Intelligent learning
In his 2020 book, “China: The bubble that never pops”, Bloomberg chief economist, Thomas Orlik, attempts to explain what underpins China’s continued economic success. To be honest, and Orlik (2020) acknowledges as much, China’s resilience continues to surprise many. And even as it braves crisis after crisis, the sceptics believe it is only a matter of time before it unravels. That said, most agree that China’s resurgence began with Deng Xiaoping’s accession to paramount leadership in December 1978 with his “resolutely pragmatic ‘practice is the sole criterion of truth’…guiding philosophy (Orlik, 2020).”
Firstly, in December 1978, China abolished agricultural collectives, beginning the “household responsibility” system. Orlik (2020) asserts this was a turning point in China’s economic evolution because “by restoring the link between effort and reward”, China’s farmers stopped free-riding on their compatriots and “put their backs into it”. “By 1984, 99 percent of rural households were participating in the [household responsibility] system, up from 1 percent in 1979. Next came “enterprise autonomy” for industry, the gradual elimination of price controls, allowance for sale of “above-plan output” and more equitable profit-sharing in favour of entrepreneurs (Orlik, 2020).
Naturally, China was thereafter ready to conquer the world. In this regard, China set up special economic zones, within which “import and export tariffs were relaxed, businesses could operate according to market principles, free of the constrictions of China’s still-planned economy (Orlik, 2020).” From a real GDP growth rate of -1.6% in 1976, China grew by 15.2% in 1984 and after slowing to a 3.9% rate in 1990, has been accelerating largely above 6% annually ever since. Yes, there are contentions about the accuracy of its output data. But what is not in doubt is its economic success. Even so, it is still widely believed that its success would not be sustainable.
Pundits expected China to unravel in 2016, for instance. One Washington Post op-ed in mid-January 2016, captioned as “The China bubble pops”, triumphantly opined “no longer are the country’s economic managers viewed as magicians who can orchestrate rapid growth whatever the obstacles.” Its equity market was in turmoil and its debt markets were on steroids.
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According to Orlik (2020), the authorities faced an imposible choice. They could sustain the credit bubble till it popped or they could deflate it. Either choice would be consequential for economic and social stability. Maybe the mostly western pessimists should have held their horses a little bit longer. Because of the surprise of many, the Chinese authorities managed to pull out a rabbit yet again. “Two years into the deleveraging campaign, China’s policymakers had achieved faster growth, a steady debt-to-GDP ratio, and a shrinking shadow banking sector (Orlik, 2020).”
So, how did the Chinese manage to do the impossible? Orlik (2020) believes the resilience of the Chinese economy was underestimated. More importantly, the “ingenuity of policymakers” and “unusual resources of an authoritarian state” proved decisive (Orlik, 2020).
The politics underpinning Chinese capitalism, which ordinarily constrains the kind of game-changing innovations that only a free society can incubate, did come in handy when the crisis hit, though. Actually, at the initial stages of an economy’s development, freedom might not be as differential as we might think. A firm, determined and visionary leadership matters more in those early days.
After witnessing the United States’ decimation of Japanese cities Hiroshima and Nagasaki with nuclear bombs, the Chinese saw an urgent need to have nuclear weapons of their own. But how to go about it? Since they did not have the know-how, they sought help from the Soviet Union, which obliged in the “spirit of communist brotherhood” (Orlik, 2020). But not for long, as Soviet politics later tilted towards a rapprochement with the West.
The politics underpinning Chinese capitalism, which ordinarily constrains the kind of game-changing innovations that only a free society can incubate, did come in handy when crisis hit
In Orlik’s (2020) narration, Chinese leader Mao was not particularly enthused about acquiring nuclear weapons in any case. China would go on to detonate an atomic bomb in October 1964, five years after the Soviet abandonment. How did they do it? They did it by “drawing on what they had already learned from some fourteen hundred Russian advisors, gleaning further insights from scientific publications in the United States and Europe, and peeking in on other countries’ weapons tests (Orlik, 2020).”
They would later apply the same “copy” strategy to strengthen their industrial base in the 2000s. China joined the World Trade Organisation (WTO), boosting exports. It closed many of its state-owned enterprises and cleaned up its banking system. But “even as exports were booming”, with annual growth in overseas sales topping 40 percent, Chinese firms made limited technological input (Orlik, 2020).
“Chinese firms and workers were confined to the low-value, low-wage task of snapping the pieces together (Orlik, 2020).” Instead, “high-tech inputs came from Japan, Korea, and Taiwan”, with American and European multinationals retaining ownership and control of intellectual property and brands (Orlik, 2020). “Multinationals did their research and development in their home country, leaving China in the dark on how new products and technologies were developed (Orlik, 2020).”
Clearly, if China wanted to develop further, it had to do something drastic. And that is exactly what it did. According to Orlik (2020), China decided it would have “control of the technologies that were necessary to the next stage of its development.” Leveraging on its huge population of more than a billion people, China demanded foreign firms form joint ventures with local firms or required they “hand over valuable technology as the price of market entry (Orlik, 2020).” The rest as they say is history.
