Debating the China Model

de minimis yesterday posted about an article in The Economist last week regarding the failures of industrial policy. “Industrial policy” in this sense refers to the practice of governments attempting to choose “winners” that can help accelerate economic growth and development.

I’m pretty sure Malaysians can cite our own examples of failures in industrial policy.

What brings this up is that there is an ongoing debate regarding what’s termed the China model, or alternatively the Beijing Consensus (in opposition to the Washington Consensus). The gist of this is that democracy isn’t always the best form of government for a developing country, and centrally planned economic development might have some value (ergo, an ipso facto argument for the efficacy of industrial policy).

You can read more on the subject here, here, and here (warning: pdf link) for instance, and The Economist magazine is also hosting a debate on the same subject. The empirical evidence, if you must know, is rather mixed – research shows that democracy doesn’t always foster economic growth, though economic development does tend to favour growth of democracy (for example, this paper).

Dani Rodrik, who is one of the leading lights in favour of industrial policy, doesn’t agree that the China model is something to emulate:

The Myth of Authoritarian Growth
Dani Rodrik

...The relationship between a nation’s politics and its economic prospects is one of the most fundamental – and most studied – subjects in all of social science. Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players?

East Asian examples (South Korea, Taiwan, China) seem to suggest the former. But how, then, can one explain the fact that almost all wealthy countries – except those that owe their riches to natural resources alone – are democratic? Should political openness precede, rather than follow, economic growth?

When we look at systematic historical evidence, instead of individual cases, we find that authoritarianism buys little in terms of economic growth. For every authoritarian country that has managed to grow rapidly, there are several that have floundered. For every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.

This is one of the issues that Malaysia’s new economic model is supposed to fix. How that translates into practice however, is something everyone is still waiting for.