- China's Future Isn't What It Used to Be—But Maybe That's How China's Leaders Want It
Nicholas Lardy's The State Strikes Back: The End of Economic Reform in China? is a slim book on a big topic; it nonetheless backs its arguments with a wealth of data. The book makes one point that is not very controversial—that the state is playing a growing role in the Chinese economy—and another that is much more provocative: that if the state would reverse its growing support for the state sector, China could return to the very high growth rates of the early 21st century.
The book focuses sharply both on impediments to growth that lend themselves to econometric analysis and on the short to medium term. That matters because its core argument for the possibility of returning to faster growth—presenting obstacles other than the recent growth of state-owned enterprises (SOEs) and explaining why they need not be insurmountable—requires that this list be reasonably complete. There is, however, no discussion of environmental obstacles to China's future growth or of the role of corruption in misallocating resources.
There is discussion of demography's role, but it is one of the less compelling ones in the book. Its key points are that (1) China's now-vanished demographic dividend was most important in the early years of its boom, and (2) China probably hit the Lewis turning point, at which it no longer had surplus labor, around 2006 and economic growth continued (pp. 23–24). But worsening dependency ratios began about 2010,1 and growth since then has not hit the levels that Lardy thinks possible. Granted, growth rates were very high during many years when the dependency ratio was higher than it is today, but trends, not just levels, may well affect investment and thus growth. Meanwhile, the decline in labor compensation as a share of GDP between 2000 and 2011 (p. 30)—past the Lewis turning point—suggests caution about assuming that we know when to expect the effects of demographic change. [End Page 162]
That said, Lardy is probably right to argue that in the near term these sorts of structural factors do not preclude faster growth than China is currently experiencing. He is also right to point out that arguments about reversion to the mean—that China's rapid growth must slow down simply because it has been unusually high, and that this happened in Japan, Taiwan, South Korea, and Singapore—are not by themselves compelling. As Lardy notes, those countries had all achieved levels of GDP per capita much closer to the U.S. level when their growth slowed (p. 27). Thus, to the extent that the mechanism behind reversion to the mean is the exhaustion of "easy" growth, China still has room. But if this shows that China's unusually rapid growth does not have to stop, it also does not mean that it is bound to continue. It is worth remembering how unusual dramatic economic convergence is within the larger sample of developing countries (pp. 45–47). And if the mechanism by which rapid growth stops is not that there is something magical about having reached a particular level of convergence, but rather that vested interests and institutional rigidities accumulate over time as a system succeeds well enough to be exempt from radical overhauls (perhaps especially where rapid growth occurred under a strongly interventionist regime and where a free press is lacking), then the analogy to other East Asian "tigers" might be relevant to China after all. Indeed, this might suggest that reversion to the mean is not an alternative to Lardy's core claim that policy is responsible for China's growth slowdown but a manifestation of it.
The biggest policy problem, as Lardy sees it, is the return since roughly 2006–7 to a focus on state-led growth and SOEs—a trend that Xi Jinping initially seemed inclined to reverse but has instead accelerated. The book is particularly persuasive in showing that SOEs have become an increasingly large drag on the Chinese economy in recent years, and that various attempts to explain...