ForeCastle

The 4 Stages Of Chinese Growth



From the early 1980s until now, China has grown at a pace not matched since the four decades Argentina enjoyed before the First World War. In spite of some fairly goofy attempts a few years ago, however, to characterize China during this period as having followed a set of policies called the "Beijing Consensus", these decades did not involve a unified set of policies, or a set of related polices, that Beijing implemented consistently. It is far more useful, I would argue, to think about the past 3-4 decades as consisting of four very different periods, the last of which we are, with great difficulty, just starting.

The idea of a Beijing Consensus has probably helped to prevent or postpone an understanding of the vulnerabilities in the current growth model and the steps China must take to address these vulnerabilities. Among other things, this confusion made China's nearly four decades of growth seem far more exceptional than it was, and so created the very lazy belief among analysts that there are no historical precedents that can guide us in understanding the strengths and the vulnerabilities of China's economic trajectory.



Before explaining why China's growth trajectory can best be understood by separating out these different periods I want to re-introduce the idea of social capital, a topic about which I wrote last year. As I use the phrase, social capital is the set of institutions - including the legal framework, the financial system, the nature of corporate governance, political practices and traditions, educational and health levels, the structure of taxes, etc. - that determine the way individuals are given incentives to create value with the tools and infrastructure that they have.

In a country with highly developed social capital, incentive structures are aligned and frictional costs reduced in such a way that agents are rewarded for innovation and productive activity. The higher the level of social capital, the more likely they are to act individually and creatively to exploit current economic conditions and infrastructure to generate productive growth.

It is a hard concept to explain precisely and to quantify, but the idea of differing levels of social capital helps explain why, for example, French entrepreneurs (not to mention Indian, Chinese, Mexican and Nigerian) are more likely to create successful tech startups in the U.S. or the U.K. than at home, or why it is easier to start a business in Sidney than in Beijing, or why technological innovation is not evenly spread out among countries, even among countries at similar development levels, but rather tends to cluster in a few areas in a few countries where tech entrepreneurs seem to believe that their work is made easier and the rewards greater.