Book Review: The Chinese Economy-Adaptation and Growth

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ISBN-100262534797 ISBN-13978-0262534796 Edition second edition Publisher The MIT Press  Publication date March 16, 2018  Paperback US$21.16-32.62 (Amazon)

by Ankit Kumar       19 June 2023

About the author

Barry Naughton is an accomplished analyst and one of the foremost authorities on China’s economy. His textbooks on China’s economy are widely regarded as the most authoritative and widely used in the field. Currently, Naughton holds the prestigious So Kwanlok Chair of Chinese International Affairs at the School of Global Policy and Strategy at the University of California, San Diego.

With his extensive knowledge and expertise, Naughton has become a prolific author, writing for both specialized and general audiences. His contributions to the field of Chinese economics are notable, including his book “Growing Out of the Plan: Chinese Economic Reform, 1978-1993” and his involvement as a contributor and editor of numerous other books such as “Reforming Asian Socialism,” “The China Circle: Economics and Technology in the PRC, Taiwan and Hong Kong,” and “Holding China Together: Diversity and Integration in the Post-Deng Era.”

Naughton’s most well-known publication is his widely-used textbook on China’s economy titled “The Chinese Economy: Adaptation and Growth.” This textbook, which underwent revision and became “The Chinese Economy: Transitions and Growth,” in 2018 has become a cornerstone resource for students and researchers studying China’s economic development.

In addition to his book publications, Naughton’s scholarly contributions extend to academic journals, where he has written numerous articles. Moreover, he is a regular contributor to the highly respected publication, the China Leadership Monitor, further solidifying his status as a leading expert in the field.

With his impressive body of work and his ability to bridge the gap between specialized and general audiences, Barry Naughton continues to make significant contributions to our understanding of China’s complex economic landscape. His expertise and dedication to the subject make him a trusted source for anyone seeking insights into China’s economic transformations.

Pigeonholing

Barry Naughton is a highly respected and influential economist specializing in the study of China’s economy. With his extensive research and expertise, he has established himself as a leading authority in the field. Naughton’s works, including his widely used textbooks, demonstrate his profound understanding of China’s economic reforms and growth.

As the holder of the So Kwanlok Chair of Chinese International Affairs at the School of Global Policy and Strategy at the University of California, San Diego, Naughton has dedicated his career to unravelling the intricacies of China’s economic transformation. His analysis and insights provide valuable perspectives on the country’s economic policies, institutions, and their impact on the global stage.

His expertise encompasses various aspects of China’s economic development and reforms. Notably, Naughton has conducted extensive research on topics such as Chinese economic transitions, market institutions, industrial policy, innovation, and intellectual property rights.

Naughton’s contributions go beyond academia. With his prolific writing, he effectively communicates complex economic concepts to both specialized and general audiences. His textbooks, such as “The Chinese Economy: Adaptation and Growth,” have become go-to resources for students and researchers studying China’s economy. Additionally, Naughton’s involvement in editing and contributing to various books reflects his commitment to expanding knowledge and fostering a comprehensive understanding of China’s economic landscape.

Assessment of the author

Barry Naughton, the author of “The Chinese Economy, Second Edition: Adaptation and Growth,” demonstrates a profound understanding of China’s economic landscape and its remarkable transformation over the past few decades. The introduction sets the stage by highlighting China’s extraordinary economic performance and its rise as a major player in the global economy.

Naughton’s expertise in the field is evident through his analysis of China’s development challenges, such as overcoming geographic and resource limitations, technological gaps, and the need to establish a market-oriented economy. His emphasis on China’s unique development strategy, independent of traditional economic prescriptions, highlights his ability to delve into the intricacies of China’s economic model and provide valuable insights.

The author’s objective to trace the processes of structural change and institutional transformation is commendable, as it allows readers to understand the underlying factors driving China’s economic growth. By examining key areas of the economy, Naughton provides a comprehensive view of the changes and challenges faced by China throughout its development journey.

Naughton’s assessment of China’s current stage as an upper-middle-income economy and the need for adaptation to new conditions demonstrates his ability to provide a balanced perspective. He acknowledges the successes and potential of China’s robust growth while addressing the pressing issues of transitioning to a more consumption-driven economy and implementing sustainable social policies.

The author’s integration of specific realities, such as China’s unique institutions and incentive environment, with broader patterns of structural and institutional change, enhances the comprehensibility of China’s economic ascent. This approach allows readers to grasp both the strengths that propelled China’s growth and the vulnerabilities it continues to face.

Overall, Barry Naughton’s expertise, comprehensive analysis, and balanced perspective make him a highly capable author for “The Chinese Economy, Second Edition: Adaptation and Growth.” His ability to integrate specific realities with broader economic concepts provides readers with a valuable resource for understanding China’s economic journey and the challenges it faces in the future.

Assessment of the book

“The Chinese Economy, Second Edition: Adaptation and Growth” by Barry Naughton is an extensive and comprehensive resource that provides in-depth insights into the complexities of China’s economic development. With over 900+ pages divided into 7 chapters, the book offers a comprehensive exploration of various aspects of China’s economy.

The book adopts a bottom-up approach in its organization. Chapters 2 through 6 delve into endowments, legacies, and economic systems, tracing their evolution to the present. Chapters 7 through 10 offer complementary perspectives on the developmental process, covering structural change, population, labour, and living standards. Following these chapters, the book examines specific sectors, beginning with agriculture and progressing through industry, technology, foreign trade, and investment. Macroeconomic, financial, and fiscal issues are also addressed in three dedicated chapters, with a final chapter focusing on the environment.

“The Chinese Economy, Second Edition: Adaptation and Growth” is a valuable starting point for anyone seeking to deepen their understanding of China’s economic landscape. It is comprehensive coverage and organized structure allows readers to explore specific topics of interest while providing a broader context for China’s economic transformation. Whether you are a student, researcher, or practitioner, this book serves as an essential resource for studying and analyzing the intricacies of the Chinese economy.

One of the notable features of this book is its design as a platform for understanding the Chinese economy. Each chapter functions as a self-contained descriptive essay, allowing readers to delve into specific topics of interest. The chapters are extensively cross-referenced, enabling readers to navigate between related subjects easily.

Barry in the 2nd chapter of “Patterns of Growth and Development” explain China’s long-term growth has been remarkable. Between 1949 and 1978, China experienced rapid growth, but it truly took off after the initiation of economic reforms in 1978. The acceleration of economic growth coincided with a slowdown in population growth, leading to even more significant per capita growth. From 1978 to 2000, average annual GDP growth accelerated from 6% to almost 10%, while population growth slowed from 1.9% to 1.3%. This resulted in a doubling of per capita GDP growth from 4.1% to 8.3% annually. China’s growth story became even more impressive in the following decade. Despite the global financial crisis in 2008-2009, China managed to maintain strong growth rates comparable to those before the crisis. By 2010, it became the world’s second-largest economy much earlier than expected. Per capita GDP growth continued to accelerate as population growth further slowed, reaching nearly 10% annually. However, since 2010, growth has gradually slowed down, with per capita GDP growth dropping to 7.1% annually between 2010 and 2016. Despite some challenges with the reliability of Chinese data, China’s economic growth is substantiated by factors such as export growth, fiscal revenues, and personal experiences. Even with a potential upward bias in official growth rates, China’s economic growth over the years remains a significant achievement and one of the most sustained periods of rapid growth in history. China’s growth has followed a cyclical pattern with periods of peak growth followed by policy-induced slowdowns. These cycles were often associated with institutional changes and restructuring efforts.

However, the recent slowdown since 2013 is driven by long-term structural factors in the economy. As China has developed, it has undergone structural changes, transitioning from a predominantly agricultural economy to an industrialized and diversified one. The share of the labour force in the primary sector, particularly agriculture, has declined, while the secondary sector, including manufacturing and construction, has grown. This process of industrialization has reshaped the economy and contributed to overall growth. In summary, China’s growth story is characterized by impressive long-term economic growth, acceleration in per capita GDP growth, and structural transformations. While challenges exist in accurately measuring and interpreting Chinese data, the fundamental picture of rapid growth remains intact. China’s growth miracle stands out as one of the longest and most impactful periods of sustained economic growth in history.

In the 3rd chapter of “Rural Economy” Barry discusses the transformation of Chinese villages and the role of rural industry in China’s economy. The Chinese village has experienced revolutionary changes over the decades and is now entering a new era in an urban-dominated China. Instead of being pressured by an extractive state, villages are facing challenges due to the steady outflow of their members.

The rural industry has been a significant part of China’s economy for centuries, particularly during the golden age of township and village enterprises (TVEs) from 1978 to 1996. TVEs played a catalytic role in transforming China’s command economy into a market economy. They emerged in rural areas with less rigid control, providing competition to state-run industrial enterprises and driving marketization across the entire economy. TVEs contributed to increased rural incomes, absorbed labour from farms, and helped narrow the urban-rural gap.

During the period of TVEs, these enterprises had a distinct ownership and corporate governance setup. Initially collectively owned, TVEs grew rapidly and challenged the monopoly previously held by state-run enterprises. Various TVE models adapted to different conditions, fundamentally changing different parts of the Chinese economy.

Since 1949, rural enterprises have undergone four successive transformations. In the 1950s, traditional rural businesses were swept away during the collectivization of agriculture. In the Cultural Revolution, the focus shifted to “commune and brigade industries” serving agriculture rather than the market. After 1978, rural enterprises were liberated and rebranded as TVEs, transforming the Chinese rural economy. In the 1990s, TVEs privatized themselves and became private firms to cope with intense competition. Since 2000, TVEs have evolved into new forms, such as industrial clusters, with cooperation between large firms and numerous household-based enterprises. The arrival of the Internet in rural areas allowed villages to tap into national and global markets.

China’s rural entrepreneurs have shown flexibility and institutional creativity, leading to the emergence of new forms of rural industry.

In Chapter 4, titled “The Urban Economy,” the industrial transformations in China since 1978 are discussed. The industrial output has grown significantly, making China the industrial workshop of the world. The transition from a planned to a market economy was crucial, particularly in state-owned industries. Today, China has successfully transitioned to a diverse mix of ownership types, with private corporations playing a significant role. However, the Chinese industrial economy remains distinct due to the strong presence of state-owned firms and government involvement at various levels.

While China’s industrial institutions have supported its industrialization, the next phase of growth will require increased innovation and efficiency to counter rising costs. China’s state-owned enterprises dominate the sector of large firms, although private firms have also made progress. The protected domestic market has contributed to the growth of state-owned enterprises, but they still face challenges in global competition.

China has experienced a remarkable transformation in its industrial sector over the past 35 years, leading to a vibrant and competitive system of diverse ownership. The industrial sector has shifted from government control to being dominated by privately owned firms, contributing to China’s emergence as the world’s workshop. Despite this transformation, state-owned firms still hold importance, but questions regarding their role and efficient governance remain unanswered. The profitability of state-owned enterprises has declined, hindering their contribution to China’s national wealth. The first phase of reform was successful, eroding the command structure without catastrophic consequences. However, the achievements of the second phase have been comparatively less impressive.

China’s industrial economy is highly marketized and competitive, making it crucial for firm-level governance institutions to align with market principles. Unlike other market economies, China lacks a substantial separation between ownership and managerial control in both private and state-owned firms. There is a need for the growth of modern and transparent corporations in both sectors. Within the state sector, the limitations on firm-level corporate governance and authoritative ownership agencies have led to a lack of oversight on managerial discretion, resulting in potential abuses.

China’s corporate oversight system does not align with either equity-market-based or control-based systems observed in other countries. Stock markets lack adequate disclosure and ownership contestability, while banks, the traditional capital providers for state-owned enterprises, lack the capability and mandate for aggressive performance monitoring. Consequently, the question of corporate governance in China remains unresolved. Efforts have been made since 2013 to improve corporate governance in state-owned firms, with potential efficiency gains at stake. However, entrusting additional developmental missions to state-owned enterprises may undermine these gains, diverting their focus from productivity and profitability, which are essential for national development and well-being.

In summary, China’s industrial sector has undergone a significant transformation, but challenges persist in terms of governance, particularly in state-owned enterprises. The need for improved corporate governance is recognized, as it can lead to efficiency gains. However, the tendency to assign multiple objectives to state-owned enterprises may hinder their ability to contribute effectively to national development and well-being.

In chapter 5th, “China and the World Economy”, Barry argue that, Over the past 35 years, China has undergone a remarkable transformation from an isolated economy to become the world’s largest trading nation. It achieved the status of the largest exporter in 2009 and the largest trader (combining exports and imports) in 2012, surpassing Germany and the United States, respectively. China’s level of openness is exceptional for a large continental economy. At its peak in 2006, China’s total trade (exports plus imports) accounted for 65% of its GDP, surpassing the levels of the United States, Japan, and India. Although trade as a percentage of GDP has decreased since then, trade remains a crucial driving force behind China’s growth and modernization.

China’s trade success can be attributed to the basic economic principle that countries benefit from trade. China’s factor endowments, such as abundant labour and scarce land, have allowed it to export labour-intensive products and import capital-intensive goods. This trade integration has played a vital role in China’s rapid economic growth, as it enabled the expansion of the labour-intensive manufacturing sector, created employment opportunities, and improved efficiency through access to imported technology and raw materials.

Trade also facilitated China’s structural transformation by providing an expansive market for its exports and allowing the country to spread its exports globally. Furthermore, the desire to access the benefits of trade has been a driving force behind market-oriented reforms in China’s domestic economy. China’s entry into the World Trade Organization (WTO) in 2001 marked a new phase of trade policy reform and signalled its integration into the global economic community.

China’s trade growth has been closely linked to foreign investment, particularly within the context of East Asia’s economic restructuring. China adopted liberalization policies and developed close relations with exporters in Hong Kong and Taiwan. By participating in cross-border production networks, China was able to integrate itself into the global trade system and take advantage of opportunities arising from foreign investment.

Despite China’s impressive trade achievements, there are challenges ahead. The country’s trade ratios have declined in recent years, and the global economic slowdown has affected demand from developed countries. The erosion of cost competitiveness in labour-intensive manufacturing and changing global dynamics will have implications for China’s future trade growth. However, China remains highly competitive in trade due to its robust trade-related infrastructure, lower transaction costs resulting from WTO accession, and access to trading opportunities. Given China’s unique factor endowments and a skilled labour force capable of absorbing technology and skills, the country stands to gain significantly from globalization.

In summary, China’s transformation into the world’s largest trading nation has been driven by domestic economic reforms, strategic integration into global trade networks, and an astute approach to foreign investment. Despite changing global dynamics, China’s trade competitiveness remains strong, and it stands to benefit greatly from globalization.

In the 6th chapter ‘Macroeconomics and Finance,’ the author examines China’s macroeconomic record from 1978 to 2016 and explores the topics of full employment and stable prices. When considering the unique circumstances of a developing and transitional economy, China’s macroeconomic record generally displays full employment and stable prices. The management of macroeconomic policy during the transition to a market economy posed significant challenges, particularly due to the lack of proper tools for modern monetary and macroeconomic management. While transitional economies in Eastern Europe and the former Soviet Union faced macroeconomic instability and high inflation, China managed to avoid major pitfalls. Although there were three inflationary cycles in the first 20 years of the economic transition, China was able to control high inflation quickly, maintain the value of household financial savings, and minimize extreme uncertainty regarding future expectations.

In the 7th chapter of “Conclusion and China’s Future” Barry delves into the relationship between economic activity, human endeavours, and the natural environment, highlighting the concept of “natural capital” that provides essential services necessary for economic operations. Often overlooked, these services such as clean air, potable water, and diverse ecosystems are undervalued and taken for granted. Like many industrializing nations, China has experienced the depletion and degradation of its natural capital. The quality of China’s air, water, and living resources has suffered significant deterioration over the past century. However, the country is now grappling with the task of repairing the damage and transitioning towards a sustainable development path.

China boasts a historically rich natural endowment, evident in its large traditional population. Nevertheless, environmental degradation began even in earlier times. A century ago, China had already witnessed the depletion of its forests, and pristine wilderness areas were scarce. The Maoist economic policies of the past also failed to acknowledge the importance of environmental conservation. However, the most substantial environmental destruction occurred during the rapid growth phase after the reforms of 1978. The massive industrialization in China since then has presented challenges far surpassing those of the Maoist era. The country has transformed from an energy-deficient state into an energy powerhouse. Additionally, traditional agricultural practices that incorporated organic waste into the soil have been replaced by chemical-intensive and highly polluting methods. As a result, China finds itself confronting a severe environmental crisis. The chapter examines the gravity of China’s environmental issues today and questions whether the country’s economic growth has come at an unacceptably high environmental cost. Are these environmental challenges posing a threat to the progress made towards improving the quality of life for the majority of Chinese citizens?

Economists often analyze environmental concerns through the lens of the “environmental Kuznets curve.” This perspective suggests that pollution and environmental issues worsen during the early stages of economic growth and subsequently diminish as a country reaches middle-income status. Graphically, pollution levels plotted against GDP per capita resemble an inverted U-shaped curve. This pattern is supported by both preference-related and technology-related arguments. Regarding preferences, people in poverty prioritize economic growth to enhance their income and consumption, initially overlooking the environmental consequences. As household incomes rise to middle-income levels, individuals start demanding a better personal environment. Environmental quality becomes a “luxury good” with demand increasing disproportionately as incomes grow (income elasticity greater than one). Citizens begin demanding that governments provide clean air and water as public goods more effectively. In China, there is clear evidence of broad-based popular demand for a better environment, with over 70% of respondents in a 2016 Pew poll stating that air and water pollution were significant problems. Furthermore, 65% agreed that air pollution should be reduced, even if it means slower economic growth. In terms of technology, early industrialization stages often witness the proliferation of crude and polluting production techniques that are easily adaptable but fail to utilize by-products efficiently. As technological capabilities advance, cleaner and more efficient production techniques become accessible, and government regulatory capacity improves, enabling the implementation of measures to curb pollution. These factors are all applicable to China’s situation.

Conclusion

In conclusion, Barry Naughton’s “The Chinese Economy, Second Edition: Adaptation and Growth” is an impressive and highly informative book that offers a wealth of knowledge about China’s economic development. Its comprehensive approach, extensive cross-referencing, and updated content make it a must-read for anyone interested in understanding the dynamics and challenges of the Chinese economy.

One of the notable strengths of this book is its ability to cater to a diverse audience. Whether you are a student looking to delve into the complexities of China’s economic policies, a researcher seeking in-depth analysis, or a practitioner aiming to navigate the Chinese business landscape, this book provides valuable insights and a solid foundation. Naughton’s writing style strikes a balance between academic rigour and accessibility, making complex concepts understandable without sacrificing depth.

Moreover, the book’s organized structure allows readers to explore specific topics of interest while maintaining a broader understanding of the overall economic landscape. From China’s economic history to its market reforms, trade policies, and financial system, Naughton covers a wide range of subjects, providing a comprehensive view of China’s economic evolution.

Another commendable aspect of this book is its emphasis on up-to-date information and analysis. China’s economic landscape is constantly evolving, and Naughton ensures that readers are equipped with the most current data and insights. This second edition incorporates recent developments, such as the Belt and Road Initiative, technological advancements, and shifts in economic priorities, offering a contemporary perspective on China’s economic trajectory.

Furthermore, Naughton’s expertise and deep understanding of the Chinese economy shine through in his analysis and explanations. He navigates complex economic theories and policy debates with clarity, offering nuanced perspectives that challenge conventional wisdom and provide a balanced view of China’s economic reality. The book encourages critical thinking and enables readers to form well-informed opinions on the opportunities and challenges facing the Chinese economy.

In summary, “The Chinese Economy, Second Edition: Adaptation and Growth” is a valuable starting point for anyone seeking to deepen their understanding of China’s economic landscape. Its comprehensive coverage, organized structure, up-to-date information, and insightful analysis make it an essential resource for studying and analyzing the intricacies of the Chinese economy. Barry Naughton’s expertise and engaging writing style ensure that readers gain a nuanced understanding of China’s economic development and are well-equipped to navigate the complexities of this global economic powerhouse.