Many people are profoundly pessimistic about the Chinese economy’s growth prospects, owing to the emergence of massive debt, excessive investment, overcapacity, and so-called “ghost cities” since the 2008 global financial crisis.
But these problems are not new. They have, in various forms, affected China’s economy since 1978, and were evident in East Asia’s other high-performing economies – Taiwan, South Korea, and even Japan – during their periods of rapid growth, Project Syndicate reported Saturday.
Nonetheless, in the 35 years since Deng Xiaoping initiated his program of “reform and opening up,” China has recorded 9.7% average annual growth. And it took only 40 years for South Korea and Taiwan to complete their transitions from low- to high-income status.
How did these economies manage to grow so fast for so long and overcome the serious problems that they faced along the way? The answer is simple: resilience.
Growth Strategies
Economic development is a convoluted process, full of challenges and risks, successes and failures, external shocks and internal volatility. And adverse effects – such as a rising debt-to-GDP ratio and excess capacity – are inevitable.
If a country fails to respond adequately to new challenges as they arise, economic growth and development stall. Many countries in Latin America and South Asia, for example, have become mired in the so-called “middle-income trap,” because they failed to adjust their growth models in a timely manner.
East Asia’s economies, by contrast, consistently adjusted their growth strategies and engaged in continuous institutional reform. The aim was not to tackle the problems they faced directly, but to induce new, more efficient activities that would help to turn debt into assets and maximize use of the economy’s capacity.
Creative Destruction
In this sense, East Asia’s economies have embraced the process of “creative destruction” described by the Austrian economist Joseph Schumpeter, whereby the economic structure is continually revolutionized from within. Moreover, by implementing incremental reforms that facilitate – and even encourage – the replacement of old, inefficient sources of growth with new, more dynamic ones, they have expedited this process.
For example, China’s productivity-enhancing agricultural reforms in the 1980s were spurred partly by growth in the non-agricultural sector, a result of policies aimed at stimulating township and village enterprises. Similarly, in the 1990s, China addressed the buildup of bad debt and unfinished construction projects – the result of state-owned enterprises’ chronic loss-making and excessive property investment, respectively – by implementing institutional reforms that stimulated growth in more dynamic sectors, thereby offsetting the SOEs’ declining return on capital.
Resilience has thus characterized the interaction between the government and markets since the introduction of Deng’s reforms.
