Book Review
Demystifying the Chinese Economy


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For those under the impression that the spectacular rise of China is a purely 20th Century phenomenon, here is a bit of reality check. China was one of the most advanced, wealthy and powerful countries for over a thousand years before the modern era, till the 18th Century Industrial Revolution tilted the balance in favor of the West. After the Opium War defeat in 1840, China strived to regain prominence. At the end of 1970s, it started implementing reforms that led to a miraculous economic performance. The rest, as they say, is history.

It is this extraordinary transformation of China, from zenith to submission and back, that forms the core of the book Demystifying the Chinese Economy. Justin Yifu Lin’s book, which has been translated from Chinese, is based on the author’s lecture notes at Peking University in 1993, before he took up a leading position at the World Bank. It is, in essence, an analysis of the reasons for China’s decline from its peak, its efforts to reverse the slide, and the reforms adopted by the country to complete the transition to a well-functioning market economy.

China has hogged the limelight in recent decades for a reason. Since the late 1970s, the country’s annual GDP growth has averaged 9.9 percent over 30 years. China’s per capita income in 1979 was at $210 – a third of the average among developing countries in sub-Saharan Africa – but by 2009, its per capita GDP reached $3,744. It overtook Japan as the world’s second largest economy in 2010 and passed the US as the world’s biggest trading nation as measured by the sum of exports and imports in 2012. If China sustains its current rate of growth, it will become the world’s largest economy by, or before, 2030. In the process, the country has lifted 600 million people from extreme poverty.

Repetitive figures notwithstanding, the book provides a unique perspective into the challenges and opportunities, vis-à-vis China’s economic development over the years. It elucidates how a civilization that was large and advanced before Industrial Revolution lagged far behind Western world after it? Justin Lin gives an insider’s view of this transformation.

The author was a major in economics at Peking University when Deng Xiaoping, the architect of China’s reforms, set a target in 1978 to quadruple the country’s GDP by the end of the Century, possibly with the average annual growth of 7.2 percent. Lin doubted the possibility of this target being achieved. Yet Deng’s seemingly impossible mission proved successful. But despite the rapid growth, challenges remain for China. There is a major gap between China and the rest of the developed world in per capita income, which can only be narrowed with sustainable growth. This makes job creation for its growing population critical.

Lin’s real exercise of demystifying the Chinese economy begins with a dissection of factors behind the country’s slump during the Industrial Revolution. According to Lin, in the pre-modern times invention was based mostly on the experience of peasants and craftsmen where China enjoyed advantage because of its large population. This advantage disappeared with the Industrial Revolution because controlled experiments by scientists in the West replaced experience as the basis of invention. Moreover, in China, the civil service system discouraged talented people from acquiring the capacity for mathematics and controlled experiments.

Industrial Revolution brought about mechanization of textiles, invention of steam engine and production of iron and steel. This turn of events, Lin maintains, began a “history of humiliation” for China. The country, however, still has the capacity for industrial and scientific revolution and with obstacles to scientific learning removed, there is a possibility that China will again contribute to scientific and technological progress.

The highlight of the book is its description of an important phase in China’s transition from agrarian to industrial economy and the role played by Russia in this process. The victory of the 1917 October Revolution in Russia brought Marxism-Leninism to China and its intellectuals began to spread the new theory. This laid an ideological foundation for the founding of the Communist Party of China.

Lin believes that the May Fourth Movement of 1919, at the end of the First World War, facilitated the integration of Marxism with the Chinese labor movement, providing both an ideological underpinning and personnel for the new party. When the Communist Party of China was born in 1921, it followed Marxism and Leninism closely and the Communist International – an international communist organization initiated in Moscow – dispatched representatives to guide revolutionaries in China. The uprisings, however, were not as successful as in Russia, apparently due to the differences in conditions prevailing in these two countries.

The book then turns its attention to Mao Zedong under whom the Communist Party of China first established revolutionary bases in rural areas and then gradually targeted capitalists in cities. His strategy simply was to “Unite the Majority and Fight against a Handful”. This rapid transformation from an agrarian to a socialist country entailed a transition for China to catch up in industrialization and modernization. In a generation’s time (1921-49), the Communist Party of China grew from a small social movement started by intellectuals to a party that united the whole country. This was unprecedented even in China’s history.

Demystifying the Chinese Economy gives adequate attention to the process of reforms in China, especially delineating the difference between rural and urban reforms. Interestingly, the timing of these reforms coincides with the changing leadership styles in the country, especially the downfall of the Gang of Four [a radical political elite group convicted for implementing harsh policies directed by the Communist Party] and the rise of the second generation of leadership headed by Deng Xiaoping.

While the Gang of Four had advocated an ultra-leftist line, which proved to be extremely detrimental to economic development, Deng’s administration felt it necessary to develop policies that not only differed from those of the predecessors but also benefited the country. Lin’s World Bank connection comes to the fore when he deals with the financial sector and where China stands on it. He holds the view that in the modern economy, the financial sector is important for financing and risk-sharing. If the financial sector is inefficient, technological innovation suffers, and the economy is bound to stagnate or even encounter crisis. Hence, for Lin, there is no modern national economy without a modern financial sector.

The concept of CAD [comparative advantage defying] and CAF [comparative advantage following] strategies is a recurring motif in the book. According to Lin, soon after its founding, the People’s Republic of China implemented a CAD catching up strategy, prioritizing heavy industries. The idea was to quickly develop advanced, capital-intensive and technology-intensive industries to keep the country competitive.

On the down side, the book does not contain post-2009 figures, which is not ideal for a 2012 publication. Yet, given its scope, canvas and unique perspective, Demystifying the Chinese Economy should be of interest to academicians and students alike. This is among the best books to have come out on China in recent years although, going by the burgeoning China story, it is definitely not going to be the last.