The London School of Economics and Political Science China as a Post-Socialist Developmental ...

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The London School of Economics and Political Science

China as a Post-Socialist Developmental State:
Explaining Chinese Development Trajectory

Andrzej Bolesta

A thesis submitted to the Department of Government of the
London School of Economics for the degree of Doctor of
Philosophy
Declaration

I certify that the thesis I have presented for examination for the MPhil/PhD
degree of the London School of Economics and Political Science is solely my
own work other than where I have clearly indicated that it is the work of others.

The copyright of this thesis rests with the author. Quotation from it is
permitted, provided that full acknowledgement is made. This thesis may not be
reproduced without the prior written consent of the author.

I warrant that this authorization does not, to the best of my belief, infringe the
rights of any third party.

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Abstract

This thesis is intended to contribute to the discussion on China’s socio-economic
development during the post-socialist period of reform and opening up. It is aimed at
providing an explanation of the Chinese contemporary development trajectory, by
establishing an institutional and policy model, which China is believed to have been
following. This model is also believed to offer some general solutions to the
underdeveloped countries in systemic transformation.

The thesis argues that China’s post-socialist development trajectory has been
determined by the provisions of the Developmental State (DS) model, as far as state
development policies, state ideology, and state institutional arrangements are concerned,
and to the extent, that China has become a genus of the Post-Socialist Developmental
State (PSDS) model – this model being an alternative to the post-socialist neo-
liberalism.

In the course of scholarly enquiry, China’s development trajectory is analysed against
the paths of historical developmental states, and against the general and developmental
aspects of the process of post-socialist transformation. I start by analysing the features
of the historical developmental states and by investigating whether the provisions of the
DS model are viable contemporarily and how the model extends to the discussion on
China’s development. I then examine China’s post-socialist transformation, partly in its
DS context. Next, I analyse the features of China’s development trajectory in
comparison with the features of historical developmental states, as far as ideology and
political and economic arrangements as well as state development policies are
concerned. Finally, based on the previous analyses, I explain the DS-determined post-
socialist development trajectory of China, address the causal relation between the DS
institutionalisation and post-socialist transformation, and construct the PSDS model, as
a general guideline for states in transition.

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List of Contents

Introduction ………………………………………………………………………. 7
1. China and the Relevant Models of Socio-Economic Development ... 7
2. Post-Socialist China and the Developmental State Model:
Explaining Chinese Development Trajectory ……………………… 11
3. The Methodology and Chapter Composition ………………………. 15

Chapter 1: The Developmental State: Its Conditionality and Its Future …... 20
1.1. The Definitions ……………………………………………………... 20
1.1.1. The Geographical and Temporal Limitations ……………. 22
1.1.2. The State-Society Relations: From “Embedded
Autonomy” to “Subordinate Society” ……………………. 26
1.1.3. The State Development Policies: From Import
Substitution Industrialisation to Export Oriented
Industrialisation …………………………………………... 31
1.1.4. The State Ideology: Economic Nationalism ……………… 33
1.1.5. The Quantitative Definition ……………………………… 35
1.2. The Political Conditionality ………………………………………… 38
1.3. The Economic Conditionality ………………………………………. 47
1.4. The Future of the Developmental State ……………………………. 58
1.5. China and the Developmental State ………………………………… 67

Chapter 2: Post-Socialist Transformation in China …………………………. 71
2.1. Post-Socialist Transformation – The Overview ……………………. 71
2.2. Post-Socialist Transformation – The Debate ……………………….. 78
2.3. Post-Socialist Transformation in China ……………………………. 83
2.3.1. China during the State Command Period ………………... 84
2.3.2. China in the Process of Post-Socialist Transformation ….. 87
2.3.3. Political Reforms and the Gradual Path ………………….. 93
2.3.4. Economic Reforms ………………………………………. 99
2.3.5. The Chronology ………………………………………….. 107
2.3.6. The Chinese Perspective …………………………………. 111

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Chapter 3: China’s Development Trajectory and the Developmental State
Model: Ideology, Political and Economic Arrangements ………. 117
3.1. Economic Nationalism in China ……………………………………. 118
3.2. The Political Arrangements of the State ……………………………. 129
3.3. The Interaction of the Four Actors of the Developmental State –
“The Relational Aspects” …………………………………………... 136
3.4. The Economic Arrangements of the State ………………………….. 147

Chapter 4: China’s Development Trajectory and the Developmental State
Model: Comparative Policy Analysis …………………………….. 157
4.1. The Perceptions on Industrial Policies
and the Developmental State Model ………………………………... 157
4.2. Agrarian Reforms and Rural Industrialisation ……………………… 166
4.3. The DS Policy of Industrial Development …………………………. 169
4.3.1. Industrialising by Learning and by Innovating …………... 170
4.3.2. The Targeting …………………………………………….. 179
4.3.3. The Business Actors ……………………………………... 191
4.4. The DS Policy of Import Discrimination and Export Support ……... 193
4.5. The DS Financial Policy of Support
for Industrial Development and Export …………………………….. 202
4.5.1. The Monetary Policy and the Banking Sector …………… 203
4.5.2. Indirect and Direct Subsidies …………………………….. 207
4.5.3. Price Control, Investment Policy and Foreign Direct
Investments ………………………………………………. 213

Chapter 5: China – The Post-Socialist Developmental State ………………... 217
5.1. The Unordinary Character
of China’s Post-Socialist Development Trajectory ………………… 217
5.2. China’s Post-Socialist Development
and the Developmental State Model ………………………………... 223
5.3. Post-Socialist Developmental State Model:
The Natural Choice of Systemic Transformation? …………………. 236

Bibliography ……………………………………………………………………… 247

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Appendix ………………………………………………………………………….. 281
1. National Development and Reform Commission’s (NDRC)
Main Duties ………………………………………………………… 281
2. Ministry of Commerce’s (MOFCOM) Main Duties ……………….. 284
3. Socio-Economic Indicators ………………………………………… 288

List of Tables
Table 1: Development-related Indexes of Post-Socialist States (1990-2005) .. 288
Table 2: HDI Change in Historical Developmental States …………………... 289

List of Figures
Figure 1: Four Actors of the Developmental State …………………………… 136
Figure 2: HDI Change in Post-Socialist and Developmental States ………….. 289

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Introduction

1. China and the Relevant Models of Socio-Economic Development

In the course of economic history, various civilisations have risen and fallen and the
gravity of mankind’s socio-economic development has shifted from one region to
another. There is an abundance of often interconnected factors which constitute a
successful developmental model, among which are institutional arrangements, systemic
environment, state policies, societal capacity, as well as geo-political and geo-economic
locality. This thesis concerns the contemporary developmental model China has been
following during the post-Mao period of reforms and opening up (gaige kaifang).

Up until the nineteenth century, China was the largest economy in the world and Adam
Smith (2003) would see it more appropriate to compare the Chinese economy with that
of the entire Europe, rather than separate European states. Maddison (2007) claims that
China owed its position to the intensive economic growth between the seventh and the
thirteenth centuries and this was attributable to the development of an intensive and
sophisticated agrarian production sector, to the creation of an internal market to trade
goods, and to the well-organised and effective state1 supported by a highly qualified
state bureaucracy. At least until the end of the fifteenth century, China’s civilisation was
considered to be more advanced than European civilisation. Smith pointed out in 1776
that ‘no other country has yet arrived at this degree of opulence [and that] China had
probably long ago acquired that full complement of riches’ (Smith 2003, p.132).
Nevertheless, the overall progress of mankind in terms of socio-economic development
in the first eighteen centuries A.D. was relatively slow as compared with the subsequent
time periods. Kolodko (2008, pp.68,70) points out that it is estimated that the
aggregated output of the world’s economy between year 1 and 1000 did not increase
and between 1000 and 1800 increased by a meagre 50%, with an average annual
economic growth of 0.05%.

1 The state, defined by Max Weber as a compulsory association claiming control over a territory and the
people therein (cited in Evans 1995, p.5), is considered here to be the structure of governance institutions
(Wade 1990, p.8). In keeping with Wade (1990), the term state is often used interchangeably with the
term government.
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The consequences of the Industrial Revolution of the late eighteenth and early
nineteenth centuries2 allowed for a significant acceleration of socio-economic
development and subsequently firmly established the representatives of the so-called
Western world as the leaders of developmental advancements, first – the United
Kingdom, then the United States, Germany and other European countries. The
Industrial Revolution marks perhaps the establishment of the first effective
developmental model of the modern era. This model was characterised by capital-driven
economic expansion. The capital was generated through production increase, enabled by
technological advancements. At the same time, economic expansion was facilitated by
military means. China seemed not to be affected by the Industrial Revolution and, as a
consequence, the developmental rift between Europe and the “Middle Kingdom”
continued to increase. It is believed that the initial waves of Industrial Revolution failed
to have an effect on China, otherwise a relatively well-developed state with well-
educated elites and efficient bureaucracy, because of its 300-year policy of isolationism,
which limited the diffusion of foreign technologies, domestic incentives for
modernisation and the effective exchange of ideas related to economic policies. The
militarist model of capitalist development of Western Europe was soon to affect the
political stability of China, which as a result of several wars and domestic rebellions,
became a semi-colonial state with 92 “treaty ports” with extraterritorial rights.3

The beginning of the Industrial Revolution prompted a critique of mercantilism, until
then broadly considered to be world’s main economic doctrine, which advocated state-
controlled foreign trade monopolies as paramount for developmental advancements
(Skousen 2007). Adam Smith and then David Ricardo among others, supported the idea
of trade liberalisation leading towards international production specialisation and
utilisation of comparative advantage (Haakonssen 2006). However, their classical
economy theory of “natural liberty” met opposition among the representatives of less
developed countries. For example, a German economist Friedrich List believed that
Smith’s ideas would bring benefits to more affluent countries and leave the less
developed vulnerable. His perception was influenced by Alexander Hamilton’s (2008)
American school, developed by the president of the United States, John Quincy Adams
and senator Henry Clay into the American system – an economic plan to support the US

2 Preceded by 300 years of pre-capitalist development which had commenced with the Renaissance epoch
in Europe.
3 Subsequently, 19 foreign nationalities residing in the treaty ports were granted effective diplomatic
immunity from the Chinese legal jurisdiction (Maddison 2007).
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domestic industries development by providing the necessary physical and financial
infrastructure, as well as by protecting them from foreign competitors through tariff
barriers. Hamilton, the first US Secretary of Treasury, believed that those state
interventions and protectionist measures are necessary for overall socio-economic
development. As a result, List saw politics and economics as inseparable. He argued
that ‘economies need to be seen in their political context, if their relative successes and
failures are to be understood. […] It is only when a polity gains the status of a
geographically substantial nation-state that it can become and remain a successful
manufacturing and commercial entity’ (Winch 1998, p.302).

The model of capitalist development brought enormous wealth to the industrial elite,
whereas the labour force employed in the newly established factories and manufactories
suffered the problems of low wages and difficult working conditions. Social
marginalisation and exclusion as well as widespread industrial exploitation4 became
urgent issues, with the long-term potential capacity to politically destabilise many
countries. This prompted considerations for a new economic model, based on Marxist
critiques of capitalism, labelled as socialism or, due to the fact that the proposals for
new systemic arrangements were presented in the document called The Manifesto of the
Communist Party – communism. In its socio-economic form the model advocated the
abolishing of private property and therefore eliminating the capitalist elite. It eventually
evolved into advocating the abolishing of the market mechanisms in economic affairs
and the establishing of a state-command mechanism in which the decision on the
quantity and assortment of production, goods allocation and price would be met by the
state (see: Schumpeter 1942). This model had a significant impact on China’s
development trajectory, since the state ideology of Mao Zedong – the founder of the
People’s Republic of China (PRC) – drew significantly from Marxism. Without
subsequent extensive acceleration of socio-economic development, the implementation
of the new model nevertheless reversed the trend of economic decline, as a result of
which, the ‘Chinese GDP per capita was lower in 1952 than in 1820 [and] China’s share
of world GDP fell from a third to one-twentieth’ (Maddison 2007, p.43).

However, the second half of the nineteenth century was also marked by the enforcement
of the Listian political economy into the systemic arrangements in continental Western
Europe and thus by creation of what perhaps can be seen as initial institutional

4 As opposed to the earlier agrarian exploitation related to the feudal system.
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fundamentals for what would later become a developmental state – a model believed to
be largely responsible for the effective developmental catching up of some countries
from the so-called group of late developers. This model denied the capitalist class the
dominant role in development, entrusting the guiding of the process of socio-economic
development to the state. Its origins can be traced from the institutional arrangements of
Bismarck’s Prussia and the nineteenth century period in Japanese history referred to as
the Meiji restoration,5 influenced by the ideas presented by List in his study entitled The
National System of Political Economy (originally published in 1841) and by the
“American system” of early nineteenth century. In this model the state elite, supported
by effective state bureaucracy, would guide the process of the industrialisation of
national economies. It was consistent, to some extent, with the perception prevalent
after the Great Depression until the late 1970s and motivated by the Keynesian theory,
that the role of the state or the public sector is crucial in the developmental endeavour,
especially among underdeveloped countries.

In the mid twentieth century, when Western countries, comprising predominantly of
Western Europe and North America, distanced the rest of the world in terms of the level
of development and continued to rely on what evolved from the model of capitalist
development and the Prussian interventionist state, and, at the same time, Eastern
Europe was coerced into adopting the state-command economic system, the so-called
developing countries, many of which were emerging from colonialism, were in
desperate need for a developmental model to enable significantly better developmental
dynamics in order to establish a sound trajectory of “catching up”.

By the end of the twentieth century, among the most successful late developers were
those countries who became developmental states, i.e. South Korea, Taiwan and
Singapore, as well as Japan – considered a prime example of the developmental state
model, despite a rather “early” start to “late development”.

This however, did not secure its position as a feasible developmental option for less
developed countries worldwide. In fact, the political competition between the Western
world and the communist parties’ controlled Eastern bloc, especially between the
superpowers of both structures, i.e. the United States and the Soviet Union, affected

5 The Meiji restoration was the process of significant changes in Japan’s political, social and economic
structures, which accelerated the country’s industrialisation.
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