China’s astonishing growth trajectory holds few lessons for democratic Britain (City A.M.)

CPS Head of Economic Research Ryan Bourne argues in City A.M. that China’s astonishing growth trajectory holds few lessons for democratic Britain.

To view the original article, visit the City A.M. website.

Ryan Bourne“I’VE SEEN the future and it works.” That was US journalist Lincoln Steffers’s message after visiting the Soviet Union in the 1920s. It’s worth remembering how wrong he turned out to be. Why? George Osborne and Boris Johnson have just come back from China, and they’ll be tempted to use the impressive things they’ve seen to justify huge infrastructure projects, like HS2 and a floating airport off the Kent coast.

Already, Osborne has claimed that China, unlike Britain, has ambition. There may be some truth in this. More uncomfortably, in conservative circles I’ve heard some discuss “the limits of democracy” – whether seen in the time it takes to build nuclear power stations, or the recent stand-off over the US debt ceiling. Sometimes this implies that China’s model of so-called political-economic “state capitalism” may be on to something.

It’s easy to see why China’s story is so appealing. The World Bank shows average annual GDP growth between 1998 and 2012 at 9.7 per cent. In that time, real GDP per capita rose from $821 to $6,188 – up 754 per cent. This transformation is the most important global story of the past 35 years, and foreign politicians want a piece of the action. China’s growth provides huge export opportunities (particularly in services – though politicians obsess about manufacturing), so it’s right to set frameworks for the UK to benefit. But we shouldn’t become starry-eyed about state direction of the economy or indeed authoritarian rule.

Ronald Coase’s book, How China became capitalist, posits that – in contrast to the state-led narrative – the transformation really coincided with a shift towards a more market-oriented economy. Yes, powers were devolved to state-led enterprises, and there was more investment in consumer goods. But critical, according to Coase and Ning Wang, were the “marginal revolutions” of private farming, village and township enterprises, private urban business and Special Economic Zones. None of these were centrally directed from Beijing. From 1992, tax and prices reform, and regional competition and experimentation, helped push on the development.

Much of this is “catch-up growth”. China’s average real GDP per capita is an eighth of the US’s figure, and it is still capitalising on the innovations of others, leading to rapid productivity gains. This offers few lessons for developed countries like the UK – near the technological frontier.

Ultimately, what leads to growth in countries like ours is innovation and new ideas. And inclusive, democratic institutions are important in creating the conditions for these to flourish. As Daron Acemoglu has noted, the private sector can act as a brake on the state’s power, maintaining incentives, allowing profits, and protecting intellectual property. Under these conditions, more innovation takes place. Alan Greenspan has noted that a Reuters study of the world’s 100 most innovative firms had no Chinese representation. China has nine Nobel laureates, but seven live abroad.

Democracy – if constraints prevent pure majoritarianism – allows a competition in ideas and the protection of rights. This sometimes prevents steam-rollering projects through towns, or creates stand-offs over healthcare reform that push countries towards their debt ceilings. But this is a small price worth paying for the economic and political freedoms we enjoy.”

To view the original article, visit the City A.M. website.

Date Added: Tuesday 22nd October 2013