Regional Competition

The presence of two reforms was a defining feature of China’s economic transition. The failure to separate the two is a main source of confusion in understanding China’s reform. The Chinese government has understandably promulgated a state-centered account of reform, projecting itself as an omniscient designer and instigator of reform. The fact that the Chinese Communist Party has survived market reform, still monopolizes political power, and remains active in the economy has helped to sell the statist account of reform. But it was marginal revolutions that brought entrepreneurship and market forces back to China during the first decade of reform when the Chinese government was busy saving the state sector.

The second part of our tale began in 1992 after Deng Xiaoping’s southern tour. While marginal revolutions brought market forces back to China in the previous decade, regional competition became the main transformative force in the second decade, turning China into a market economy at the end of the century. Regional competition was not new; it existed in the first decade of reform. But then it created trade barriers at provincial borders and fragmented the Chinese economy. China implemented price reform in 1992, tax reform in 1994, and began to privatize state enterprises in the mid-1990s. These reform measures paved the way for the rise of a common national market, which was able to impose market discipline on all economic actors, turning regional competition into a transformative force.

Here, our account differs from the one presented by Huang Yasheng in his book, Capitalism with Chinese Characteristics. A controversial argument of Huang is that China was more capitalistic and entrepreneurial in the 1980s than in the 1990s. If the argument means that private entrepreneurship prevailed against the state in the 1980s, it is in full accord with our tale of “marginal revolutions.” But if it suggests that China moved away from a free market economy in the second decade of reform, it misses a fundamental change in the economy in the 1990s; the emergence of a common national market, which was a precondition for regional competition to work.

Identified with repetitive investment, regional competition is often faulted for distorting comparative advantage and hindering economies of scale. A more nuanced pictured emerged in our account. What regional competition did was to translate China’s advantage in space as a continental country into the high speed of industrialization. How this happened can best be seen from a Hayekian perspective, which stresses the growth of knowledge as the ultimate force driving economic change. In Mao’s time, education was under attack and knowledge became a political liability; China isolated itself from the West and cut itself off from its own traditions. Mao’s radical ideology impoverished the Chinese economy and, worse, closed Chinese minds.

After Mao died, China re-embraced pragmatism. “Seeking truth from facts” became the Party’s new guideline; getting rich became glorious. Then the most restrictive constraint for economic growth was the lack of knowledge. This included technical knowledge, knowledge about institutions — how various market-supporting institutions work, and local knowledge — what Hayek called “knowledge of the particular circumstances of time and place.” The solution to this problem was found in regional competition. When China’s 32 provinces, 282 municipalities, 2,862 counties, 19,522 towns and 14,677 villages threw themselves into an open competition for investment and for good ideas of developing the local economy, China became a gigantic laboratory where many different economic experiments were tried simultaneously. Knowledge of all kinds was created, discovered, and diffused fast. Through the growth of knowledge, the enormous scale of Chinese industrialization made its rapid speed possible.

Conclusion

Given our account of how China became capitalist, what can we say about the form of capitalism that has emerged in China? A persisting feature of China’s market transition is the lack of political liberalization. This is not to say that the Chinese political system has stood still over the past 35 years. The Party has distanced itself from radical ideology; it is no longer communist except in name. In recent years, the internet has increasingly empowered the Chinese to exercise their political voice. Nonetheless, China remains ruled by a single political party.

This continuity hides a fundamental change in China’s political reality. With the death of Deng Xiaoping, “strongman” politics was brought to a closure. Under Jiang Zemin and Hu Jintao, China is no longer ruled by a charismatic leader. In that sense, Chinese politics today is qualitatively different from the time of Mao and Deng. But the Chinese government has not come to terms with this political change on the ground; there have been few efforts at institution-building to prepare China for the new political reality.

The combination of rapid economic liberalization and seemingly unchanged politics has led many to characterize China’s market economy as state-led, authoritarian capitalism, which many people have rightly recognized as fragile and unsustainable. When and how China will embrace democracy, and whether the Party will survive democratization, are the main questions asked about China’s political future. In our book, a different perspective is offered. It provides a different diagnosis of the main flaw of the Chinese market economy: China has developed a robust market for goods, but it still lacks a free market for ideas.

The market for ideas points to an alternative way of thinking about China’s political future. Our reasoning is mainly based on the following two considerations.

First, multiparty competition does not work unless it is cultivated and disciplined by a free market for ideas, without which democracy can be easily hijacked by interest groups and undermined by the tyranny of the majority. The performance of democracy critically depends on the market for ideas, just like privatization depends on the market for capital assets.

Second, multi- party competition had virtually no precedent in Chinese history. Indeed, the Chinese word for the “party” (党) has a strong negative connotation in traditional Chinese political thinking. “Forming a party and pursuing self-interest” (结党营私) has been consistently denounced as undermining the political ideal, which is “what is under heaven is for all” (天下为公). In contrast, the market for ideas has a deep and revered root in traditional Chinese thinking; “let one hundred schools of thought contend” has been respected as a political ideal since the time of Confucius. In our view, the market for ideas promises a more gradual and viable approach to rebuilding Chinese politics on the principles of tolerance, justice, and humility.

Over the past 35 years, China has embraced capitalism not just in the economy. The Theory of Moral Sentiments has more than a dozen Chinese translations; the book has won the heart and mind of premier Wen Jiabao. The message of Adam Smith resonates strongly with the Chinese, not least because of its striking affinity with the traditional Chinese thinking on economy and society. A surprising outcome of China’s transition to capitalism is that China has found a way back to its own cultural roots.

“Seeking truth from facts” is a traditional Chinese teaching, which Deng Xiaoping mistakenly called the “essence of Marxism.” But many facts are still covered in China because a free market for ideas does not exist yet. We are cautiously optimistic that China may well embrace a market for ideas in the decades to come, just like the way it embraced the market for goods in the recent past. As our modern economy becomes more and more knowledge-driven, the gains from free exchange of ideas are too great; the costs of suppressing it are too high.

China’s embrace of both its history and globalization leads us to believe that Chinese capitalism, which just started its long journey, will be different. This is desirable not just for China, but for the West and everyone else as well. It is also desirable for the global market economy. Today, biodiversity is recognized as vital for sustaining our natural environment. Institutional diversity plays a similar role in keeping human society resilient. Capitalism will be much more robust if it’s not a monopoly of the West, but flourishes in societies with different cultures, religions, histories, and political systems. While trade in the global market for goods makes war too expensive to fight, a global market for ideas can accommodate and thrive on the clash of ideas but steers us away from the clash of civilizations.

Ronald Coase is a Nobel laureate and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. Ning Wang is an assistant professor at the School of Politics and Global Studies at Arizona State University. This essay is based on their recent book How China Became Capitalist.