State Capitalism Did Not Build China’s Economic Miracle

State Capitalism Did Not Build China’s Economic Miracle

Advocates of a strong state in Europe and the United States want the public to believe China’s economic success confirms that economic growth is inextricably linked with a strong state. Weiying Zhang’s analysis proves that the opposite is true

As recently as 1981, 88 percent of the Chinese population was living in extreme poverty. Today it is less than one percent. How was this possible?

Never in the history of the world have so many hundreds of millions of people risen from abject poverty to the middle class in such a short time. China’s development shows that economic growth—even accompanied by rising inequality—benefits the vast majority of people. Inequality in China has risen, but no one would choose to go back to the time of Mao Zedong, when the Chinese were more equal but, above all, poorer.

Today, only the United States has more billionaires than China. Beijing is home to more billionaires than New York. This confirms the inherent fallacy of anticapitalist “zero-sum thinking,” which claims that the rich are only rich because they have taken something away from the poor. Hundreds of millions of people in China are better off today not despite the fact that there are so many new Chinese millionaires and billionaires, but because after Mao’s death, Deng Xiaoping adopted the slogan: “Let some get rich first.”

In his 2020 book Ideas for China’s Future, Chinese economist Weiying Zhang describes Deng as the “architect” of reform in China.

“However, Deng Xiaoping understood that economic and social reforms are different from constructing buildings,” Zhang states in his book. “They cannot be built according to predesigned blueprints. Instead a ‘cross the river by feeling the stones’ approach must be taken.”

Deng, Zhang asserts, implemented reform through experimentation. Nothing that mattered was simply decreed—not price reforms, labor market reforms, tax reforms, or foreign trade reforms. Deng always tested new approaches in certain areas or sectors (e.g., special economic zones). If his reforms succeeded on a smaller scale, they were expanded. If not, they were abandoned. Much of China’s success was the product of initiatives “from below,” which were encouraged as an alternative to decrees from the central leadership. As Zhang puts it, “Deng Xiaoping knew what he did not know!”

Deng was correct to prioritize economic development. The Chinese provinces where poverty has declined the most in recent decades are the same provinces that have experienced the greatest economic growth. Zhang dismisses the notion that China’s extraordinary success is a result of the significant role played by the state. This misinterpretation is widespread in the West, but it is also increasingly prevalent in China, where some politicians and scholars believe that the explanation for the country’s success lies in a particular Chinese model. “The advocates of the China model are wrong because they mistake ‘in spite of’ for ‘because of.’ China has grown fast not because of, but in spite of the unlimited government and the large inefficient state sector,” according to Zhang.

In fact, marketization and privatization are the driving forces behind China’s tremendous economic growth. Zhang analyzed data from different regions across China and concluded that “the more the market-oriented reform a province had implemented, the higher economic growth it had achieved, and laggards in marketization reform are also laggards in economic growth.” The areas where market-oriented reforms had been implemented most consistently, such as Guangdong, Zhejiang, Fujian, and Jiangsu, were also those that had delivered the greatest economic growth.

In addition, “the best measure of reform progress is the changes in marketization scores in the concerned periods, rather than the absolute scores for a particular year.” The growth rate is greatest where private companies play the decisive role. Zhang’s data prove it: “The provinces whose economies are more ‘privatized’ are likely to grow faster. It is non-state sectors, rather than the state sector, that have driven the high growth.”

The reform process in China over recent decades has not been uniform, nor in a single direction. There were phases in which market forces quickly became stronger, but also phases in which the role of the state was reasserted. It tended towards “state-out-and-private-in” (guo tui min jin) in the long run, but there were also periods and regions in which there was a backward trend, i.e., “state-in-and-private-out” (guo jin min tui). Zhang examines the different growth rates in the “state-out-and-private-in” regions and the “state-in-and-private-out” regions. Again, the results are clear: Economic output grew significantly faster in the “state-out-and-private-in” regions. As Zhang explains, this proves “that China’s rapid growth of the past four decades has been driven by the power of the market and the non-state sectors, rather than the power of the government and the state-sector as claimed by the China model theorists.”

The degree of innovation is crucial for the further development of the Chinese economy. An analysis of the research and development intensity in industry, patents granted per capita, and percentage of sales of new products in total industrial revenue makes it clear that all these key figures for innovation correlate positively with the degree of marketization.

Zhang stresses the danger of misunderstanding the reasons for China’s growth not only in China but also for the West. If people in the West mistakenly conclude that China’s economic success is founded on a “third way” between capitalism and socialism, also known as “state capitalism,” Zhang worries they will draw the wrong conclusions for their own relations with China. In Ideas for China’s Future, Zhang uses an apt metaphor: “Imagine seeing a person without an arm running very fast. If you conclude that his speed comes from missing an arm, then you naturally will call on others to saw off an arm. That would be a disaster … Economists must not confuse ‘in spite of’ with ‘because of.’”

Advocates of a strong state in Europe and the United States want the public to believe China’s economic success confirms that economic growth is inextricably linked with a strong state. Zhang’s analysis proves that the opposite is true. Are the Chinese themselves forgetting the roots of their success? Over the past four decades, there has been a constant struggle between two economic ideologies—the socialist against the capitalist. Sometimes the free market’s supporters have gained the upper hand, at other times it has been the supporters of the state. This struggle continues, and its outcome will determine China’s future. The way China deals with its recent real estate crisis will provide an indication of whether China—like Europe and the United States—follows the path of state interventionism or is courageous enough to implement market-based alternatives. Developments in recent years tend to indicate that in China (as everywhere else in the world today) faith in the state is stronger than faith in market forces. In the short term, this may alleviate the latest dramatic crises, but in the long term, it will create even greater problems.

Rainer Zitelmann is the author of The Power of Capitalism.

Image: Reuters.