Far Eastern Economic Review May 2007

The Chinese Economy: Transitions and Growth by Barry Naughton The MIT Press, 504 pages, $24 Reviewed by Rick Carew The story of China’s rise is the most important case study in economic development since the Industrial Revolution. The country’s shift from a stifled agricultural backwater to the world’s factory and its fourth-largest economy in less than 50 years evokes a mixture of awe and fear from different corners of the globe. African leaders look to China for a growth model, American workers look to China for the cause of jobs cuts, and CEOs look to China for new markets to boost their bottom line. It seems odd then that no single textbook comprehensively tackled the issues of China’s development: the transition from socialism to capitalism; the challenges posed by a massive population; and rural/urban inequality. This new book by Barry Naughton, a China specialist and professor at the University of California, San Diego, tries to do just that, and in large measure succeeds. He skillfully navigates the contours of China’s economic landscape, delivering a history lesson and then parsing sectors of China’s economy and explaining how different government policies transformed China for better, or worse. On this journey, Mr. Naughton presents a clear framework for understanding China’s economic changes by looking at the two problems it deals with simultaneously— transition and growth. Transition defined as China’s shift from a heavy-handed, inefficient planned economy to a more agile and insecure market economy in the post1978 era. Growth meaning that after Mao Zedong’s death in 1976, China’s leaders never forgot that theirs was a poor, developing country and delivering sustained rising incomes and jobs would be crucial to their country’s success and their grip on power. These two problems Mr. Naughton outlines in his framework for understanding China are the right approach, but aren’t original. Deng Xiaoping and his economic lieutenants Chen Yun and Zhao Ziyang appeared to understand this quite early in the process of China’s market reforms. The set of policies they devised are labeled the Beijing Consensus—a mixture of gradualism, careful support for the losers of reforms, and export-led openness. China’s prescriptions contrast with the Washington Consensus policies—a set of policies which include rapid pricing reforms, new institutions mirroring those in rich Western countries, and full openness of the economy to foreign goods and capital. The former succeeded in finding answers to those two problems for China. The latter resulted in political instability and economic decline in Russia, and much of Latin America and Africa.

In The Chinese Economy, Mr. Naughton repeatedly displays a subtle understanding of the complexities of managing China’s institutions and the delicate political issues involved in the reform process. This is a point readers will miss if they rely on the stream of investment-bank research and news reports on China’s economy. The reason is simple: It’s difficult to see these shifts in the short term because of poor transparency in China’s policy-making institutions, and much easier to understand once the dust has settled from internal policy debates that take place behind closed doors. This is where Mr. Naughton excels. For example, he cuts to the fundamental difference in the economic policies between the Deng Xiaoping and Zhao Ziyang-led reforms in the 1980s and those led by Zhu Rongji in the 1990s. Mr. Naughton argues that the former led China out of a planned economy by setting incentives so that state firms could profit from income they earned on sales that took place in addition to their transactions with the state. This made state firms sharper and more efficient, and gradually moved prices to a market system without causing the sharp inflation that shocked Russia’s economy. Then, in the 1990s Mr. Zhu decided to “smash the iron rice bowl,” closing inefficient state companies en masse and forcing reform forward by committing to joining the World Trade Organization in 2001. However, this book falls short in matching other sources of information on China in terms of timeliness. While a textbook can’t be judged on the same timetable as a newspaper, the book could still use more timely information in a few places. For a book published this year, Mr. Naughton’s chapter on China’s financial system misses out on the rebound of China’s stock market and dramatic government-led restructuring of the banking system. In these dynamic spheres, where many readers are likely to be most interested, the book only brings us up to 2005 and an updated edition with more current information on these points would be most welcome. Overall, this book is a substantial contribution to filling the gap in available resources on China by providing a broad economic overview, doing so without a moral judgment on China’s political or military ambitions. For those looking for a valuable reference to understand China’s economic miracle, this is probably the best book available today, and a welcome addition to the shelf of any student of economic development or China. Mr. Carew is a Beijing-based correspondent with Dow Jones Newswires.