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NRO’s domestic-policy blog, by Reihan Salam.

A Field Guide to China 3.0



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In China 3.0, a new edited volume from the European Council on Foreign Relations, Mark Leonard gathers contributions from leading Chinese intellectuals representing a range of views on core policy questions. And though Leonard’s introduction betrays his strong social-democratic bias — he has ancestral ties to the Labour Party, and his career as a foreign policy thinker was helped along Tony Blair himself — it carefully and helpfully delineates emerging camps on the future direction of economic and political reform and foreign policy. The basic premise of the collection is that if Maoist China can be understood as “China 1.0″ and Dengist China can be understood as “China 2.0,” China’s successful (so far) transition to middle-income status under one-party rule has created enough tensions and contradictions that the state is in need of yet another comprehensive reinvention, which goes beyond the modest incremental reforms of the Hu-Wen era to really rethink the basics of the Chinese Communist Party’s political and economic bargain with the wider populace, hence “China 3.0.”

In Capitalism with Chinese Characteristics, however, MIT economist Yasheng Huang argues that policy analysts have misinterpreted what Leonard calls the China 2.0 era by failing to reckon with the sharp discontinuity that occurs in 1989. Whereas the period from 1979 to 1989 saw balanced growth in urban and rural areas and robust gains in domestic consumption and a surge in indigenous entrepreneurship, much of it masked under the rubric of “township and village enterprises” that were notionally state-owned, the period from 1989 until the Hu-Wen era was defined by a turn towards channeling resources away from households to state-owned enterprises and a more concerted effort to attract foreign direct investment, both of which had the effect of spurring capital-intensive growth in coastal regions and stunting the development of the Chinese interior. Huang’s book, published in 2008, is skeptical of whether or not the Hu-Wen fourth generation leadership is capable of changing direction, but he acknowledges its attention to the rural-urban divide. All of this is to suggest that the real China 2.0 era might have been much short than conventionally understood, having only lasted from 1979 (or 1978) to 1989 and that what China really needs to do is foster a China 4.0 spirit that learns from the best aspects of that earlier period. 

Leonard builds his essay around three dilemmas facing Chinese policymakers, which he describes as the affluence trap, the stability trap, and the power trap. Having achieved the Dengist goal of fostering a “xiaokang (moderately well-off) society,” in which subsistence is guaranteed and larger economic aspirations have taken hold, China’s leadership must decide between slowly dismantling debt-ridden state-owned enterprises and relaxing constraints on indigenous entrepreneurship or creating new, distinctive institutional forms designed to democratize ownership and promote worker control while allowing the state to largely retain its role as central planner. One of the more awkward aspects of Leonard’s essay, for me at least, is that while he seems to appreciate the scale of the challenge facing Chinese economic policymakers, he also seems sanguine about China’s ability to navigate them successfully. That is, he artfully describes the crucial role of financial repression in driving export-led growth, and he is attuned to the wasteful capital investments that are the most readily apparent byproduct of financial repression and cronyism. Yet he confidently predicts that China will not only surpass but greatly surpass America’s economic weight in the world over the next two decades. Granted, even taking the aging of China’s population into account, the sheer size of its working-age population suggests that this outcome will ultimately come to pass. But undoing the damage caused by decades of financial repression, and the hypertrophied and highly vulnerable export sector that is its legacy, will, I suspect, take many years. Michael Pettis suggests that Japan’s post-1990s experience of diminished growth and diminished horizons is a more appropriate analogue for China’s future. And if Pettis is right, the political implications are profound.

There is much to admire in the collection, which opens with Cui Zhiyuan, a self-described liberal socialist, writing in praise of the so-called “Chongqing model” of development. I recently had the pleasure of reading a Cui Zhiyuan essay on what he calls “Petty Bourgeoise Socialism,” which, in the spirit of Roberto Unger, calls for a post-capitalist market economy, including intriguing references to “stamp scrip” (which bears a family resemblance to Miles Kimball’s calls for electronic currency as the unit of account), “topsy-turvy state ownership” (in homage to James Meade’s “topsy-turvy nationalization”), and Unger’s notion of “disintegrated property” as a vehicle for reconciling egalitarian aspirations with a post-Fordist economy. It’s all very heady stuff, most of which strikes me as too market-oriented to achieve socialist goals and too “centralist” to allow fast-growing young firms to drive larger economic transformations, the chief virtue of entrepreneurial capitalism.

More broadly, Leonard’s collection suggests that as China develops a more robust and inclusive public sphere, it will be really interesting to follow. I might revisit it in the future, and dive deeper into some of China’s so-called “New Right” economic thinkers, e.g., Justin Yifu Lin, author of The Quest for Prosperity, which was recently praised by Clive Crook in Bloomberg View.



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