Ron Baiman, Andrea Boltho, Robert Brenner, Ben Fine, Mehrene Larudee, Victor Lippit, Jie Meng, Shaianne Osterreich, Alfredo Saad-Filho, and Susan Watkins. Thanks are also due to Guicai Li and Fuhai Hong for research assistance. We are solely responsible for the views expressed in the paper, and any errors or mistakes that remain. The completion of this paper received financial supports from the 9-8-5 Research Funding Program of the Renmin University of China (project entitled “Technological Innovation and China’s Economic Growth”), which is gratefully acknowledged.
Making Sense of China’s Economic Transformation
ABSTRACT
China’s sustained rapid economic growth in the post-1978 reform era, which is also the era of capitalist globalization, is of worldwide importance. This growth experience has been based mainly on China’s internal dynamics. In the first half of the era, economic growth was driven by improvement in both allocative efficiency and productive efficiency. From the early 1990s until the present time, however, economic growth has been increasingly based on dynamic increasing returns associated with a growth path that is characterized by capital deepening. In both periods, the growth paths and their associated institutional frameworks appear to contradict principles of the free market economy – the mainstream doctrines of globalization. In the form of an analytical overview, this paper seeks to explain and interpret the dynamics and developmental implications of China’s economic transformation. The analytics draws on a range of relevant economic theories including Marxian theory of capital accumulation, Post-Keynesian theory of demand determination, and Schumpeterian theory of innovation. It is posited that these alternative theoretical perspectives offer better insights than mainstream neoclassical economics in explaining and interpreting China’s economic transformation.
Keywords: China, globalization, late development, transition
JEL classification: O14, O53, P36
1. Introduction: Globalization Meets the “China Paradox”
Viewed from the perspective of worldwide economic development in the era of globalization, i.e., the three decades since the late 1970s, China’s performance could be regarded as unique. The country has survived well three waves of catastrophes that beset the non-Western world over this period: first, the “lost decades of development” in most parts of the developing world in the 1980s and 1990s, second, the systemic crisis in countries of the former Soviet bloc between the mid-1980s and the end of the century, and, finally, the financial and economic crisis that devastated most parts of East Asia in the closing years of the century. As of early 2009, it appeared that China was once again in a relatively strong position – relative to most parts of the world – in coping with the recession that emanated from the advanced capitalist countries and engulfed the world economy as a whole.
The latest crisis since 2008 aside, for the developing world, what the afore-mentioned three catastrophes indicate is the transition of economic development from the Golden Age of the 1950s-1970s to an era of prolonged stagnation in the 1980s and 1990s. Along with the general stagnation, there was also a trend of uneven development, i.e., growing disparity among major regions of the developing world. Prior to the 1980s, the growth performance of most regions was respectable, while that of the newly industrializing economies (represented by South Korea and Taiwan in East Asia, and Brazil and Mexico in Latin America) could be considered as encouraging. And the record of countries of the former Soviet bloc was in no sense far behind the best performers. 1 A totally different picture emerged in the stagnation era, however. As can be seen from Table 1, the real growth rate of per capita income for all low-income and middle-income economies was a mere 1.3% per annum in the 1980s, and 1.8% in the 1990s. The same rate for low-income economies alone actually fell sharply, from the already low level of 2.0% per annum in the previous decades to 1.2% in the 1990s. Thus, especially when the growing disparity across regions is taken into account, it is no exaggeration to call the 1980s-1990s the “lost decades of development”. This is even more so for countries of the former Soviet bloc (the category “Europe and Central Asia” of low- and middle-income economies in Table 1), where the average annual growth rate of per capita income in the 1990s was -1.7%.
[Table 1]
Entering the new century, the developing world seems to finally witness economic rebound. Between 2000 and 2007, the growth of per capita real GDP for all low- and middle-income economies reached a hefty average annual rate of 4.5%. This was more than double the average rate of the 1980s and 1990s. It also reversed the trend of growing divergence between the income levels of developing and developed economies. For both low-income and middle-income economies, the growth record in 2000-2007 was even substantially better than that of the Golden Age decades of the 1960s and 1970s. All these encouraging symptoms notwithstanding, however, there is still an enormous uncertainty as to whether the recent growth performance reflects a long-term trend or merely a recovery from the lost decades of the 1980s-1990s. The world-wide recession since 2008 does tend to give rise to pessimism rather than optimism.
Against this background of disappointments in world development, China’s sustained rapid economic growth throughout the three decades since the late 1970s, over and above its respectable record in the previous decades, is rather unique. As can be seen from Table 1, the country’s per capita income grew at an average rate of 8.8% per annum in the 1980s and 9.3% in the 1990s, far exceeding the rest of the developing world. This comparison that is strongly in favor of China has continued in the new century, even though other parts of the developing world have experienced the indicated substantial growth rebound. In the first seven years of the twenty-first century, the growth of China’s per capita real GDP reached an average annual rate of 9.0%, still far exceeding the record of 4.5% for all low- and middle-income economies combined. 2
This contrast in growth record is not only phenomenal but also paradoxical. China’s economic institutions and policies have long been dismissed by the orthodox establishment of the world – represented by the Washington establishment and its associated doctrines known as the Washington Consensus – as seriously deviating from the free market economy. They have been deemed akin to the crisis-causing factors of the three groups of economies indicated in the beginning of this paper. The fact that the authorities of the European Union, Japan, and the United States of America have sternly refused to grant their recognition of “market economy” status to China testifies to this dismissive attitude. 3
China’s economic performance has also appeared to be paradoxical for many in the critical, left-wing scholarship. It is widely perceived that, rather than fundamentally deviating from principles of the market, China has actually followed through capitalist transformation. Indeed, it is posited that China has followed the extreme form of capitalist transformation – namely, neoliberalization. Given that writers in this camp have tended to hold the view that capitalism can never deliver development on a world-significant scale, they have been obliged to deny that China’s sustained rapid economic growth is a real development. In particular, they have often argued that the growth performance has been mainly based on the “super-exploitation” of Chinese labor, as well as on “under-cutting” the world working class as a whole. 4 But, whether or not this argument has its validity, there still remains the paradox to be resolved: that China’s economic performance, after all, is truly phenomenal in the context of persistent stagnation throughout the developing world.
The objective of this paper is mainly to take on the orthodox, market-fundamentalist discourse on China, while also attempting to engage with the critical scholarship. The paper seeks to construct an analytical account for explaining and interpreting the dynamics and developmental implications of China’s economic transformation. The analytics draws on a range of relevant theories including Marxian theory of capital accumulation, Post-Keynesian theory of demand determination, and Schumpeterian theory of innovation. It is posited that these alternative theoretical perspectives offer better insights than mainstream neoclassical economics – as well as the existing critical scholarship – in explaining and interpreting China’s economic transformation. The paper is organized in five sections, of which this introduction is the first. Section two reviews the central propositions of the orthodox discourse on China. Section three highlights the main stylized facts of China’s economic growth process and offers some relevant theoretical considerations. On that basis, section four analyzes the dynamics of Chinese economic growth. Section five integrates the growth dynamics with the evolution of institutional reforms. Section six concludes the paper.
2. China and the Transition Orthodoxy
Is the Chinese experience of economic transformation really a paradox for the orthodox doctrines of globalization? In particular, does the experience fundamentally undermine the validity of the orthodox doctrines on systemic change and economic development? Attempts to interpret the Chinese experience in a way that is consistent with the so-called transition orthodoxy – also known as “market fundamentalism in transition” (IMF 2000) or “the transition doctrine of the Washington consensus” (Stiglitz 1999) – have coalesced around the following two propositions:
First, concerning institutions – that China’s reformed economic institutions have been a mix of market-conforming and market-supplanting elements, that its developmental achievements have been ascribable to the conforming elements while the accumulated problems have been ascribable to the supplanting elements, and that the problems have tended to outweigh the achievements as Chinese economic transformation proceeds from the allegedly easy phase to the difficult phase; and
Second, concerning development – that differences in country-specific factors, most importantly the different levels of industrialization, have largely explained the contrast between China’s sustained rapid growth and the depression in countries of the former Soviet bloc, and that this contrast is largely unrelated to differences in the strategies of systemic transformation. 5
The main thrust of Proposition One is the principles of individualistic property rights. Ultimately, the so-called market-supplanting elements refer to widely observable institutional arrangements that violate the principles: discrete government intervention in economic affairs (the state-business relationship), soft budget constraints (the finance-industry relationship), and rigid employment and compensation systems (the worker-enterprise relationship). The negation of these arrangements is necessary for justifying the orthodox policy prescriptions of mass privatization, and of subjecting ownership to market trading via liberalization of the regimes of domestic and international finance. It is asserted time and again that, should the market-supplanting elements continue to exist, the future prospects for the Chinese economy are at best uncertain and more likely crisis-prone. The only way to avoid this looming crisis is to “complete the transition to the market”, as speedy as possible. 6
Leaving aside its detailed arguments to be discussed later in the paper, at the overall level, Proposition One does not fare well with the reality. Early on, Martin Weitzman (1993, p.549) observed: “According to almost any version of standard mainstream property rights theory, what has been described as the ‘East European model’ basically represents the correct approach to transformation, while what we are calling the ‘Chinese model’ should represent a far-out recipe for economic disaster… The central paradox is the enormous success of the Chinese model in practice, contrasted with the sputtering, tentative, comparatively unsuccessful experience with the East European model.” Almost ten years later, in reviewing the persistent contrast between “East Asian transition economies” (i.e., China and Vietnam) and transition economies in Europe and the Commonwealth of Independent States (i.e., countries of the former Soviet bloc), Stanley Fischer (2001) made a similar comment: “Most indicators suggest that progress of structural reform in East Asia has been relatively modest, yet output performance has been far superior to even the best reformers in Europe and the CIS.” The Chinese experience appears to indicate that adherence to the principles of individualistic property rights is neither necessary nor sufficient for generating sustained rapid economic growth, indeed for avoiding economic disaster.
Proposition Two is thus needed for the transition orthodoxy. The World Bank (1996, p.5), in its first systematic report on the economics of transition, frames such a question for itself to answer: “Do differences in transition policies and outcomes reflect different reform strategies, or do they reflect primarily country-specific factors such as history, the level of development, or, just as important, the impact of political changes taking place at the same time?”. Proposition Two is the answer. Its implied message is that the transformation experiences of China and countries of the former Soviet bloc are not really comparable, but, insofar as there is a limited scope of comparability, the comparison tends to support rather than undermine the transition orthodoxy. Because of the incomparability, the World Bank (2002) simply excluded China in its second systematic report on the economics of transition. The IMF (2000) and the OECD (2005), meanwhile, still bothered to insist on the assertion concerning the implication of the limited scope of comparability. They endorsed what Sachs and Woo (1994) had argued early on: that, unlike countries of the former Soviet bloc, China was just fortunate to be with a low level of industrialization in the beginning of its reform – it has thus been able to generate economic growth via labor transfer from the rural-agricultural sector to industry, whilst postponing the needed, unavoidably painful reforms.
What underpins both of the two orthodox propositions is the belief that economic development as dictated by the principles of the market – and the actual working of the world market – is somehow easy, natural or normal. This is the notion of the “natural path of development”, the ultimate promise of globalization. But the notion is in no sense uncontroversial. Joseph Stiglitz, at the time when he was chief economist of the World Bank, spent great efforts to try to direct the orthodox establishment away from this belief. Regarding the economics of transition, Stiglitz (1999) argued that China has faced a task of economic transformation that is far more difficult than that faced by countries of the former Soviet bloc. This is because China’s task encompasses both systemic reform and economic development, rather than systemic reform alone. This judgment suggests that economic development is by no means a natural or easy process.
Stiglitz’s judgment appears to fare far better with the reality than the transition orthodoxy. China’s growth performance stands in contrast to not only countries of the former Soviet bloc but also most parts of the developing world. The actual record of world development under globalization, as depicted above with reference to Table 1, has been very dismal. Meanwhile, the initial condition of China’s economic transformation is not simply one of under-industrialization. In 1980, industrial value-added accounted for an astonishingly high proportion of 44% of China’s GDP. This is lower than the Soviet Union (54%), on a par with Brazil (44%), but higher than South Korea (40%) and India (24%) in the same year (data from World Bank, World Development Report 1982). The fact that, despite starting with one of the highest industry-to-GDP ratios in the world, China has been able to maintain very rapid industrial growth throughout the reform era, and with it to absorb labor transferred from the rural-agricultural sector, clearly should not be taken for granted.
3. Stylized Facts and Theoretical Considerations
China’s sustained rapid economic growth since the late 1970s is a world-phenomenal event, not only in terms of the rate of growth but also in terms of its structural-institutional attributes. Discernibly, there are three crucial attributes with this process: first, industrialization has persistently been the immediate driving force of economic growth, second, there was a switch in the early 1990s from labor-intensive growth to capital-deepening growth, and, third, the growth path also switched from consumption-led to investment-led between the two halves of the reform era. The analysis of the dynamics and conditions of these three attributes is key to the understanding of China’s overall economic transformation.
The immediate dynamics behind Chinese economic growth over the reform era is clearly a process of rapid industrialization. Between 1978 and 2007, the average annual growth rate of real GDP and per-worker real GDP was 9.8% and 7.5%, respectively. In the same period, the average annual real growth rate of industrial value-added and per-worker industrial value-added was 11.6% and 9.2%, respectively. Both the output and productivity growth rates of industry substantially exceed those of the economy as a whole, on average by almost two percentage points per annum. Figure 1 shows the evolution of labor productivity of Chinese industry relative to the rest of the economy, both in nominal and real terms. The curve representing relative labor productivity at constant prices has persistently exceeded that representing the indicator at current prices. This indicates a transfer of productivity gains in industry to the rest of the economy via changes in relative prices, thereby propelling overall economic growth. The fact that the gap between the two curves has tended to widen over time, moreover, implies that the pace of productivity transfer has tended to accelerate.
[Figure 1]
The transition from labor-intensive growth to capital-deepening growth is also clearly evident. As can be seen from the data in Table 2, between 1978 and 1992, economic growth, along with productivity improvement, was associated with fast growth of labor employment. The average annual growth rate of employment actually exceeded that of the labor force. Improvement in productivity has accelerated after 1992, on average by more than three percentage points per annum over the record of the previous period. But, this has been achieved along with the slow down in employment growth. The growth of employment since then has lagged behind that of the labor force, on average by 0.08 percentage points per annum.
[Table 2]
The transition from consumption-led to investment-led growth is equally apparent. Figure 2 charts out the composition of Chinese GDP by expenditures. It can be seen that, of the aggregate expenditures, consumption accounted for a substantially bigger share in the first half of the reform era (1978-1992) than in the second half (1993-2007), on average by more than ten percentage points. The opposite was true for the evolution of the share of aggregate expenditures accounted for by investment. It is only in recent years, since 2005, that the third component, net export, has accounted for a significant – and very rapidly rising – share of aggregate expenditures.
[Figure 2]
To account for these attributes of Chinese economic growth requires a theoretical perspective of transformational growth – that is, seeing growth as a process of change rather than simply as a process of expansion. Succinctly, the analysis needs to clarify the structural-institutional arrangements that underlie the growth process (the productivity regime), and the condition that facilitates the working of these arrangements (the demand regime). It is the interaction between these two aspects that form a particular economic growth path, such as those that prevailed in China in the two sub-periods of the reform era.
The orthodox notion of the “natural path of development” is not helpful in this regard. It does have a theory of growth as a process of change, in the form of the so-called stages approach to comparative advantage. The essential idea is that the optimal path of structural change of an economy will emerge automatically, if the international specialization of the economy follows its shifting (endowment-determined) comparative advantage over time. This theory is insufficient for, by taking a black-box view on production and assuming that the best practices of production are automatically accessible to all producers, it is of little help for clarifying the productivity regime. The theory could even be misleading, in the sense that it simply assumes away the need to clarify the demand regime – the world market, in particular, is assumed to provide whatever demand condition that is needed for economic growth. 7
The literature on transformational growth has actually been dominated by the work of Nicholas Kaldor, or the tradition associated with him. And there are good reasons for this, as the general observations or stylized facts of industry-led economic growth known as the “Kaldor-Verdoorn Laws” are almost universally accepted by development economists. The essential idea of this tradition is that the interaction between the productivity regime and the demand regime, particularly within the manufacturing sector, is typically one of circular and cumulative causation. An industry-led growth path is thus necessarily a disequilibrating process that would not converge to a predictable steady state. 8
Kaldor himself, and the broader tradition of Post-Keynesian economics, do have well-developed theories on the determination of the composition and growth of aggregate demand. Yet, for studying a particular growth process in reality, the Post-Keynesian tradition might need to be complemented by further theories on the specific character of the productivity regime as well as the specific mechanism through which the productivity regime interacts with the demand regime. The Schumpeterian theory of innovation might be helpful for the former task, while the Marxian theory of capital accumulation might be helpful for the latter task. The next two sections seek to analyze China’s economic transformation by drawing on these three theoretical traditions and contrasting them with the orthodox theory. 9
4. The Dynamics and Conditions of Economic Growth
Consider the economic growth path in the first half of the reform era, 1978-1992. As indicated above, this was a process of labor-intensive, industry- and consumption-led growth. The downward movement of the incremental capital-output ratio (ICOR) of the economy in this period, shown in Figure 3, suggests that there was a continuous process of substitution of labor for capital in production. The growth process was associated with massive transfer of labor from the rural-agricultural sector to industry, where the latter sector was characterized by a much higher productivity level and much faster productivity growth. Now, was this process simply a validation of the neoclassical theory of relative scarcities and, therefore, the orthodox notion of the “natural path of development”? This question can be approached by examining both the prevailing productivity and demand regimes.
[Figure 3]
Insofar as the orthodox notion does explain the sources of productivity growth, it must be with serious qualifications. In the institutional dimension, as will be looked at in the next section, throughout the first half of the reform era the Chinese economy was almost entirely composed of public firms, i.e., state-owned and collectively-owned enterprises. The orthodox notion envisages that the “natural path of development” would occur in the context of a market economy, but it is not clear whether this judgment could remain valid if the economy is in fact dominated by public firms.
In the structural dimension, the sources of productivity growth were also far more complex than improvement in allocative efficiency alone, as envisaged in the orthodox notion. It can be argued that of equal importance in accounting for the productivity growth was improvement in productive efficiency, which was associated with the explosive growth of a wide range of mass-production, “new” consumer durables. 10 These goods were mainly products of the broad machinery sector, i.e., the mechanical and electronics industries. Thus, between 1978 and 1992, the share of gross output value of Chinese industry accounted for by the machinery sector registered a massive increase: from 26% to 27% if measured at current prices, and from 26% to 33% if measured at constant prices of the base year 1978. 11 In terms of technical and economic characteristics, the production of these goods was characterized by rapid technical change, extensive backward and forward linkages, and high income elasticities of demand. Yet, the industries did not clearly accord with the principle of relative scarcities: it can be verified that, according to the customary criterion of relative labor productivity, the machinery sector in China during this period could not be classified as labor-intensive while the electronics industry could only be classified as capital-intensive. In a significant measure, therefore, the direction of structural change in Chinese industry in the first half of the reform era appeared to contradict the expectations of the orthodox notion. 12
Meanwhile, the demand regime also cannot be considered as a trivial issue. Recall that China’s rapid industrial growth has been achieved in the context of starting in the late 1970s with one of the highest industry-to-GDP ratios in the world. On the world scale during this period, a main factor that impeded late industrialization came precisely from demand-side constraints. 13 There must exist some peculiarities in China in the first half of the reform era such that the accelerating pace of industrialization found its necessary demand conditions. The crux appeared to be the “consumption revolution” that was felt by the entire urban population: between 1981 and 1992, for example, the ownership per 100 households in urban China of color television receivers increased from 0.59 to 74.87, that of washing machines increased from 6.31 to 83.41, and that of household refrigerators increased from 0.22 to 52.60. It was the existence of domestic mass consumption which sustained the explosive growth of the industries of mass-production, new consumer durables. Conversely, it can be argued that Chinese economic growth in this period was based on a nexus of causal relationships of the following form: consumption induced investment and overall demand expansion, thus making it possible to absorb transferred labor from agriculture and to improve industrial productivity via dynamic increasing returns. There seemed to exist a virtuous circle between consumption and production, and between industry and the economy.
The dynamics of Chinese economic growth in the 1978-1992 period as characterized above presupposes the existence of two necessary conditions. First, the process of structural change involved both an expansion of the share of industry in the economy and the leading role of a wide range of mass-production industries. The former aspect corresponds to the trend of labor transfer from agriculture to industry, and hence improving allocative efficiency, while the latter aspect corresponds to the “Kaldor-Verdoorn Laws” of improving industrial productivity via dynamics increasing returns. Second, there must exist an egalitarian pattern of income distribution which underpinned mass-consumption, thereby inducing investment and overall demand expansion. Income distribution covers the total of both money and non-money incomes for Chinese people, particularly for urban residents in the first half of the reform era. The degree of egalitarianism is thus difficult to gauge by conventional measures of income distribution such as the Gini index. Perhaps a more appropriate measure would be the indicator life expectancy at birth, which in some ways reflects the combined effect of all indicators of social development. It is well-known that, on this measure, China’s performance in the late 1970s was very close to the average of all middle-income economies in the world, even though it was a low-income economy. By the early years of the twenty-first century, China’s performance in this indicator remained very close to the average of all middle-income economies, despite the fact that its economic growth in the preceding two decades had far outstripped the rest of the developing world. It seems reasonable to argue that a social development performance that substantially exceeds the average of economies of comparable income levels must be due to a higher-than-average degree of egalitarianism in income distribution. On this basis, it seems appropriate to assert that, for the main part of the reform era, China’s pattern of income distribution tended to be egalitarian by international standard – although it is also true that egalitarianism tended to wither along with market reforms. 14
Turning to the economic growth path in the second half of the reform era, 1993-2007, its capital-deepening nature is most clearly indicated by the upward movement of the ICOR during this period. This direction of change appears to violate the principle of relative scarcities – particularly in view of the fact that, as indicated above with reference to Table 2, employment growth has tended to lag behind that of the labor force. The growth process has actually been associated with the further, and continually very fast, expansion of the broad machinery sector: by 2007, its share in the gross output value of Chinese industry as a whole remained at 26% if measured at current prices, but increased to 40% if measured at constant prices of the base year 1978. Just like what happened pre-1993, the machinery sector has continued to play a leading role in Chinese industrialization, both in terms of its faster pace of growth and the transfer of its productivity gains to the rest of Chinese industry via changes in relative prices. It appears that the driving force behind Chinese economic growth post-1993, which has been associated with a pace of productivity growth that is much faster than the previous period (see Table 2), has been improvement in productive efficiency alone. The capital-deepening growth path, while deviating fundamentally from the “natural path of development”, has actually been impressively efficient.
But the demand regime has changed, evident in the decreasing share of consumption in aggregate expenditures. The explanation of the sluggish growth of consumption in China is complex and controversial, but one point seems clear: that it has been in a significant measure due to the continuous worsening of income distribution. Albeit not a adequate measure, the Gini index does broadly indicate this worsening trend. In 1978, the value of the Gini index in China was 0.16 for urban households and 0.21 for rural households, both being rather low in international comparison. By 1992, the value increased to a moderate level of 0.25 for urban households and a high level of 0.31 for rural households. By the year 2000, the value rose to high levels for both set of households: 0.32 urban, 0.35 rural. 15 In this context, the change in output-mix associated with the expansion of the machinery sector has no longer been mainly based on the growth of consumer durables. In line with the rising ICOR in production, Chinese economic growth since the early 1990s has tended to follow what is known in the literature as the Feldman-Mahalanobis model – i.e., a growth path that is based on “producing investment goods for producing investment goods”. Conceptually, can such a growth path be efficient, and sustainable?
In the theoretical literature and especially in the tradition of Marxian economics, the justification for the Feldman-Mahalanobis model is that the machinery sector is particularly responsible for the generation and diffusion of technological change. The development of the sector is considered to be necessary for promoting dynamic increasing returns, and hence productivity growth, in the economy as a whole. The sources of increasing returns, as emphasized by the Kaldorian theory of circular and cumulative causation, are the interaction between the appropriate productivity and demand regimes. These take the form of learning by doing, induced investment for technological upgrading, and the deepening of the division of labor in the economy – the effects of “(productivity-improving) innovative activities”, in short. The contribution of the Schumpeterian theory of innovation, in this connection, is its focus on the capability of the institutions involved in generating innovative activities. Specifically, institutional attributes that are consistent with innovative activities of these three forms entail the requirement of rigidities, i.e., long-term-oriented relationships among major stakeholders of the business system. Such attributes are antithetical to the logic of allocative efficiency, which requires flexibilities particularly the free movements of finance in its profit pursuits. Thus, there exists a trade-off between the required institutions for productive efficiency and those for allocative efficiency. This argument underpins an insightful framework for analyzing the institutional attributes of China’s productivity regimes, which will be carried out in the next section. 16
What about the sustainability of the post-1993 economic growth path? Conceptually, in both Marxian and Post-Keynesian economics, demand expansion is normally determined by two sets of factors, exogenous and endogenous. Exogenous factors refer to the pattern of income distribution and that of consumption, and underpinning these patterns the history-specific political and cultural conditions. Endogenous factors refer to the specificity of the economic growth path in question. For a growth path based on “producing investment goods for producing investment goods”, Marxian economics suggests that its sustainability on the demand side hinges on the pace of product innovations. It is through product innovations that the variety of investment goods could continuously expand, and that the law of diminishing demand for the output-mix would not set in. 17 The sources and pace of product innovations in Chinese economic growth particularly in the post-1993 period are an important issue wanting scholarly studies. Nevertheless, one point seems clear: in addition to domestic generation, an important source of product innovations is from continuous, large scale importing of foreign technology. This is a continuation, but on much larger scales, of the situation in the first half of the reform era, where the expansion of the industries of new consumer durables (which were new to China) required the import and assimilation of foreign technology.
Before closing this section on Chinese economic growth, it is necessary to have a brief discussion on the importance of the external dynamics, i.e., the role of foreign trade and inward foreign direct investment. For, in the existing literature, much importance has been attached to this. A popular story from the application of the notion of the “natural path of development” states that Chinese economic growth throughout the reform era has followed a path of labor-intensive, export-oriented industrialization based on its endowment-determined comparative advantage. If it is further posited that the export sector is precisely China’s market-conforming sector, then, once again, the two orthodox propositions described earlier in section two appear to be preserved. This completes the story of a market-determined, natural-cum-desirable development experience. Paradoxically, at the descriptive level, this view appears to be shared by the mainstream of the critical scholarship. The thesis of “under-cutting” implies that cheap labor, claimed to be created by repressive politics, have been the underpinning of Chinese economic growth. To complete the story of an undesirable experience of (under)development, the thesis of “super-exploitation” further implies that cheap labor is not just slow wage growth relative to productivity growth but rather persistent low wage levels relative to competitor economies. 18
Has Chinese export expansion been mainly based on cheap labor? Answering this question is crucial to the assessment of both the orthodox and critical stories. This need not require a comprehensive study of the evolution of the composition of Chinese exports. One counter indicator might suffice: in 2007, mechanical and electronic products accounted for 61% of the total of China’s manufacturing exports (and electronic products alone accounted for 40%). As indicated earlier, relative to Chinese industry as a whole, the machinery sector cannot be classified as labor-intensive while the electronics industry can only be classified as capital-intensive. A further, related indicator concerns the proportion of high-tech products in manufacturing exports. In 2006, the ratio was 30% for China, which is higher than Brazil (12%), Russia (9%) and the average of all middle-income economies (20%), and is close to South Korea (32%). Compared with China, these economies are with higher levels of per capita income, and hence lower degrees of “labor abundance” or “capital shortage”. It is thus seriously flawed to explain the expansion of Chinese exports in terms of cheap labor, i.e., its “given” comparative advantage. 19
Has Chinese economic growth been mainly based on improvement in allocative efficiency realized via the external dynamics? As depicted above, the growth process has been actually mainly based on the improvement in productive efficiency, particularly since the early 1990s. The contribution of the external sector has been mainly in terms of technology transfer, which was essential for sustaining the economic growth path both in the first and second half of the reform era. It is this contribution – at high costs, though – which suggests that increasing openness, or integration into the world market, after all, is a necessary condition for successful late development. 20 Even so, the Chinese experience indicates that this contribution of the external sector is nothing automatic or natural. It rather requires the existence of the particular internal dynamics of economic growth for the contribution to materialize.
5. Institutions in Chinese Economic Transformation
The logical starting point in the nexus of causal relationships underpinning Chinese economic growth in the first half of the reform era, as depicted in the preceding section, was the existence of an egalitarian pattern of income distribution. This pattern was, in turn, based on China’s specific political economy. For a major part of the reform era but especially in the first half, the economy was dominated by public ownership, and within the publicly-owned sector egalitarianism in distribution was the norm. In 1992, state-owned enterprises (SOEs) and collectively-owned enterprises combined to account for 86% of the output of Chinese industry as a whole. By the turn of the century, the share still remained at 64%, with the rest being accounted for by the catch-all category of enterprises of “other ownership types” which include private firms and various types of joint-ownership firms. Even for shareholding firms that are not formally state-controlled, a significant proportion (mainly those listed in the stock market) are actually with state agents as the ultimate owner-controller.
It is thus possible to turn back to view the orthodox establishment’s Proposition One on China, concerning the nature and attributes of its reformed economic institutions (see beginning of section two), in different light. What it considers as market-supplanting elements of the Chinese economy are precisely the egalitarian systemic features, particularly those of SOEs. The observation is widely agreed upon: that the institutions of SOEs have significantly deviated from principles of the market economy, notably individualistic property rights. Conceptually, in the relevant literature, China’s enterprise reform has generally been portrayed as a process of the state attempting to induce entrepreneurial activities by the management. But, this process has occurred in a broader context where various stakeholders of enterprises – local governments, workers, local communities, the banks and other business partners – have been involved to form a web of checks and balances governing the operation and development of enterprises. This systemic feature is visible not only in SOEs but also in enterprises of other types of public ownership, including the renowned collectively-owned township and village enterprises (TVEs). 21
The crucial question, however, is: what are the developmental implications of this rigidity-infused, long-term-oriented systemic feature of Chinese public firms? It was alluded to, in the beginning of this section, that this feature has its advantage of underpinning the egalitarian pattern of income distribution and therefore mass consumption. But, has it also resulted in gross inefficiency of enterprises at the micro level – as the orthodox establishment has persistently maintained?
The assertion about China’s allegedly ailing state sector has been so popular in the media that it seems trivial to answer this question. But, in the scholarly rather than journalistic literature, the assertion has in fact been a matter of debate. The debate first centers around the assessment of productivity change of SOEs in the reform era. Because of the very different estimation results of total factor productivity growth in SOEs obtained by large number of different studies, and because an objective criterion is lacking to resolve the difference, the orthodox assertion has been far from the dominant view on the matter. Even the World Bank (1996, p.23) has to adopt a concessive tone by stating: “(China’s state sector) remains a drag on the economy during the reform era – even though its efficiency may be improving.” Hence, and in connection with the 1997-98 East Asian financial crisis, the orthodox establishment has shifted to base its assertion on the financial performance of SOEs. It is claimed that the trend of declining enterprise profitability, together with the rising ratio of non-performing loans of state banks, are symptoms of the same ill: the gross inefficiency of SOEs. It is further claimed that this must be treated as a matter of urgency, as otherwise an East Asian-type crisis is most likely to occur in China. 22
Compared with the orthodox Proposition Two (on development) dissected in section four, this Proposition One (on institutions) does not fare better with reality. At one level, it is a gross exaggeration to assert that the nexus of SOEs, state banks and the state itself as a whole has ever been on the verge of a financial collapse. The fact that the Chinese economy performed well during and after the 1997-98 East Asian crisis flies in the face of this assertion. To the extent that the nexus has indeed accumulated financial problems, this is largely a result of the fiscal difficulty of the state rather than enterprise inefficiency. For, over the reform era, SOEs have paid all the social costs that should have been the responsibility of state finance. They have paid income taxes at much higher rates than other enterprises, while also facing serious under-capitalization from the state-owner. At another level, the observed decline of enterprise profitability reflects more a macroeconomic issue than microeconomic inefficiency. As can be seen from Figure 4, the pre-tax profit rate of SOEs has in fact been very close to the average of all enterprises: slightly higher in the 1980s and slightly lower in the 1990s, while both exhibiting a tendency of secular decline up until 1998, and of substantial rebound post-1998. Noting that China’s accounting system has tended to underestimate depreciation, and hence to overestimate the capital stock of SOEs which are in general much older than non-SOEs, it could be argued that the profit rate of SOEs is likely to have been higher than industrial average in most years of the reform era. 23
[Figure 4]
Figure 4 also shows that, throughout the reform era, the pre-tax profit rate of large-scale enterprises has been higher than the industrial average. It can be verified that the same applies to the comparison of other performance indicators, such as output and productivity growth. Given that the vast majority of large-scale enterprises are in fact SOEs –they have formed the core of China’s state sector – it appears that the orthodox Proposition One cannot be farther from the reality. What is more reasonable, therefore, is to see how this seemingly paradoxical reality could be made sense of. What kind of advantage can be generated by the systemic feature of SOEs, which appears to have more than compensated for the (allocative) efficiency loss that is deemed unavoidable from the standpoint of orthodox economic theory?
It has been noted that the reformed Chinese enterprise system has been infused with rigidities, especially with an emphasis on maintaining a long-term relationship with major stakeholders. This is akin to the canonical East Asian, or Japanese, system, and there are well-developed theories to explain the economic advantage and disadvantage of systemic features of this kind. Succinctly, in the context of steadily growing market demand, industrial firms that are infused with rigidities and long-term orientation are especially capable of improving productivity via various kinds of dynamic efficiency, particularly through collective learning. In contrast, in the context of stagnant or contracting demand, firms of this kind have difficulty in adjustment and hence tend to be out-competed by flexible, market-conforming and short-term-oriented firms. 24
The above theoretical argument appears to be reasonable for explaining the fact that, with respect to the indicator of industrial profitability, China’s SOEs out-competed non-SOEs in the demand-expanding 1980s (and again in 2004-2007) but were out-competed in the demand-stagnant 1990s (Figure 4). Conversely, such an explanation also pushes to the forefront the most prominent feature of the Chinese “model” of economic transformation especially in the first half of the reform era. This, namely, is the basically appropriate match between mass consumption at the macro level and the long-term-oriented behavior of enterprises at the micro level, and, behind this, that between the egalitarian income distribution and the systemic feature of enterprises being accountable to major stakeholders. The significance of this match is no less than the sustained rapid economic growth itself. It offers the opportunity for China to embark on a path of late development that takes a strongly socialist character. But, there are also serious constraints on such a pattern of economic transformation. The introduction of market practices might be necessary for the formation of micro-level incentives for economic development, but market reforms in the strict sense – i.e., in applying principles of individualistic property rights – are bound to disrupt the indicated match between the macro environment and the micro institutions. On the macro side, such reforms tend to reduce workers’ income and threaten their job security, thereby undermine egalitarian income distribution and mass consumption. On the micro side, such reforms tend to threaten the loyalty or long-term commitment of major stakeholders (again, workers in particular) to the firm, thus undermine the scope for productivity-improving innovative activities.
The 1995-97 nationwide downsizing drive in state industry is especially crucial in this regard. Initiated by the state leadership with an objective of transforming large and medium SOEs into modern corporations and small SOEs into shareholding cooperatives, the drive was seized upon by many local governments to simply sell off state assets while unilaterally defecting on the state’s obligation for the job security of workers (and passing the liabilities of the sold enterprises onto state banks and ultimately to the central government). The crux of the matter is that, in the context of the demand-stagnant 1990s, SOEs had difficulty in utilizing the relative efficiency attributes of their rigidity-infused, long-term-oriented institutions to generate dynamic increasing returns. They were thus ill-equipped for competing with the more market-oriented private and collective firms, as well as Western transnational corporations which began to enter China on a massive scale from the early 1990s onwards. The downsizing drive launched by local governments, in the form of mass lay-off, further worsened the situation.
Consequently, unemployment surged, consumption expansion slowed down further and investment growth also stagnated. Together with the worsening external environment caused by the East Asian crisis, all these plunged China into serious difficulties in the closing years of the century. A state of deflation persisted at the macro level. Worsening financial performance of industrial enterprises and state banks was the norm at the micro level. It was only with a significant policy reversal that economic growth was sustained in the crisis-prone period of 1998-2002. This policy reversal took the form of the state leadership shifting from the stance of pushing forward the marketization drive to forcefully implement a range of market-supplanting policies. These policies included Keynesian-type fiscal stimuli, welfare-state measures, policies to revitalize SOEs and state banks, and a cautious approach to further liberalization of the regime of external finance. 25
The policy reversal in 1998-2002 did not result in the resumption of the previous pattern of economic transformation, however. What has emerged is a new pattern that exhibits strong resemblance to the canonical East Asian model of economic institutions and growth. At one level, the path of industrialization characterized by capital deepening has become firmly established, with the pace of capital deepening tending to accelerate. This is largely due to the fact that consumption expansion has continued to be sluggish, and its leading role has been taken over by investment – hence the characteristic of “producing investment goods for producing investment goods”. At another level, consistent with capital deepening and economic growth based on increasing returns is the rapid expansion of large-scale enterprises: their value-added share in Chinese industry as a whole increased from 27% in 1998 to 36% in 2002. This is somewhat ironical, as it occurred in a period when, on the world scale and particularly from the orthodox establishment, there was widespread criticism of the East Asian model of capital-deepening industrialization carried out by large-scale business conglomerates – the model dismissively termed as “crony capitalism”.
This new pattern of economic transformation is clearly different from that of the first half of the reform era. There is no trace of an appropriate match between egalitarian income distribution and a systemic feature of enterprises being accountable to major stakeholders. True that, along with capital deepening and the indicated policy reversal, there has been a a phenomenal revival of the state sector. The value-added share of SOEs in Chinese industry increased from 33% in 1998 to 35% in 2002 and further to 37% in 2004, amid the rebound of their profit rate to once again surpass the industrial average. Yet, in an institutional sense, this revival has been more than outweighed by the massive decrease in the employment share of SOEs in Chinese industry: it decreased from 38% in 1998 to 15% in 2007. And this reflects the broader trend of shrinking employment share of the public sector in the Chinese society as a whole. Of the total of urban employment, the combined share of state-owned and collectively-owned units decreased from 76% in 1995 to 41% in 2000 and further down to 24% in 2007. In the rural areas, the employment share of township and village enterprises has continued to grow (though at a substantially slower pace than that of the first half of the reform era), but these enterprises have mostly been transformed from collective ownership to private ownership. Surely, a society where the main part of labor employment is with the private sector is very remote from socialist goals.
6. Conclusions
Because of its worldwide importance and its seemingly anomalous nature, China’s economic transformation in the era of globalization has presented a formidable task for scholars to make sense of. The central message of this paper is that any attempt to taking up this task needs to start with stylized facts of the reality, rather than “first principles” or “fundamental theorems” of economic theories. For analyzing the dynamics of China’s sustained rapid economic growth, the paper takes as its starting point the observation that the process has undergone a transition from labor-intensive, consumption-led to capital-deepening, investment-led industrialization. The paper then argues that to explain the strength and limitation of this dynamics it requires a broad theoretical perspective of transformational growth – a synthesis of Marxian theory of capital accumulation, Post-Keynesian theory of demand determination, and Schumpeterian theory of innovation. It is also from this perspective that attempts are made to explain the direction of evolution of the overall process of economic transformation. The focus is on the appropriate match, or otherwise, between the growth dynamics and the concurrent institutional reforms.
Such an analytical approach, while argued in the preceding sections as being more convincing than the existing orthodox as well as critical studies, certainly has limitations. Throughout the paper, we have left untouched a dimension that is conceivably of enormous importance in China’s economic transformation: namely, politics. But, politics has been at the heart of the relevant literature. The critical scholarship’s thesis of “super-exploitation” claims that repressive politics has been the most important factor in explaining China’s experience of economic growth and reforms. The transition orthodoxy likewise claims that the contrast between China and countries of the former Soviet bloc has been in a significant measure explained by politics (see, e.g., the statement by the World Bank quoted in section two).
From the perspective of transformational growth, the inquiry into the role of politics in China’s economic transformation comes down to answering the following question: if the pattern of economic transformation in the first half of the reform era proved very successful, in terms of economic growth and social development, why was it abandoned in the early 1990s? Why did the Chinese state unfailingly pursue the policies of rapid marketization in the 1990s? An adequate answer to these questions would require analyzing such fundamental issues as the changing social formation and class relations – defined, to be rigorous, in the Marxian sense in relation to the prevailing “modes of production” – in China, as well as the changing relationship between China (“socialism in one country”) and the capitalist world. These issues are really too big to be dealt with in this paper.
Nevertheless, it might be possible to attempt a less deep-going answer to the indicated questions by looking at the “agents”, rather than “structures”, in China’s social formation. Recall that what has most fundamentally undermined the depicted pattern of economic transformation is the 1995-97 enterprise downsizing or privatization drive (together with the process of financial liberalization in 1993-95). From these developments, it could be posited that, to an extent, the Chinese state authorities have been captured by the newly emerged financial interests in the economy. By extension, it can be said that the power relations in the Chinese society has been to some extent dominated by agents of accumulating speculative capital. Yet, the fact that the Chinese state leadership turned to adopt the wide range of market-supplanting policies in the 1998-2002 period suggests that the indicated capture and dominance are far from absolute or unconstrained.
More generally, the character of the new pattern of economic transformation that has emerged since the late 1990s implies that the Chinese state, while lessening its socialist commitments, has turned to strengthening developmental concerns (to retain control over the “commanding heights” of the economy and thereby to direct the path of overall development) rather than to embracing the free market doctrines in toto. Entering the new century, there are signs that the state leadership has even attempted to reinstate the importance of socialist concerns in the actual process of economic transformation – as is evident in the slogan of “constructing a harmonious society” and the policies associated with this slogan. All these suggest that, in the face of the unfavorable world environment for late development under globalization, Chinese political economy on the whole is unlikely to be subdued by the logic of speculative financial capital, domestic or international. In line with the East Asian model of development, China is likely to stick to the logic of production (industrialization) rather than that of exchange (the “natural path of economic development”) in the foreseeable future.
Notes:
1. For the analysis of major trends of world development in the Golden Age, including the outstanding performance of the newly industrializing economies and countries of the former Soviet bloc, see Gordon (1988). For an analytical overview of the worldwide developmental crisis and uneven development after the Golden Age, see Singh (1992). Weeks (2001) gives a more theoretical treatment. Lo (2001) notes the structural features of the world economy that have been highlighted in the relevant literature as possible causes of the crisis, while Lo (2007) furthers the same proposition by taking into consideration of recent trends in world development. Easterly (2001) notes the almost total ignorance of the worldwide developmental crisis in the mainstream literature.
2. Unless otherwise indicated all statistical data in this paper are from issues of China Statistical Yearbook. The quality of China’s statistical data has invited suspicions, but, in the scholarly literature, even the foremost skeptics accept that the actual performance of long-term economic growth is not significantly different from that indicated by official data (Rawski 2002). Because China is both a developing country undergoing very rapid structural changes, and a “transition economy” experiencing the marketization and monetization of assets and economic activities, statistical accuracy is inevitably a serious problem. Nevertheless, as Naughton (2007, ch.6) notes, official data remain the most reliable data in existence. Scholars have also raised concerns on the possibility of official falsification of data, not by the central government but by local authorities of various levels (Rawski 2002). In a response to such concerns, Xu Xianchun (2001), a leading researcher with the National Bureau of Statistics, contends that the Bureau has developed an increasingly sophisticated system to verify the reliability of data reported by lower-level authorities, and has accordingly made the necessary adjustments.
3. “China calls on EU to recognize full market economy status”, Xinhua, 4 June 2008, ; “China hopes Japan to recognize its market economy status as early as possible”, Xinhua, 3 December 2007, ; “China expresses bilateral trade concerns to U.S. in economic dialogue”, Xinhua, 5 December 2008, . For a scholarly review of the issues concerning China’s quest for the recognition of its market economy status from its main trading partners, see Green (2004).
4. See Hart-Landsberg and Burkett (2004), Harvey (2005), and Li (2008). Arrighi (2007), with his favorable views on Chinese economic transformation not only in achieving real development domestically but also in promoting a more equal international economic order, clearly appears to be the exception rather than the norm in the circles of left-wing, critical scholars.
5. See IMF (2000), OECD (2005), and World Bank (2002), all containing main elements of these two propositions. For Proposition One, see also Lardy (1998) and Steinfeld (2000). For Proposition Two, the pioneer work is Sachs and Woo (1994).
6. Examples of such claims abound, see, e.g., The Economist 24th-30th October 1998, pp.15-16 and pp.23-28, together with the citations listed in the previous endnote.
7. The notion of the “natural path of development” coined in the form of the stages approach to comparative advantage is most fully presented in the World Bank’s 1987 World Development Report, which is, in turn, based on the previous work by economists associated with the Washington establishment, such as Bela Balassa and Anne Krueger. The following statement by Balassa (1981, p.22) is a good summary of the essential idea of the stages approach: “the process is exemplified by Japan that shifted from unskilled-labor intensive exports to skill-intensive and to physical-capital intensive exports and is increasingly expanding its technology-intensive exports.” See Lo (1995) for a review, and critique, of this body of work.
8. The “Kaldor-Verdoorn Laws” are of the following forms: first, economic development is often associated with the process of industrialization, in the form of an increasing share of employment of resources and production of output by industry in the economy; second, there exists a positive relationship between output and productivity growth within the industrial sector; and, third, there also exists a positive relationship between industrial growth on the one hand, and the output or productivity growth of the rest of the economy on the other hand (Kaldor 1966; McCombie and Thirlwall 1994). The interpretation of these observations by Kaldor and associates has been a matter of debate, but the stylized facts themselves have been largely a consensus in the literature (Syrquin 1994).
9. Toner (1999, ch.6) summarizes the Kaldorian theory of economic growth. Nell (1998) is a seminal work in the broader Post-Keynesian tradition on transformational growth, while Boyer and Petit (1991) provides a schematic account of the tradition. Lo and Smyth (2004) review the even broader literature of transformational growth, which also encompasses relevant theories from the Schumpeterian and Marxian traditions. Kaldor (1957) is the classic in Post-Keynesian theories of the determination of the composition and growth of aggregate demand.
10. The explosive growth of mass-production “new” consumer durables in China in the first half of the reform era is best indicated by the following examples: between 1978 and 1992, the annual output of color television receivers increased from merely 3800 units to more than 13 million units, that of household washing machines increased from 400 units to more than seven million units, and that of household refrigerators increased from 28,000 units to almost five million units. The same pace of growth was evident in a wide range of similar products, so much so that they collectively signified a “consumption revolution” that was felt by the entire urban population in China. Within several years in the middle of the 1980s, China emerged from almost nowhere to become the biggest manufacturer in the world of many of these products. For a detailed study of the achievements and problems of these developments, see Lo (1997).
11. Figures cover the formal sector of Chinese industry: “township-and-above independently accounting industrial enterprises” before 1998 and “all state-owned industrial enterprises plus non-state-owned above-scale (of five million yuan in sales revenue) industrial enterprises” from 1998. Hence, figures pre- and post-1998 are not strictly comparable but are only indicative of the trend of evolution. Official statistics of the machinery sector are available from issues of China Machinery Industry Yearbook, which, however, reports the share of gross output of the machinery sector in Chinese industry mostly in various base-year constant prices. The figures reported here are reconstruction using the ex-factor price indices of all industries and of the machinery industry as deflators.
12. Relative labor productivity is defined as the per worker value-added of the industry in question relative to the average of the manufacturing sector as a whole. Traditionally, in the literature of trade analysis, a value of 0.9 and below for this measure suggests that the industry is labor-intensive, while a value of unity or above suggests that it is a capital-intensive industry. For the period between 1980 and 1992, the value of the measure for China’s broad machinery sector averaged to around 0.91, while that for the electronics industry alone averaged to around 1.25 (Lo and Chan, 1998).
13. Singh (1992) analyzes the slowdown in late industrialization with an emphasis on the worsened demand conditions after the Golden Age. Taylor and Rada (2003) provides a more recent analysis along the same line of arguments.
14. Life expectancy at birth in some ways reflects the combined effect of all indicators of social development because “it summarizes the impact of health and nutrition on the human organism” (Naughton 2007, p.222). In 1980, the indicator was 66.8 years for China and 65.6 years for all middle-income economies. By 2000, the figures increased to 70.3 years and 69.1 years, respectively (World Bank data cited in Li 2008, p.34). Li (2008) provides an elaborate assessment of China’s performance in various social development indicators – particularly life expectancy at birth – and reaches the same judgment as this paper.
15. Data from Li Shi et. al. (2000) and Renmin Ribao (People’s Daily) 9th July 2002.
16. Fransman (1986) provides perhaps the most thorough and incisive review of the literature on the Feldman-Mahalanobis model and related growth theories. For further elaborations in relation to theories of transformational growth, see the citations in footnote 9.
17. Meng (2004) provides a reformulation of the relevant theories, particularly on the role of product innovations in the debates surrounding Rosa Luxemburg’s theory of capital accumulation and Ernest Mandel’s theory of the long waves in capitalist development.
18. For the orthodox view, see World Bank (1996, ch.9), and Lardy (2002). For the view of the mainstream of the critical scholarship, see Hart-Landsberg and Burkett (2004) and Harvey (2005, ch.5). But note the different view of Arrighi (2007) and Glyn (2006), both appear to hold the thesis of “under-cutting” but not “super-exploitation”. Conceptually, even if it is true that Chinese labor has been under-cutting the world working class as a whole, this is not necessarily the result of Chinese wage being persistently depressed to levels below those of competitor countries. An equally plausible underpinning of under-cutting would be faster productivity growth of Chinese labor. The contentious issue then is not about super-exploitation as the basis of economic growth, but rather about the division of the fruits of productivity improvement.
19. Lo and Chan (1998) analyze the implications of China’s massive expansion in the export of mechanical and electronic products since the mid-1980s, and argue that these exports have largely leapfrogged over the country’s “given” comparative advantage. Yoshitomi (1996) gives a similar assessment: “China has revealed comparative advantage vis-à-vis ASEAN countries in capital- and technology-intensive products despite a similar development stage and even lower per-capita income. China’s comparative advantage in labor-intensive and natural resource-based products is essentially in relation to advanced countries and NIEs [newly industrializing economies], not ASEAN countries. However, it is also interesting to note that over the past ten years, China has been gaining comparative advantage relative to NIEs (in a broad range of technology- and capital-intensive industries).” See Rodrik (2006) for a more recent study that arrives at the same conclusion, and the more skeptical view of Naughton (2007, ch.16).
20. This is a main theme of what can be called the “capability theory of late development” (Amsden 1989; Wade 1990), where the argument is that late development requires the creation of sophisticated production capabilities – and technology import is needed for the creation. Scholars that apply this theory to study Chinese industrialization have concluded that what is required for successful late development is not just production capabilities as such but rather the building up of an indigenous “national system of innovation” (Lu 2000; Lazonick 2003). In line with our discussion on collective learning, a complementary “capability theory of business institutions” (Aoki 1990; Best 1990) might be needed for the study of the Chinese experience. More on this in the next section.
21. It is a consensus in the scholarly literature that the degree of egalitarianism in income distribution was extremely high by international standards in both urban and rural China in the first half of the reform era, and that this was mainly due to the nature and role of the “socialist system” (Naughton 2007, ch.9). The perception of an exceedingly high degree of egalitarianism was also a common sense underpinning all the policy efforts to promote market reforms particularly at the enterprise level – with the 1995-97 mass privatization drive as the culmination (see below). In contrast to the general focus on its distributive function, the productive function of Chinese public firms has rarely been noticed. Lo (1999) and Smyth (1998) are among the exceptions, which analyze the productive attributes of the institutions of China’s SOEs and TVEs, respectively. Both studies observe that the reformed enterprise system – whether SOEs or TVEs – has exhibited the kind of institutional rigidities and long-term orientation that are akin to the canonical Japanese system, and argue that this system has embodied the kind of relative efficiency attributes detailed below.
22. Representative of the orthodox view on productivity growth are the works by Woo et al. (1994a, 1994b). Representative of the dissident view are the works by Jefferson et al. (1992, 1996). Along the orthodox line, the most articulate analysis of the financial aspect of Chinese enterprise performance is Lardy (1998).
23. Lo (1999) gives an assessment of the performance of SOEs, particularly large-scale enterprises, that is in line with the arguments presented here. Cheng and Lo (2002) contend that, even without taking into account of social burdens, the financial performance of SOEs has been at least comparable to the rest of Chinese industry while that of large-scale SOEs has been much better.
24. Aoki (1990) provides a schematic, theoretical exposition on the relative efficiency attributes of the (both stylized) Japanese firm vis-à-vis the American firm. Lo and Smyth (2004), in a similar vein, synthesize a range of theories on technological paradigms, growth paths and economic institutions to investigate the relative efficiency attributes of different economic systems.
25. Lau (1999) provides a detailed analysis of the 1995-97 enterprise downsizing and privatization drive. Lo (2001) and Lo (2007) analyzes the significance, short term and long term, respectively, of the policy reversal in 1998-2002.
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Table 1. China’s economic growth in international comparison
| |1960-1970 |1970-1980 |1980-1990 |1990-2000 |2000-2007 |
|China |2.9 |3.7 |8.8 |9.3 |9.0 |
|India |1.1 |2.3 |3.6 |4.2 |6.0 |
|South Korea |6.0 |8.4 |7.7 |4.7 |4.2 |
|Brazil |2.6 |6.5 |0.7 |1.3 |1.7 |
|USSR/Russia |4.0 |4.7 |1.3 |-4.7 |7.0 |
|Low-income economies |2.0 |1.8 |2.2 |1.2 |3.9 |
|Middle-income economies |3.5 |2.1 |1.2 |2.2 |4.8 |
|Low- and middle-income economies | | |1.3 |1.8 |4.5 |
| East Asia and Pacific | | |5.9 |5.7 |7.7 |
| Europe and Central Asia | | |1.2 |-1.7 |5.8 |
| Latin America and Caribbean | | |-0.3 |1.7 |1.9 |
| Middle East and North Africa | | |-1.1 |0.7 |2.7 |
| South Asia | | |3.4 |3.7 |5.5 |
| Sub-Saharan Africa | | |-1.3 |-0.1 |2.4 |
|High-income economies | | |2.7 |2.2 |1.7 |
|Sources: World Bank, World Development Report and World Development Indicators, various years. |
|Note: Figures are average annual real growth rate of per capita GDP (%). |
Figure 1. Relative labor productivity of industry
[pic]
Notes: Y = GDP and its components at current prices, with *denoting data at 1978 constant prices. L = total labor employment. The subscripts i and n denotes the secondary sector (i.e., industry plus construction) and the rest of the Chinese economy, respectively.
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook, various issues.
Table 2. Average annual growth rates (%) of real GDP, employment and labor force
| |(a) |(b) |(c) |(a)-(b) |(b)-(c) |
| |Real GDP |Employment |Labor Force | | |
|1978-2007 |9.82 |2.27 |2.30 |7.55 |-0.03 |
|1978-1992 |9.39 |3.63 |3.60 |5.76 |0.03 |
|1992-2007 |10.16 |1.02 |1.10 |9.15 |-0.08 |
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook 2008.
Figure 2. Composition of GDP by expenditures
[pic]
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook, various issues.
Note: C = final consumption; I = investment; NX = net export of goods and services.
Figure 3. Incremental capital-output ratio (5-year moving averages)
[pic]
Sources: Chinese National Bureau of Statistics, China Statistical Abstract 2007.
Notes: Incremental Capital-Output Ratio = dK/dY, where dK = total fixed-asset investment, dY = GDP of current year minus GDP of last year.
Figure 4. Pre-tax profit rates of Chinese industrial enterprises
[pic]
Notes: A = All industrial enterprises (i.e., township-and-above independently accounting industrial enterprises for 1997 and before, and all state-owned plus above-scale non-state-owned industrial enterprises from 1998). B = state-owned industrial enterprises (including state-controlled industrial enterprises from 1996). C = large-scale industrial enterprises (data before and after 2003 are not fully comparable because of changes in statistical coverage).
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook and China Statistical Abstract, various issues.
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