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The Economist on the “Beijing Consensus”

March 13, 2011

The Economist this past week published a powerful statement on the vital role of private enterprise — as opposed to state direction — as the driving force behind China’s economic progress, one that echoed my earlier writings on the subject (which you can read here and here).

The Economist begins by observing that China’s astonishing economic performance:

is often vaguely attributed to “capitalism with Chinese characteristics” — typically taken to mean that bureaucrats with heavy, visible hands have worked much of the magic. That, naturally, is a view that China’s government is happy to encourage.

To the contrary, it argues, the miracle has been mainly due to efficient and innovative private entrepreneurs, often laboring against significant disadvantages.  It concludes that:

Too many people—not just third-world dictators but Western business tycoons—have fallen for the Beijing consensus, the idea that state-directed capitalism and tight political control are the elixir of growth. In fact China has surged forward mainly where the state has stood back. “Capitalism with Chinese characteristics” works because of the capitalism, not the characteristics.

It’s gratifying to hear The Economist driving home the point I made back in August, when discussing the phenomenon of guo jin min tui (“the state advances, the private sector retreats”):

As for China, my concern is that its leaders, its policy-makers, and to some extent its people have forgotten what made the economic miracle of the past 30 years possible.  It was not the product, as is commonly portrayed these days, of a series of five-year government plans, in which entrepreneurs played their cooperative but subordinate part.  It was the courageous and far-sighted decision, on the part of China’s leaders, to get out of the way and allow the Chinese people to create better lives for themselves — starting with the humble step of allowing farmers to grow and sell their own surplus crops.  When the state advances, and the people retreat, China wanders and backtracks on the very path that has led it to accomplish so much.

10 Comments leave one →
  1. March 13, 2011 10:10 am

    Really fascinated by this post. That last bit in the last quote is striking, because somehow everyone seems to know that China’s growth has been due to the state allowing private enterprise (and running ever more SOEs as if they were private) – but then, maybe especially in the last one or two years, because Keynesian deficit spending is around again, the state intervention bit just got too strong a notion…

  2. March 13, 2011 1:31 pm

    Er, the Chinese miracle is due to super high savings rates over the last 40-50 years. This is not news, guys.

    Furthermore, in response to the Time quote, there’s nothing inherently ‘efficient’ about Capitalism, it’s competition that makes companies efficient. A market with no competition is not so dissimilar from government itself. Obviously.

    • prchovanec permalink*
      March 13, 2011 1:37 pm

      A super-high savings rate will not generate growth unless either (a) the savings are being invested productively or (b) there are enough “low-hanging fruit” in terms of productive improvements that even if a great deal of capital is mis-invested, the capital that isn’t wasted generates exceedingly high returns. I don’t think savings rates alone explain sustained growth, otherwise all countries with suppressed consumption (such as the Soviet Union and China in the 1950s and 60s) would be considered paragons of economic development. In fact, they may have looked that way at the time, but only until it became obvious that their massive investments were generated poor or negative returns.

      Think about it this way: it didn’t matter what percent of your income you saved, if you put the money with Bernie Madoff, you would have nothing to show for it.

      The key question is, why did China go from wasting its savings (in the 1950s, 60s, and 70s) to investing it productively (since the 1980s)? I think market reforms and the emergence of private enterprise has a great deal to do — almost everything to do, in fact — with explaining that.

      • March 15, 2011 11:09 am

        Don’t Chinese families typically take all their money and buy property? I’d say buying an apartment in Shanghai, Hangzhou or Shenzhen 30 years ago would have some pretty slick gains.

        With zero transparency, Chinese know better than to their the stock market seriously here. They save money, buy a home, and when the kids are married, pass most , if not all their wealth onto the kids. Here we have a culture (esp. in big cities) of not being marriage material, if you don’t own your own home.

        As you say, that has been happening forever, but only in the recent half century did property values start to explode, in a few key cities. Part of that explosion in property value also has to do with Beijing decision to appoint lower tax rates in select Economic Zones. A mansion in Gansu province is not necessarily a great investment either.

  3. Anon permalink
    March 14, 2011 3:56 am

    On the other hand, it’s my impression that a number of Chinese industries have benefitted significantly from more active state involvement over the past 5-10 years, where government assistance–from subsidies, to R&D grants, to local content requirements, to using market access to strong-arm (in some cases) foreign companies to cooperate rather than compete with domestic companies–has helped domestic companies overcome barriers to entry into the global market. The rural economy has indeed suffered mightily since the government began to reassert its role in economic planning to favor high-tech and heavy industry, but high-tech and heavy industries have boomed. In almost no time, Chinese companies have become formidable global competitors in high speed rail, green technology, and telecommunications, and they are moving in that direction in aviation and automobiles–all industries in which the state has taken a strong “strategic” interest. I think it’s correct that a lot of multinationals have become obsessed with the “Beijing Consensus,” and that’s why I find it odd that they seem to decry every step the US government takes to become more active in the US economy, even as they pour billions in long-term investments into an economy where their commercial autonomy is heavily restricted in many areas… The argument that markets prefer light government involvement is odd to hear, as it seems like global markets are going gaga over a country where government involvement is particularly heavy… I will honestly believe the small government mantra as soon as markets begin behaving as though they in fact favor small government. For now, it appears as though global businesses enjoy being manhandled by a strong, centralized authority. “If I don’t submit, then my competitors will.” “China is different.” “To succeed here, you need to play nice with the government.” The list goes on.

    • March 15, 2011 11:00 am

      “On the other hand, it’s my impression that a number of Chinese industries have benefitted significantly from more active state involvement over the past 5-10 years, where government assistance–from subsidies, to R&D grants, to local content requirements”

      Following the Korea/Japan models that preceded China…Well spotted

  4. March 14, 2011 10:29 am


    it seems to me that China’s Capitalists are to be respected/feared/watched much more than China’s Communists.

  5. Joe Joe permalink
    March 14, 2011 10:38 am

    This discussion is missing some important aspect, IMHO.

    Regardless of the internal structure in China, it seems that one important reason for their success, is that it was given to them. Greed and short term view has caused the current developed countries to transfer a lot of their wealth and know how to China. This continues to this day. In the history of man kind, has there been such an event that the current power that be transfered much of their power and knowledge to another country without a war involved?
    I’m not saying that this is bad or good or making any judgement, what I’m saying is that this what seems to be happening.

    Anyone who has been in China for awhile can witness the amazing entrepreneurship spirit and the desire to start business of the local Chinese. For sure it’s also culturally driven, just opening the door is not enough as can be seen in other countries. There might be other aspects involved, economists often get their theories wrong as they get stuck in a very specific spectrum.

  6. Joe Joe permalink
    March 14, 2011 10:48 am

    Sorry, P.S.

    I do agree that competition is the mother of success. The article mentions China’s “government” as if it is one entity. In practice there are many local governments which have competition between themselves. As an example, this is very evident in the economic development zones which compete to attract certain investors or competition between Shanghai, Beijing, Shenzhen etc. It is definitely not just small businesses doing their own thing. Would be happy to hear different opinions.

  7. Glenn Luk permalink
    March 14, 2011 7:05 pm

    I agree that it has been the unleashing of the private sector that has been the key driver of China’s growth. 30 years ago, it comprised 0% of the economy. Today, it comprises majority of the production, employment – a China that is over 20x larger. The facts are so clear-cut that it is hard to think that this concept is lost on Chinese leadership (in general). These are some of my unorganized thoughts on the topic:

    – The private sector and state-owned sector largely focus on different sectors. SOEs are more likely to be in real estate, commodities (oil, coal, refineries), highly regulated sectors (banking, telecom, insurance, media) and logistics & heavy industry (rail, ports, shipping) – industries that existed before reforms began. These indstries also happen to be very capital intensive.

    – The private sector is disproportionately skewed towards export industries (labor-intensive manufacturing), new industries created after reforms began (tech, telecom equipment, software) and smaller businesses that were privatized in the 1990s. These businesses generally do not require significant capital.

    – In the 1980s and 1990s, China did not have much a lot of capital. Thus, growth was driven by the private sector i.e. enterprises and sectors that generally did not require significant capital to grow and, moreover, took advantage of the surplus labor streaming in from the countryside.

    – By the early 2000s, capital was no longer an issue, and while the private sector continues to grow very well on its own (and has even gotten into more capital-intensive sectors such as automobiles).

    – Meanwhile, SOEs had been turning over their own capital stock, upgrading equipment and had gradually improved over time. They are not world-beating by any means, but just as an example, in my research into the domestic automobile industry, I was surprised to learn that the SOE formerly known as “Second Automotive Works” (now called Dongfeng Motor Corporation) averaged close to 15% pre-tax return on capital from 2005 to 2009 and close to 30% in 2010 – if these numbers don’t mean much to non-finance people, by comparison Toyota’s was 7%, Ford’s -16% and Geely Auto (a private automaker in China, recently acquired Volvo) was 17% in the same period. Going into the specific reasons behind Dongfeng itself would require its own post, but suffice it to say that this was just one example of a SOE that had actually become a relatively business.

    – Dongfeng is probably a very successful example of an SOE that has made the transition well and may not be representative. I have not done a comparative study. Others have, and from what I can remember, returns on capital for SOEs range from low single digits to low teens i.e. between poor and mediocre. I mention it because I believe it does represent the trend that while they may not have improved as dramatically as their private sector counterparts, most SOEs have actually taken the last twenty years to improve and in some cases dramatically.

    – An important point however is that these SOEs require lots of capital and as China was generating more and more excess capital, it had to go somewhere. The private sector simply could not suck up that much capital. There were not enough energy/commodities assets overseas that were available to buy. SOEs sucked up a ton of capital and directed much of it into real estate. And even after all of this, China still has excess capital which sits in treasuries collecting a meager interest rate.

    – One other factor to mention is that you will inevitably find a lot of “princelings” running SOEs and I think it is a natural human nature to build empires. Even if the return on incremental investment is poor or mediocre.

    Anyway, my point is that I do not think the private sector is retreating or that the government doesn’t recognize its importance. I believe it will continue to grow and China’s best-run global companies will come out of this batch. Instead, the SOEs have risen alongside the private sector because the country is literally overflowing with capital and SOEs tend to be capital intensive businesses that are run by people who can direct capital allocation. That does not necessarily crowd out the private sector because they play in different sectors and the private sector has access to its own funding sources nowadays (and again, does not require that much capital to grow). You brought up the airline industry as an example of where there might be friction, but I think that is more the exception than the rule.

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