China’s forgetting keys to success

China is arguably the valedictorian of Asia’s MBA program. When Deng Xiaoping ditched the radical economics of Mao and steered China into the global economy beginning in the early 1980s, he borrowed liberally from programs and policies that had earlier ignited rapid growth in Japan, South Korea, Taiwan, Hong Kong and Singapore. The student quickly outshone the teachers, riding an export-led, investment-heavy strategy to years of double-digit growth.

Now, however, China’s President Xi Jinping appears to have misplaced his textbooks. Rather than continuing to heed the experiences of Asia’s tiger economies, he’s ignoring critical lessons at his — and China’s — peril.

Probably the key truism to emerge from the region’s postwar boom is that if countries are to grow quickly, development must subsume all other priorities. Former South Korean President Park Chung Hee, who launched his country’s economic ascent, put it best when he wrote: “In human life, economics precedes politics or culture.”

What separated East Asia’s high-growth economies from the rest of the developing world back in the 1960s and 1970s was their leaders’ single-minded — almost maniacal — commitment to raising incomes and building industries. Park would often sit in his office in Seoul’s presidential palace with a notepad, doing his own calculations with economic data.

True, these early leaders also had little time for the niceties of representative democracy. But at least the policymaking process was shielded from political debates and hassles, giving experts the freedom to carry out reforms. By contrast, those countries that mixed other agendas into the process ultimately ran aground. Malaysia’s attempt to re-engineer the nation’s social structure by promoting the economic interests of the Malay community helped strand the economy in a middle-income trap.

Xi has pushed economic reform too far down his to-do list. Instead, he’s devoted much of his attention and energy to an anti-corruption campaign, a drive for ideological purity within the Communist Party, greater control over social media and civil society, and squabbling with neighbors over territorial issues. Rather than separating economic and political agendas, he appears to have placed the former at the service of the latter.

A corollary of this is that leaders need to trust their technocrats. Even the strongest of strongmen, from Korea’s Park to Indonesia’s Suharto, relied on experienced, talented economists and other experts to devise and direct economic policy. In Indonesia, Suharto eagerly took notes while his “Berkeley Mafia” of U.S.-trained economic advisors lectured on sound policy. Singapore’s Lee Kuan Yew was blessed with a crack team of professional policy wonks, most notably Goh Keng Swee, one of the economy’s main architects. During Japan’s go-go years, the economy was effectively run by talented bureaucrats, not by elected politicians.

Technocrats certainly populate all rungs of the Chinese leadership and central bank; Premier Li Keqiang himself has a Ph.D. in economics. But President Xi has grasped more and more authority over policymaking in his own hands, effectively sidelining his deputy.

The experts seem to have been reduced to writing papers laying out worthy reform proposals, only some of which are eventually heeded.
After a certain point, money can’t cover up for other mistakes. Much like China is doing today, policymakers in Japan flooded their economy with cash in the late 1980s in an attempt to avoid structural reform; the strategy only further inflated the bubble that led to the country’s years of stagnation. Nor have other Asian countries been all that successful in employing state-directed money to spur innovation, as Xi is attempting. The effort by Japan to “target” certain industries for development with special government support had as many failures as successes, while many of the most competitive Japanese industries, from video games to robotics, were never the beneficiary of state coddling.

This raises perhaps the most important lesson of all: Eventually, governments have to get out of the way. South Korea tumbled into a financial crisis in 1997 in part due to continued state manipulation of the financial sector; the gradual government pullback that followed has helped spur an explosion of entrepreneurship and innovation. In Japan, on the other hand, where bureaucrats have resisted letting go their grip on the economy, a lack of deregulation continues to crimp the economy’s potential.

Even though Xi has pledged to undertake a sweeping liberalization program, progress has been slow, especially in the reform of critical areas such as the financial sector and capital flows. Even more, Xi has made it clear that the government intends to retain the “commanding heights” of the economy, merging and bolstering state enterprises, for instance, rather than letting them die a natural death.

No doubt Xi is hoping to avoid the fate of leaders in places like South Korea and Taiwan, who yielded to demands for democracy as their economies grew richer and more advanced. Unfortunately for China, he’s likely to miss out on their success, too.

*The author is a journalist based in Beijing and author of “Confucius: And the World He Created.”

Michael Schuman