- 1.The Development of China’s Developmental State: Environmental Challenges and Stages of Growth
- 2.In Due Time: China’s business environment makes the case for due diligence
- 3.China’s Currency Reforms from a Banker’s Perspective
- 4.China and the Ukraine Crisis
China’s political leaders are grasping for ways to clean up a notoriously polluted environment without sidetracking economic growth plans. For longtime observers of the East Asia scene, this evokes a sense of déjà vu replete with flashbacks to South Korea in the 1990s and Japan two decades earlier. Despite geographic proximity and many cultural commonalities, China, South Korea, and Japan are distinctly dissimilar countries. China’s large, diverse citizenry inhabits a vast, resource-abundant subcontinent ruled by a “communist state” in a semi-marketized economy. Located on a peninsula still divided by Cold War machinations, South Korea is a small, homogenous, and resource-poor country with an advanced economy and a presidential-style democracy. Also homogenous and resource-poor, Japan boasts a mature market economy and a stable parliamentary democracy. South Korea and China were numbered among the second and third waves of developers, while Japan was the first Asian country to cross the industrial divide. Nevertheless, at comparable stages of advancement, these dissimilar states responded in broadly similar ways to common challenges. Why is this so?
Outward dissimilarities aside, China, South Korea, and Japan are exemplars of the East Asian “developmental state.” Allowing for case-specific variations, we posit that the developmental state has three structural components. First, it requires a stable policy environment to insulate government bureaucrats from political demands that might derail state-led guidance of a market-driven economy (Johnson 1982, 315-6). Japan’s Ministry of International Trade and Industry (MITI, the organizational predecessor of today’s Ministry of Economy Trade and Industry), South Korea’s Economic Planning Board, and China’s National Development and Reform Commission played the part of pilot planning agencies in their respective economies. Second, the economic bureaucracy must be “embedded” in a set of ties that bind the state to society and open channels for ongoing negotiation and renegotiation of goals and policies (Evans 1995, 12). And, third, the long-term success of the developmental state requires a relatively equitable distribution of national wealth to ensure the social quiescence needed to endure the rigors of forced-march industrialization (Johnson 1995, 29). Japan industrialized while simultaneously narrowing the gap between rich and poor, and South Korea did so without expanding that gap. China’s increasing income inequality – which, in theory, allows a “few to get rich first” – is rationalized as a temporary expedient to achieve the socialist ideal of income equality (Prime 2012, 693).
Similarities in institutional responses at comparable levels of advancement suggest that the East Asian developmental state evolves through discernible stages. To test this premise, we explore the state of affairs in post-1978 China by focusing on a key subset of the broad set of consequences produced by the obsessive pursuit of profit and improved productivity. Specifically, we focus on the institutional responses of Chinese state actors to pressure to address environmental degradation, which is an inevitable social cost of the developmental state’s business-first growth strategy. In this way, the institutional response of Chinese state actors to environmental protest represents a crucial case study of the sorts of forces that punctuate the development of the East Asian developmental state into discernible stages of growth.
Environmental Challenges and Stages of Growth
The developmental state is constructed of institutions, which we define as humanly devised constraints that structure behavior and carry power-distributional consequences (North 1990, 3; Mahoney and Thelen 2010, 7, 14). Viewing institutional choices in this way draws attention to their “social costs,” which, in the case of the developmental state, includes all of the losses imposed on domestic and foreign interests as a result of a business-first economic strategy. For example, under China’s developmental state, “producers have been favored over consumers, state companies … over private firms, and production of export goods … over provision of household services” (Prime 2012, 688). In other words, the developmental state’s institutional arrangements give favored interests an implicit license to pollute, and, in so doing, create potential change agents among those who must suffer in a degraded environment.
While the East Asian developmental state is the focal point in a contentious debate, little effort has been made to explain how and why its institutional arrangements change over time. We argue that the developmental state progresses through a process that, to paraphrase W.W. Rostow, can be understood as a “sequence of stages rather than merely a continuum” (1959: 2; italics added).1 During Stage 1, the primary task is to erect the institutional scaffolding to nurture strategic industries and sectors. In Stage 2, export-led growth brings industrialization along with predictable consequences, including a badly degraded environment and friction with trading partners. As a result, during Stage 3, state actors must decelerate the high-growth machine and liberalize some of its mercantilist components. If and when a developmental state arrives at the frontier of technological and economic advancement – and, in so doing, enters Stage 4 – state actors will be pressed to address the challenges of globalization and sustainable development. To be clear, there is considerable room for case-specific variation within these broad stages (e.g., the relatively greater powers of local Chinese authorities), and consequently, there is no reason to assume an exact convergence of developmental processes or outcomes.
We argue that Japan and South Korea have progressed to the fourth hypothesized stage, while China is just now crossing the threshold of the penultimate stage. In the analysis that follows, we explore China’s progression through these stages of growth, focusing intensively on the response of political leaders to pressure from domestic and international interests negatively impacted by a polluted environment.
Stage 1: “Crossing the River by Feeling the Stones,” 1978-1992
China’s developmental state began to emerge in December 1978 at the Third Plenum of the Eleventh Central Committee of the Chinese Communist Party (CCP). With annual per capita income at around $155, trade volume at a mere trickle, and China’s lagging development brought into sharp relief by the normalization of relations with the United States and Japan, CCP leaders were incentivized to experiment with institutions to guide in the gradual transition to socialist modernization. In his famous “Emancipate the Mind, Seek Truth from Facts, and Unite as One in Looking to the Future” speech, Deng Xiaoping made the case for pragmatic change. Not surprisingly, leftist critics lambasted Deng’s reform program, arguing – correctly, as it turned out – that it would transform China “from a planned economy to a semi-market one” (Prime 2012, 694). While questions were voiced about the suitability of Maoist institutions for the tasks at hand, when properly modified these institutions provided political leaders with “an impressive array of policy instruments and political capacity” (Oi 1995, 1133).
Reforms were enacted to increase agricultural production, nurture the growth of township and village enterprises (TVEs), and expand foreign trade. The first clear sign of change appeared Anhui Province, where peasants reaped a bumper crop after taking the liberty of decollectivizing farmland. In 1982, after initial misgivings, central authorities established the “household responsibility system” to permit decollectivization nationwide (Oi 1995, 137). Subsequent reforms targeted the fiscal system and nurtured TVEs, whose contribution to GDP leaped from six percent in 1978 to 26 percent by 1996 (Naughton 2007, 271). By allowing firms to compete in markets while continuing to fulfill obligations under central planning, gradual market liberalization spurred growth in the non-agricultural sector.
In 1979, Shenzhen, Zhuhai, Shantou, and Xiamen were designated “Special Economic Zones” (SEZ), and, by 1985, an additional 14 coastal cities and three delta regions had been added to the list. While these SEZs were becoming growth engines, many state-owned enterprises (SOEs) floundered. Officials began looking to Japan – a potentially attractive reference model because of its interventionist state and a hegemonic ruling party – for solutions to China’s problems (Heilmann and Shih 2013, 6). In 1988, an “industrial policy” (chanye zhengce) division was established under the State Planning Council, and the transportation, coal, oil, and steel industries were singled out for developmental nurturing. However, these early industrial policy experiments produced mixed results.
China’s full-speed-ahead growth strategy produced badly sullied air and waterways, just as had been the case in Japan and South Korea. Although China established its first national-level organ for environmental protection in 1973, a half dozen years would pass before a nationwide environmental law was promulgated and another decade would elapse before the law was fully implemented (Jing 2010, 198). In 1982, the authorities established an Environmental Protection Commission under the Ministry of Urban and Rural Construction and Environmental Protection. Political leaders set a target year of 2000 to harmonize environmental protection and socioeconomic development, and had, by 1993, almost a dozen laws relating to environmental and natural resource protection were on the books (China 1994, 7). However, local governments and SOE managers were incentivized to grow the economy and not curb pollution, which translated into lax enforcement. Fearful of an authoritarian state and with no environmental NGOs to turn to, Chinese citizens were left with few channels through which to voice their complaints.
Stage 2: “Blind Pursuit of GDP Growth”: 1993-2007
Deng attempted to respond to critics who claimed that his reforms displayed “disregard of the difference between socialism and capitalism,” but the People’s Daily refused to publish the op-ed (Peng and Chen 2008, 375). So, in the spring of 1992, the 87-year-old retiree ventured to southern China to visit the reform “laboratories” that “lit the fire for further market opening and faster growth” (Vogel 2011, 664). In a series of speeches, Deng called for a “socialist market economy,” and warned that “leftist” elements posed the greatest impediment to progress. Afterward, Jiang Zemin and Zhu Rongji – Deng’s handpicked successors – took the baton and pressed a broad reform package that included price liberalization. While the reforms granted local governments greater leeway in steering economic policy, a centralized Leninist regime continued to function.
In November 1993, at the Third Plenum of 14th Party Congress, the CCP embraced Deng’s vision, and proceeded to institute tax and financial system reforms. The 1994 Outline of Industrial Policy proposed measures to grow the electronics, machinery, construction, automobile, and petrochemical industries. Other industries were subsequently added to the list, while central authorities invited the inflow of FDI that would transform China into the “world’s factory.” Although the non-state sector was confined to only a few industries, its total factor productivity expanded twice as fast as the state sector, which, between 1995 and 2002, shed 38 million workers as a result of restructuring (gaizhi) and layoffs (xiagang) (Brandt et al 2008, 687). Although China was now deeply enmeshed in the world economy, the accumulation of large reserves of foreign currency enabled the country to avoid the worst effects of the 1997 Asian Financial Crisis.
In December 2001, after 15 years of lobbying, China finally became a member of the World Trade Organization. Henceforth, state actors would have to respond to accusations of “unfair” trade practices from foreign governments whose markets were now awash in Chinese exports (Prime 2012, 695). By reducing tariffs that restricted Chinese exports and opening the door to the increased inflow of FDI, WTO membership accelerated the pace of growth, and the world took note of a Chinese economic machine that displayed characteristics of the East Asian developmental state.
The reforms pressed by Deng and his successors produced a system of decentralized authoritarianism that employed concrete measures of growth in GDP and foreign direct investment as yardsticks for assessing the effectiveness of local officials (Oi 1995, 1136). Officials whose metrics were positive stood to gain promotions and their localities might be upgraded in administrative status, say, from county to city level. Meanwhile, poor performing officials could expect demotions or less desirable postings (Xu 2011; Knight 2012, 8). By inducing a sort of “best practices” competition among local authorities, China’s reformist leaders created a gigantic “laboratory, with different economic experiments taking place all over the land” (Coase and Wang 2012, 149).
China got its pilot planning agency in 1998 when the State Development Planning Commission (SDPC) replaced the State Planning Commission. Five years later, the SDPC morphed into the National Development and Reform Commission (NDRC), which became a superagency with responsibility for formulating and implementing policies affecting all aspects of socioeconomic development. Nicknamed the “mini State Council” because as many as four members of the CCP’s powerful Central Committee were recruited from its ranks (as opposed to the solitary representatives from most other ministries and departments), the NDRC became the cockpit for national-level economic planning, price setting, and industrial policy coordination. While its formal powers rivaled those of Japan’s MITI or South Korea’s Economic Planning Board at comparable levels of development, in practice the NDRC was obliged to share power with local authorities in China’s decentralized authoritarian system. Like their counterparts at MITI and the EPB, however, many NDRC officials – as well as senior CCP leaders – were alumni of prestigious educational institutions such as Tsinghua University and Beijing University.
The double-digit growth rates of the 1990s reshaped China’s industrial structure into one founded upon consolidating the commanding heights sectors of iron, steel, energy, chemical and heavy machinery, while encouraging an emerging high technology sector led by telecom. Still, much of the growth was driven by labor-intensive exports, which, between 1992 and 2002, expanded from 19 percent to 25 percent of GDP, elevating China to fifth place among trading nations. As economic growth picked up, more and more motor vehicles appeared on roadways, especially in large cities such as Beijing, where the number of cars quadrupled between 1990 and 2002 (Tang 2004). In the Seventh Five-Year Plan (2001-2005), central authorities aimed to produce a Chinese family car that would encourage mass ownership. The rapid increase in auto ownership contributed to heightened levels of airborne pollutants and CO2 emissions, which had already jumped from 2.7 million kt (thousand metric tons) to 3.7 million kt in the decade that began in the early 1990s (World Bank 2013). China now found itself numbered among the major culprits in the global campaign to combat climate change.
As had been the case in South Korea and Japan, Chinese state actors did almost nothing to prevent environmental pollution, even as favored firms reaped windfall profits. For the most part, those actions taken – e.g., the 1998 decision to grant the National Environmental Protection Agency vice-ministerial status – were not accompanied by a corresponding expansion of enforcement authority. It is not coincidental, therefore, that the first troubling reports of hundreds of so-called “cancer villages” (aizheng cun) appeared at this juncture (The Guardian, June 4, 2013). Meanwhile, local Environmental Protection Bureaus (EPBs) were hamstrung in their enforcement efforts by local governments committed to economic growth (Economy 2005, 92). Although Friends of Nature – China’s first environmental non-governmental organization – was established in 1994, it and similar groups mainly advocated for protection of endangered species and nature preservation. Citizens voiced their discontent over environmental issues by submitting letters and petitions, filing civil lawsuits, and staging demonstrations. In 2006, authorities received 600,000 protest letters, a six-fold increase from the 1997 figure, and, beginning in the early 1990s, an average of 80,000 citizens submitted petitions each year (Jing 2010, 197). While protests took place in localities, fear of harsh treatment by an authoritarian state kept a nationwide protest movement from congealing, in contrast to the large-scale protests that erupted in late 1960s Japan and in South Korea two decades later (Economy 2007, 47-8; Broadbent et al 2006).
Stage 3: Deceleration and Structural Change, 2007 to present
As China’s experiment with the developmental state model enters its fourth decade, central authorities retain control of capital investment and labor mobility. After peaking at a rate of 14.2 percent in 2007, the Chinese economic juggernaut began to decelerate, leading to predictions of five to seven percent growth over the forthcoming two decades. Some observers believe that Premier Li Keqiang’s 7.5 percent growth target for 2014 is overly optimistic (Bloomberg BusinessWeek, April 3, 2014). Despite an expanding private sector, SOEs continue to dominate the economy. Ninety-five of the world’s 500 largest companies are Chinese, and most of them are SOEs in “pillar industries” (zhizhu chanye) such as petrochemicals, steel, telecommunications, and banking. With their strong ties to state actors, the SOEs are positioned to exploit rent-seeking opportunities (Nee et al 2007, 43; Xia 2000). Although South Korea and Japan realized economic miracles in spite of – or, perhaps, because of – “structural corruption,” rent-seeking poses a grave threat to the legitimacy of the CCP’s claim to be the “people’s party” (Wedeman 2012, 9).
The “cost side” of the Chinese economic miracle includes a dangerously damaged environment, and state actors must find a way to decouple economic growth and pollution control. Today, China is home to 16 of the world’s 20 most polluted cities, and energy inefficiency is a major cause of the problem. To produce goods worth $10,000, it is estimated that China has to consume seven times the energy needed by Japan, six times more than the U.S., and three times the requirement for India (Economy 2007, 40). In 2006, 36 percent of China’s sulfur dioxide pollution was the result of export production, more than one-fifth of which found its way to U.S. markets. Ironically, the outsourcing of “dirty manufacturing” to China improved air quality in America’s eastern states, but pollution from Chinese factories now pollutes the air in western states (Lin et al, 2014). In response to international and domestic outcry, the CCP pledged in its Eleventh Five-Year Plan (2006-2010) to improve monitoring, enforcement, and assessment of environmental protection regulations. China’s first-ever comprehensive air pollution prevention and control strategy was proposed in the current Twelfth Five-Year Plan (2011-2015).
Despite some reforms and much oratory, economic growth continues to trump environmental protection. Local officials and company managers are rewarded for promoting economic growth, not for rigorously enforcing environmental regulations. In 2007, central authorities launched a study of China’s “Green GDP,” but scrapped the project upon discovering that the costs of pollution negated more than 3 percent of 2004’s GDP. In 2008, the State Environmental Protection Administration (SEPA) became the Ministry of Environmental Protection (MEP), but the new ministry remains relatively weak in the State Council. That same year, the central government began experimenting with “environmental courts” in the hope of keeping protests from mushrooming out of control (Jing 2010, 197). Local EPBs continue to lack enforcement power, and are obliged to compromise with local authorities obsessed with growing GDP and expanded tax revenues (Chow 2013, 6; Ma and Schmitt 2008, 99). This message was conveyed to an EBP director by a high-ranking local government official who made it clear that: “If you don’t change your mind, we will change your place” (personal communication, May 24, 2013). Some local EPBs are said to view the trivial fines paid by local businesses caught violating environmental protection regulations as an important revenue stream.
In recent years, large-scale environmental protests broke out in major Chinese cities (Xie 2011, 210; Zaobao 2013). To address the problem, the SEPA (MEP’s predecessor) issued a 2006 report entitled “Tentative Measures for Public Participation in Environmental Impact Assessments,” which advocates roles for ordinary citizens, developers, and NGOs in environmental impact assessment. In addition, Chinese authorities are being pressured to take action by media reporting and foreign governments. In 2011, the U.S. Embassy began publishing hourly air quality monitoring data for Beijing using an index based upon particulate matter with aerodynamic diameter smaller than 2.5 micrometers (Wall Street Journal, February 1, 2013). Prior to this, the Beijing Municipal Government had assured citizens that “fine particulate matter” poses no harm. Consequently, in June 2012, central authorities ordered foreign embassies to stop their reporting on domestic air quality (CNN, June 6, 2012). On September 12, 2013, the State Council announced 10 broad measures to curb pollution, including a 30 percent pollution reduction in heavy polluting industries by 2017 and greater accountability for local governments (Xinhua, September 12, 2013). Meanwhile, protests are becoming larger and more frequent, and surveys show that a majority of Chinese people favor environmental cleanup over economic growth (The Guardian, May 16, 2013).
Stage 4: China’s Road Ahead?
When the East Asian developmental state arrives at the frontier of technological and economic advancement – the threshold of Stage 4 – policymakers must address the challenges of globalization and sustainable growth. Currently, Japanese and South Korean state actors have put these issues at the forefront of policy, and, although China has yet to embark upon this stage, its leaders are under pressure to curb emissions while sustaining growth. Combating climate change was not the policy agenda when Japan decoupled pollution control and economic growth, and it was only on the distant horizon when South Korea tackled the challenge. Japan accomplished the objective by enacting a raft of laws that created incentives (e.g., low-interest loans, tax breaks, mandatory appointment of an “energy manager” in factories and workplaces, etc.) to encourage energy efficiency, establishing a cabinet-level Environment Agency (later given ministerial status), and expanding reliance on nuclear power and renewable energy (Woodall 2013, 154-7). Yet the challenge is even more daunting for Chinese leaders, who must reduce pollution while pondering policies to cut greenhouse gas emissions.
China’s leaders must orchestrate environmental cleanup efforts in a context in which globalization and advances in information technology make it difficult to muzzle demands for reform from an increasingly affluent citizenry, as well as from the international community. Authorities succeeded in making Beijing’s air somewhat more breathable in advance of the 2008 Olympics, although, in truth, many heavy polluters merely shifted operations outside the capital. Meanwhile, although state authorities are able to shut down groups that fail to do as they are told, the emergence of environmental NGOs and anti-pollution protests in major cities seems to indicate that China’s store of “social capital” is growing (Ma and Schmitt 2008, 102; Economy 2007, 54). Nevertheless, by the time the CCP embraced sustainable development in its Tenth Five-Year Plan (2001 – 2005), China had already overtaken the U.S. to become the world’s largest CO2 emitter (Economy 2007, 45). Only time will tell whether Prime Minister Li Keqiang’s declaration of “war against pollution” is a signal of genuine governmental resolve (New York Times, March 25, 2014).
In the final analysis, the East Asian developmental state model can be adapted to settings as dissimilar as those presented by China, South Korea, and Japan. Many unique aspects of China’s institutional arrangements are the product of path dependence and situational imperatives, including the fact that the country is more akin to an empire than to a typical nation-state. Going forward, the stability of China’s developmental state will depend on how well its leaders respond to the challenges of decoupling economic growth and environmental cleanup, curbing corruption while resisting the temptation to prop up politically potent but inefficient firms, and narrowing the gap between rich and poor. The well-being of the world economy hinges on the success of the Chinese leaders in addressing these critical challenges. Although China has ascended a developmental staircase broadly comparable to that trodden by Japan and South Korea, there is no reason to assume that development cannot beget decay or that the road ahead inexorably leads to a common terminus. Indeed, the institutional framework of China’s developmental state remains fragile, and concrete steps must be taken if it is to survive and prosper in an uncertain future.
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- The concept of “developmental stages” of the East Asian developmental state is more fully explored in Woodall (forthcoming) and Woodall and Han (2014). ↩