The China Economic Model in Global Context: A Review of Three Books

At a time when U.S.-China relations are spiraling downward, a fracturing of global supply chains is underway, and countries are struggling to respond to the coronavirus pandemic, interest in the possible benefits of the “China model” has grown. China’s success in dealing with the 2008 financial crisis, its promising moves to become an innovative nation, and its ability to contain COVID-19 and restart its economy are achievements envied by many countries.  Social and political stress in the U.S. has further pushed leaders worldwide to rethink their relationship with the U.S. and, inevitably, with China.

At the same time, China’s spectacular economic rise has an ominous side as it secures control over the South China Sea with a navy that increasingly rivals the U.S.  China also has begun to behave in more belligerent ways toward its neighbors, for one thing by instigating skirmishes on the India-China border. And some of China’s domestic policies, such as increased digital surveillance of citizens, treatment of the Uyghurs in Xinjiang, and rising nationalism, have led to wariness of China’s authoritarianism.

These developments beg the questions: How can we define the China model, and in what ways has it been successful or not? In this essay, I review three recently published books with these questions in mind:

Dexter Roberts, The Myth of Chinese Capitalism: The worker, the factory, and the future of the world (St. Martin’s Press, 2020)

Scott Rozelle and Natalie Hell, Invisible China: How the urban-rural divide threatens China’s rise (The University of Chicago Press, 2020)

Thomas Orlik, China: The bubble that never pops (Oxford UP, 2020)

The Migrant Dilemma

In The Myth of Chinese Capitalism, Dexter Roberts argues that rural migrant workers have been the bedrock of China’s growth model since economic reforms began in 1978.  Following Guizhou villagers who worked as migrants in Guangdong, Roberts provides personal examples of the challenging lives these migrants have faced.

One of the most serious challenges, and one Roberts spends a lot of time on, is the household registration system, or hukou.  Chinese citizens are assigned official residences tied to their rural or urban places of birth.  Many aspects of a person’s life are then also tied to whether they have a rural or urban hukou, such as access to education and health care, permission to marry and have children, and the right to purchase a home. This social structure prevents rural citizens from achieving a better urban life or even sending their children to urban schools while they live and work in the cities as migrant workers. Meanwhile, in the countryside, the lack of property rights over land stifles their options at home because they cannot sell land and use the profits for other pursuits. As Roberts describes it, the lack of reforms in the labor and land markets hits rural migrants the hardest. He sees capitalist market reforms as falling short of the rhetoric, and hence, the “myth.”

From Roberts’ perspective, the economic model’s fundamental characteristic is an urban bias created by state policies that systematically hurt, however inadvertently, non-urban hukou holders. Roberts’ analysis suggests that the development process has been extremely beneficial for urbanites, but that constraints on rural citizens will need to change for progress to keep spreading to the rest of society.

He acknowledges that some things have improved for rural migrants, such as wages. Still, he emphasizes that without reforms allowing land sales by individuals and freedom for rural people to live where they choose, China’s development will not succeed because it will leave out too many people.

From an economic development perspective, China’s policymakers understand that moving up the value chain is the right way to go, even in rural villages, as Roberts describes. They promote innovation and entrepreneurship, using the state to push development goals through incentives and directives. However, leaving half of the population out could lead to failure.  And although Roberts does not say so explicitly, if ending the hukou system and state ownership of land would undermine Party control, these steps are not likely to be taken.  In an optimistic sign, the latest National People’s Congress in March 2021, approved some reforms of the hukou rules.   

Human Capital is Key

Invisible China: How the urban-rural divide threatens China’s rise, by Scott Rozelle and Natalie Hell, makes the case even more forcefully that China must pay attention to the health and well-being of rural citizens, or its growth may well stagnate. The authors fully recognize the impressive progress that China has made, leaving most people much better off than before the reforms began in the late 1970s. Poverty reduction has been real and widespread. However, Rozelle and Hell argue that the lack of adequate education and health, which are the basics of investment in human capital, for 70 percent of the labor force could leave China in the dreaded “middle-income trap.” Their conclusions are based on thousands of interviews and surveys over several decades.

The middle-income trap refers to the process of industrializing based on low-skilled, labor-intensive manufacturing and exports. Once wages begin to rise, workers cannot move to higher value-added, relatively more skilled jobs. This problem emerges when the workforce lacks the needed higher level of skills. The result is economic stagnation and social challenges such as unemployment that arises from that stagnation.  Mexico, Brazil, and Turkey are examples of initial development success stories that have failed to grow into high-income economies. In contrast, South Korea, Singapore, Taiwan, and Ireland were able to transition to higher-skilled manufacturing and services, and then on to innovation and become some of the world’s richest economies.

What makes the difference between countries that become high-income and those that do not?  Rozelle and Hell argue that the percent of the population with a high school or greater education level is the critical factor. They point out that countries that have succeeded in moving from middle to high income had over 70 percent high school attainment for decades (p.25-26).  And surprisingly, despite all of China’s successes and focus on education, only 30 percent of China’s labor force has a high school degree or higher today.

Many years of meticulous research led by Rozelle uncovered challenges such as myopia in elementary school children and poor nutrition affecting youth development, leading to large achievement gaps between rural and urban students. The result is a large, mostly rural, increasingly unemployed or underemployed population as the country moves to more sophisticated manufacturing and services as the drivers of growth.

Rozelle and Hell are hopeful that China can build an education system that will serve all citizens and match needed skills. They point out that China has been able to address seemingly intractable challenges over time. China’s focus on education has been extensive. The authors describe how investments in buildings, textbooks, teachers, and meals have greatly improved schools.

However, timing remains a problem. Since obtaining a proper education takes many years, rural youth are at least two decades away from achieving this, even if the existing challenges are solved now. There is also a matching problem.  Although China’s economy has been good at creating new jobs, Rozelle and Hell argue that there is a mismatch — skilled workers will find work, but unskilled workers may not. There simply are too many unskilled workers for the forecasted number of unskilled jobs. The authors estimate that perhaps between two and three million people may not be employable in formal jobs (p.48). If so, they argue, China will unlikely be able to move up the income ladder.

Dealing with Debt

Thomas Orlik looks at a different slice of China’s growth process — that of the financial sector — in China: The bubble that never pops. He argues that China has been able to overcome serious challenges time and again. Given the high debt levels that China has incurred, analysts wonder why the country’s “coming collapse” has not occurred yet.¹ However, Orlik views the reform process as working just the same. He documents the various parts of China’s enormous debt levels with extensive detail and yet sees the system continuing to thrive. Orlik argues that the strength of the system rests in part on the creativity of policymakers and the vast resources available to them through the country’s high savings rate managed by a single-party state.

For example, a major concern has been the high debt levels in “shadow banking,” which operates outside the formal banking sector. This sector emerged initially to help finance the many investments, small and private, that state banks shunned. Eventually, the state banks also participated in lending to this sector because the rate of return was much higher than with formal lending. This non-transparent, high-risk debt grew to an estimated 36 percent of China’s GDP by 2016 (p.43).   Policymakers were worried that a crisis in the sector might spill over to the formal economy, but they did not want to restrict lending for fear of seeing a major part of China’s growth engine disappear.

However, Orlik suggests that as part of China’s moves to control its debt levels, reducing shadow lending has been successful — without serious negative growth consequences. He argues that lending was kept open for productive projects funded within the traditional banking system even as funding was restricted for property speculation and emergency loans to companies near bankruptcy, which shadow lending largely funded by that point (p.133).

Another major part of the deleveraging process deals with the over-building of housing and real estate generally. Outsiders are shocked by the “ghost city” phenomena in China.  How can so much empty real estate be supported financially? A debt or financial crisis is certainly coming.

Contrary to other analysts’ gloom and doom scenarios, Orlik describes how Chinese policymakers have been tackling the real estate challenge while spurring growth. The policy’s thrust was to increase demand for housing to absorb inventory and help bolster developers’ profits to lessen their debt. When the developers have incentives to invest, they buy land from local governments, filling public coffers. To increase demand when there is an oversupply of apartments, policies such as favorable mortgage rates, access to urban residency permits, teardowns of slum housing, and subsidies have worked in many areas. Where housing is tight and prices are high, such as in Beijing, restrictions and incentives not to buy are used instead.  Orlik lauds the variability of the policies depending on the needs. The focus is on helping all stakeholders — buyers, banks, developers, and governments — by considering the interests of each. Orlik is clear that China’s approach has been government action rather than a market solution. He acknowledges that this approach has most likely led to inefficiencies but avoided the high costs of a major financial crisis.  

Defining the China Model

How can we describe the China model? Table 1 summarizes China’s economic system’s key elements based on these three books and my research on China’s economy.

The characteristics in Table 1 reflect a prominent role for the state in setting priorities and directing resources, but also a large role for the private sector. Sufficient savings to fund high investment underlies rapid growth rates. These characteristics are similar to those of other East Asian countries as they developed from low to middle income and then succeeded in becoming high income.

Table 1: Defining the China Model

 Is the “China model” special? Does China have tools that others do not?

High savings and investment are key, but this is not country-specific. As Roberts, and Rozelle and Hell, describe, China followed a typical development process of starting with low-skill, low-wage production and moving up the value chain over time. Granted, China has been consistent in pushing this process forward, while other countries seem to have a shorter time perspective and less political will. One might argue a difference is that China’s leaders have state control, secured by a single-party state, over land, labor and other resources. However, the high-income countries succeeded without as much control, authoritarian rule, or as many resources. Development can occur in a variety of ways.

From China’s official view, there is no “China model.”² Leaders claim to share methods of good governance and problem-solving that worked for China, with the underlying message that a country does not have to be democratic to succeed. East Asian high-income countries have shifted the balance from government to more reliance on markets as their economies have matured, and they have become more democratic. These shifts are not apparent in China and by some measures are in reverse today.

The maintenance of the Chinese Communist Party’s power is one reason. While the Party is not the focus of these studies, the authors acknowledge the Party as a key factor in China’s development. The Party can define national goals and marshal resources toward them, maintain law and order, and build national consensus through propaganda and surveillance. When the regime faces risks, the Party can act ruthlessly, unlimited by law.  But the Party’s legitimacy rests on continued economic growth and solving problems people care about, such as environmental degradation. To date, the Party has pushed development forward and avoided most challenges to its monopoly power using both sticks and carrots.

While the authors of these books document that China has many elements needed for success, each contains warnings about possible constraints going forward. Roberts argues more freedom for rural citizens will be necessary for China to continue to develop; Rozelle and Hell argue that China has underinvested in one critical ingredient: human capital; and Orlik, the most optimistic of the group, lists difficult structural transitions needed for the fifth cycle of growth driven by innovation. All the authors conclude that China’s long-run success is far from assured. However, they all also emphasize China’s willingness to be flexible, imaginative, and forward-thinking in dealing with challenges that arise. This political will to develop may be the most important lesson that countries can learn from China.