An intense debate has been underway for more than a decade about whether the East – China in particular – is in the ascendancy. Some argue this is so and that the West is in decline. Others say China’s flawed political institutions will limit its monumental growth and render it precarious. Recent upheavals concerning the democratic election of Hong Kong’s Chief Executive make this an especially opportune time to address these questions.
If conclusions can be drawn from broad surveys of historical experience, these generalizations may suggest what the future trajectories of developing and developed nations are likely to be. Many books have explored how nations achieve sustainable economic growth. A recent important contribution to this work, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Daron Acemoglu and James A. Robinson, respectively professor of economics at MIT and professor of government at Harvard, recounts the historical development or non-development of pluralistic political institutions in a broad swath of countries and polities, ranging from European countries and the United States to countries of Africa, Asia, and South America.
In every case, the authors’ goal is to show how differently the economy develops in a country depending on whether the nation is able to create “inclusive institutions” or remains mired in “extractive institutions.” Extractive institutions only benefit a small ruling elite to the detriment of the vast majority of the population. Self-serving dictatorships, oligarchies, extractive colonies, and feudal societies fall into this category. Only when the dictator’s or the ruling elite’s power is limited – either forcibly or due to circumstances – by a broad coalition of domestic factions are inclusive institutions able to develop.
According to the authors, it is only “inclusive institutions”, those political and legal institutions which “are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrined in the rule of law,” that are conducive to sustainable economic growth.
But what are “inclusive institutions”?
Acemoglu and Robinson define inclusive institutions as those that are “sufficiently centralized and pluralistic.” Other than that imprecise characterization, they define inclusive institutions more by example than by strict definition. This vagueness causes one reviewer, Bill Gates (yes, that Bill Gates) to complain about the book in a review on his blog: “Important terms aren’t really defined, and they never explain how a country can move to have more ‘inclusive’ institutions.”
The complaint that Acemoglu and Robinson never explain how a country can move to have more inclusive institutions is partly justified. It cannot be denied, however, that they explain how countries have moved to have more inclusive institutions in the past. But the gap between how it does happen and how it can be made to happen is wide.
How it can be made to happen is, of course, what we really want to know. Acemoglu and Robinson put great emphasis on the role of “contingency” – that is, chance. For example, they say that the Black Death, which swept across Europe in the 14th century, killing as much as half the population, played a significant role in setting off the historic liberalization of Western Europe and its gradual move toward inclusive institutions. Why? Because it reduced the size of the labor market, making it easier for laborers to bargain with their masters – the ruling elite – and thus increase their power.
The meaning of “inclusive institutions” is readily understandable to the vast majority of Acemoglu and Robinson’s readers – Americans and Europeans. Inclusive institutions are those that have been developed in Europe, North America and countries friendly to the West such as Australia, New Zealand, and Japan. To that extent the authors’ views are Eurocentric. Inclusive institutions are those that are embraced and idealized by a Eurocentric viewpoint.
Why China won’t work
Nevertheless, Acemoglu and Robinson argue that this isn’t just a point of view. Defending against the charge that their analysis doesn’t explain how to create inclusive institutions, they say that at least it explains how not to create them. For example, the United States’ foreign nation-building efforts, as in Iraq and Afghanistan, are doomed to fail because the institutions they attempt to build can only be developed domestically.
Their analysis further concludes that China’s growth path will not be sustainable:
Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions. Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing technologies and rapid investment, not creative destruction. An important aspect of this is that property rights are not entirely secure in China.
We are prepared for this conclusion by two revelations, or reminders.
The ghost of predictions past
First, the authors recall how enamored the West was by authoritarian governments for many years after the 1929 crash. As the Canadian academic and former politician Michael Ignatieff writes in an excellent New York Review of Books article, “Are the Authoritarians Winning?”: “In the 1930s travelers returned from Mussolini’s Italy, Stalin’s Russia and Hitler’s Germany praising the hearty sense of common purpose they saw there, compared to which their own democracies seemed weak, inefficient and pusillanimous.”
Acemoglu and Robinson point out that the belief that the Soviet system was working persisted until as late as at least 1980. “Indeed,” they write, “the most widely used university textbook in economics, written by Nobel Prize-winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition there was little change in the analysis, though the two dates were delayed to 2002 and 2012.” This should be a bracing waker-upper in light of modern predictions of China’s economy overtaking the U.S.
Suppression of creative destruction in Britain and China
Second, Acemoglu and Robinson provide solid anecdotes to show how creative destruction was deliberately suppressed by extractive institutions in both pre-industrial revolution Britain and modern China. (One of the authors of this article once lamented that “Many economists are enamored of Austrian economist Joseph Schumpeter’s magnificently evocative term ‘creative destruction,’ but you’d be hard-pressed to find what role it actually plays in neoclassical economic modelling.” It is satisfying to note that Acemoglu and Robinson use the term “creative destruction” in their book no less than 63 times.)
In one of the authors’ anecdotes, William Lee in 1589 perfected his “stocking frame” knitting machine that could have enabled knitters to increase their production of garments many-fold. He sought and obtained an interview with Queen Elizabeth I to ask for a patent. The Queen refused, saying, “Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.”
Later, Lee tried again with her successor, James I, who also refused. The authors’ interpretation: “Both feared that the mechanization of stocking production would be politically destabilizing. It would throw people out of work, create unemployment and political instability, and threaten royal power. The stocking frame was an innovation that promised huge productivity increases, but it also promised creative destruction.”
As to modern China, Acemoglu and Robinson present this anecdote. Dai Guofang thought “that his company, Jingsu Tieben Iron and Steel, could capture a large market as a low-cost producer, especially compared with the inefficient state-owned steel factories. Dai planned to build a true steel giant, and with support from the local party bosses in Changzhou, he started building in 2003.”
But Dai’s plans were dashed:
By March 2004, however, the project had been stopped by order of the Chinese Communist Party in Beijing, and Dai was arrested for reasons never clearly articulated. The authorities may have presumed that they would find some incriminating evidence in Dai’s accounts. In the event, he spent the next five years in jail and home detention, and was found guilty on a minor charge in 2009. His real crime was to start a large project that would compete with state-sponsored companies and do so without the approval of the higher-ups in the Communist Party. This was certainly the lesson that others drew from the case.
As in Britain under the monarchs before the Glorious Revolution of 1688 – which limited the king’s power and “relocated to Parliament the power to determine economic institutions” – creative destruction and innovation in China were suppressed because they threatened the extractive institutions of the state.
Why China might still work
Acemoglu and Robinson’s pronouncement about the unsustainability of China’s economic growth phenomenon does, however, contain a caveat. They say, “China under the rule of the Communist Party is another example of society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.”
Many believe that China is attempting to make that transformation, slowly and gradually. Although China’s economic institutions – as Acemoglu and Robinson admit – are partially inclusive since the economic reforms initiated in 1979 by Deng Xiaoping, its political institutions vest power tightly in a ruling elite. The right of assembly and the free flow of information, which could destabilize the ruling Communist Party authority, are vigorously suppressed.
Nevertheless, reforms advocated and initiated by the current General Secretary of the Communist Party, Xi Jinping, and to a lesser extent by his predecessor, Hu Jintao, seem aimed at gradually relieving the unrest that such suppression can bring. The unrest has grown since a large segment of a country’s population has entered the middle class and begun to care more deeply about a healthy environment and secure ownership of property. Xi is vehemently pursuing the elimination of corruption in high places and advocating environmental protection even if it means slower economic growth.
Some believe (though not Acemoglu and Robinson) that China’s ability to successfully run a viable authoritarian state is due – like Singapore’s success – to Chinese cultural values, which include strict norms and proper ways to act in relation to family and community. This cultural explanation is particularly advocated by Lee Kuan Yew, the highly successful architect and long-time leader of authoritarian Singapore.
China’s ability to get things done is envied in the West. In 2003, China’s Ministry of Railways, according to Evan Osnos in a 2012 article in The New Yorker, determined to build 7,500 miles of high-speed rail – more than the rest of the world combined. Proceeding with great haste, China is succeeding. It is rapidly constructing the fastest and most extensive high-speed rail network in the world – notwithstanding one tragic accident. The accident, caused partly by corruption and error, killed 40 people, regrettably obscuring the aversion of a far greater number of automobile deaths.
Meanwhile, in the United States, the state of California struggles to make snail-like progress on the planning and building of a single high-speed rail link between San Francisco and Los Angeles – a project that was proposed more than 20 years ago. While China expands its infrastructure at breakneck pace, erecting structures and transportation systems in China and in client states – such as in Africa – in the United States infrastructure is degrading continuously with no remedy in sight.
Ignatieff points out that even John Micklethwait and Adrian Wooldridge, editors of The Economist magazine and authors of The Fourth Revolution: The Global Race to Reinvent the State, who are no supporters of authoritarianism, “urge Western democrats to learn from their authoritarian competitors. So they dash to Singapore to learn how Lee Kuan Yew’s people have cut entitlements and lowered taxes, but managed to keep the poor from falling through the safety net. Instead of going to the Harvard Kennedy School or the École Nationale d’Administration, they fly out to the Chinese Executive Leadership Academy in Pudong to learn how the Communist Party has adapted the imperial mandarin tradition in order to create an efficient and meritocratic bureaucracy.”
Hong Kong: proving ground or flashpoint?
China’s leadership is smart and realistic. It knows that while the Communist Party, through liberal economic reforms, has spawned enormous growth, it is now threatened by the effects of that growth – the rise of a large middle class – “unless it undergoes a fundamental political transformation toward inclusive political institutions,” as Acemoglu and Robinson believe it must.
No one knows exactly what goes on and what is discussed in the proverbial smoke-filled rooms of central Communist Party leadership deliberations. Political commentator Fareed Zakaria, in his highly intelligent 2003 book The Future of Freedom, strongly suggests that the United States might be better off if it could only move back to its own smoke-filled decision rooms of not-so-distant memory. Zakara argues that the U.S. suffers from an overdose of democracy and transparency that makes decision-making almost impossible.
Nonetheless, because of the Chinese leaders’ intelligence and realism, some aspects of their intentions have been widely inferred – in part, from their actions. In negotiating with the British over the handover of Hong Kong, Britain’s former colony, to the Chinese mainland in 1997, China agreed to allow Hong Kong to continue its liberal institutions – including its freedom of speech and of the press – under the banner of “one country, two systems.” And China has stuck to its agreement, even agreeing to universal suffrage in the 2017 election of Hong Kong’s Chief Executive (similar to mayor).
Yet, as Zakaria notes, “For decades the tiny island of Hong Kong1 was a small but revealing illustration that liberty did not depend on democracy. It had one of the highest levels of constitutional liberalism in the world but was in no way a democracy. In fact in the 1990s, as the Chinese takeover of Hong Kong drew near, many Western newspapers and magazines fretted about the dangers of this shift to Hong Kong’s democracy. But of course Hong Kong had no democracy to speak of. The threat was to its tradition of liberty and law. We continue to confuse these two concepts.”
Does mainland China regard Hong Kong as the pilot project for its gradual, planned, supremely cautious political liberalization? China’s long-term orientation is often encapsulated in this ironic (apocryphal?) anecdote, frequently retold: During President Nixon’s and National Security Adviser Henry Kissinger’s bold foray into China in 1972, Kissinger is said to have asked then-Premier Zhou Enlai, “What do you think of the French Revolution?”
Zhou’s reply: “It is too soon to tell.”
Ignatieff identifies the crucial problem. Authoritarianism “is arrogant but it is brittle: it must control everything, or soon it controls nothing.” The Chinese Communist Party knows that – and that is why it reacted with brutal suppression in Beijing’s Tiananmen Square 25 years ago, on June 4, 1989, to the pro-democracy demonstrations taking place there and across China.
Hong Kong still burns a candle, literally, for those lost in the Tiananmen crackdown. It commemorates that tragedy on June 4 every year – and is free to do so. Not so the mainland, where the event has been essentially erased from history, and virtually any word of it is expertly elided from the Internet by central authorities.
Perhaps partly due to the undying resentment of that historical event and its annual commemoration, Hong Kong’s pan-democratic movement has been challenging mainland authorities to allow completely free elections in Hong Kong. The issue is not the election itself, which Beijing agrees will be conducted with universal suffrage — it is the nominating process. Mainland authorities demand a strictly controlled nomination process that will allow only candidates acceptable to the mainland to be nominated. The pan-democrats, on the other hand, demand that the nomination process be thrown open.
Resentments are simmering, for other reasons, among the populace on the mainland too. Chinese citizens are holding environmental protests, protests against unfair appropriation of land and property and protests against corruption. If the Chinese government appears to cave to the pan-democrats’ demands, that could embolden mainland protesters.
In the latest developments, the Communist authorities’ insistence on firm control over the nomination process is provoking strong reaction from advocates of Hong Kong democracy, who are making the Party bosses’ presumed plans for gradually creating more inclusive institutions more problematic.
China should have realized (or perhaps it did) that when it comes to political liberalization, small steps can yield to larger ones. Will Hong Kong yet prove to be a constructive proving ground, or will it become a destructive flashpoint? We may soon find out.
Hong Kong’s pan-democrats are pushing noisily for theoretical democratic perfection in a city that has little experience of democracy, though it otherwise has what Acemoglu and Robinson would consider admirably inclusive institutions. (Hong Kong regularly ranks first on The Wall Street Journal and the Heritage Foundation’s Index of Economic Freedom.) The noisiness may threaten Beijing more than the demands. For the sake of China’s transition to more inclusive institutions, it is to be hoped that Hong Kong and Beijing will quietly come to terms.
Michael Edesess, a mathematician and economist, is a visiting fellow with the Centre for Systems Informatics Engineering at City University of Hong Kong, a principal and chief strategist of Compendium Finance and a research associate at EDHEC-Risk Institute. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, has just been published by Berrett-Koehler.
Kwok L. Tsui is a distinguished statistician and Head of the Systems Engineering and Engineering Management department and Chair Professor of Industrial Engineering at City University of Hong Kong.
Read more articles by Michael Edesess and Kwok L. Tsui
