Chinas Distinctive System: can it be a model for others - Essay Example

Naughton, Barry. June “China’s Distinctive System: can it be a model for others?” The Journal of Contemporary China. Vol.19, pg. 437-460 Final Draft In the past thirty years China’s economy has continuously gone through unique alterations with aims toward improvement in order to reach new levels of financial success. The transition of China towards industrialization has made way for the leaders in China to consistently reform economic policies that have set the country on the path to achieving long-term growth. The industrialization of China was a major turning point in the abilities of policy makers, which also led to a turning point in the overall policy making of developing countries, due to the fact that the “Washington Consensus” was the go-to approach for developing countries to implement strategies to sustain growth. The evident success that China has seen using their own unique approach has granted Chinese policy makers great recognition, and the term of their approach has been deemed the “Beijing Consensus”. China’s unique ability to venture away from the traditional approach, taken by developing countries, has created a rising interest in whether or not this strategy could be successfully demonstrated in other growing countries like itself. Barry Naughton’s article, “China’s Distinctive System: can it be a model for others?” details the unique qualities of China’s economic system and explores how the applicability of said system may or may not be possible in other developing countries. The methods used by China have produced growth via organizational as well as government structure, nevertheless, the successful application of this approach for other developing nations is unclear due to the varying degrees of society, government involvement, and the overall economy. While strategies aimed towards economic development are continuously evolving all over the world, the “Beijing Consensus” has been steadily gaining traction in contrast to the, “Washington Consensus”. The “Washington Consensus” is not a model, but rather the overall agreement among the world’s policy makers regarding developmental strategy counsel. While the “Beijing Consensus” depicts another understanding that a different kind of development approach is capable and likely to be implemented in the future. If the “Beijing Consensus” were to replace the “Washington Consensus” as the go-to approach for developing countries, the proponents of it must be able to validate why the approach has been successful in China and whether or not similar success is capable of being achieved in other developing countries. The success seen in China has been achieved in the absence of the “Washington Consensus”, which has granted China’s policy makers the abilities to practice innovative development strategies. As the “Beijing Consensus” continues to grow in recognition, the universal acceptance of the “Washington Consensus” dwindles. The substantiating role of China in the world today has given ever more credit to the acceptance of the “Beijing Consensus” as a means for developing countries to grow, and other countries may look to China for guidance in the future. The development methods that China has continued to use are gaining more recognition throughout the world as a realistic option for other developing countries to follow in suit and take up their approach. However, it is substantial to the argument on whether or not their approach can be successfully mimicked to note that China has several very unique conditions that are unlike many other countries. Size is one of the key conditions of China that make it different from most other developing countries. China’s vast size has given them the opportunity to take advantage of a great internal market, which has been driven through competition as well as investments from over seas. Through the utilization of competition and investments, size has given China a unique competitive advantage that many other developing countries simply do not have access to. With a seemingly limitless supply of laborers, China has grown as well as shifted to a more labor intense strategy of development. This approach has opened the doors for China to increase its well-trained work force, which in turn increases the overall efficiency of the market. Alongside its size, another condition that China has taken advantage of its government system in support of the implementation of a political system that favors coordination in the market and economy. China’s government is extremely important to its growth because of the responsibilities that it carries out. One such duty is to intervene economically when barriers enter the market as well as making crucial decisions the promote growth in the long run. Basically, the government serves as a watchdog that only gets involved in the economy when it is necessary. Thirdly, Barry Naughton gives evidence to the condition of China’s successful industrialization that has been a key effect to the overall success of the economic development seen in China. The system in place in China rides on the shoulders of capitalist features as well as public ownership. It is evident that the success seen in China has come at the benefitting relationship between government involvement and the vast economic system. While other developing countries should note China’s process, they need to closely observe not only the processes in place but also the unique characteristics of the country and what lessons are to be learned from their approach. Even though China’s population is greater than one billion people and has the world’s second largest economy, it remains categorized as a developing country—due to the per capita income remaining only a fraction of that in advanced countries. Since the conception of the “Washington Consensus”, which is an economic policy that embraces free-market capitalism, it has largely been accepted as the most effective economic model for developing countries to use in order to stimulate growth. However, the success seen in China’s economy comes from a contrasting approach, an approach that is now known as the “Beijing Consensus”. This new model for growing developing countries is a variation from the traditional system of the “Washington Consensus” in that China’s system is defined by key principles that require no strong government intervention (but only when necessary), whereas developing countries are ordinarily characterized by strict government that impede the functions of the market. Through the application of this model China has been able to successfully grow and gain recognition for their approach around the world. In this academic journal, Barry Naughton specifies the aspects of China’s economic development and explores the plausibility on whether or not this approach would be successful or not in other developing countries. While the progress in China can be contributed to the effectiveness of the model implemented by policy makers, the adoption and success of this system by other developing nations around the world is uncertain primarily because of the many other aspects of each economy. While the Washington Consensus has historically been the primary system in which developing countries have modeled their economy in order to grow. The strategy implemented in China is continuing to gain recognition as a means by other developing nations to grow and develop in hopes of mimicking the success in China. However, China has reached great levels of economic achievement by using this approach, it does not necessarily mean that it is the best approach for other developing nations. Firstly, China has what many other countries do not, which is a huge population of over one billion. China’s great size has given them an economic advantage of a large internal market with high levels of competition that has opened the door even wider for the attraction of foreign investments. In comparison to other countries, only the U.S. and India had similar size advantages in their developing phase of economic growth. Secondly, due to the increasing investments in human capital among the greatly sized work force China has been able to increase its advantage in labor-intensive activities, which resulted in great success. Thirdly, the well-trained labor force coupled together with newly implemented policies that allow government influence and political control as well as a market economy, bring together the entirety of the key concepts of the Beijing Consensus. The responsibilities of the government in economics are to respond to obstacles in order to pursue the further success that they see in the future. The relationship of the government to the economy is primarily in place to guard the economy from unnecessary barriers that hinder the growth of economic expansion. China’s system’s success can greatly be contributed to the size as well as the relationship between the government and economy. Developing countries should take note of the varying aspects between their country and China in order to grasp what has lead to their success and if it can be mirrored in their own country. While it isn’t necessary that all of the elements that have contributed to the success in China are necessary for other countries, Naughton goes into detail on how the policies put in place have worked out in China. Naughton subdivides how the Chinese industrial system has achieved what it has into his six conjectures as to why and how the system currently works with China and how it may or may not work in the future with other developing countries. Naughton’s first conjecture on how the use of the Beijing Consensus in China has benefitted them over the use of the Washington Consensus revolves around how the two differ. The first conjecture states, “public ownership can be reasonably efficient, and the ‘mixed economy’ is a decent model of industrial organization”. China’s industrial system can be classified as a mixed economy where private firms regulate the competitive sectors and the non-competitive sectors are regulated through government involvement and political policies. However, the government has still held on to some important competitive industries such as the main heavy industrial firms as well as the highly advanced technology companies. The Chinese model resembles that of ‘developmental socialism’, which was practiced in the 1950’s and 1970’s in a wide majority of developing countries. The model of developmental socialism revolves around the government controlling certain aspects of the economy in order to ensure that certain social goals that were in reach while also protecting foreign domination over their economy. This model however has been largely dismissed by the world for its failure to remain effective. Nevertheless, China’s model has proven to be successful, and while some may argue that government regulation is necessary because it combines the effectiveness of privatization as well as the benefit of protecting social goals, however it strongly overlooks the fact that government agencies in developing countries are more than likely not able to implement successful regulation policies. Except, when financial crisis strikes, it is important to have a government system in place that can fund bailouts as well as increase investments in human capital as well as technology. Naughton hypothesizes that developing countries may need to readjust their utilization of public ownership as well as government in the non-competitive sector. Although privatization has consistently been the initial path that developing countries took on the way to solidity, in the wake of global financial crisis concerns have been raised that have caused this view to change. Looking forward developing countries may be able to function the way China has in that they operate their economies in a mixed economy with public ownership. Competition in the market is a catalyst for innovation and investment, which leads to more and more doors opening for an economy to grow and develop. Naughton’s second conjecture on why China has remained successful in their approach states, “competition is still more important than ownership”. Shifting from privatization to public ownership has spurred competition in the market that has created a steadily growing economy that some argue that competition is more efficient not only economically but it changes behaviors socially. In a centrally planned economy market demand was never acknowledged, and the only incentive was to match what others sold rather than giving purchasers new products or less costly services. Growing competition brings about changes in behavioral patterns that force workers and managers to attempt to increase performance and overall efficiency. However, it is key to take note of the regulatory practices that have been put in place by China that make its effectiveness distinctive in comparison to developing countries. Not only are the agencies in place to regulate business and promote fair competition and trade, but they are also in place to guide behavioral patterns and spur competition. Although it is an essential detail to these regulatory agencies that the decisions that they make are primarily for the interests of the larger sized companies. Shifting more towards independence of regulations has contributed to China’s ability to defend itself better from failures in regulatory agencies. State ownership in firms has further increased competition, which cushions the economy if economic collapse may occur due to the battle of profit amongst the firms. In Naughton’s second conjecture, overall he contributes China’s success to the competition it has created. The distinctiveness of such competition spurs from the great size of China as well as the political regulations set in place, which has resulted in growing its developing economy great lengths and catching the attention of the world of their strategies. Thirdly, Naughton states his next conjecture slightly in contention with his previous conjecture. He states, “public ownership can be used to exploit market power and generate revenues for investment and public goods’ creation”. Primarily competition is contributed to China’s success however; competition can exceed levels that meet effectiveness, which results in losing profits. The Chinese experience confirms that oligopolistic markets are more beneficial as seen when the structure put in place stabilized, and the Chinese economy has soared, the profits felt by large state-owned firms profitability of large, state-owned firms soared as well. However, managers would often become too competitive, which threatened profits of the sector in which they competed, government intervention would often occur. For example, in 2004 the government intervened among three large, competing telecom firms by rotating the top managers to the other firms. The firms realized they must reduce their price-cutting strategies, because even though their individual firms were profiting they strategy was limiting the profits of the sector as a whole. The policies that China implements encourages strong competition to a point where the economy profits as a whole rather than certain large companies taking over complete control of a sector as well as limiting their own intervention so as not to inhibit market competition. Once again, Naughton contributes the success of public ownership on correlation with the size of China and overall its capability to spur competition. While acknowledging China’s success, Naughton does not believe that countries of lesser size would be as successful in implementing the same strategies. The fourth conjecture that Naughton addresses that “a strategy of investment-led growth” is key and therefore it is tolerable to “invest ahead of demand, creating a capacity that is only gradually utilized”. Overall, the model that China uses differs greatly in the aspect from investments than the traditional model of that the Washington Consensus would follow. Chinese policy makers and economists believe in high levels of investments contrary to what most of the other financial organizations of the world would believe is beneficial for a developing country to grow. Policy makers in China contribute the growth to investments and contribute the growth in investments by use of incentives that encoureage state-owned companies to utilize their profits in whatever way they believe to be beneficial to their company. This gives state firms the motivation to increase profits and overall re-invest in their companies rather than give out bonuses or compensation. This policy directly correlates to the competition conjecture that Naughton previously stated. As firms generate profits, they put those profits back into the company in order to expand and grow itself as well as driving competition to do the same and increase market profits. While China notes the investments successfully utilized by powerful firms to grow, the government watches over their actions in order to benefit the market as a whole. Even though China is a developing country, it is much greater in size than most other developing countries. In these smaller countries it can be conjectured that their governments lack the means and capabilities to ensure effective oversight on the whole market without letting in foreign corporation takeovers or individual price cutting from competing firms in a market sector. When arguing whether or not China’s approach to investment could be emulated in other countries it is imperative the political systems in place are able to be an effective watchdog of the economy as a whole as well as in certain sectors. Especially since the level of investment seen in China is in great contrast to what the Washington Consensus has agreed on for years on how developing countries should operate, a country should not immediately praise the Beijing Consensus as the sole approach to reaching long-term growth. Conjecture number five from Naughton that China has been able to grow states that, “for a growth-oriented polity, the state sector may be used aggressively to create growth and revenue opportunities outside the state sector”. This conjecture follows suit with the previous in that Chinas approach varies from the Washington consensus greatly. While the traditional approach to growing a developing country often encouraged maintaining a distinct dividing line between public and private interests, under the Beijing Consensus the Chinese government often invests in ways that create spill-over benefits for private parties. If governments lead the way in generating growth and driving investment, it will inevitably create spill-over benefits for many private parties. Consequently, this brings about both economic and political opportunities for governments. While there is a lesson to be learned from China’s approach of a relaxed attitude towards the line between public and private interests, it must be kept in mind that it is important to ensure that the distribution of benefits is equal among the economy and society. The sixth and final conjecture that Naughton addresses states, “managers of publicly-owned corporations can be motivated by tying their compensation to their company’s performance in maximizing asset value”. In order to motivate the top leaders in publicly owned businesses, Chinese policy makers implement incentives that encourages their compensation to tie in directly to the firms performance. While the Washington Consensus firmly stresses privatization, it gives little attention as to how motivate public firm managers. In regards to compensation generated by the Chinese government, since it lacks the stock market levels of fully developed economies it cannot incentivize managers through stock options and overall fractional ownership of the company. However, as the stock market grows managers are beginning to see the assets of a business having market value. The incentive system was put in place through China’s State-owned assets Supervision and Administration Commission (SASAC). The system that was established as a means of incentives was through three-year managerial contracts that set performance goals and given a grading scale on that performance. The grading scale was out of 100-points, where 30 points were given to profit related to the agreed on goal, 40 points for the return on equity, and another 30 points for specific targets for individual sectors. So the firms could impact their scores greatly though saving on disposable equity and leveraging smaller amounts of the assets that they owned. While managers that received bad grades had no growth or decrease in their salaries the managers with exceptional growth scores increased their salaries greatly. Managers were motivated to not only increase their own salary and compensation levels, but increased the overall market value of their companies which benefits the stock of their company also. The approach that China has taken to incentivize managers can be seen in many developing countries, however it is important to keep in mind the motivation of the public sector. In order to adapt the Beijing Consensus and successfully carry out the operations in which China has, it should be combined with all the conjectures previously stated while keeping in mind how China’s success may be contributed to the capabilities it has achieved due to the great size of the country. Overall, the main foundation behind China’s development approach is that government involvement needs to be and activist role economically through motivating investments. While government involvement has played key roles in many developing countries strive for growth, the role that China’s government has maintained does not make it that distinct. The government in China has had quite an impact on the economy, but it is not the only factor that has contributed to its growth. Even though their political system has been a key contributor to its success, China’s Authoritarian system—ruled by one party—has been seeing alterations to focus more and more on a nationally minded goal for success. Their system has gone through an evolution from focusing on civil rights to focus on national economic growth. This type of system is suitable when a developing country wishes to implement key economic decisions. While the only party in charge has all the power to implement decisions that regard the entire economy, there is no opposition to slow down the process. So either success is seen quickly, or failure is seen and changes are again made. Due to the great amount of resources that China has at its fingertips alongside the lacking of opposition, policies are put in play most efficiently. Alongside its government leadership, China’s economic system is also a vital reason for its success. As the world transitions from types of economies, China has been evolving to work more efficiently as well. What began as a socialist controlled system has been reformed into what it is today. One of the most distinguishable features of China’s economic system is its ability to motivate and increase efficiency through the use of incentives to government officials. While government officials succeed, they are rewarded and overall the market grows. This incentive system is effective because the incentives given are directly correlated with the overall economic goals. The success seen in developmental projects benefits the policy-makers as well as the government officials that are motivated through the incentives, however, failure of such projects does not hurt the government officials. While some assume that this type of incentive environment would spur corruption and bribery amongst government officials and policy makers, the oversight from the Authoritarian structure has been able to implement regulation. The same structure has grants the government the capabilities to control market power through the regulation of individual market sectors as they deem fit. This is the most distinguishable characteristic of China’s system that is unlikely to be implemented in other developing countries. As China looks to what is in its future, they are most likely to continue changing and altering the way policy makers and the economy interact. While the phrase, “if it is not broken, do not fix it”, has no place in Chinese policy-making or its economic agenda. China has been able to successfully grow because they have taken note of what has been successful throughout the world. Learning from the practices of Western and Eastern economies alike, China has used this knowledge to implement effective decision making strategies. While much of the growth in China can be pointed towards its successful industrialization, China will most likely move towards creating a more viable infrastructure for its economy in the future. However, the main goals of policy makers, now that the economy has seen development, will be to improve the efficiency of investing in the economy as well as projects that promote further growth. Although, the spur of industrialization has been one of the most deeming factors of China’s growth, its key to note that their economy is possible to be hit by hard times. As the global financial crisis hit, China decided to put in place infrastructure investment projects with the goals of increasing domestic demand, which only created a financial deficit in the country. The premonition of financial deficit is a worrying idea for China’s economy due to the fact that it restricts growth because of increased demand for private funds as well as the increase in debt. If this proves true in the future, China’s government will need to promote more conservative financial policies in order to sustain their overall economy. As China’s economy continuously evolves and learns new means to adapting to problems, it will strive to achieve long-term growth and full economic development. China will eventually reach a turning point and shift from predominantly industrialization and shift from rural to urban development as well. Due to China’s size it has been able to carry out a unique approach to development and cut some corners that other countries haven’t been able to on the way. Other changes that will occur in China will be that the state-run oligopolists will soon becoming global-scale giants as well as other sectors expansions with private firms out growing expanding rapidly with private firms vastly out-growing the old state-firms. As developing countries take note of China’s distinctive approach, the once certain aspects of the Washington Consensus are slowly being replaced. Following in suit is the shift towards believing and adopting the government role as more active role in the economy. While developing countries should not pack up and completely move away from the Washington Consensus, it would be beneficial to use China as a case study in order to possible mimic the success that their country has seen and ultimately reach long-term economic growth. The application of China’s approach to developing countries stands in place of great uncertainty. While China has learned its ways from varying economies throughout the globe it would be beneficial for developing countries to do the same. By taking note of what works and what does not, as well as how China was able to implement their policies and would their own developing country be able to do the same. Read More