History matters: the influence of pre-industrial China’s institutions on post-1978 economic boom.

From divergence to convergence: re-evaluating the history behind China’s economic boom

by  Loren Brandt  (brandt@chass.utoronto.ca),  Debin Ma (d.ma1@lse.ac.uk) and  Thomas G. Rawski (tgrawski@pitt.edu)

URL: http://d.repec.org/n?u=RePEc:ehl:wpaper:41660&r=his

Abstract

“China’s long-term economic dynamics pose a formidable challenge to economic historians. The Qing Empire (1644-1911), the world’s largest national economy prior to the 19th century, experienced a tripling of population during the 17th and 18th centuries with no signs of diminishing per capita income. In some regions, the standard of living may have matched levels recorded in advanced regions of Western Europe. However, with the Industrial Revolution a vast gap emerged between newly rich industrial nations and China’s lagging economy. Only with an unprecedented growth spurt beginning in the late 1970s has the gap separating China from the global leaders been substantially diminished, and China regained its former standing among the world’s largest economies. This essay develops an integrated framework for understanding this entire history, including both the long period of divergence and the more recent convergent trend. The analysis sets out to explain how deeply embedded political and economic institutions that had contributed to a long process of extensive growth subsequently prevented China from capturing the benefits associated with new technologies and information arising from the Industrial Revolution. During the 20th century, the gradual erosion of these historic constraints and of new obstacles created by socialist planning eventually opened the door to China’s current boom. Our analysis links China’s recent economic development to important elements of its past, while using the success of the last three decades to provide fresh perspectives on the critical obstacles undermining earlier modernization efforts, and their removal over the last century and a half.”

Review by: Anna Missiaia

China’s economic performance in the long run is one of the hot topics in economic history today. The growth pattern followed by China since the mid-14th century until today has been characterized by one of prosperity until the end of the 18th century, a period of falling behind in the 19th century and throughout the Revolution, to later observe a reversal in post-1978 years until today. In particular, economic historians face the riddle of China having had comparable economic conditions to Western Europe until the eve of the British Industrial Revolution when China missed the opportunity for the industrial take off. The debate is also focused on how China managed to reverse this trend after the death of Mao Zedong in the 1970s, experiencing very high levels of economic growth that we still see today. The paper by Loren Brandt (University of Toronto), Debin Ma (London School of Economics) and Thomas G. Rawski (University of Pittsburgh) is concerned with the link between the historical picture that underlays China’s long term economic performance. The main questions addressed here are why China was unable to industrialize in the 19th century in spite of similar starting conditions of Britain; why it did not take advantage of the new technology and information made available by the British Industrial Revolution and how China managed to catch up in the post-1978 period. The paper proposes a very detailed and exhaustive review of existing literature on Chinese economic history. In particular, the view proposed by Pomeranz (2000) in his work The Great Divergence is the one that has recently taken root. The claim is that the divergence of the 19th century was due to a better factor endowment (such as coal abundance and access to land-intensive goods) by Britain. In this view there is little room for institutional factors, such as differences in the financial, political and legal system. The main contribution of the paper by Brandt , Ma and Rawski is to propose an alternative view based on institutional factors that seeks to explain both the 19th century divergence and the 20th convergence within the same analytical framework. The authors adopt a political economy perspective and guide us through the historical roots of present China’s economic boom, finding many analogies (and influences) between past and present Chinese institutions. The authors identify several institutional continuities between the Qing period (1644-1911) and the People’s Republic today: both systems were authoritarian and lacked of a checks and balances; both had monitoring problems in their implementation of central policies, suffering from corrupt diversion of tax payments;  in both periods economic policy was quite decentralized; education was in both periods a primary concern of the state;  finally, both today and in the Qing era, the state was able to align the incentives of the leading class and those of common people, achieving prosperity and stability. In the view of the authors, these elements were present in the Qing period until the beginning of the 19th century and were fully re-established after the death of Mao Zedong. According to the authors, the reasons for the period of divergence during the British Industrial Revolution lay in Qing China’s inadequate response to this new phenomenon. In particular, they offer a few institutional departures between People’s Republic in the reform era and the Qing rule that can help understand how post 1978 China managed to reverse its fortune. In particular they underline the increased ability to effectively implement and enforce policies at national level and the opening of the Chinese economy to foreign trade and investment. The analysis proposed in this work points at institutional obstacles that prevented China from joining the West in its 19th century Industrial Revolution. It also describes the slow changes that took place over the 19th century until 1970s that culminated in the boom we see today. According to the authors, today’s success is due to two factors. One is the slow erosion of constraints from the Qing period, such as lack of monitoring and closeness to the foreign trade. The other is the reversal of new obstacles created during the pre-1978 Revolutionary period, such as the creation of conflicts of objectives among different social groups and the loss of focus on education. The parallel between the early Qing period and the post-1978 period has major implications for policy-makers today: according to the authors the Chinese model for economic growth is far from being applicable to any other low income nation. This is because Chinese history and past institutions had a major role in shaping post-1978 Chinese success.  In its conclusions, this paper provides a very detailed historic and literature review of Chinese economic growth and proposes a unified institutional framework to link pre-industrial and present China, challenging the established endowment view on the 19th century divergence.

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