China’s Economic Development Model Shows Some Cracks

After nearly two decades, the consensus is shifting on the so-called Washington Consensus — and the political and economic ramifications are profound.

To recap, the Washington Consensus of the 1990s suggested that reforming and post-communist economies should move rapidly (it was known as “shock therapy”) to market prices and the private ownership of capital goods. China, of course, mostly rejected this model and engaged in limited privatization. Yes, China’s private sector grew, but so did Chinese state-owned enterprises, many of them even more.

A few years into the 21st century, it was clear that China was producing one of the greatest growth miracles of all time. Thus was born a new consensus — may I call it the Beijing Consensus? — that wise and sophisticated commentators were expected to embrace. While few Western intellectuals favored every aspect of the Chinese model, many were happy to cite results that showed the benefits of widespread government intervention.

As the years pass, however, the Washington Consensus is looking better. On the research side, recent work has suggested that, overall, it produced good results and reliably raised per capita incomes.

The more dramatic developments have come from China itself. China did effectively wield state power to build infrastructure, manage its cities and boost economic growth. And most advocates of the Washington Consensus underestimated how well that process would go.

But along the way, China became addicted to state power. Whenever there was a problem in Chinese society, the government ran to the rescue. The most dramatic example was the extreme use of fiscal policy to forestall the 2008 financial crisis from spreading to China.

Yet this general application of state power, even if successful in a particular instance, brought a great danger: The Chinese were left with overdeveloped state-capacity muscles and underdeveloped civil-society capabilities. Over the last several years the Chinese government has done much to restrict civil society, free speech and religion within China. Now much of the world, including but not limited to China’s neighbors, is afraid of Chinese state power.

It is a mistake to view this fear as entirely separate from China’s development strategy. If a society relies on state power to solve its problems, that state will grow ever stronger — and the associated risks ever greater. With the benefit of hindsight, it’s hard not to think that China would be better off today if the Chinese state had remained weaker.

Now, because state power has its limits, it is difficult for China to solve many of its most fundamental problems. Chinese leaders are worried about the country’s low birth rate, for instance, but lifting restrictions on the number of children has not yet helped increase the birth rate. In many societies, it is religious families that have more children, but promoting religion is not a remedy that comes easily to China today.

And how will China deal with the pending spread of the omicron variant of Covid-19? The Communist Party staked its legitimacy on the claim that it could control Covid while the U.S. could not. Soon Chinese citizens may be in for a rude awakening, especially if the Chinese vaccines are not so effective.

The problems with the Beijing Consensus are larger yet. For much of the last decade, Ethiopia had been following a version of the Chinese model, relying on industrial policy and growth in manufacturing. For a while this worked, and Ethiopia had double-digit rates of economic growth. I myself called the country “the China of Africa.”

But the growth of state power fractured any political equilibrium that might have held Ethiopia together. The state became such a locus of control that various ethnic groups felt threatened and made a bid to seize power, and Ethiopia collapsed into civil war. While the central government finally appears to be winning that conflict, it is difficult to be optimistic about Ethiopia’s prospects.

For most of the last two decades, the prevailing view has been that, when it comes to economic development, history is on the side of Chinese model. It is unlikely that this view will prevail for the next two decades.

Author: Tyler Cowen, Bloomberg

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