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BEIJING CONSENSUS OR

What Explains ’s Economic Success? BY yang yao 26 DEVELOPMENT OUTREACH APRIL 2011 27 SPECIAL REPORTS

hina’s remarkable change and policy reform, whereas de- VARIATIONS ON A THEME veloping countries are usually charac- economic growth is terized by rigid institutions that impede In Joshua Ramo’s original formula- the function of the . A big-bang often attributed to tion published in 2004 by the U.K.’s approach to reforms is usually politi- Foreign Policy Centre, the BC is defined cally impractical or prohibitively costly. strong government by three principles, none of which nec- China’s gradual one-step-at-a-time ap- essarily requires strong government in- proach has been more successful. So if intervention that tervention: there is a Beijing Consensus it refers to ■■ institutional innovation, the way China shaped its institutional Ccan mobilize large amounts of ■■ equitable and sustainable develop- and policy reforms to make the Wash- ment, and ington Consensus work in the Chinese resources to clear any bottleneck ■■ self-determination. context. Over the last 30 years, the Chinese to growth or institutional economy has moved progressively to- THE BEST MAY BE THE ENEMY ward the market doctrines of neoclas- OF THE GOOD change. This approach is sical economics as summarized by John Williamson in his formulation of the often referred to as the Beijing WC. These include: The Chinese experience has yielded a ■■ prudent fiscal policy, number of lessons for other developing Consensus (BC) as compared ■■ economic openness, countries. ■■ , First, institutional efficacy is more to the Washington Consensus ■■ market , and important than institutional purity. ■■ the protection of . The recent development economics (WC): the former being a China has been extremely cautious in literature points to the importance of maintaining a balanced budget and keep- institutions for economic growth. But model of ing inflation in check. Programs aimed institutions are effective only if they purely at redistributing economic re- provide the right incentives to align the and heavy state involvement sources have been few, and transfers from personal interests of economic and so- the central government to the provinces cial agents with the interests of society in the economy, the latter have generally been dominated by infra- at large. structure investment. The country is the In this case, first-best institutions a model of neoliberal and world’s second largest recipient of foreign may be ineffective because they often direct investment after the United States; require drastic changes in the incentive market-oriented doctrines. But and more than 80 percent of China’s structure which may be detrimental to state-owned enterprises have been priva- and alienate the major stakeholders. these characterizations are tized or transformed into publicly listed Admittedly, adaptation which implies companies. compromises with political and social inaccurate. realities, can result in lower efficiency. BIG BANG OR EVOLUTION? This may simply be the cost of success. Adaptation properly applied can mo- tivate the stakeholders to buy into the What’s unique is the way China has reform, which is a key success factor. applied the WC. Implementing the WC requires substantial institutional

28 DEVELOPMENT OUTREACH Workers assemble solar-powered vehicles in Weifang. Designed and manufactured by a Chinese company, the vehicle can run 120 to 150 kilometers under normal driving conditions on a full charge with speeds of up to 48 kilometers per hour. It has attracted its first batch of export orders from countries including Germany, the United States, and Norway.

losses came in the form of corruption: recent 2008 Growth Report. Although WHAT’S IN IT FOR ME? because the planned prices were much both explored how government can lower than the market prices, the offi- usefully take action to remove bottle- But China also offers many ex- cials who controlled the quotas could necks to economic growth, they spent amples of institutional adaptation that take advantage of the price differential little time on how to motivate govern- improved efficiency. to make money (arbitrage). However, ment officials to take those actions. The township and village enterprise the system provided powerful incen- In China, government officials are (TVE) played a key role in China’s in- tives for state-owned enterprise (SOE) motivated in two ways. dustrialization in the 1980s. TVEs were managers to produce more output for First, promotion of government nominally owned by local governments the market while protecting weak SOEs officials is strongly based on merit, but in effect managed by private entre- from failing in the face of market com- especially their contributions to eco- preneurs. So although their ownership petition. This was important to win nomic growth. This is quite different structures were unclear, they did offer support for reform from the larger part from performance evaluation based strong incentives to both entrepreneurs of the society. In addition, the system on accountability, which requires gov- and local officials to improve economic prevented hyperinflation which was ernment officials to follow preset rules efficiency. They helped entrepreneurs plaguing other transition economies. or be punished. Although this kind of circumvent the adverse political con- negative incentive exists in China, posi- straints at the time and generated local THE CARROT OR THE STICK tive incentives for innovation and per- government tax revenues and econom- formance leading to economic growth ic growth. are more prevalent. So far, the positive The dual-track imple- Second, government officials need to effects of this system have outweighed mented between 1985 and 1994 is an- be motivated. the negatives. other example. This system assigned The role of government in econom- Second, public servants benefit di- two prices to a single good, one for ic development was highlighted in the rectly from economic growth: planned quotas and the other for market ’s influential 1993 report ■■ those in more prosperous regions transactions. In this case the efficiency The East Asian Miracle and echoed in its enjoy much higher salaries than

APRIL 2011 29 those in less developed regions, less pressure from powerful inter- society, the government must take a ■■ different government departments est groups. The primary interest is in stand and address challenges from the can offer different levels of income promoting long-run economic growth less favored. Pareto-improving reforms and welfare, with departments that which helps ensure better incomes for make it easier to mobilize broad public are directly involved in managing society as a whole. support. economic activities enjoying better treatment, and ■■ some provinces provide bonuses to A HOPEFUL FUTURE officials in subnational governments for generating more tax revenue. In describing East Asia’s growth Politically, many of those practices When reforms experience, political scientists have pro- are regarded as extra-legal. In China posed the concepts of autonomous states they are considered practical ways of or developmental states, where the state drastically change harnessing the inevitable forces of hu- plays a role in macroeconomic planning. man nature. But they are strong concepts because they Fiscal decentralization, too, has the distribution of require that the state have certain intrin- helped motivate subnational govern- sic qualities. Ultimately, they lay the bur- ment officials. As one of the most fis- den on having visionary and committed cally decentralized countries in the wealth or power leaders. The Chinese experience has taken world, China’s subnational government a different approach. It treats the govern- revenue accounts for 45 percent of total in society, the ment as made up of of rational individu- government revenue and subnational als who need to be motivated to work for spending accounts for 77 percent of the common good of society. Based on total government spending. Decentral- government must this belief, a wide range of institutional ization turns local government officials arrangements have been established to into strong stakeholders in local eco- take a stand and incentivize government officials to be- nomic growth. In addition, fiscal de- have as if they were disinterested when centralization has created a construc- they face conflicts of interests in society. tive competition for resources among address challenges Although China’s application of the local governments, inducing them to Washington Consensus may be coun- improve services, local infrastructure, from the less try specific, it contains a key principle and other aspects of the business envi- that others can learn from: namely, a ronment. volitional pragmatism featuring con- favored. stant experimentation with a defined REDUCING ELITE CAPTURE objective to improve on the status quo. Nothing is taken as permanent or per- fect: the future is always envisioned as Third, insulation from special interests. better than today and incentives are Government officials should be im- crafted to make that vision a reality. mune to conflicts of interests and pres- Another strategy has been to search sure from special interest groups which for so-called Pareto-improving re- Yang Yao is a Professor and Director of in many developing countries often de- forms: when no one is made worse off the China Center for Economic Research rail institutional and policy reforms. and at least one person is made better at in the Peoples Because Chinese society has been off. When reforms drastically change Republic of China. relatively equal, the government faces the distribution of wealth or power in

30 DEVELOPMENT OUTREACH