November 9th, 2015 Bridge Cafe (Wudaokou)
Robert WADE, Professor of Political Economy and Development, London School of Economics
Shaun BRESLIN, Professor of Politics and International Studies, University of Warwick
WANG Zhengyi, 王正毅, Professor of International Political Economy, Peking University
Giuseppe GABUSI, Professor of International Political Economy and Political Economy of East Asia, University of Torino
ThinkIN China, the leading community of young China experts at the academic heartland of China – the triangle of Tsinghua, Beida and Renmin in Beijing – hosted three atypical European and Chinese intellectuals to discuss a core catchphrase of CPC’s ideological code: “The Socialist Market”. Seen by many as an oxymoron or a product of dialectic materialism, the term “Socialist Market” (社会主义市场经济) has since its invention in the early 80s defined the operational code of Chinese officials from small town mayors to county and provincial governors, up to the very source of power in the imperial palaces of Beijing and the politburo of the CPC. Torino University professor Giuseppe Gabusi moderated the discussion.
The date of the event could not have been more symbolic as 2015 marks the 25th anniversary of Robert Wade’s seminal and groundbreaking book “Governing the Market” which is now considered a classic, setting the intellectual foundations to the concept of the “Asian developmental state” and the new political economy.
The ThinkIN China event provided a unique opportunity to reflect on consequential issues for the evolution of political economy after taking into consideration new “known knowns”; that is, new historical inputs in the course of the past 20 years since Wade’s book. These include: the “.com” crisis of the late 90s, the meltdown of Wall Street and the great recession in 2008, the crisis in the Eurozone and the meteoric economic rise of China. Particularly the latter, the rise of China, has re-inspired a heated discussion on the “Developmental State” as a pragmatic alternative to the laissez-faire imperative of the Washington Consensus.
Wade: two faces of Emerging Economies:
Commodity Dependent Economies
It is by now well understood that at the dawn of the new millennium many emerging market economies began to grow strongly thus narrowing their economic gap with the developed world. To many myopic observers of the 2000 age of “Asiaphoria”, economic convergence would sooner or later lead to a more homogeneous and isomorphic world.
Yet while on the surface emerging economies grew fast, the quality of their growth has been very diverse. Some grew by exporting commodities, while others grew by exporting increasingly complex industrial or even technology intensive products. Many countries, particularly in Africa and Latin America, became increasingly specialized in exporting commodities to China whereas China became an industrial superpower narrowing its gap with Europe and the United States.
Much of the developing world thus run a commodity export dependent economy prone to exogenous demand crisis. When Wall Street came crushing down in 2008 unleashing the “Great Recession”, the developing countries began to slow down as well. This trend has now been exacerbated as China has also slowed down to single digit growth, limiting its imports of basic commodities. The collapse of world price and demand for commodities has lead to a negative feedback loop for many emerging economies and Brazil is expected to contract by more than 3% this year. After all, Citigroup supports that Chinese growth is closer to 4% rather than 6%, which is the official estimate and if Citigroup is correct the developing word will experience a prolonged economic shock and need to receive increased developmental funding to survive.
While China has slowed down, still though, if one takes as a measure the number of years that a country grows more than 6% a year then China has broken the record growing over 6% for 38 year, Taiwan grew for 32 years, South Korea for 29 years.
China an industrial superpower prone to a middle-income trap?
In China there is also a serious worry in elite governing circles that China will grow old before growing rich as it could fall into the “middle income trap”. According to a widely circulated World Bank study on middle income trap, out of 101 middle income countries in 1960, only 13 have gone up to develop high income economies. The chances of a middle-income country to become high income are low even within a time horizon spanning several decades.
China’s aggregate economic power has blinded analysts. While the middle kingdom is the second largest economy (in nominal GDP terms), it only ranks 90th in the world in terms of Human Development Index (HDI). For the past 10 years there has been a lot of discussion on the repercussions of the meteoric rise of China for the world economic system. However, on absolute indicators of development China remains at about 20 to 30% the level of US. “Asiaphoria” is an unfounded optimism about the Global Economic Center of Gravity shifting to Asia.
China’s Industrial Governmentalism
Economic development is a long-term complex process that requires both the invisible hand of individual entrepreneurship and the very visible hand of governmental strategic economic management. In the West, however, there is a prevalent all powerful orthodoxy that development is based on a one-size-fits-all model; a panacea prescribed by the World Bank and IMF that supports privatization, and other types of unabated liberalization solely supported by the invisible hand of the market. This market fundamentalism coupled with very limited state programs to reduce extreme poverty and corruption secure long-term sustainable growth, technocrats adhering to the liberal orthodoxy boldly declare.
Studying the economic history of countries that have broken away from the middle-income trap, two empirically evident scenarios are however crystal clear. Some of the countries have escaped the trap because of abundant natural resources, others have escaped by “manufacturing or industrializing their way out”. In that case the role of the state has been prominent: strategically managing trade, industry and the very pace of liberalization the government has become the ultimate catalyst in taking those countries out of the middle-income trap.
Yet in the “development industry of the Washington Consensus” industrial policy has been a forbidden term inspiring an intellectual casus belli. This is fully confirmed in the case of Justin Yifu Lin who in 2007 became the first Chinese to reach the position of World Bank’s Chief Economist. Lin tried to shift the Washington Consensus to the idea of production transformation mainly expressed through a special form of state induced industrial policy. That term was immediately forbidden from official World Bank rhetoric and Lin was eventually marginalized. According to his own statement more than 90% of World Bank economists disagreed with his policy suggestions, arguing instead that, “for every Korea there are 100 cases of failure so where would you put your money on?” Only one operational World Bank vice president made an attempt to apply Lin’s industrial policies. This program was called the “Competitive Partnership Initiative”.
The other case is the one of the United Nations Industrial Development Organization (UNIDO). UNIDO exists to help promote industrialization in the developing world – an imperative that Western countries oppose as they want Third World countries to be dependent commodity exporters. For that reason many western countries have withdrawn from UNIDO. Seeking to boost UNIDO’s influence, developing countries asked China to lead the organization. The members achieved to pass the sustainable development goal number 9 which is a goal of industrialization while Western advanced economies went to great lengths to remove goal no. 9 from the sustainable development goals.
China has the unprecedented potential to institutionalize and reformulate the idea of development and include industrial transformation as the core theme of development. China is trying to shift the gravity of thinking within the World Bank, yet its power there is limited. The Asian Infrastructure and Investment Bank (AIIB) should be seen under this prism as it offers China space to set up its own imperatives without being marginalized by the United States. And also the new BRICS Bank and contagion arrangement mechanism, that Asian nations with the leadership of China have already institutionalized, should also be viewed under the same prism of higher Chinese policy freedom to redefine developmental strategy and industrialization.
Overall, while there seems to be an alignment between China and the developing world, this is not yet comprehensive and final. It is more possible that the world is moving to a fragmented rather than multipolar interstate system, as alliances will be narrow and topic specific instead of comprehensive and south-south. There seems to be a complex set of relationships increasing the entropy of the global system and leading more toward networks of power rather than axis of power. Think for instance the proliferation of diverse interests between G20 states. For the G7 the correlation between per capita income and world ranking of G7 members based on aggregate GDP is 0.75. At G20 the correlation is down to 0.3. It is self evident by mere numbers that there is a much higher diversity of interests between G20 members than between G7 members. This creates asymmetries for policies thus grounds for dispute. And this is very relevant for China because it will host the 2016 G20 and has a big puzzle on how to make the G20 more effective and reconcile so diverse interests. This will be perhaps the very first chance to test China’s Strive for Achievement foreign policy reform and exercise leadership in calibrating global governance.
Wang : Socialist Market with Chinese Characteristics
Why do people come to China these days? The pursuit of wealth seems as an attractive answer. It is indisputable that in the past three decades China has progressed economically and the concept of “Socialist Market” has significantly contributed to the economic development of China and to the raise of more than 700 million people out of poverty.
The intellectual history of the idea of socialist market is important to understand the term. First China introduced market economy from the capitalist world through the open door plan. From 1992 till today, in reality, China can be defined as a market socialist economy and this should not be seen a peculiar distinction from Chinese Marxist ideology. Different civilizations institutionalize different market models reflecting their own normative understanding of economic and social structures. Even within the European civilization one can find significant differences between Britain, France, Germany and Scandinavia, let alone the gap between EU welfare state and the United States liberal capitalism. In many statements in US, presidential candidates call the EU a socialist state that should not serve as a model for the United States while in the EU many see US market Darwinism as a disastrous social model.
The grand goal of Chinese socialist market is Social Justice and Harmony and its operational application is based on: a) Hierarchical Vertical management, b) Competition of the 31 local governments with each other. Even at the same province different cities compete with each other: a competition of all against all to attract resources, investments and also political power. The governors of areas that have achieved high growth and innovation stand better chances to be promoted at central governmental posts in Beijing.
To be sure the Socialist Market economy is a new culture; perhaps a Chinese socio-economic innovation that has never existed before in the world. This new culture regulates the behavior of both the individual actors and the state; it shapes social and governing norms, civic and political conduct. Societal harmony can only flourish if there is a shared value that inspires both the hearts and minds of individuals and also regulates the overarching authority of the State.
Breslin: China’s Story is a story of Market Success
In 1980s many visionary young Europeans came to China hoping that they would see a different model of socialism from the one in the Soviet Union. Some were inspired with what they found; the majority, however, was disappointed and left soon after.
It is indisputable that China’s success story is a story of market success. It is the private sector and the invisible hand that have enriched the middle class of the country. China is a market economy but not a liberal one, as the United States or Western Europe. Thus the state still enjoys significant influence, particularly in strategic sectors, and acts as the ultimate arbitrator over resources and strategic design. The state controls the commanding heights of the economy through which it can shape the direction of the market. In addition, the financial system complements state sector’s initiatives providing essential funding and acting as a catalyst to central planning.
The Chinese state controls prices in crucial sectors and it has created a very complex system of SOEs. The most interesting case is that of pyramid companies; that is, of seemingly private enterprises that look like private on the surface, yet they are eventually owned by SOEs. Lately the SOE reform document makes a contradictory call. On the one hand it calls to reform SOEs and turn them into market actors while at the same time it asks for the control of the soul of the organizations and strength the power of the party.
The question of China’s economy is also a question relevant to China’s power. Power as it is widely accepted can be broken down in two categories: soft and hard power. Soft power includes productive power, material power, financial power. The latter is something that China is gaining fast. But there is also a third one, imagined power or marketing power; it is about how other actors perceive you. If China is perceived as an all mighty entity and then states design policies to deal with such an image of China, then it becomes a self-fulfilling prophecy and China will after all become all mighty transitioning from a mighty phantom to a true physical behemoth. Finally, there is also an interesting concept of power that Suzan Strange calls Structural Power. Structural power is about being able to shape the way that others interact not with you but with each other. And I think this is something that people are scared of in the sense of Martin Jacques idea on how China will rule the world. How will China behave? A case study to test this latter dimension of Chinese power could be the newly led Chinese institutional initiatives with the AIIB and the BRICS bank.
written by Vasilis Trigkas