The West and China Both Have Lessons for Success and Failure

An article by Philip Pan at the NY Times provided a short review about how China failed to fail over the past 40 years. The title of the article “The land that failed to fail: How China caught up with the West” indicates that many people fail to identify what contributes to success, failure and what does not matter.

There are now many examples of national success and failure and mixed results. It should be easier to learn the lessons of what works, what does not and what does not matter.

There are still those who deny China has been a clear winner from 1978. There have been 40 years of success. There are flaws in what China has been doing.

The UK and USA did have an economic success and rise before China. Japan, South Korea, Singapore, Taiwan and Hong Kong also had rises from undeveloped to fully developed nations. Germany, Canada, Austrlia and Europe have had success.

What does not work

The Soviet Union and Russia provided a lot of lessons to China and the World about what does not work in running a country. Learning this lesson is actually not completely trivial. Venezuela, Cuba, western progressives and some western intellectuals failed to learn about what did not work for the Soviet Union and Russia. Russia itself is still repeating some of its Soviet Union mistakes.

Problems in analysis of what works and what does not

More developing countries need to study and follow how China rose from 1978 through 2018. This is again a lesson that is actually not completely trivial. The World Bank and various NGOs still advise countries with development models that ignore methods which were proven successful with China.

Before his death in 2012, Meles Zenawi, Ethiopia’s leader for 21 years, wanted his country to mimic China’s economic strategy. His successor, Hailemariam Desalegn, has been even more enthusiastic about trying to create a developmental state modeled on East Asia.

Ethiopia, Rwanda, Kazakhstan, and Bolivia are trying to replicate China’s economic transformation. High-ranking decision-makers visit China on study trips. National planning bodies issue ambitious documents modeled on China’s experience.

Vietnam and many other Asian countries finally appear to be on paths of economic success. There will be more Asian countries and some African countries to find more of what works, what is essential and what are harmful. There are South American and African countries to study what does not work.

America and Europe have insisted that the Western historical path to affluence is the only model of development. The central idea is that democracy and free markets are the only pathways to stability and prosperity.

China’s development model is too often misinterpreted or oversimplified. For many Western analysts, the Beijing Consensus was a non-democratic challenge to liberal capitalism. It was boiled down to a combination of authoritarian rule with pro-market economic policies.

There are various comparisons of China’s development model to the Western development model.

There is a list of six models of development. This list does not include a China development model.

There are several problems:
* analysis of development is often done by political scientists who do not understand business, finance or engineering
* they often do not properly split out what is truly driving success versus what is a problem but not a fatal problem that does not kill success.

There is more than one way to success and multiple options are needed.

Democracy

There is detailed tracking of how democratic a country is. There is a political score from -10 authoritarian to +10 for fully democratic. This does not correlate to economic growth or economic success. There are many very successful countries with full democracy. There are some autocratic countries with economic success. Singapore and China have or will have full development while being mostly autocratic.

Norway and Sweden have economic success but the lessons they provide on development need to be analyzed for what works and what is there and is leaching upon the success.

Details of China’s model

1) China and the West started with small farmers and rural areas. Partly because of worries about an impending food crisis, China started its reform drive by breaking up farming collectives and empowering small-scale farmers. They linked effort to reward, productivity and output sharply increased. It also laid the groundwork for change throughout the economy.

China’s leaders did not simply unleash agricultural markets, as Western development agencies often recommend developing countries do. Instead, they concentrated state policies on ensuring that peasant farmers had the resources, knowledge, and incentives necessary to maximize output.

The gains from reconfiguring incentives were immediate and dramatic: the rural poverty rate fell from 76 percent to 23 percent between 1980 and 1985, as hundreds of millions escaped poverty for the first time. Higher incomes and productivity, in turn, prompted demand for new manufacturing products.

The US and the West also had a strong rural sector first. This was created over a hundred or more years.

2) Invest heavily in knowledge infrastructure. China has invested heavily in education and innovation, producing the well-educated workforce and highly skilled specialists that have motored its economy forward.

3) Prioritize cohesion over participation. Although China is often criticized for being authoritarian, many of its leaders feel more accountable to its people than those in many developing countries that hold regular elections. The primary explanation for this apparent paradox is the country’s high degree of social cohesion and strong sense of nationhood, which result from its ethnic homogeneity (China is 90 percent Han) and its long history as a unified state.

Despite the lack of elections, Chinese leaders have been concerned with performance. Just as General Electric managers are concerned with performance.

4) Build a competent government committed to inclusive development.
* administrative function competence. Government is able to execute.
* The state has worked to ensure that all its citizens are able to participate and gain from economic growth; this is rarer in the developing world than is usually recognized.
* China’s government has been consistently committed to promoting development, adopting aggressive policies to attract investment, promote growth, boost exports, and develop technology and human resources.

5) Invest heavily in infrastructure.

6) Experiment with new policies first, then implements reforms gradually. Lots of trial and error and A-B testing.

The US also has an effective process of creative destruction.

7) Focus on reworking incentives and removing obstacles to growth.

China eschewed the “big bang” approach to reform under which all prices and markets are freed simultaneously, as happened for example in Poland in 1990. Instead it focused on “big issues” such as “incentives, mobility, price flexibility, competition, and openness.

8) Use financial markets to promote development and stability.

9) Use government policy to boost economic competitiveness.

Just as Japan, Korea, Taiwan, Germany, and to some extent even the United States once did, China’s government prioritized certain sectors and companies deemed likely to become globally competitive. It then ensured their access to cheap capital and land, technology, human resources, and regulatory assistance—advantages over their peers elsewhere. It has also used regulation to keep foreigners at bay (such as in restricted industries) or to diminish their influence. Yet it has also used Special Economic Zones (SEZs) to promote foreign investment at certain times, in certain places, and in certain sectors, giving them a larger share in its economy than many of its neighbors do. Protectionism has thus been selectively strategic.

10) Promote self-reliance.

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