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Zhang Weiying : Understand the economy of China and the world


The story behind trade conflicts between China and the USA is beyond mere confrontation between China and USA, it is a conflict between China and the western worlds, including European Union, United Kingdom, and many other countries with milder trade deficit with China, turning bilateral relationships into negative. As such, these conflicts are beyond trade conflicts, it could also mean clashes of values and system, where the latter shall cause deeper problems that are difficult to resolve by technical means. To understand this problem better, we must attempt to understand economy of China and the world; firstly, to understand westerners’ ways of thinking, and secondly, to understand ourselves more accurately.

Understand the world

Interests and Rights in International Relations.

What I meant by “to understand the world” here is, to understand how westerners view the world. The first question to be answered is: whether bilateral relationships formed between countries are founded on interest, or values?

In the past, international relations were construed as being founded on mutual interest, therefore conflicts between nations can only happen when there are conflicts of interest. Such notion has transformed after world war II, where relationships between countries also include common values. That is to say, when countries interact among one another, they are assessing common interest and  sense of right and wrong, very much like how human being interact with each other – (Chinese Idiom) people with different path shall not make plans together. When there is inconsistency between values and interest, values always prevail as the leading force. Such is the reflection of mankind’s progress in the past century. Take the USA and Egypt as example, Mubarak’s government shared common interest with the USA in maintaining peace within the middle east, therefore their relationship has always been cordial, even if the Egypt is ruled by dictatorship. However, the values propagated by revolutionists’ fraction in Egypt were more in sync with USA’s value systems, which prompted the USA to stand by their side, even if it’s interest is compromised, instead of helping Mubarak’s effort in suppressing the revolution. Further, numerous confrontations in western histories, such as conflicts between Islamic and Christian worlds, and wars between Protestants and Catholic nations etc., were convoluted by clashes in values and interests.

Values of the Western Worlds

Values are simply defined as men’s understanding of justice, right and wrong. There are three important views on western’s values: human rights, racial equality and assistance by the advanced towards the backwards.

The concept of human rights traces back to 17th century English Philosopher John Locke’s ideology, purporting superiority of human rights over state’s sovereignty, which later on influenced the conceptual-shaping of modern western countries. Prior to this, the concept of “countries” referred more towards ruling classes and ruling families, where a family can rule few countries. Today in the context of international relations, many conflicts were stemming from the idea of human rights, where western countries often consider matters related to human rights as beyond a country’s internal affairs. These too, forms the moral and legal basis for the United Nations’ to dispatch its peacekeeping forces in preventing genocide.

The idea of racial equality began to form after World War 2, and it is under the guidance of such value that Europe – especially western European countries cannot refuse to accept refugees, despite the series of problems that might be caused by such.

Assistance by the advanced towards the backwards, is too an ideology conceived after World War 2. Under such belief, the conditions and requirements for participation in international organizations differs, among countries of different development stages. China benefited greatly initially as developing country, where it ranks highest in receiving financial assistances from World Bank’s capital flow. China also benefited from many preferential clauses in its WTO membership as a developing country. On the contrary, the USA had to undertake colossal cost for its role as world’s leader, and such can be seen in its assumption of 1/5 of United Nation’s total expenditure. Trump Government’s proposal on “reciprocal requirement’, is attributed to changes in China’s development status. Therefore, China status as a developing country has become an important point of contention.

Peace, as understood by the West

The western world regards trade, democracy and international organization as the 3 corner stones of world peace – based on the experiences and lessons derived from human history for the past 300 years. Trade unites interest of countries; democracy curbs ambition of rulers; while international organizations improves communication among countries to avoid conflict and misunderstanding.

French Philosopher Montesquieu once mentioned: the natural outcome of commerce is to bring forth peace. French liberal economist of the 19th century Bastiat once said : When Goods cross border, soldiers will not (cross border); When goods don’t cross borders, Soldiers will (cross border).

The theory of democratic peace, is created by German philosopher Kant, and is now deeply ingrained among westerners. American political scientists Bruce Russett and John R. Oneal, found that democratic countries are less likely to involve in war, based on their studies on thousands of warfare between 1816-2001, as published in one of their works in 2011. When one, between two conflicting countries is an undemocratic country, chances of warfare erupting become twice as high compared to average. When both are democratic countries, the chances of warfare drop by 50%. Chances of conflicts are further reduced when factoring market economy and international trade into the equation. They noticed, that when democracy, opposing military might, status of great power, and economic growth remain ‘controlled variables’, in a given year, countries with high dependency on trade are less likely to engage in warfare in the following year. A country that opens up to the world is also less likely to involve in military conflicts. Suffice to say, democratic peace only exists in countries that are both democratic in nature; but trade peace works, even if only one side practices market economy. Therefore, when it comes to world peace, trade is more important than democracy!

Understand China’s achievements for the past 40 years

China’s thousand years of history aside, the past 40 years of history is enough to warrant serious effort in deepening our understanding about China.

In the past 40 years, we have seen China’s economy booming, and the escalation of standard of living among the people, but there were discrepancies in interpreting and understanding these situations. As of now, there were 2 interpretations of China’s growth in past decades – namely “China Model Theory” and “World Model Theory”. Former believes that China’s growth is mainly attributed to the unique “China Model”, which entails having strong government, colossal state-owned enterprises, and brilliant industrial policies, while the latter opines that China’s achievement, very much like the rise of Britain, France, Post World-War II Germany, Japan, and the Four Asia Tigers, was based on the power of market, innovative and risk taking entrepreneurships, and the application of technologies developed in the past 300 years by western developed countries. My article “the three industrial revolutions that I’ve experienced”, published earlier this year, concluded on how China experienced the 250 years of Western World’s three Industrial revolutions, within 40 years, post reform and opening up. Later stage development allowed us to avoid ‘detours’, and we get to enjoy technological outcomes that were developed at great cost by others.

The China Model Theory is untrue, and will lead to bad consequences for China’s future.

China Model Theory – is untrue

According to the report on marketization published by National Economic Research Institute (NERI), China’s overall marketization numbers have increased from 4.01 in 1997, to 8.19 in 2014, and in between there were some minor drops in number after the “4 trillion Yuan” stimulus policy in 2009. However, the level of marketization differs greatly among different region – Zhejiang, Guangdong, Suzhou topped the list of marketization, with eastern region’s marketization level faring higher than central and western regions. In terms of GDP growth rate prior to 2007, eastern region had been performing better than central and western region. After 2007, western region took over and recorded highest in growth rate, with central region coming next, followed by eastern region. There are also a series of evidences showing negative correlation between marketization level and GDP growth rate in various provinces in the past 5 to 10 years.

Therefore, can we then conclude from this observation, that there is a “Western-China Model”, and that the system and policies in Western-China are better than those of Eastern-China, and subsequently demands that Eastern-China learns from Western-China? The answer is in the negative. Reason is simple: Marketization-reform in Western-China started late, and as such shall have ‘latecomer advantage’. Eastern-China’s marketization progress in 1997 and 2001 supersedes those of Western-China in 2006 and 2014 respectively. Data on marketization from NERI, and data on economic progress from China’s Statistical Yearbook both showed, that whether in the past 10, or 40 years, the degree of marketization correlates positively with GDP growth. This answered the question on “China Model”: where marketization is a continuous process with dynamic progress, and we cannot simply deduce any causal-relation base on economic performance on specific period, without referring to history.

There are more empirical evidences that can prove the positive relationship between marketization and economic growth, such as comparison of: employment ratio between state-owned sectors and private enterprises in cities within China, ratio between industrial assets held by state or private/foreign enterprises and GDP per capita together with economic growth, etc. All these have proven without exception that: in regions where state-sectors are big, economic growth shall become slower. Compared to regions where people take a back seat in the economy, regions where the state takes a back seat shall record higher growth and better performance.

For the past 40 years, China’s growth relied significantly on arbitrage opportunities arouse from technological ‘latecomer advantage’, where both Chinese and western entrepreneurs can make profits through arbitrage. Over time, spaces for arbitrage became more restrictive, and as such subsequent developments end up relying more and more on innovation.

Economists use 3 indicators to measure innovation: density of research and development, patent, and sales percentage of new products, and their respective correspondences on 3 stages: input, intermediate and final output. Based on these 3 indicators, China is considered to have progressed well in past decade, but such progress differs greatly from one region to another. Cross-regional data shows that these 3 indicators correlates positively with levels of marketization and privatization efforts, and at the same time reveals negative correlation, with numbers of government agencies and public department employments per 10000 capita. Whether going by enterprises volume, employment rates, or industrial assets, all in all, as long as state owned sectors remain higher in proportion in certain region, innovation shall remain low there; in regions where private enterprises and foreign enterprises are proportionately higher, innovation capacity is also higher.

“China Model Theory”- severe consequences

Evidences presented above showed how gravely untrue the “China Model Theory” is. China’s past 40 years of growth came from marketization, entrepreneurships and technological development by the western worlds that were accumulated over past 300 years, instead of “China Model”.

The bigger problem could be that, explaining China’s achievements for the past 40 years with “China Model Theory” might be bad for China’s future development.

First, it is self-misleading, leading towards self-destruction. The emphasis on China-Model’s uniqueness means further strengthening of state-owned enterprises, expanding government’s authority, and dependency on industrial policies, which reverses progress on reform, and shall nullify all previous efforts in reformation. The economy eventually becomes stagnant.

Second, it misleads the world, that causes confrontations. “China Model Theory” shall establish China as a worrying “alien” in the eye of western worlds, which leads to inevitable conflicts between China and the western worlds. The hostile international environment that we are facing now, is relevant to how certain economists (both local and international economists) misread China’s achievement in the past 40 years. Westerners perceive “China Model” as “State Capitalism”, which goes against the principles of fair trade and world peace and shall not be allowed to continue smoothly. 

Hayek once said: although fact itself cannot tell us what is right, the wrong interpretation of fact might alter the fact itself and the environment around us. When you see someone who runs very fast, but at the same time is without an arm, you then deduced that losing an arm is the reason why he runs fast. You would then naturally call for others to amputate their arm to be as fast. This is what Hayek meant by interpretation of fact shall alter the true meaning of fact.

Economists mustn’t mistook “In spite of” as “because of”.