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THE MAKING
ECONOMIC OF AN
SUPERPOWER
of Rapid Industrialization
Unlocking China’s Secret
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THE MAKING OF AN
The Making of an Economic Superpower Downloaded from www.worldscientific.com by 37.44.207.54 on 01/15/17. For personal use only.
ECONOMIC SUPERPOWER Unlocking China’s Secret
of Rapid Industrialization
Yi WEN Federal Reserve Bank of St. Louis, USA & Tsinghua University, China
World Scientific NEW JERSEY
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LONDON
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SINGAPORE
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BEIJING
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SHANGHAI
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HONG KONG
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TAIPEI
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CHENNAI
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TOKYO
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Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601
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UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE
Library of Congress Cataloging-in-Publication Data Names: Wen, Yi, author. Title: The making of an economic superpower : unlocking China’s secret of rapid industrialization / Yi Wen (Federal Reserve Bank of St. Louis, USA & Tsinghua University, China). Description: New Jersey : World Scientific, 2016. | Includes bibliographical references and index. Identifiers: LCCN 2015048899 | ISBN 9789814733724 (hc : alk. paper) Subjects: LCSH: Industrial policy--China. | China--Economic policy. | Economic development--China. Classification: LCC HD3616.C63 W46 2016 | DDC 338.951--dc23 LC record available at http://lccn.loc.gov/2015048899
British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.
Copyright © 2016 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the publisher.
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b2349 The Making of an Economic Superpower
For JIN Baoli (䠁ᇍѭ) and WEN You Ricardo (᮷৸), with love
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About the Author Yi Wen Research Division, Federal Reserve Bank of St. Louis, USA & School of Economics & Management, Tsinghua University, China The author is a senior economist and assistant Vice President in the Research Department of the Federal Reserve Bank of St. Louis and CCB Chair Professor in the School of Economics and Management (SEM) of Tsinghua University. The views expressed are those of the author and do not reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. I would like to thank Costas Azariadis, Ping Chen, Justin Yifu Lin, and Bill Gavin for strong encouragement and insightful comments on an earlier version of this project. Thanks also go to Jess Benhabib, Michele Boldrin, Roger Farmer, Belton Fleisher, Hong Ma, Carlos Marichal, Nancy Stokey, Peer Vries, Yong Wang, Yang Yao, Xiaobo Zhang, and Tian Zhu for kind comments and criticism, and Maria Arias and Jinfeng Luo for research assistance. My greatest gratitude goes to George Fortier, who has carefully edited the entire manuscript and provided numerous suggestions to improve the exposition of the ideas presented herein. Several ideas presented in this paper also exist in the related literature, and I have cited the original sources for all previously published content that I am aware of. But limitations in my knowledge and survey of the literature may have caused unintended omissions. Therefore, I welcome and appreciate feedback from readers who can identify any omitted or incorrect citations. vii
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b2349 The Making of an Economic Superpower
Abstract
The rise of China is no doubt one of the most important events in world economic history since the Industrial Revolution. Mainstream economics, especially the institutional theory of economic development based on a dichotomy of extractive vs. inclusive political institutions, is highly inadequate in explaining China’s rise. This book argues that only a radical reinterpretation of the history of the Industrial Revolution and the rise of the West (as incorrectly portrayed by the institutional theory) can fully explain China’s growth miracle and why the determined rise of China is unstoppable despite its current “backward” financial system and political institutions. Conversely, China’s spectacular and rapid transformation from an impoverished agrarian society to a formidable industrial superpower sheds considerable light on the fundamental shortcomings of the institutional theory and mainstream “blackboard” economic models and provides more-accurate reevaluations of historical episodes such as Africa’s enduring poverty trap despite radical political and economic reforms, Latin America’s lost decades and frequent debt crises, 19th century Europe’s great escape from the Malthusian trap, and the Industrial Revolution itself.
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Quotes from the Book
“Poverty or backwardness or the lack of industrialization is always and everywhere a social coordination-failure problem. The problem arises because of the enormous costs of creating market and its fundamental pillar — social trust.” “The ‘free’ market is not free. It is a fundamental public good that is extremely costly to create. The ongoing industrial revolution in China has been driven not by technology adoption, per se, but instead by continuous market creation led by a capable mercantilist government.” “The Glorious Revolution did not make British government more ‘inclusive’ in the sense of sharing political power with the working class (as glorified by Acemoglu and Robinson (2012, pp. 1–5) in their appraisal of the Arab Spring movement). It simply made the government more authoritarian and powerful in levying taxes, creating markets and commercial networks, promoting manufacturing and mercantilist trade, and reigning over the British economy.” “The market for mass-produced industrial goods cannot be created by a single ‘big push’ under import substitution or ‘shock therapy.’ It can only be created step by step in the correct order (sequence). China’s rise to global economic supremacy has been unstoppable because it has found xi
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xii
Quotes from the Book
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and followed the correct recipe (sequence) of market creation, in contrast to its earlier three failed attempts at industrialization between 1860 and 1978 under different political systems.” “The degree of industrialization is limited by the extent of the market. The fundamental reason the United Kingdom, instead of the Netherlands, kickstarted the First Industrial Revolution was because of its successful creation of the world’s largest textile market and cotton-supply chains in the 18th century, which made the nationwide adoption of the spinning jenny and factory system profitable and inevitable. Likewise, the fundamental reason the United States, instead of France or Germany, overtook the U.K. to become the next economic superpower was the U.S. government’s help in creating an even larger manufactured-goods market in the 19th century, which nurtured the world’s greatest inventors such as Thomas Edison and industrial giants such as Andrew Carnegie, Henry Ford, J.P. Morgan, John D. Rockefeller, and Cornelius Vanderbilt. Today, China (instead of India) is well-positioned to overtake the United States in manufacturing and technological innovations in the 21st century because the Chinese government has helped create a gigantic market that is several times larger than the U.S. market.” “Democracy cannot function without industrialization. Industrialization is impossible without a strong state.”
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Yi Wen (The Making of an Economic Superpower)
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Table of Contents
About the Author Abstract Quotes from the Book Chapter 1
vii ix xi
Introduction
1
i. China’s Perseverance and Unfaltering Attempts at Industrialization ii. China’s Legacy and the Plans of the Book Chapter 2
Key Steps Taken by China to Set Off an Industrial Revolution
i. ii. iii. iv. v.
Food Security and the Malthusian Trap A Primitive Agricultural Revolution A Proto-Industrialization in the Rural Areas Ideological Shift toward Commerce and Commercialism Mercantilist Governments as Market Creators and Commerce Organizers vi. Corruption, Chinese Style vii. Laws, Lessons, and the Central Questions of Development
8 15
23 23 31 36 44 50 61 67
xiii
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Table of Contents
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Chapter 3
Shedding Light on the Nature and Cause of the Industrial Revolution
i. The Nature of the Firm ii. The Indian Textile Syndrome iii. The Rise of the Textile Industry and the Logic of the English Industrial Revolution iv. The Industrial Trinity and Another Look at the “Nature and Cause” of the Industrial Revolution Chapter 4 Why Is China’s Rise Unstoppable? i. Correct Development Strategies ii. “Learning by Doing” — the Ultimate Source of Technology Innovation iii. A Capable Mercantilist Government as Market Creator Chapter 5 What’s Wrong with the Washington Consensus and the Institutional Theories? i. A Little Bit of Theory: The Fundamental Theorems of Welfare Economics ii. A Case in Point iii. The Washington Consensus as Antithesis of ISI iv. Such Theories Are Economically Misleading v. Such Theories Are Politically Naïve Chapter 6
Case Study of Yong Lian: A Poor Village’s Path to Becoming a Modern Steel Town
i. Agricultural Diversification and Commercialization ii. Proto-Industrialization through TVEs iii. Evolution into Modern Industries Chapter 7 References Index
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Conclusion: A New Stage Theory of Economic Development
87 87 89 101 115 127 132 141 156
173 173 181 184 189 193
211 221 225 228
239 263 275
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