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Will China continue to grow at a breakneck pace?

Rochester Business Journal
October 19, 2012

In this election year, Gov. Mitt Romney and President Barack Obama have both sought to convince Americans that they would, if elected president, be tough on China. This putative need to be tough on China is predicated chiefly on the perception that China is increasingly a threat to the United States. In turn, this perception is based largely on the astonishing rate at which the Chinese economy has grown in the last three decades.
 
This state of affairs has led to a lot of hand-wringing and pontificating about China. Academic economists, policy analysts and politicians all want to know whether the Chinese economy will continue to grow as rapidly as it has in the recent past. A thought-provoking new tome titled "Why Nations Fail" by Massachusetts Institute of Technology economist Daron Acemoglu and Harvard University political scientist James Robinson sheds light on this salient question.
 
The central point made by Acemoglu and Robinson is that if one is to comprehend why some nations succeed and others fail, then one has to look at the economic and political institutions in these nations. Specifically, one needs to ask whether these economic and political institutions are extractive or inclusive in nature. Inclusive economic institutions require secure property rights and economic opportunities for large sections of society. In addition, inclusive economic institutions encourage economic activity, productivity growth and prosperity.
 
In contrast, not only do extractive economic institutions not have the above characteristics, but they exist to extract incomes and wealth from one section of society to benefit a different section. Similarly, the political institutions of a particular nation are described as inclusive by the authors when they are sufficiently centralized and pluralistic. Political institutions that do not share these twin traits are said to be extractive.
 
In the context of China, Acemoglu and Robinson rightly point out that Chinese economic institutions are certainly more inclusive today than they were three decades ago. Even so, the Chinese experience thus far has been a good example of economic growth under extractive political institutions. Further, these authors tell us that despite the recent emphasis in China on innovation and technology, it is important to bear in mind that Chinese economic growth is based primarily on the adoption of extant technologies and new investment and not on the notion of creative destruction.
 
The economist Joseph Schumpeter argued that economic growth and technological change are accompanied by a process called creative destruction, in which new sectors of an economy attract resources from the old, new firms take business away from established firms, and new technologies make extant machines and skills obsolete.
 
In China, the Communist Party's control over the media is extensive, property rights are not secure, and because of the party's control over economic institutions, the scope of creative destruction in China is substantially curtailed. Put differently, the economic growth that we do observe has been taking place under extractive political institutions. Acemoglu and Robinson marshal an impressive amount of historical evidence and credibly contend that economic growth under extractive political institutions has always been ephemeral and hence that such growth in China probably cannot be sustained without significantly reforming its extractive political institutions.
 
The upshot of this discussion is twofold and sobering. First, there is no reason to believe that authoritarian economic growth based on extractive political institutions will lead either to democracy or to inclusive political institutions. Second, authoritarian economic growth is neither desirable nor viable in the long run, and therefore the "Chinese model" ought not receive the endorsement of the global community as a feasible template for other nations in Asia, Latin America and sub-Saharan Africa.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology; these views are his own.10/19/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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