The events in the last few months
induced by the spread of the Chinese virus has brought attention onto the
China’s role destructive or otherwise in the global economy. China for long, as
many argue, apparently has had a free pass despite it being a non-market
economy functioning on mercantilist principles seeking a victory in a zero sum
game over the rest of the countries. It is perhaps an antithesis to the rule
based order intended to promote global trade, commerce and mobility in a
peaceful atmosphere. By opening up multiple fronts, it seeks to intimidate its
neighbours, land ad maritime alike. Therefore, it would be of interest to
understand the Chinese economic path. An earlier post had sought to link up the current
Chinese behaviour through a prism of its behaviour throughout its history. The
current post seeks to understand the nature and structure of Chinese economy
through a glance at its immediate past. The solutions too would perhaps lie in
adjusting the behaviour of the rest of the world to the possible moves and
countermoves of China as it seeks to establish itself as the global power.
As one sought to probe the
antecedents of theorisation of Chinese economic rise, there is thought
provoking post on Facebook by Dr. Arvind Virmani, former Chief Economic Advisor
Government of India. His piece is titled “Dualistic Trade Policy (India and the
World)”. The post
seeks to explain the Chinese economy through its evolution post the revolution
of 1949. It would be worthwhile to analyse the arguments put forth in the post.
As he analyses evolution of Chinese
economy, Dr. Virmani divides the Chinese modern economic process into six
phases. As a long standing advocate of globalization, he defends globalisation
and argues that it has indeed benefited many across the world. To him, if there
are losers, it would be certain groups in rich countries. In his contention,
China was to a good extent responsible for the asymmetries that were accentuated
by globalization. The losers of globalization were due to the pace of rise in
Chinese exports partly abetted by the Western world which chose to turn a blind
eye on the Chinese economic practices. Perhaps implicit in this is the price and
substitution in the global consumption basket thanks to the lowering prices of
Chinese goods.
The Chinese economy was not market
driven for the first thirty years post the revolution. Post 1980, as the Deng
era began, there was a transition to what Dr. Virmani terms as socialist market
economy. In the Mao era, there was the communist economy and yet it differed
from something that was designed and executed by Stalin in Soviet Union. The Stalinist
economy was centralized and defined top-down. For instance, the party apparatchiks
sitting is Moscow would dictate to a farmer in Vladivostok on what to grow
without an iota of knowledge about the conditions in the Far Eastern Republic.
In China, it was the contrary. The top leadership merely defined the broad
contours of the objectives that were sought to be attained and it was the local
leadership which was responsible for attainment of the same. The agency
problems found resolution through acts like Cultural Revolution wherein many
regional chieftains would find themselves at the receiving end in case they
were perceived to offend the party top hierarchy in Beijing.
In the first of the socialist market
economy(SME) which is termed SME0 by Dr. Virmani, assets including land and
natural resources continued to be owned by the party as during the communist
economy. However the decisions were taken at the company level leading to the
perception of market economy in practice. However what seemed implicit was a presence
of implicit coordination in maximising company province and national economic growth.
Implied is the terms of profit maximization objective as viewed in market
economics are sought to be changed. It is not mere company profit maximization
or industry profit maximization but the maximization of province and country
economic growth. In many ways, this began to resemble the foundations for an
economic cartel rooted in national economic growth than industry or firm level.
Dr. Virmani terms the next phase in
the 1980’s as SME1. In addition to the features of SME0, China apparently began
to focuse on export oriented foreign direct investment. Export promotion was
the key objective. Labour intensive export chains were apparently began to get
shifted to China primarily from Hong Kong and Taiwan. Prices were linked to
market dynamics of supply and demand. Though assets continued to be party
owned, the establishment of town and village enterprises (TVEs) was a unique characteristic. These enterprises
began to be managed by the local party members who brought in their relatives
and friends on board thus the beginning of nepotism at local level.
Dr. Virmani posits this phase to
transit into what he calls SME2 in the early 1990s. This was the period where
the Chinese took their next step in attracting the technology oriented FDI. The
TVEs which had begun on a small note now proliferated across towns and
provinces. There was fierce competition that began between these TVEs for
sales. The Chinese were guarded in the information they leaked. Therefore, the
information asymmetry meant that to the rest of the world, these TVEs implied a
dynamic operation of market economics and blooming of the private sector. Yet in
practice, all that was happening was the rise of party capitalists. As Dr.
Virmani mentions, these TVEs were the incubators of party capitalists.
The next decade beginning the 200s
saw the party sector joining hands with SME2 to form SME3. The TVEs morphed
into the party sector. The modus operandi as illustrated in the post cited
above, enabled the admission of successful and prominent entrepreneur-managers
into the party. Dr. Virmani posits that genuine domestic private sector was
very limited and perhaps existed in textiles, garments, gaming, and education
among few other industries. He argues that the communist party controlled the
commanding heights. The objective of the party while portraying a sense of
robust private sector to the outside world was to make sure that no private
firm or individual would become powerful enough to defy the party objectives.
The Xi era is what is described as
SME4. The so-called anti-corruption campaign is ostensibly to purge any
potential rivals in the party. The central leadership is using the phase to
consolidate its power over both state enterprises and party sector. There is
evidently, decline in the autonomy offered to the state enterprises and
organizations. There is a further shift from implicit control to explicit
control over the so-called private organizations. The party members are
increasingly being appointed on the board. Unlike in the earlier era, the party
is explicitly seeking to exercise direct control over foreign invested
companies. This would perhaps have implications not just for China but for
other countries too.
Any understanding of the Chinese behaviour
is contingent on understanding of how its economy functions. For long, the rest
of the world has believed willingly or otherwise that the Chinese economy is
based on the principles of market sector and not on its self-created party
capitalist principles. Since, the economy functioned on an implicit cartel
designed bottom-up, China could perhaps escape scrutiny. With the emergence of a
desire of explicit control over the economic actors, the country is facing
initial signs of scrutiny. Yet the damage has been done. The extent and nature
of the damage needs separate treatment. What however would be suffice to
suggest at the moment is there is a pressing need for the market democratic
economies to function in synchronicity to bring China to the book not just for
the coronavirus it has unleashed but to its economic structure as well.
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