Only the rule of law can ensure sustained prosperity in China
Andy Xie says China's cycle of economic instability will continue unless the rule of law and the necessary checks are implemented to rein in abuse of government power
Over the past quarter of a century, China has escaped poverty and joined the ranks of the middle-income countries. The statistics are staggering: nominal gross domestic product in US dollar terms has increased by more than 20 times, exports more than 40 times, and electricity production over eight times. China today consumes more energy than the US. The World Bank calculates that China's GDP will exceed America's this year in purchasing power parity.
The remarkable success is a combination of good policy and luck. The most important decision was shifting to a stable currency policy in 1994. Repeated devaluations before then kept the economy small at market exchange rates.
With a stable currency policy, the focus for other decisions is on efficiency to maintain competitiveness. The subsequent structural reforms, such as joining the World Trade Organisation, corporatising state-owned enterprises, privatising the housing market and building modern infrastructure, wouldn't have happened without the currency constraints.
When a country achieves a period of spectacular growth, it's not just due to good policies or a benign global economy. Society must have strong fundamental human resources to begin with. China's modernisation began a century before the reform and open-door policy of 1978. While economic development was periodically interrupted by wars and revolutions, the development of human resources continued. In the 1930s, parts of China's eastern seaboard had already caught up with developed economies.
Between 1949 and 1978, the government wiped out mass illiteracy through a national education system. It also implemented basic health care. These two achievements were critical to the subsequent economic development.
The government has been firmly in control of economic development. The lack of institutions to check excesses has fostered a mentality of taking short-cuts. A race to the bottom in behaviour has accompanied the rapid growth. Some have mistakenly seen a causality between the two. In fact, most challenges that haunt China today could have been avoided without significantly hurting growth.