# Understanding China’s Political Economy

- Link: https://www.thailand-business-news.com/china/130826-understanding-chinas-political-economy
- Published: 2024-03-13T10:18:54+07:00
- Author: Project Syndicate

SHANGHAI_ –_ As China grapples with enormous challenges – including an imploding
property sector, unfavorable demographics, and slowing growth – doubts about the
future of the world’s largest growth engine are intensifying.

    ```wp-block-verse
    By Zhang Jun and Tomas Casas-Klett
    ```

Furthermore, with China’s increasing geopolitical influence and escalating tensions
with the United States, there is an increasingly urgent need to comprehend China’s
political economy.

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A recent book by MIT’s Yasheng Huang – [_The Rise and Fall of the EAST: How Exams, Autocracy, Stability, and Technology Brought China Success, and Why They Might Lead to Its Decline_](https://yalebooks.yale.edu/book/9780300266368/the-rise-and-fall-of-the-east/)–
can help. Huang unpacks the “EAST” heuristic from the historical record of the last
two and a half millennia, especially the last 40 years, to arrive at a clear conclusion:
China must make radical changes if it is going to realize its full development potential.

Huang argues that the seeds of China’s decline were planted as far back as the sixth
century, with the implementation of the stifling _Keju_ civil-service examination
system. In his view, this system provides an answer to the historian Joseph Needham’s“
grand question”: Why did imperial China, with its profound scientific and technological
advantages, fail to launch its own Industrial Revolution long before Europe did?

Before the _Keju _system was introduced, China was producing some of history’s most
transformative inventions, such as gunpowder, the compass, and paper. But Huang’s
empirical research suggests that Chinese creativity peaked between 220 and 581, 
during the rather chaotic Han-Sui Interregnum. “The first wave of technological 
stagnation in China,” Huang observes, “coincides with the end of China’s political
fragmentation.”

_The Rise and Fall of the EAST _does seem to overstate some aspects of the historical
record, in order to offer a “cleaner” narrative than might be warranted. For example,
a dataset of prime ministerial resignations forms the basis of Huang’s conclusion
that, with the introduction of _Keju_, checks and balances between emperors and 
their bureaucrats disappeared in favor of a “symbiotic relationship.” The result
is an almost linear narrative of decline. But that is difficult to square with the
Qing dynasty’s “industrious revolution,” during which China’s population more than
doubled and its share of global GDP reached one-third.

Huang can also be extremely perceptive, however, such as when he challenges David
Landes’s [judgment](https://wwnorton.com/books/The-Wealth-and-Poverty-of-Nations/)
that the state kills technological progress. Instead, Huang argues that “China’s
early lead in technology was derived critically – and possibly exclusively – from
the role of the state.” Quoting the Nobel laureate economist Douglass North, he 
writes: “If you want to realize the potential of modern technology, you cannot do
it with the state, but you cannot do without [the state], either.”

But what kind of state? In Huang’s view, autocracy “has deep roots in China because
of its near-immaculate design, absence of civil society, and deep-seated values 
and norms.” But China’s tendency toward “unitary rule,” he writes, is fundamentally
cultural, with the “causal direction” of autocracy running “from culture to politics,
not the other way around.”

Similarly, many modern Chinese scholars blame China’s waning fortunes in the nineteenth
and twentieth centuries on conservative Confucian ideology, which lacked any spirit
of discovery or impetus for risk-taking. Huang even suggests that, in times when
Buddhists and Daoists represented a larger share of prominent historical figures,
relative to Confucians, novel ideas were more likely to flourish.

But there are reasons to believe that China’s state structures and policy preferences
are not just cultural in origin, but also – or perhaps rather – the result of deliberate
institutional arrangements. For example, China’s business organizations are famously
run by domineering_ laoban_, or bosses. In any case, a narrow focus on China’s top-
down structures can obscure the bottom-up nature of many aspects of Chinese political
and economic life.

As Huang notes, the Chinese political economy is characterized not only by control,
but also by autonomy. While China has benefited from state management, in the form
of deliberate, top-down policies (exemplified by the government’s Five-Year Plans),
private initiatives that are bottom-up and chaotic (such as entrepreneurial activity)
have also proved vital to its development. Understanding the balance between control
and autonomy is essential to any assessment of the challenges China faces, from 
unleashing “animal spirits” to implementing institutional reforms. 

_The Rise and Fall of the EAST _also considers why China has so far managed to avoid
what he calls “Tullock’s curse” – the instability or conflict caused by the bad 
and misaligned incentives that define autocratic successions. But it might have 
benefited from a deeper analysis of another phenomenon explored by the economist
Gordon Tullock: rent-seeking.

Any country’s economic- and human-development trajectory is determined largely by
whether the elites use their power to create or to extract value. Some degree of
rent-seeking is probably unavoidable. One might dismiss the “robber barons” of nineteenth-
century America as amoral, but the Rockefellers, Vanderbilts, Carnegies, and others
played a pivotal role in making the US the world’s most prosperous country. Likewise,
the tech monopolies created by the likes of Bill Gates and Mark Zuckerberg continue
to exemplify American innovation.

Unfortunately, Huang’s account lacks a nuanced assessment of the relationship between
rent-seeking and value creation. He might have noted that China’s “[elite quality](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4418550)”
is much higher than that of other countries with the same per-capita GDP. Instead,
it is comparable to European Union countries with triple China’s per-capita GDP.

The fact is that sustainable value creation underpinned China’s double-digit growth
rates for decades. Nonetheless, as Huang makes clear, the development strategy that
propelled China’s rise over the last few decades has largely reached its limits.
Now, China must harness its innovative potential and high-quality elites to spur
its animal spirits and strengthen its institutions, all while pursuing greater liberalization.

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Whatever comes next will be based on China’s unique traditional value system, which,
as Huang emphasizes, has underpinned prosperity and innovation in the past. And 
it will reflect the grit – not rigidity – that lies at the core of China’s political
economy.

**_Zhang Jun, Dean of the School of Economics at Fudan University, is Director of
the China Center for Economic Studies, a Shanghai-based think tank. Tomas Casas-
Klett is a visiting professor at Fudan University._**