Communist China has capitalism to thank for its meteoric rise
China’s status as an economic superpower is undeniable. But the reasons behind its success are hotly debated.
Weiying Zhang, Professor of Economics at Peking University, objects to the notion that China’s extraordinary economic success is a result of the strong influence exerted by the state. This misinterpretation is common in the West, but it is also increasingly prevalent in China, where some politicians and academics believe that the explanation for the country’s success lies in a particular Chinese model.
In his paper, Zhang explains why the advocates of the China model are wrong: “China has grown fast not because of, but in spite of unlimited government and the large inefficient state sector.” He adds: “The China model view is factually false.”
In reality, “marketisation” and “privatisation” are the driving forces behind China’s tremendous economic growth. Zhang analysed data from different regions in China and concluded that: “The more market-oriented reform a province had done, the higher economic growth it had achieved, and laggards in marketisation reform are also laggards in economic growth.” The regions in which the most consistent market-oriented reforms had been implemented – i.e. Guangdong, Zhejiang, Fujian and Jiangsu – are also the ones that had experienced the greatest economic growth.
One key insight is that: “The best measure of reform progress is the changes in marketisation scores in the concerned periods, rather than the absolute scores of a particular year.” The growth rate is highest where private-owned enterprises and foreign-owned enterprises play the decisive role. The data shows that: “The provinces whose economies are more ‘privatised’ are likely to grow faster. It is non-state sectors, rather than the state sector, that have driven the high growth.”
The reform process in China over the past few decades has never been uniform.There have been phases in which market forces rapidly gained ground, but there have also been phases in which the role of the state expanded. Even if, over the longer term, the overwhelming tendency has been “state-out-and-private-in” (guo tui min jin), there have also always been periods and regions where the opposite, i.e. “state-in-and-private-out” (guo jin min tui), has been the case.
Zhang examined the different growth rates in the “state-out-and-private-in” regions and compared these with the “state-in-and-private-out” regions. Again, the result is clear: GDP grew significantly faster in the state-out-and-private-in regions. This, according to Zhang, proves that “China’s rapid growth of the past four decades has been driven by the power of the market and the non-state sectors, rather than the power of the government and the state-sector as claimed by the China model theorists.”
The pace of innovation is crucial for the further development of the Chinese economy. An analysis of the research and development intensity in industry, patents granted per capita and percentage of sales of new products in total industrial revenue clearly confirms that all these key figures for innovation are positively statistically correlated with the degree of marketisation.
I met Weiying Zhang in Beijing, and in conversation he emphasised that, in his opinion, the misunderstanding about the reasons for China’s growth is a major danger. This is true not only for China, but also for the West. If people in the West are under the misconception that the basis of China’s success is a uniquely Chinese “third way” between capitalism and socialism or “state capitalism,” this will lead policymakers and economists in the West to draw completely wrong conclusions.
Advocates of big government in Europe and the United States want to persuade us that China’s economic success confirms how crucial a strong state is for economic growth.
Weiying Zhang’s analyses prove that exactly the opposite is true.
Rainer Zitelmann is the author of The Power of Capitalism, in which he explores the reasons for China’s economic success in greater detail.