During its 18th Congress held in last November, the Chinese Communist Party has been discussing the country's economic future. At a time when many questions arise about its upcoming challenges, one must take a look back at the current model. Will the spectacular success of the Chinese economy bring forth a Beijing consensus as a successor to the Washington consensus?
Paris Innovation Review - Yves Tiberghien, in Asia and the Future of the World (Presses de Sciences Po, September 2012), you analysed the development of the Chinese power with a particular emphasis on contemporary China's development model. Is the "Washington Consensus" obsolete?
Yves Tiberghien - Indeed, the debate is opened, even within the IMF and the World Bank, despite the fact that these two spearhead institutions of the famous Washington Consensus, whose name was a reference to their geographic location.
Let's take a quick look back to what this expression meant. It emerged during the late 1980s, when all the standards and practices that seem to condition economic development crystallized into a paradigm whose name was coined in 1989 by the economist John Williamson. In an article from 1993, Williamson detailed the Ten Commandments that summarize this paradigm: fiscal discipline, good priorities in public spending (infrastructure, education), tax reform, financial liberalization, competitive exchange rates, trade liberalization, openness to foreign investment, privatization of public firms, deregulation, and protection of property rights. This model, which can be said neoliberal, is now challenged. The 2008 crisis has obviously contributed to hurt its prestige, but in fact there have been debates since the very beginning.
As soon as in 1993, the World Bank published a study on the Asian miracle, ordered by the Japanese government. It covered Japan, Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand and China. Of course, the role of markets in the allocation of capital were taken in account, but the study also includes an important chapter on the institutional foundations of the Asian miracle, with a special emphasis on the role of state and on industrial policies. Within the Bank, this study has led to tensions between the body of economists and the Japanese sponsor. A agreement was eventually reached: the study concluded that the conditions for Asian success were so restrictive that they weren't reproducible elsewhere. But since that time, it was clear that the dogma of the Washington Consensus was confronted to an empirical problem, since countries with the most successful economic development did not follow its precepts.
Which specific points were subject to criticism?
For the most part, criticisms aimed deregulation, financial liberalization, and limiting of the role of the state. The economists that backed the Washington consensus tended to neglect the problems of information asymmetry and more generally market imperfections. As stressed by Joseph Stiglitz, former chief economist of the World Bank, in Globalization and its Discontents (2002), the Washington model was based on assumptions rarely found in the real world and its models were obsolete. Another economist, Dani Rodrik, showed in the late 1990s that trade openness and foreign direct investment can be a factor in development, but only when strong institutions can serve as intermediaries and resolve internal conflicts between different social groups.
In the same years, Korean economist Ha-Joon Chang went further, showing in a book entitled Kicking Away the Ladder (2002) that the development trajectory of rich countries had never followed the Washington principles and had always assigned a strong role to the state: even in the United States, the federal government helped the industry and resorted to protectionism. Comparing the Asian experience with that of OECD countries, Chang also claims that the free market policies have never been enough to enrich a country. And he concludes, vigorously, that the ideas of the Washington Consensus were to remove the ladder that had allowed rich countries to become rich.
The multiple financial crises of the 1990s and that of 2008 have helped in challenging the neoliberal model of development. Williamson himself acknowledged in an article from 2004 that he should have incorporated the importance of political stability, the need for strong institutions and an objective for reducing inequalities. He also admits that his analysis of exchange rates and financial liberalization proved wrong. This mea culpa has not prevented the OECD, the IMF and the World Bank to continue promoting these ideas.
But even within these institutions, there are many undergoing changes. Lin Yifu, chief economist at the World Bank until June 2012, has recently refuelled the debate by reporting on the lessons from the Asian and Chinese experience, especially regarding to our understanding of the development phenomenon.
What are the outlines of this new synthesis?
It is still being developed, but if we follow Lin Yifu, it will be based on the following features. Firstly, there is no point in questioning market economy, but rather bring corrections to a certain idealistic vision that would make of markets the alpha and omega of economic development. For example, and this is the first highlight of Lin's reasoning, the constant implementation of technological progress (continuous technological upgrading) is an essential dimension: it isn't simply about creating the conditions for well-functioning markets. One must also be concerned with the proper orientation of industrial development. This requires both openness to international investment to facilitate the transfer of technology, but also an active role of the state as mediator and infrastructure provider.
Second point, the strategic capacity of leaders is vital, and they need to know how to resist to dominant ideas that are often wrong. Dominant patterns are often descriptions of the results of the development process, more than useful guides on the causal path to follow to achieve this result. Thus, neither the Soviet model focusing on heavy industry (not to mention the massive collectivization corrected by an extreme voluntarism which led China to the disaster of the Great Leap Forward) nor the Washington model that simultaneously promotes commercial liberalism, Financial opening and the reduction of the role of the state, neither did not allow their followers to find the path to rapid and sustainable development. The right path is more experimental, progressive and adapted to the conditions and concerned institutions of the country.
Third, in developing countries, the most important institution is the state. This is essential because the Washington Consensus insisted primarily on corruption risks, bureaucracy, etc. These are true risks. And yet, the state must still play a crucial role in the early stages of development.
Fourth, the sustainability of the chosen program depends on the benefits and realities of each country. One can use this as a lesson of pragmatism. And clearly, it’s smoke in the face of parlour economists – those who theorize on development without any knowledge of the complexities of the real world, if not to dream of its simplification.
The last point goes in the same direction and one can certainly recognize a small Maoist touch: spontaneous innovations, both local and private, are very important and must be accepted and generalised.
It is indeed a pragmatic, progressive, respectful approach to the reality of each country. We are very far away from the general principles of the Washington Consensus. It should be noted that this synthesis is supported by the Chinese experience, the latter itself being inspired by Japanese and Korean elements, on fundamental subjects such as state mediation of global flows, industrial policy and export incentives.
Japan has experienced spectacular success, but also significant setbacks. Does the new synthesis draw the lessons from past failures?
Absolutely, and it is a crucial point indeed. One of the lessons learned from the Japanese is that the fall of their model initiated from the moment when the Japanese leaders accepted a strong U.S. pressure on their currency. The Plazza agreements of 1985 paved the way for an international coordination that led to the doubling of the yen's value in a few years. This period of strong evaluation has forced the Japanese central bank to maintain during a too long time very low interest rates, which combined with financial deregulation, helped to inflate the housing bubble. Japan still hasn't recovered from its explosion. Today, Chinese leaders pay great attention to the bubble that has begun to affect real estate in major urban centres. They have clearly learned the Japanese lesson: this partly explains their caution on the question of a possible revaluation of the Chinese yuan.
The Japanese experience has also highlighted the importance of the response policy to a crisis of this magnitude. A banking crisis must be treated immediately with large injections of capital into the banks and a massive fiscal response. Because of the lack of political leadership during the 1990s, but also due to an overestimation of the efficiency of financial markets, Japan waited until 1998, and even partly until 2003-2004, to address this problem thoroughly. This lesson is addressed to all countries and in 2008-2009, the United States showed that they had learned it too.
These principles obviously refer to the global Asian experience and to the Chinese in particular. Some now talk of the “Beijing Consensus.” Can we take it as a new model?
Yes and no. Yes, if one considers that all the preconceptions that dominated the Washington Consensus are no longer taken as granted: the Chinese lesson simply shows that nothing works without strong institutions and the State, as an active mediator. No, if one thinks of the Chinese model as primarily a lesson of pragmatism and experimentation. China's success is marked by a concern for local differences and a well-balanced art of experimentation. Of course, these common sense recipes can be adopted everywhere. But we are far from a model as strict and consistent as was the Washington consensus. In fact, the true character of this new model is to avoid dogmatism and so in a sense, to reject the very idea of a model.
Moreover, the Chinese experience itself had given birth to several models of development, both in time and space. Diversity is somehow one of the keys to China's success: it goes hand in hand with experimentation, but also with a differentiated treatment whether applied to almost private rural businesses, economic areas open to foreign investment or large state-owned enterprises in urban areas. Since the 1980s, based on some aspects of the Maoist political culture, the Chinese have adopted a philosophy of experimentation and gradual implementation, accepting both the idea of a zigzag path and that of a non-integrated economy, a “mosaic” economy. This is the true meaning of the creation of special economic zones run as enclaves with their own specific rules. But along with the freedom given to local and private initiative, there is also a strong state presence to support national champions that are encouraged to invest across borders.
To summarize, we now have three models. The first is that of Guangdong, with special economic zones (referred to usually by their acronym: SEZ) created in 1979-82 and expanded in the 1980s and again in the 1990s. The first four SEZ were Shantou, Shenzhen, Zhuhai, to which must be added Xiamen, in Fujian. They host businesses that are fully integrated into globalization, depend heavily on direct foreign investments.
The next model is centred on state-owned firms (Chongqing, Shanghai or Tianjin model). These older companies were inefficient during a long time. They suffered of a brutal purge between 1997 and 2002: 40 to 50 million layoffs, bankruptcy, privatizations; thus, the resources were concentrated on a thousand national champions – a model inspired by the Koreans and through them, by the French.
The third model is formed by a semi-private economy, which has grown in the 1990s and in which local authorities play an important role ; there is also the corporate version or purely private model of Zhejiang, particularly of Wenzhou, funded by an informal shadow financial system, globalized through an ethnic network (very present in France for example).
Finally, we could perhaps add the case of Inner Mongolia, where the exploitation of raw materials is in rapid expansion.
Has the 2008 crisis changed the balance within this patchwork of models?
Yes, first of all because the Guangdong model took the brunt of the crisis head on, and that the Chinese boosts for recovery have focused mainly on state-owned companies. Local private companies have suffered too. Then, in parallel with the crisis, there has been a rapid increase in labour costs, in part due to the change of generation of migrants from the inside: the previous generation coped with its second-class citizen status. But the new generation however, claims for more rights and higher wages. There have been strikes, for instance. In a way, all of this contributes to a desirable general development: domestic inner demand starts to take over exports; the Renminbi is more expensive and the comparative advantage of China is less significant today.
What are the main challenges for the Chinese model today?
The first one is immediate, and it is the economic overheating. Accumulated imbalances, overinvestment, the housing bubble and weak domestic consumption have triggered many problems. Leaders attempt to deflate the housing bubble, but the latter has grown as a result of local authority investment, and there is a communication problem between the different levels of economic policy. Beyond this fact, the issue of social inequality may eventually become critical and even explosive, because China has now a Gini coefficient of 0.50, higher than the United States.
CCP leaders have officially asked during the congress in November 2012 for a new development model. It is a good thing, because the rebalancing of the current model towards domestic consumption is problematic. The President of the World Bank, Robert Zoellick, also emphasized this need for rebalancing which, apart from boosting domestic consumption, points towards a transformation of China's energy profile, a strengthening of the rule of law and an expansion of social services.
Will China meet these needs?
The announced shift will be a crucial test for their state capacities. One aspect of this challenge is that China is now the second largest global economy, and it will soon be the first. Economic forecasts vary, but most estimations give as a fact that China will catch up with the United States somewhere around 2016-2018 in terms of purchasing power parity, and 2018-2022 in terms of nominal exchange rates. In 2010, China has already overtaken the United States in terms of energy consumption and sales of cars! This new position makes economic management even more difficult, because if the economic rule is a source of freedom, it also implies its own set of constraints.
One must also understand that the rise of China, especially the burst of its financial reserves (near to 0 in 1995 and reaching about 3,200 billion at the end of 2011) has been so quick that the Chinese political leaders are propelled overnight on the centre of the international economic stage, when they were primarily specialists of dams, agricultural issues, rural firms, or SOEs. Similarly, the academic elite are suddenly asked to find solutions to global governance, when that's an entirely new subject. Thus, some opinion makers argue that "China hasn’t adjusted yet to its new global role" and this is certainly one of the challenges for the upcoming years.
A systematic study by Dani Rodrik on the issue of economic convergence and the catching up of emerging countries alerts on a well-known risk in development economics. If they want to continue their rapid growth and climb all the necessary levels to make up their economic ground, China and other emerging countries must break their restrictions and create new institutions. These steps are difficult to take and in the past, many countries have found themselves caught in the so-called middle income trap. The economic power of China is accompanied by a strong risk factor. Chinese leaders are very well aware of this fact and act with caution: they are more concerned about their vulnerability than by the exercise of their new power.
The other big challenge to which the Chinese model must respond now is the issue of sustainable development and energy transition. Not to mention the pollution and its impact on climate change. The rising prices of raw materials and of energy could jeopardize the overall balance on which Chinese growth is built. The new 2011 five-year plan attempts to bring a significant response. The challenge is truly gigantic. An effective response would probably imply a recentralization process and unprecedented innovation efforts.
On the whole, we see that there are many challenges, and that the Chinese model is far from being consistent or even stabilized. It is a hybrid model that combines international trade liberalism with the integration, into the international division of labour orchestrated by large globalized multinationals, of huge state enterprises that have the wind in their sails; and an entrepreneurial fabric, both regionalized and decentralized. This extensive and resource-hungry model is striving to rebalance itself and create its own institutions, a crucial step to move towards the next phase of development.
May this explain why at the present time, this model isn't able to prevail or spread out?
Yes: China has proved itself, but it only halfway to its goals. The Chinese trajectory is very difficult to reproduce, even if some elements are directly importable (for example, the special economic zones).
Finally, the model hasn't responded yet to the challenges of sustainable development – even though genuine efforts regarding renewable materials and the implementation of a carbon tax prove an acute awareness: concerning these topics, China will not step backward, but forward. The best evidence is given by the amazing boom of sustainable industries since 2005 and the restructuring and rationalization of the entire fleet of coal power plants in a decade. The state has been increasingly involved to reduce the energetic intensity of the economy. This commitment is amplified by a sense of energy vulnerability that allows a powerful coalition of several administrations. Let's also keep in mind that the growing rallying of netizens (500 million people connected to the Internet) on environmental issues are increasingly successful, as demonstrated by mass movements against facilities since 2011 (representative cases of Sichuan Hongda, Qifang and Shifang).
In short, there is no Beijing consensus, but only an experimental and gradual approach that combines integration to the corporate (but not financial) globalization, entrepreneurial energy, with a strong state leadership and control. This is a dynamic and moving ensemble that incorporates a risky dose of inflexibility to the powerful dynamics of change and evolution.