Book Summary: How China Escaped Poverty Trap

[From now on I decided to post book reviews in 2 parts. The first part would include two versions of the book summary — a TL;DR summary and a bit detailed summary. The second part would include my comments on the book. This is the 1st part of series on “How China Escaped Poverty Trap” that has its summary]
Author: Prof. Yuen Yuen Ang
Publisher: Cornell University Press
Year: 2016

TL;DR Summary

Chinese growth story is an outlier in the world. It is a versatile example that fits into many narratives, depending on what you look at and at what point of time. The book “How China Escaped The Poverty Trap” is also about China’s growth story but unlike the earlier research that focused only on parts of the puzzle, the book seeks to locate the Chinese story in the context of big questions of development and draws lessons from it for other developing countries. Broadly, the book deals with two big questions, drawing up on Chinese story.
The first question that the book deals with is regarding the growth-institutions debate that is usually posed as a chicken and egg dichotomy: Institutions are necessary for growth vs. Growth is necessary to build institutions. While the former doesn’t tell how to proceed forward starting from weak institutions, the latter doesn’t tell how to achieve the initial growth with weak institutions. What is the way out of this?
The book argues that the way out of poverty traps is to first use existing weak/bad/wrong institutions to build markets. That is the first step of development. Drawing from in-depth analysis of Chinese reforms, US and Europe’s evolution, the book argues that even in the countries that have good institutions now did not kick-start development by first establishing good institutions. They used whatever they had at the time (communal property rights, non-formalized public finance, non-technocratic bureaucracies) to create new markets. The rise of new markets subsequently motivated institutional change. Hence, in Ang’s term, development is “coevolutionary” (bi-causal), rather than in one direction.
Further, the book argues that the popularly cited cases like Glorious Revolution that are used to demonstrate that legislating modern day institutions led to prosperity, only tell a partial story. There’s a long history of co-evolution of markets and institutions much before Glorious Revolution. Glorious Revolution is only one event in that long history.
The pattern of growth-institutions coevolution in the past in China, US, Europe and elsewhere has been an adaptive path of: Harness weak institutions to achieve growth -> Use the growth to develop institutions -> Use these institutions to preserve markets.
While many have studied the second and third steps, the first step is relatively under studied. The book makes an important contribution here drawing from China’s experience. Harnessing weak institutions doesn’t necessarily mean doing the ‘second-best’ thing or ‘minimum possible’ or ‘good enough governance’, as is generally suggested. The key is to do incremental reform but across wide range of connected domains simultaneously, building upon the positives of weak institutions.
The further significance of the three-step pattern is that a) it is no dead end for countries with weak institutions, there’s a way out; b) the market building institutions are different from market preserving institutions and hence are to be dealt differently; and c) there’s no one ‘Chinese Model’ — it changed with time and also across regions within China.
The second question that the book deals with is the underlying conditions that enable the adaptability of institutions. Prof. Ang calls them “meta-institutions”. The idea is that it isn’t enough to merely state that adaptability is necessary to move from 1st step to 3rd step in the three-step pattern discussed above. One has to also identify the factors that enable the adaptability, the meta-institutions.
The book draws from China’s experience to identify those reasons that enable adaptability. China followed what Prof. Ang calls “directed improvisation”. It is a combination of a) appropriate decentralization to balance uniformity and variability b) franchise model of bureaucracy that shaped the incentives at local level, and c) pairing up regions to address regional inequalities.
Finally, the book updates the current general consensus of “man-made political and economic institutions underlie economic success (or lack of it)”, as argued in the book “Why nations fail?”. It posits that the “underlying cause of economic development, if indeed we had to name one, is the construction of an adaptive environment that empowers relevant actors to improvise solutions to continuously evolving problems.”
The lesson for other countries is not the specifics of China’s policy but its broad approach of enabling institutions to adapt themselves.
Now that I have given you the big picture of the book (TL;DR version), the rest of the post is structured as follows.
Section 1 explains the arguments and nuances of the two big questions mentioned above, in detail. This is for those interested in the details of the reform. Section 2 lists the lessons for other developing countries from China’s experience. In Section 3, I try to answer some of the common questions asked regarding China, from what I infer from the book.

Detailed Summary

I. The two big questions

1. Growth-Institutions dichotomy
We discussed that China’s story reflects a three-step pattern of growth-institution co-evolution: harness weak institutions to achieve growth → use growth to develop institutions -> use institutions to preserve markets. The three steps are explained in detail below.
In the first step, when China decided to pursue the prosperity path by promoting investment it had severe constraints as seen from today’s lens of ‘good institutions’. The bureaucracy was under paid, they were oriented in Communist framework and had little experience of promoting capitalism, and the huge size of China added its own complications. However, China still had the commune mindset where the inter-personal relationships were strong. China used this to promote initial growth.
Essentially, local bureaucratic heads were given yearly targets to attract investments. The bureaucrats would be paid as per the tax-revenue generated by the investments they brought. These targets were not just given to one organization, they were given to a wide range of organizations across the board, in some cases to even those organizations like environment department that’s supposed to screen investments. Since the bureaucrats were paid bonuses for bringing the investments, it addressed the problem of low pay. The bureaucrats now went on a major propaganda spree, digging into family networks, friends, relatives and anyone possible, persuading them to invest in their locality. The propaganda experience of Communist era was put to creative use here to attract investments.
One may observe that this is contrary to the modern day maxims of Weberian bureaucracy that emphasizes specialization and impersonality (conduct as per rules, not favouring anyone). There was no specialization here, all organisations were doing the same thing, bring investments. There’s also no impersonality, the investments were essentially based on personal contacts of the bureaucrats. Some times it led to conflict of interest and corruption too.
After this stage, once there were a large number of investments, the local governments started focusing on quality instead of quantity. It was accompanied by the administrative reforms that recognized property rights, reduced bureaucratic extortion etc. Essentially, it built modern day institutions compatible with markets. These institutions now preserve markets.
2. Meta-Institutions: Adaptability enabling factors
The idea of adapting institutions to enable growth before these institutions become ideal ones may not be completely new. Scholars like Qian talked about ‘transition institutions’ that explain the difference between China and Russia, despite Russia having better institutions on traditional metrics of property rights, openness etc.
The book builds on this, goes a step back in the causal chain and identifies the factors that enable the emergence of these transition institutions and their adaptability. China followed what Prof. Ang terms “directed improvisation”, a bundle of strategies that enable adaptation. It included the following.
One, the central bureaucracy categorized local bureaucracy’s tasks into three categories. The first category of tasks included those, which the local bureaucracy is prohibited from doing. The second category of tasks included those, which the local bureaucracy is mandated to do compulsorily. The third category of tasks are those where vague objectives are given but left completely to the local bureaucracy to figure out themselves.
Two, the local bureaucracy is given bonuses linked to the investments they bring in. At some point of time, apparently counties had to deposit some money with the central bureaucracy. Not meeting targets meant that this money wouldn’t be given back to counties.
Three, the well performing coastal states are paired up with inland states to balance regional inequality.

II. Lessons for other developing countries from China’s experience

The book lists six lessons from China’s experience for developing countries.
1. Delimit boundaries of experimentation and flexibilityFree experimentation can lead to chaos and not adaptability. China balanced these by placing limits on experimentation, depending on the policy issue and amount of information leaders had about problems at hand.
2. Activate incremental changes across connected domains simultaneously: Activating incremental changes across many connected domains simultaneously is more likely to stimulate systemic changes of the type seen in China, as opposed to strategies of “do the minimum possible”, “second best-practices” and “good enough governance”.
3. In the beginning, define success narrow: This is to focus the limited bandwidth but it doesn’t mean that one has to do few changes. China defined success narrowly as “economic prosperity” but it required changes across a broad range of issues.
4. Give everyone a personal stake in development process: I suppose this is self-explanatory, though few examples are found in developing countries, where incentives for development are typically lacking.
5. Let some get rich first but pair up the poor and the rich: Suppressing the rich initially to balance the rich and poor might be counter productive, as observed in Mao’s period. Deng chose to open markets and let the natural comparative advantages of coast work.
6. Harness weak institutions to build marketsIt may sound counter intuitive but one can make creative use of local weak institutions, as observed in case of China, Nigeria (Nollywood) etc. The book warns, “Where institutions that foster adaptive processes cannot be provided, it helps to at least not have wrong interventions”.

Section III: Inferring answers to Common FAQs and presumptions on China

Q1. What’s the Chinese model of growth?
A1: There is no single factor. It depends on the region of China you are looking at and at the time point you are looking at. But “directed improvisation” — a package of strategies that fostered adaptation within the bureaucracy — was the underlying system of adaptive development.
Q2: Is China a centralized government?
A2: China is a politically centralized regime, ruled by only one party, but, at the same time, it has one of the most decentralized administrative structures in the world. It has 5 levels of decentralized structures, with high autonomy to local governments.
Q3: Was China’s prosperity possible only because of China’s autocratic approach? If it were a democracy, would this have been possible?
A3: Not necessarily. The specifics of adaptive approach are because of the constraints of China that meant a bureaucracy dominate approach. In democracies, instead of centralized bureaucracy, society would have played a major role.

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