Oxford: Oxford University Press, 2013. xviii, 349 pp. (Figures, tables.) US$45.00, cloth. ISBN 978-0-19-920578-3.
March 2014. World stock exchanges from New York to London to Tokyo are sent into tailspins with major declines in equities and in futures prices for key commodities such as oil, metals, and food stocks. The reason? Fears that economic growth in the People’s Republic of China is fading to just over 7 percent from its previous annual highs at 10 percent or more.
Thirty-five years ago, in 1978, when the top leadership of the Chinese Communist Party, led by Deng Xiaoping, announced dramatic economic reforms, including plans to open the previously insulated and autarkic Chinese economy to the outside world, no one could have foreseen such a turn of events. Yet with plans to maintain 30 to 50 international conglomerates with many listed in the Fortune 500 and a growing middle class in what is now the second-largest economy in the world, China is by all accounts a major player in the international economy, a situation that will only expand. The reason for this growing economic prowess is, of course, the dramatic annual growth rates between 9 and 10 percent that the Chinese economy has sustained for the last thirty years or so. It is to this basic question that the author, a prominent economist in Europe and China, has turned her accomplished analytical skills and data collection abilities in what is undoubtedly one of the most comprehensive, if sometimes a bit overloaded, books on this crucial question on the origins of China’s rapid and sustained economic growth.
Utilizing standard models of economic growth and relying on the extensive research of existing prominent research on China’s roaring economy, the author emphasizes that she sees “specific aspects” of Chinese economic growth that go beyond the standard theories. Like most works on this heavily studied topic, the exhaustive sources and research employed in the book, which the author stresses draws on more reliable micro-level over macro-level data, demonstrates that fully one-half of this growth stems from the continuing and substantial capital accumulation in China, financed primarily by a very high savings rate among the general population, corporations, and even the government. Also contributing to this rapid growth have been labour accumulation and development of human capital (10–20 percent), transfer of knowledge and technology that have accompanied joint ventures with more technologically advanced foreign corporations, and increasing investment in research and development by domestic corporations aimed at engendering “indigenous innovation.”
For this reader, one of the most interesting aspects of the book is its focus on institutional developments, especially the slow but evident creation of legal protection of property rights (2007 Property Rights Law), patent law and courts, and adherence to standards mandated by the World Trade Organization, to which China ascended in 2001. “Improved protection of property rights,” the author argues, “appears to have contributed to the strong industrial output that boosted the GDP growth of the 2000s” (315). To the extent that an Intellectual Property Rights (IPR) regime is strengthened, especially protection of patents that are increasingly applied for by Chinese firms for protection from other Chinese firms, benefits will continue to accrue to the macro economy and hopefully the Chinese consumer.
Despite these evident gains over more than three decades, China’s economy is not without major structural and institutional problems which could affect its future prospects for continued economic growth. The most serious is the “financial repression” that rewards persistently inefficient state-owned enterprises (SOEs) with cheap and almost unlimited credit at the expense of the more efficient private-sector corporations that too often are starved of domestic capital. And while the role of the state has retreated considerably from the pre-1978 era to the point that government spending at 19 percent of GDP is among the lowest in the developing world, the author calls for recasting the Chinese state’s role from economic management through the ubiquitous Party cadres in SOEs and a government-owned and run banking system to a more conventional role of protecting property rights, especially land, and ensuring social protection for its population through comprehensive social insurance. Whether and how the Chinese state, which for more than six decades has directed China’s economy, can make this transition is left unanswered.
Even more important is a significant growth in consumption that since the 1990s has fallen dramatically largely because of stagnant wages, along with an expansion of the service sector that remains at a rather paltry 40 percent of GDP. The 12th Five-Year Economic Plan (2011–2015) calls for a rebalancing of the Chinese economy with increased domestic demand and less reliance on exports, but until capital markets, specifically interest rates, are reformed and labour mobility is less restricted, Chinese workers will continue to see their dramatic improvements in productivity go elsewhere.
A prodigious work with reams of data, numerous charts, and mathematical models and equations, this is without question an enormously well-researched book. Yet, for a non-technical economist such as this reviewer, the narrative at times gets a bit overwhelming and even leaden, with excessive references and asides in the text that should have been relegated to endnotes. Still, this is an invaluable book for anyone interested in understanding the various factors—economic, political and technological—behind China’s experience at promoting economic growth for over three decades and the necessary measures for increasing privatization, marketization and rule of law that will ensure its continuing economic prowess.
Lawrence R. Sullivan
Adelphi University, Garden City, USA