There continues to be a great deal of talk about “the China Model.” It is supposed to be a way to organize an economy, especially a developing economy, that is superior to the American or Western model of competitive capitalism. This debate has many important parts, but it has largely missed one critical point: There are two China models, not one.
The first model brought China remarkable economic success and should be emulated in development. It is now largely being ignored. The second model has actually weakened China’s economy and is probably harming the world economy. Unfortunately, that is the one being seized upon.
Model 1: China Reforms
In late 1978, the Communist Party nationalized a program started locally around the country to grant certain property rights to farmers. This caused agricultural productivity and rural income to skyrocket, enabling mass migration to Chinese cities and providing the indispensable foundation for China’s industrial explosion.
A second wave of reform was launched in 1992 shrinking the state, commercializing the urban economy, and eventually enabling China to join the World Trade Organization (WTO). In 1978, per capita GDP is estimated at 381 yuan, while in 2003 it was over 10,000 yuan. This is the model that brought more people out of poverty than any program in human history.
Model 2: China Reverts
Around 2003, things began to change. A new government replaced reformers hand-picked by Deng Xiaoping. This government wound down, halted, and then reversed market reform in favor of state-led development featuring lending by state banks and production by state firms. The results appear impressive but in fact are damaging.
China’s unprecedented imbalance of investment over consumption has been created in this period. Many industries have seen small private companies driven out in the name of ungainly “national champions” that are far less capable of true innovation. To ensure the primacy of these behemoths, monetary leveraging has dramatically expanded. This obviously has nothing to do with greater property rights, shrinking the state, and meeting WTO standards.
While China is certainly bigger and more noticeable on the world stage now than in 2003, it is not healthier. It’s as if the economy ballooned in weight by eating too much in the way of resources and becoming obese.
The suppression of consumption for the sake of investment harms individual prosperity and is not sustainable. Industrial production far beyond market demand harms the environment and is not sustainable. Innovation increasingly dependent on large state firms is shown by the historical record to be a long-term mistake.
The “China Reforms” model means more rights for people, a smaller state, and trade liberalization—a superb guide for development at any stage. “China Reverts” is about centralization masked by spending, which may be appealing until the money runs out; what is left is stagnation and environmental destruction. These two have become confused in debate and in policy. For the sake of economic development, they should be separated.