- Three Factors Confounding China's Trajectory:Corruption, Speculative Investment, and the Climate Crisis
Since President Xi Jinping came to power in 2012, the sharp shift in political winds not only has startled global observers but also has forced some analysts to dramatically revise their prior conclusions about China's trajectory. In Nicholas Lardy's previous book Markets Over Mao: The Rise of Private Business in China (2014), he expressed optimism about the triumph since 1978 of market forces and the private sector over state planning. Five years later, however, his latest book—The State Strikes Back: The End of Economic Reform in China?—acknowledges both the resurgence of state dominance in China's economy and the deceleration of market-oriented reforms under Xi's leadership. The book argues that these are the largest stumbling blocks to China's growth.
In explaining China's growth slowdown after the 2008 financial crisis, Lardy rejects the "natural slowing" thesis—meaning that as China matures into an upper-middle-income country, growth will naturally slow and stay permanently low. This argument, he contends, masks the fact that China remains at a level of GDP per capita that is only 25% that of the United States, and far lower than that of Japan in the 1990s. There is still plenty of room for China to catch up, Lardy maintains, by liberalizing market forces and correcting inefficiencies in resource allocation.
According to Lardy, two principal factors account for China's slowdown. First, prior to 2008, the country performed far above its potential due its unprecedentedly large trade surplus, so the slowdown constitutes an adjustment. Second, and more importantly, under Xi growth is dragged down by "the slowing pace of economic reform and the steadily deteriorating performance of state-owned enterprises" (p. 41). Worsening these problems, he adds, are the predominant allocation of bank credit to state companies and the weakening protection of private property rights, as seen in recent instances of illegal state seizures of private assets. Hence, in 2016, China saw its first-ever decline in the share of private investment relative to state investment. [End Page 166]
Lardy's recommendation for the way forward is therefore clear—return to markets. China should increase competition, promote bankruptcy and mergers and acquisitions, cut excess credit to state-owned enterprises (SOEs), and loosen political control. He is aware that politics and vested interests stand in the way of doing the right things. Nevertheless, Lardy sounds an optimistic note, pointing out that if the leadership resolutely implements the necessary economic reforms, China "still will have another two decades of super rapid growth" (p. 27).
In the current climate of "fake news" and hyperbole, this book provides much-needed measure and balance. Lardy uses a wide variety of data and commands deep knowledge of the mechanisms of economic growth. He highlights dangers while pointing to potential for reform. And in his projections, Lardy makes an especially useful distinction between policy factors and structural factors that are "not subject to policy reversal and thus will persist" (p. 37), such as China's shrinking young population. By doing so, he distinguishes between problems that can be fixed through policies and those that cannot. This approach is far superior to making simplistic predictions of whether China will collapse as those so often read in the media.
I would like to raise three issues for thought from my perspective as a political scientist and my work in international development. The first concerns corruption and its relation to speculative investment. The word "corruption" only appears once in Lardy's book, although he also alludes to it by referring to "vested interests"—"including the top management of large SOEs, some government bureaucrats, and many local political officials" (p. 125)—who block reform. In fact, corruption pulses throughout the inefficiencies and misallocation of resources that Lardy analyzes at length. As we know well, since coming to office, Xi has embarked on China's most vigorous anticorruption campaign, disciplining more than 1.5 million officials to date.
While private investors are generally more efficient than state investors, they have their share of problems too. Private businesses are major players in real estate and...