How China escaped the poverty trap?
Political Scientist Yuen Yuen Ang’s new book “How China escaped the poverty trap?” is the new talk of the town in development economics. I am yet to read the book but it seems a promising work from her talk on the book and Lant Pritchett’s commentary on the book.
Prof Ang’s book seeks to address the grand old question of “Why do some nations prosper and others don’t?”. “Why Nationals Fail?” by Daren Acemogulu and James Robinson is the most recent authoritative work on this subject. They argued that inclusive and non-extractive institutions are essential for a nation’s success.
There are two problems with the insight that inclusive and non-extractive institutions critically decide growth. One, as Arvind Subramanian famously pointed out in his review of “Why Nations Fail?”, this thesis doesn’t apply to India and China, that constitute more than half the population of the world! Two, this insight isn’t particularly helpful to countries that have weak institutions. The challenge for them is how to build from here, given that you have weak institutions.
Prof Ang seeks to bridge this gap in understanding on China’s remarkable success story. To give an example of the distance that China has traversed, she cites that GDP per capita of China was lower than that of Bangladesh, Chad and many other countries in 1980. Today China’s GDP per capita is multiple times higher than that of Chad. How did this happen?
Prof Ang questions several other hypotheses regarding Chinese success like the existence of necessary ingredients for growth by 1980, the role of culture etc. She argues that even if necessary ingredients existed, it alone doesn’t cause growth. Someone has to cook these ingredients to make it into a dish. Similarly, the culture explanation is also not convincing because Chinese culture didn’t drastically change at the stroke of midnight in 1980. There’s something more to the story. What’s that story?
Prof Ang’s thesis is that China harnessed the existing weak institutions to improve institutions and set up institutions for market. How exactly did it harness? Lant Pritchett summarizes Prof Ang’s insights as follows
…(Prof Ang’s) insight is that the central government in China had to balance between control that was “too loose” and control that was “too tight.” She shows that the central government issued directives of three types.
One clearly prohibited local governments from doing some things. It was no question of “anything goes.” Another type of directive clearly mandated that all local governments had to do certain things. But the third type specified objectives but was deliberately vague about how to accomplish the objective and made it clear innovation was allowed but did not specify exactly what was allowed.
This created a space in which local governments could create their own innovations and attempts that the central government might have never thought of, while at the same time, allowing the central government the space to claw back if things were headed in bad directions.
This, she argues was central to China’s ability to (in our words) “crawl the design space” incrementally towards a market system. The organizational and institutional forms created on the path — like Township and Village Enterprises — were, as to be expected, unique hybrid forms. These allowed much of the functionality and dynamism of a market economy even before there were private firms and clear delineation of property rights.
Prof Ang calles this Chinese model of building institutions as directed improvisation. Was this possible because of the authoritarian state? Prof Ang answers in the affirmative but she’s quick to explain. By this, she doesn’t mean that authoritarian state is necessary to do this, she means that because the state is authoritarian, it ended up following this path. If it was a democratic state, the path would have been different, probably with more participation of civil society in the growth. In short, she means that authoritarian state isn’t a prerequisite but given that it’s the constraint, China found a way to work around it.
Ang also adds that there are other factors like personalities that contributed to the growth story but the focus of her book is to emphasise aspects that other countries can learn from China. Hence, the emphasis on directed improvisation.
Regarding corruption, Prof. Ang says that China was very particular about ending petty corruption, the usual daily bribes that common man pay to the bureaucracy. However, higher level collusive corruption still persists.
On lessons to other countries from Chinese experience, she says that the first thing to do is to not dismiss Chinese experience as something special that works only in authoritarian states. She asks people to focus on the mechanism instead, the “directed improvisation”. The directed improvisation can be done even in democracies, in a bottom up manner.
Overall, the important contribution of Prof Ang’s work is that it initiates the process of chiseling the question — how to prosper, starting with weak institutions? I am sure that this will kickstart more debate on this topic. To begin with, Lant Pritchett has some comments on directed improvisation vs. directed experimentation.
I hope to read this book soon. I will post a detailed review/critique then. The one question at the top of my mind currently is regarding the rate of fall of Chinese poverty across years. Pranab Bardhan points out that “the proportion of people below that poverty line in China fell from 64% in 1981 to 29% in 1987”. It’s more than a 50% reduction in poverty within half a decade. Did directed improvisation have a role in this? For instance, Pranab Bardhan’s argument that the decline during this period is due to removing collective rights in agriculture. If it’s the case, where does the directed improvisation theory fit into the poverty reduction process?
PS: Another book talk of Prof Ang here [This one is at the World Bank]