Model Roles

Comparison and competition between development patterns in an era of globalization By Cui Hongjian

Model Roles

Comparison and competition between development patterns in an era of globalization By Cui Hongjian

The author is an associate research fellow with the China Institute of International Studies

The world economy is mired in a real global crisis for the first time in the age of globalization. When people worldwide review the crisis, they should not simply conclude that the answer is finding a way to strengthen financial regulation or to balance the global economy. At a time when major Western economies are performing poorly, the world should begin to seek the root of the crisis in social, economic and political structures. If the crisis stems from structural problems, that means there are problems with the current development models. That is to say, the current crisis is a crisis of development models.

Three models

The Anglo-Saxon economic pattern could hardly be absolved from the blame of the U.S. subprime mortgage crisis, which dragged down the economy of the United States. This pattern has been prevailing since the era of Ronald Reagan, U.S. President from 1981-89, and Margaret Thatcher, British Prime Minister from 1979-90. In the 1980s, the United States and Britain began market-oriented reforms. The reforms of both countries advocated free trade and capital flow by reducing government meddling in the economy, encouraging market competition and deregulation. These measures greatly stimulated market dynamism and creativity, promoted rapid economic growth and helped boost Western prosperity.

CONNECTING THE WORLD: Chinese telecom equipment manufacturer ZTE Corp. showcases its cutting-edge technology at the Mobile World Congress 2012 in Barcelona

But the unconstrained market-driven economy caused a market-first and shareholder benefitfocused laissez-faire status. In the United States, the profits of the financial sector as a percentage to the total profits of listed companies soared to 40 percent from 5 percent two decades ago. The whole American society tumbled into a fever to seek fortune in the name of financial innovation. Lobbying from powerful financial groups blinded Congress and the lust for profits overthrew financial regulatory bills. In the meantime, the U.S. Government adjusted its financial policies from controlling risks to promoting development of the financial industry. The relationship between government regulators and the financial industry changed from regulation to collusion. The financial sector gradually hijacked U.S. political and economic systems, resulting in a crisis of the Anglo-Saxon economic model.

Germany and many other Western European countries pursue a “social market economy.” This economic model, known as Rhine capitalism, seeks to strike a balance between rapid economic growth on the one hand and low inflation, low levels of unemployment, good working conditions and social welfare on the other hand, by using state intervention including taxes and a social security system. Japan also follows this model.

Rhine capitalism was an outcome of the violent conflicts between labor and capital during European industrialization. With government intervention, the free market economy was modified to some degree. The cooperation between the state and the private sector created a rich and relatively harmoni-ous Europe. And most Europeans are proud of their lifestyle. The seemingly perfect economic model, however, is beset with ethical problems. Within a country, the government could provide social welfare through the redistribution of wealth, but within the euro zone, it is impractical to ask Germany to bail out debt-ridden Greece.

Moreover, under the current Western political election system, it is difficult to balance equity and efficiency. To get more support, politicians often adopt expensive social welfare programs at the cost of running a fiscal deficit, which will eventually cause structural problems such as rigid markets and economic stagnation. Even during the Greek debt crisis, the Greek Government held referendums on its policies, showing the inefficiency of its decision-making.

The export-oriented East Asian economic model, which took shape in the 1990s, is the synthesis of the successful economic development experience of some countries and regions in East Asia. It is an innovative model that emerged against a non-Western cultural background. The economic takeoff of South Korea, Singapore and China’s Taiwan and Hong Kong not only shows the successful application of Western experience in the East, but also provides a driving force and favorable external conditions for the economic development of China, the largest East Asian country.

The Anglo-Saxon economic model, Rhine capitalism and the East Asian economic model all have strong local and cultural characteristics. But since best practices spread to other parts of the world and are imitated by undeveloped countries and regions, a comparison of these development models is of global significance.

LABOR INTENSIVE:Workers at a garmentfactory in Ganyu County, east China’s JiangsuProvince, make clothes for overseas clients

The mixed Chinese model enjoys the benefits of the successful synthesis of other models, but it might also face risks caused by the mutual rejection of different models

Chinese character

The debate on the “China model” occurs at an interesting time. For one thing, after more than 30 years of development since the reform and opening-up program began, China needs to review and summarize its own social and economic achievements and find solutions to existing problems for future development. For another, compared with the collective rise of emerging countries, developed economies seem to have lost their way. They can no longer provide examples that China can follow.

For the last 30 years, China’s economic vitality has come from the late-mover advantages after competition between ideologies gave way to competition between development models with the end of the Cold War. China has adopted the successful experience of other development models. In the early stage, it absorbed the East Asian model’s export-oriented economic pattern, imitated the Anglo-Saxon economy’s openness and emphasis on attracting foreign investment, and copied Rhine capitalism’s focus on social harmony.

The mixed Chinese model enjoys the benefits of the successful synthesis of other models, but it might also face risks caused by the mutual rejection of different models. For example, the rapid economic growth of China has benefited from its large population and big market, but it is still a challenge to achieve growth through technology innovation. The relationship between government and market is not clearly defined. Structural problems in the real estate industry and state-owned enterprises may become a source of social tensions.

The key issue for China is to be fully aware of the unsustainability and imbalances of its current development model. A“China model” has yet to emerge, because China is still in the process of exploring a new development model. Due to the unique economic and political structures and cultural background of China and its big size, China cannot look for answers from other models. It should be confident to establish an independent development model based on its national conditions.

As it seeks an original model, China will continue to optimize its political and economic structures and integrate other development models. Therefore, questions such as how to loosen market controls, how to regulate the market with economic tools rather than administrative orders, how to strike a balance between equity and efficiency and how to change the unsustainable growth pattern should be thoroughly considered. Only if the answers have a Chinese character and are tested theoretically and practically, will the “China model” have a bright future.