How the “Chinese Model of Development” Applies to Developing Nations

Conventional economic theory in the West “has not been able to provide any coherent explanation for the rapid rise of China”, asserted Professor Wen Yi, a macroeconomist and former senior researcher at the Federal Reserve Bank of the United States, during Panel I of the Schiller Institute online conference on April 15 (cf. SAS 16, 17-23). He then proceeded to give his own well-informed view of the matter, which we can only summarize roughly below. (The full presentation can be viewed here, or read in Executive Intelligence Review.

While there are many similarities between “the China model and the Western capitalistic kind of development model”, Professor Wen first pointed to three well-known “superficial differences”: 1) the scale: some 250 years after the beginning of the industrial revolution, only 15% of the world population live in industrialized societies, whereas the industrialization process in China alone would add 20% to that percentage. 2) the speed: China’s economic reform began only 70 years ago. 3) the path: Western industrialization has been “full of wars”, while China’s path has been peaceful.

Despite these differences, Professor Wen contends that the underlying logic is very similar, and is important for developing countries to understand. In his view, the fundamental reason for poverty is the inability to mass produce. To be able to do so, a nation needs to build a unified market to make mass production profitable. But what “conventional economic theory never teaches us, is the following: The market itself is the fundamental public good. No individual peasant is able to produce it, so this kind of public good can only be created with the help of the state.”

Wen Yi went on to discuss “three pillars” that any market needs to develop: political stability, social trust, and infrastructure (which is also a public good). Unfortunately, during the reform of the 1980s and ’90s, the Washington Consensus told developing countries to be content with weak governments and let the state collapse, and the “market will emerge by itself”. That view is false, he stated, as can be seen in the examples of Europe, the United States, Japan, etc., that “all helped to carry the market for their own enterprises”. Another aspect Prof. Wen insisted on, is the need to create the market sequentially, step by step, and not in “one single big push or shock therapy”.

In European history, he noted, colonization helped create a global market, but “China’s experience told us that we can also create markets peacefully, without repeating the Western style of war capitalism. That’s one of the most important lessons China is able to offer to other developing countries. The state, the government, central and local, need to play a very important role to help your economy to create a market for your own economy.”