The Chinese model of economic success

The Chinese model of economic success (UN Photo/ Christopher Herwig)

“It follows that the successful catch-up development of China, if it continues, would become a turning point for the world economy not only due to the size of the country, but also because for the first time in history, successful economic development on a major scale is based on an indigenous, not a Western-type, economic model,” said Dr. Vladimir Popov at a UN DESA event yesterday.

The Development Policy Seminar “Why the West Became Rich before China and Why China Has Been Catching Up with the West since 1949”, was organized by the Development Policy and Analysis Division and chaired by its Director Rob Vos. It offered a non-technical interpretation of the “Great Divergence” and “Great Convergence” stories.

After reviewing existing explanations in the literature, Dr. Popov offered different interpretations. Western countries exited the Malthusian trap by destroying traditional institutions, which was associated with an increase in income inequality and even a decrease in life expectancy, but allowed the redistribution of income in favour of savings and investment at the expense of consumption, which speeded up economic growth.

When the same pattern was imposed on some developing countries such as Sub-Saharan Africa, Latin America, and the Former Soviet Union, it resulted in the destruction of traditional institutions, increase in income inequality, and worsening of starting positions for catch-up development due to weakening of capacity of state institutions.

Other developing countries (East Asia, South Asia, and the Middle East and North Africa) that were less affected by colonialism and managed to retain traditional institutions by the end of the twentieth century found themselves in a better starting position for modern economic growth. The slow-going technical progress finally allowed them to find another exit from the Malthusian trap—increased income that permitted the share of investment in GDP to rise without a major increase in income inequality or decrease in life expectancy and without deterioration of the quality of the state institutions.

Why did economic liberalization work in Central Europe (since the late 1980s) but fail in other regions, such as Sub- Saharan Africa (SSA), Latin America (LA), and the Former Soviet Union (FSU)? The answer, according to the interpretation presented, would be that in Central Europe, the missing ingredient was economic liberalization, whereas in SSA and LA, there was a lack of state capacity, not a lack of market liberalization. Why did liberalization work in China (1979 onwards) and Central Europe but not work in the FSU? It is because in the FSU, it was carried out in such a way as to undermine state capacity—the precious heritage of the socialist past ― whereas in Central Europe and even more so in China, state capacity did not decline substantially during transition. 

China has never really departed from the collectivist institutions that allowed low income and wealth inequality to be maintained; the short-lived Westernization attempt (1840s-1949) was aborted. On the other hand, countries that willingly and unwillingly (colonialism) transplanted Western institutions and replicated the Western exit from the Malthusian trap, ended up with high income inequality and an apparent lack of institutional capacity.

“If this interpretation is correct, the next large regions of successful catch-up development would be MENA Islamic countries (Turkey, Iran, Egypt, etc.) and South Asia (India), whereas Latin America, Sub-Saharan Africa, and Russia would fall behind,” concluded Dr. Popov.

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