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A B C D E F G H  I  J K L M N O P Q R S T U V W X Y Z

The China Miracle: Development Strategy and Economic Reform

Year of Publication : 2003

Publisher : Chinese University Press

Review :

Seven years after this book was first published, the second edition comes at a time when much dust has settled and China’s incremental approach has become a widely accepted if not admired transition model. That a fair share of the second edition is unaltered attests to the quality of the original analysis. The second edition lengthens the list of problems discussed and adds three new chapters, on sustainable development (replacing an earlier chapter on reform at a crossroad), deflation in China since 1998, and WTO accession.

The jewel of the second edition remains the authors’ ability to slice through a vast number of reform events to present an underlying logic that explains economic development and transition patterns in China in seemingly obvious terms. We are presented with a compelling explanation for the slow development prior to the reform period and for the rapid growth during the reform period. China’s economic cycles make perfect sense when seen through the analytical eyes of the authors. The success of China’s economic reforms suddenly seems beyond doubt.

The authors make their points through twelve chapters, first examining China’s development strategies prior to and during the economic reform period, then describing the economic reforms that have taken place in China and examining their successes and problems, and finally pondering current and future developments. The book is dominated by two major arguments. The first argument is the inherent logic of what the authors call the trinity of the traditional (pre-reform heavy-industry-oriented) development strategy. In brief, since a heavy-industry-oriented development strategy requires a large volume of investment but capital in China in 1949 was scarce, the only solution was to distort the price structure in favour of industry (“distorted macro-policy environment”). The resulting market disequilibria were then overcome through the “centralized planned allocation mechanism.” This in turn led to the need for “puppet-like micro-management institutions.”

The second key argument of the book focuses on the superiority of what the authors call the “comparative-advantage-following strategy.” Throughout the rest of the book the authors hammer home time and again the rewards that follow from adopting a development strategy that allows China to freely make use of that endowment factor in which it has a comparative advantage, namely labour. By allowing growth in those economic sectors where China has a comparative advantage, surplus accumulates and can be re-invested, leading to sustainable growth. The authors show the effects of China’s gradual adoption of the comparative-advantage-following strategy first on the micro-management institutions (the household responsibility system in agriculture, enterprise management in industry), through changes in micro-management institutions on the allocation mechanisms (from the material management system to the banking system), and then through changes in the allocation mechanisms to reform of the macro-policy environment (price reform, covering the prices of goods and services, the exchange rate, and the interest rate). The government’s occasional reluctance to reform the allocation mechanism or the macro-policy environment in step with the micro-management institutions causes the economic cycles China has been experiencing.

The book is brilliant in the simplicity of its key arguments. They appear so obvious, so beyond doubt, that one wonders why nobody has earlier laid them out as clearly as these authors have. But the insights required an ability to cut to the core of the matter as well as a sound foundation in comparative economic analysis and development economics.

When compared to the contributions of the book to the field of China studies, comparative economics and development economics, the shortcomings are minor. Many passages that should be referenced are not, and numerous lesser points are not argued compellingly. For example, the authors raise the question as to why Chinese leaders chose the heavy-industry-oriented development strategy and present three reasons for it (pp. 31f.). One might expect a quote or a historical discussion, but none is offered; the three reasons are presented as the unquestionable truth. Or, in a different instance, the authors argue that the prices of the products produced in China’s Central and Western areas are artificially suppressed, which implies that these areas are in effect subsidizing the relatively developed Eastern areas; two of the products listed are grain and cotton
(p. 247) — only a few pages down the authors acknowledge that agricultural product prices are artificially high (p. 250). It is in the details that the book at times appears insufficiently thorough.
There are sections where one might want more analysis and updates, such as on social security reform or on the current unemployment pressures, but the authors cannot cover every topic in depth. The chapter on deflation and the New Village Movement (the attempt to unshackle rural demand for consumer goods through infrastructure measures in the countryside) is one chapter that makes an exemplary strong argument. Other sections of the book are a little too drawn out, such as the description of the economic reforms, where facts are heaped upon facts (although within the compelling structure of the authors’ second argument). These passage are unreferenced and at times read as if translated into English from a Chinese compendium. The book could also do with some streamlining. The key points are repeated throughout the book, however, this does have the advantage that they definitely come across.

The authors place the discussion of economic growth patterns in China in the larger framework of China’s place among nations. In the introduction, China is extensively ranked against and compared to other nations. In the second chapter, China’s past failed “leapforward” reform strategy is interpreted as plausible at the time by citation of economic development theories and reference to other countries. The authors thus present China’s path as a natural path. Just as naturally, China now appears to be growing endlessly. “The possibility that China may become the
only country in world history to have fallen from the zenith of human civilization into the trough and to have again climbed to the apex will undoubtedly draw the attention of academics, among others.” (p. 3) But the authors do not take the additional step and ask what the implications of China’s economic growth are for other nations, economically and perhaps even politically.

But these are minor quibbles compared to the overall strength of the book. The book is suitable for both academic researchers (with perhaps a slightly lowered sight as to the degree to which arguments have to be proven) and for others interested in China. Its captivating simplicity and the frequently firm grounding in economic theory make it excellent reading for courses on China’s economy.

Carsten A. Holz
Hong Kong University of Science and Technology