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China and the Post-Soviet Command Economy

Benjamin Daniels

The end of the twentieth century was heralded as early as 1991,1 immediately
following the collapse of the Soviet Union and Yugoslavia. A new age was presumed to have
dawned on the world, politically as well as economically, as the USSR crumbled and the
communist mode of organization was rebuked. That annunciation now seems to have come
prematurely. The free-market economy faces financial crisis; states from the US to Greece
face massive fiscal crises. The Washington Consensus economic reforms brought to Latin
America and former Soviet republics have met dubious success. Russia itself has failed to
emerge as an economic giant despite two decades of effort. At the same time, China has
assumed the mantle of economic superpower despite its outright rejection of many of the
liberal world’s fundamental social and economic values. Such astounding performance by an
ugly-duckling state implies that the conflicts which defined the latter half of the twentieth
century – between capitalism and communism, between liberal globalism and mercantilism,
and between laissez-faire policies and command economies – have yet to be resolved.

The disappointments of the Washington Consensus reforms for developing countries


have been well-catalogued. “[D]evelopment policy, as it is commonly understood and
advocated by influential multilateral organizations, aid agencies, Northern academics, and
Northern-trained technocrats has largely failed to live up to its promise.”2 One fundamental
feature of these reforms is their strong rooting in the dominant features of the highly
developed U.S. and EU economies. The Consensus emerged in 1989 as a program of
fundamental economic values from the IMF,3 whose members overwhelmingly exhibited
democratic polities and capitalist economies. The program envisioned a smooth, rapid
transition from post-communist economic chaos in Latin America and the former Soviet
states by grafting in the successful economic institutions of the developed world. It featured
such goals as floating exchange rates, trade liberalization, industrial privatization, and
independent central banking,4 all taken for granted as key to the successes of the First World
economies, and their absence as being instrumental in the 1990s collapse of the Soviet Union.

1
Eric Hobsbawm, The Age of Extremes: The Short Twentieth Century, 1914-1991 (1994).
2
Dani Rodrik, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth
(2007) 85.
3
John Williamson, “What Washington Means by Policy Reform,” Latin American Readjustment: How
Much has Happened (1989).
4
Rodrik (2007) 17.
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Yet throughout the 1990s, Latin American countries which had instituted the Washington
reforms universally failed to exhibit the growth patterns which were expected of them.
Instead, they frequently collapsed into fiscal or monetary crises until even Argentina, “the
poster boy of the Latin American economic revolution, came crashing down in 2002 as its
currency board proved unsustainable.”5

The successful developing economies of the 1990s were instead the East Asian
“Tiger” economies, which defied the expectations of the Washington Consensus backers. The
driving force behind the extraordinary Asian growth economies, “including Japan, Taiwan,
and South Korea … was not neoclassical economics, but rather an eclectic blend of Marxism
and the economics of List and Schumpeter.”6 The economies exhibited a high degree of
central planning and state enterprise, but at the same time the policies that were pursued by
the authoritarian governments were engineered to replicate the most positive influences of a
free-market capitalist system while correcting for standard market failures. Protectionism was
used sparingly, and generally in accord with accepted ideas of infant-industry protection;
state enterprises were shut down should they fail to be profitable or generate large positive
externalities.7 Privatization and liberalization were not the hallmarks of the policies pursued
in the East Asian economies, yet the private sectors became major contributors to the
economic booms of the tiger economies under the guidance and protection of the
authoritarian governments. The national leaderships were able to successfully implement
strategies of “government-led coordination of private investment,”8 and the policies were
deployed to shepherd infant industries to success without relying on the market forces of a
liberalized trade or capital-flow regime. The governments targeted industries which had
empirically demonstrated high long-term rates of return, such as manufacturing, to capitalize
on the externalities of growth in labor productivity for the economy at large, especially in
environments where a glut of inexpensive labor was readily available.9 The policies
successfully pioneered in these East Asian countries drastically improved GDP per capita in
every case, boosting domestic standards of living along with regional and international
influence.

5
Dani Rodrik, “Goodbye Washington Consensus, Hello Washington Confusion?” (Jan 2006) 4.
6
Peter Nolan, China’s Rise, Russia’s Fall: Politics, Economics, and Planning in the Transition from
Stalinism (1995) 60.
7
Nolan 66.
8
Rodrik (2007) 158.
9
Nolan 102.
2
At the same time, China was extending the post-Mao boom of the early 1980s into a
multi-decade streak averaging about 10% GDP growth per year. Much of this growth had
been driven by China’s unique system of township and village enterprises (TVEs), which
implemented a shared public-private property right regime in order to improve productivity in
non-agricultural sectors. Despite the apparent differences between this approach and that of
the centrally coordinated East Asian economies, the TVE structure actually resembled central
planning more than it did liberal capitalism. They functioned as microcosms of national state-
owned enterprises; they were carefully directed by an “asset management agency …
responsible to the community government.”10 Corresponding two-tier price liberalization
meant that the communities themselves acquired incentives to manage the TVEs efficiently
and guarantee their long-term health. By the 1997 Asian financial crisis, after almost twenty
years of growth, China had achieved a GDP per capita (PPP) of about $2000,11 and was near
to becoming the world’s second-largest domestic economy in PPP terms but not nominal
terms.12 (The use of purchasing power parity statistics to quantify China’s economic metrics
is crucial due to sustained differentials between the global and local values of goods, services,
and currency.) This paled in comparison to the other East Asian economies, whose GDP per
capita (PPP) ranged from $6000 (South Korea) to $25000 (Singapore) in that same year.13
However, TVE employment had peaked in 1996 and had ceased to be the central driver of
Chinese economic growth.14

As the TVEs surrendered their central role in driving national economic growth,
private investments and enterprises began to boom. Privately-owned firms grew from about
1.5% of GDP in 1998 to a full 8% by 2007.15 This explosion was not a market-based
transition. Beginning in the late 1980s, the central government had decided upon the
localization of previously-centralized fiscal activities, including taxation and banking. 16 As
local governments bore even greater responsibility for the successes or failures of their local
industries, they exerted political pressure on banks to extend “overly generous”17 lines of
credit to new private enterprises. Over the period from 1998 to 2003, investment as a share of

10
Nolan 219.
11
“2009 World Economic Outlook,” International Monetary Fund.
12
C. Fred Bergsten, Charles Freeman, Nicholas R. Lardy, and Derek J. Mitchell, China’s Rise:
Challenges and Opportunities (2008) 9.
13
International Monetary Fund, “2009 World Economic Outlook.”
14
Barry Naughton, The Chinese Economy: Transitions and Growth (2007).
15
National Bureau of Statistics of China, China Statistical Yearbook 2007.
16
Dali L. Yang and Edwin A. Winckler (ed.), “Economic Crisis and Market Transition in the 1990s,”
Transition from Communism in China: Institutional and Comparative Analysis (1999) 154.
17
World Bank, China: Revenue mobilization and tax policy (1990).
3
GDP grew from about 37% to about 44%, and household consumption declined from about
45% of GDP to just 40% (although it was growing in absolute terms). 18 In competition with
each other, local governments frequently pursued policies of market liberalization, creating
development zones and subsidy policies that were aggressive to the point of corruption.19
Between 2001 and 2003, however, massive political shifts were underway. China completed
its WTO accession in 2001 after fifteen years of negotiations, 20 greatly expanding the trade
reach of its new private industries. Throughout 2002 and 2003, a massive government
transition was undertaken, culminating with the retirement of Jiang Zemin and the installation
of Hu Jintao as president. Jintao and the others chosen to head up the new government were
viewed as “technocrats, economists, managers, and other professionals”21 as compared to
previous politically-minded leadership generations. As sustained economic growth remained
the primary source of legitimacy and power for the government, new growth opportunities
unlocked by WTO accession became a point of policy focus for the new leadership.22

Beginning in 2003, China began pursuing a policy of aggressive exchange-rate


manipulation in order to foster a more profitable environment for its exporters and maintain
national growth.23 Since fiscal powers had largely been decentralized in the early 1990s, the
central government had only macroeconomic tools at its disposal, and it readily employed
them to China’s international economic advantage throughout the mid-to-late-2000s. Flouting
IMF rules, China’s central bank instituted a “prolonged, large-scale, one-way”24 program of
reserve accumulation denominated in foreign currencies, particularly the dollar and the euro.
The activities of the People’s Bank ushered in an unprecedented boom in exporting
industries. China had run a trade deficit as recently as 1993, and maintained net export at a
modest 3% of GDP between 1994 and 2003.25 Between the beginning of 2004 and the end of
2006, however, Chinese net exports grew to account for some 9% of China’s GDP.26
However, China actively denies that the activities of the People’s Bank amount to currency
manipulation intended to advantage its goods in foreign markets. 27 Beijing’s recalcitrance has

18
National Bureau of Statistics of China, China Statistical Yearbook 2007.
19
Yang 161.
20
“China joins the WTO - at last,” BBC News (11 Dec 2001).
21
Robert G. Sutter, China’s Rise in Asia: Promises and Perils (2005) 54.
22
Sutter 67.
23
Bergsten et al.14.
24
Ibid.
25
Bergsten et al. 109.
26
Ibid.
27
Edward Wong and Mark Landler, “China Rejects U.S. Complaints on Its Currency,” The New York
Times (4 Feb 2010).
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in some ways been justified by its success; despite the clear signs of manipulation – including
twin surpluses in both the current account and the balance of trade, as well as a massive
accumulation of reserves – foreign powers such as the United States refuse to take a decisive
stand on the issue.28 Instead, China has largely been permitted to continue intervening in
foreign exchange markets, subjected only to vague warnings and remarks at international
conferences and summits. Between 2003 and 2008, China’s GDP more than doubled with the
boom from its massive trade surplus, growing from $1.7 trillion to $4.3 trillion in the five-
year interval.

The successes of China’s industrial and international policies have given rise to a new
mode of thought regarding the economic and political organization of the post-Soviet world.
There is a growing body of evidence of Chinese attempts to construct a Sino-centric
economic hegemony. In 2008, concerns grew that China would attempt to sell off its
immense dollar-denominated reserve holdings.29 In 2009, Beijing announced its intentions to
lead a global campaign for establishment of a new international reserve currency to supplant
the dollar.30 At the same time, China has managed a broad portfolio of international aid that
lacks the social and political conditionality that Western aid entails.31 In this way, China is
accumulating the sort of global political and economic influence that the US gained in
troubled postwar Greece and Turkey via Marshall Aid and other initiatives, eventually
drawing both into the NATO umbrella. Thomas L. Friedman reports a new international
vocabulary of development emerging from the 2010 Davos World Economic Forum:
The Beijing Consensus, says [International Herald Tribune reporter Katrin] Bennhold, is a
“Confucian-Communist-Capitalist” hybrid under the umbrella of a one-party state, with a lot
of government guidance, strictly controlled capital markets and an authoritarian decision-
making process that is capable of making tough choices and long-term investments, without
having to heed daily public polls. 32

These principles codify China’s lasting, troubling opposition to the Western international
economic orthodoxy. As its international economic importance has grown, so too has China’s
participation in international trade agreements and economic institutions. China has,
however, utilized these institutions in a very different manner than the West originally
intended them. Its deployment of a wide range of bilateral, politically motivated trade
agreements is “full of exceptions and deviations from WTO norms” designed to maximize
28
Mark Landler, “China Shows Little Patience for U.S. Currency Pressure,” The New York Times (4
Feb 2010).
29
Bergsten et al. 18.
30
“Beijing Formalizes Call for New Reserve Currency,” The Wall Street Journal (29 Jun 2009).
31
Bergsten et al. 20-21.
32
Thomas L. Friedman, “Never Heard That Before,” The New York Times (30 Jan 2010).
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China’s trade opportunities and build a commercial network – one that relies heavily on
Chinese success in order to bolster Beijing’s political clout.33 Upon its accession to the WTO,
China immediately deployed its new international privileges and powers to further its own
hegemonic interests. Beijing played a major role in scuttling the Doha Round development
talks on the grounds that its proposed Western-style liberalization regimes were unfair to
developing nations such as itself.34 The disruption to the international economic order
executed by a state with a fundamentally different economic organization, paired with its
enormous commercial influence, signals the rise of a competing pole in the global balance of
power.

The new Sinocentric locus of economic power in the East exhibits several economic
underpinnings that stand in direct contrast to Western theories of economic management and
development. Its apparently abject illiberalism confounds the neo-Wilsonian paradigm of
open markets and multilateral, public agreements. Its centralized, socialized macroeconomic
structure, complemented by effective localization of microeconomic fiscal responsibilities,
undermines the Western conceit of “democracy as a metainstitution for building good
institutions.”35 Its professionalized, bureaucratized, technocratic central structure created “a
greater ability and willingness to bring technical competence to bear on competing policy
alternatives,”36 attacking the assumption of a market-driven structure as the most effective
driver for economy-wide direction and growth. Similar systems of growth applied throughout
the East Asian economies have given rise to a regional semi-socialist bloc whose impending
“harmonization” of institutions37 will present a serious Eastern power “to counterpoise the
existing power centers in Europe and North America.”38 The explosion of wealth in the
centrally-coordinated Eastern economies has brought both a great humanitarian success and a
great ideological challenge. In effect, Deng Xioping’s 1984 comment, “[t]he superiority of
the socialist system lies above all in its ability to increasingly develop the productive forces
and to improve the people’s material and cultural life,”39 has been largely, if not troublingly,
vindicated.

33
Bergsten et al. 16.
34
Bergsten et al. 15.
35
Rodrik (2007) 154.
36
Nolan 165.
37
Rodrik (2007) 164.
38
Bergsten et al. 16.
39
Nolan 167.
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Yet China’s successes have not come without flaws, and the fate of the world’s
fastest-growing economy and its developing hegemony will rest on Beijing’s continued
ability to mitigate the stresses that have emerged within it. Monetary pressures driven by
China’s currency-manipulation regime sent inflation to a high of 8% in 2008 prior to the
international credit crunch; despite a brief period of year-over-year deflation in 2009,
inflation had returned to 2% by January of 2010 and appears set to continue climbing. 40 Since
2007, these changes have been seen as potential underpinnings for social unrest,41 even as
internal stability has been identified as a key prerequisite for sustained growth and investment
in China.42 Compounding these issues, domestic consumption has become a grossly
underrepresented segment of China’s GDP. At just 35% of GDP by 2007, it represented the
“lowest share of any major economy in the world.”43 Under these conditions, the social fabric
of the Chinese economy is again stressed by changes in its macroeconomic balances, and
Beijing’s responses to the challenges of the growing economy will again play a major role in
vindicating the legitimacy and ability of the central government to manage the growth plan of
a massive modern economy. Should the technocracy once again effectively mitigate potential
sources of economic and political instability, the resulting growth, in terms of both standard
of living and international clout, will cement the position of the centrally-managed economy
as a contender for viability in the international system.

Perhaps the most interesting lens through which to view China’s uniquely successful
approach to development and governance is Philip Bobbitt’s historical structure set forth in
his 2002 The Shield of Achilles. The Chinese structure may indeed mark the development of a
new social contract destined to replace the twentieth-century idea of the nation-state.
Describing a potential new social arrangement for government, Bobbitt writes: “[T]he
market-state pursues its objectives by incentive structures and sometimes draconian penalties,
not so much to assure that the right thing is done as to prevent the social instability that
threatens material well-being.”44 In that sense, China may very well represent the emergence
of a new model for the social contract. Beijing’s underlying principles of governance sync
well with Bobbitt’s conception, including but not limited to the idea that “the Communist
Party’s claim to … power now rests primarily on its ability to maintain rapid economic

40
“China Inflation Rate,” TradingEconomics Global Economics Research (Feb 2010).
41
Brian Bremner, “China's Worrisome Inflation Data,” BusinessWeek (13 Aug 2007).
42
Nolan 72.
43
Bergsten et al. 108.
44
Philip Bobbitt, The Shield of Achilles: War, Peace, and the Course of History (2002) 229.
7
growth.”45 This fundamental basis for governmental legitimacy, verified by China’s
centrally-driven strategies for international competitiveness and political stability, signals a
drastic departure from the nation-states that currently populate the Western world.
Paradoxically, the Chinese model relies both on a stronger governmental authority, as well as
one that is more responsive to the needs of popular well-being. Should these characteristics
truly be indicative of the emergence of a new social contract, then China’s lasting success
could signal the end of the twentieth century by changing its underlying social structure in a
way that the Soviet collapse did not.

45
Bergsten et al. 13.

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Works Cited

“2009 World Economic Outlook,” International Monetary Fund.

“Beijing Formalizes Call for New Reserve Currency,” The Wall Street Journal (29 Jun 2009).

“China Inflation Rate,” TradingEconomics Global Economics Research (Feb 2010).

“China joins the WTO - at last,” BBC News (11 Dec 2001).

Bergsten, C. Fred, Charles Freeman, Nicholas R. Lardy, and Derek J. Mitchell. China’s Rise:
Challenges and Opportunities. 2008.

Bobbitt, Philip. The Shield of Achilles: War, Peace, and the Course of History. 2002.

Bremner, Brian. “China's Worrisome Inflation Data.” BusinessWeek. 13 Aug 2007.

Friedman, Thomas L. “Never Heard That Before.” The New York Times. 30 Jan 2010.

Hobsbawm, Eric. The Age of Extremes: The Short Twentieth Century, 1914-1991. 1994.

International Monetary Fund, “2009 World Economic Outlook.”

Landler, Mark. “China Shows Little Patience for U.S. Currency Pressure.” The New York
Times. 4 Feb 2010.

National Bureau of Statistics of China. China Statistical Yearbook 2007.

Naughton, Barry. The Chinese Economy: Transitions and Growth. 2007.

Nolan, Peter. China’s Rise, Russia’s Fall: Politics, Economics, and Planning in the
Transition from Stalinism. 1995.

Rodrik, Dani. “Goodbye Washington Consensus, Hello Washington Confusion?” Jan 2006.

Rodrik, Dani. One Economics, Many Recipes: Globalization, Institutions, and Economic
Growth. 2007.

Sutter, Robert G. China’s Rise in Asia: Promises and Perils. 2005.

Williamson, John. “What Washington Means by Policy Reform.” Latin American


Readjustment: How Much has Happened. 1989.

Wong, Edward and Mark Landler. “China Rejects U.S. Complaints on Its Currency.” The
New York Times. 4 Feb 2010.

World Bank. China: Revenue mobilization and tax policy. 1990.

Yang, Dali L. and Edwin A. Winckler (ed.), “Economic Crisis and Market Transition in the
1990s,” Transition from Communism in China: Institutional and Comparative
Analysis. 1999.