Dedication to the state’s purpose is the key lesson we must learn from China

The 20th century was a test of competing economic ideologies—socialism versus capitalism; and competing forms of governance—liberal democracy versus authoritarianism. When the Soviet Union collapsed in 1991, victory was declared for the Washington Consensus of free market capitalism and liberal democracy. 

India’s reformers adopted the Washington formula in 1991. By and large, they gave up on socialism, abandoned industrial policies aimed at growing domestic industries and opened the Indian market for foreign companies without technology-transfer requirements. China did not yield. It stayed its socialist course with single-party governance and continued to build domestic industries. 

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The growth of China’s economy is a miracle, economists say. In the 1980s, China and India’s economies were comparable in size and per capita income. Now, China’s per capita income and GDP are about five times India’s. China’s high-tech manufacturing sector has grown 48 times larger. 

The US, meanwhile, has grown alarmed with China’s remarkable economic growth and industrial strength despite Beijing not following Washington’s economic formula. That consensus has ended even in Washington, where ideological cracks have appeared with increasing inequality and unrest among workers in the US. 

The US is pressing India to come closer to it. India is wary. China shares a border with India that  has seen the two armies skirmish. India must become self-reliant and stronger much faster than it has so far. Reforms must result in faster income growth among the Indian masses and stronger domestic industries. India’s leaders should study China for lessons before pushing harder with economic reforms based on the West’s failing model. 

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US capitalism and Chinese socialism: Three recent books offer insights into how socialism and capitalism have been combined to achieve China’s inclusive and fast growth. 

China’s leaders are good learners, says German political economist Isabella M. Weber in How China Escaped Shock Therapy: The Market Reform Debate. Like Mahatma Gandhi, they kept their minds open, allowing ideas to come in from all directions without being blown off their feet. 

They listened to Western economists but applied only what suited China. Weber says, “The famous Harvard development economist Dani Rodrik represents the economics profession more broadly when he answers his own question of whether “anyone (can) name the (Western) economists or the piece of research that played an instrumental role in China’s reforms” by claiming that “economic research, at least as conventionally understood” did not play “a significant role.”

Chinese economist Keyu Jin, a professor at the London School of Economics who grew up in China and experienced the Chinese system from within, explains how the Chinese socio-economic-political system works in The New China Playbook: Beyond Socialism and Capitalism. 

She explains why Western economic models, which strip out cultural and social forces from economics, cannot comprehend how China works—or even how Western economies work. She makes visible the ‘invisible hand’ that free-market economists cannot explain. She explains why the Chinese government keeps financial markets and the private sector reined in to ensure the market produces welfare for all, especially poorer and least powerful citizens. 

She says, “The number of financial crises in China is exactly zero. It is also an oddity (from a Western perspective) that despite the nation’s preternatural economic growth, its stock market has been one of the worst performing in the world.” 

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The Chinese government has added citizen satisfaction and environmental sustainability to GDP as a measure of its own performance (and of local governments). Though private firms grew nine-fold in China from 2000 to 2019 (their number now exceeds the US’s by far), “A more striking fact,” says Lin, “is that private owners with state connections owned about a third of the capital  registered by these companies, showing how pervasive equity linkages between state and private businesses have become in China’s corporate  sector.” 

While the government has reduced the number of state-owned enterprises and pushed the remainder to add profits to their social objectives, it also demands that private firms comply with societal needs. Large, private, property and tech firms that strayed from the socialist path have been cut down. 

Three distinctive features of China’s governance: The purpose of the state, throughout China’s long history from imperial times to the Communist era, has been the welfare of citizens. The best emperor was seen as one who provides the most welfare to all citizens, not one who wins the most wars. The leadership of the Communist Party has continued this role, says Chinese political scientist Zheng Yongnian in The Chinese Communist Party as Organizational Emperor: Culture, Reproduction, and Transformation. Jin explains further (in The New China Playbook) how the ruling party’s commitment to this role has shaped Beijing’s socio-economic policies, resulting in widespread support for the party even among the young. 

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The governance of China is highly decentralized. Local communities are given freedom to craft solutions suited to their needs; the performance of local party officials is measured by the satisfaction of their communities with progress.  

Chinese leaders and economists are ‘systems thinkers.’ They see the economy as only a component of a complex social system. For them, the purpose of economic growth is the production of societal well-being, especially for less powerful people. Whenever the economy begins to fail this purpose, reforms are made to bring it back to its socialist moorings. 

India must not slavishly follow Western models. Nor can India be China. India must find its own way to create a more equitable society. 

The author is a former member of the erstwhile Planning Commission and the author of ‘Reimagining India’s Economy: The Road to a More Equitable Society’.