Comments on Martin Wolf's Chindia – Robert Wade
Robert Wade
Monday, April 09, 2007
Robert Wade: I keep looking out for literature which tackles the question raised by China's and India's investment/GDP figures. Given the standard understanding of the primary importance of "strong" property rights for economic development (as in the arguments of North, de Soto, et al.), how come China has been able to support extraordinarily high rates of investment for decades?
The puzzle arises because no-one would say that China's property rights regime comes close to the standard picture of a "strong" property rights regime. Yet it evidently works. Indeed, the same puzzle applied in Taiwan in the 1950s to the 1980s (and maybe beyond): a thin formal property regime, as we understand the idea in the West, yet very high and sustained rates of investment. On the other hand, India has long had a much "stronger" formal property rights regime than either China or Taiwan; and lower rates of investment.
Some economists have claimed that "anonymous" banking (legal opening of bank accounts without having to give evidence of identity) is an important part of the answer to the China puzzle: officials of the state have had difficulty identifying who has resources they could appropriate. But I doubt that this could be a big part of the answer. How do Chinese property owners assert their right to (a) dispose of property through sale, gift, or the like, and (b) prevent others from removing their claim to ownership? The answers presumably differ for elites, workers and peasants, with workers and peasants much less able to secure protection for (a) and (b) than elites.
China's strength is in industry, India's in services. One of Kaldor's growth laws suggests that relatively high growth of industrial output generates relatively high growth of non-industrial (including service) productivity. But relatively high growth of service output does not have the same propulsive effect on growth of industrial productivity.
If this "law" holds, the difference in specialization between China and India works to China's longer term growth advantage, including in services. Hence the question: what is the evidence for and against Kaldor's proposition in the context of countries of the Chindia type?
Martin says "It is hard to identify significant constraints on China's growth in the medium term... Failure to reform would also be a danger." For the next several years at least, China is highly vulnerable to a recession in the US.
There are already plenty of signs of "over-accumulation" in electronics, automobiles and several other sectors, as also in the built environment (airports, for example). In the medium term it may be possible to rely much more on the expansion of domestic demand than, as now, export demand. But this switch may need exchange rate controls and capital controls - among others - that run counter to WTO obligations and western demands; not least to protect the banking system with its extraordinarily high load of non-performing loans.
The switch may "need" these controls; but the controls may be fiercely opposed by the - to put it rudely -- "brainwashed generation" of returning MBAs and PhDs in economics who believe that fast economic liberalization and a bonfire of social controls is the only way forward. Presumably Martin means to endorse this faith when he says, "Failure to reform would also be a danger". With China now growing and investing so fast, why not a period of policy stability?
All the more so because China has built up huge potential for internal conflict. Proletarianization has occurred in the past quarter century on a scale far bigger than ever before in human history. Several hundred million worker households are living in classic proletarian conditions, as earlier social protections are gutted. Now a domestic Chinese capitalist class is forging ahead (having been held back earlier by the reliance on FDI), and doing its utmost to shift state policy even more in its favor, as though the revolutions of 1911 and 1949 had never happened. Class polarization poses a different kind of "constraint" on China's growth than what economists normally have in mind, but a real one nevertheless.
(Robert Wade is Professor of Political Economy and Development at Development Studies Institute of London School of Economics and Political Science. )
